International Agricultural Policy

Prof. Francesco Zeccae-mail: francesco.zecca@uniroma1.it

The influence of Common Agricultural Policy (CAP)

The Common Agricultural policy (CAP) Evolution• 1957 Treaty of Rome :Common Agricultural Policy;

• CAP as a ”coupled” model of agricultural policy (protectionism);

• CAP reforming during the 80s and 90s;

• Agenda 2000;

• Fishler Reform;

• Health Check;

• The new CAP 2014-2020.

The Treaty of Rome 1957▪ The Treaty of Rome establishing the EEC provides for member

Countries to intervene in agriculture through a CommonAgricultural Policy based on the followings principles:

▪ Single Market(same trade policy);

▪ Priority to the absorption of Community goods;

▪ Financing solidarity(not depending from the advantages forproducts and/or beneficiary Country);

▪ Article 39 of the Treaty defines the objectives of theintervention;

▪ Article 40 of the Treaty defines the adopting instruments.

The CAP genesis

• EU Reg.26/1962 general framework of CAP;

• Similar agricultural policies in the six foundingCountries;

• Agriculture and CAP as a ”laboratory” ofEuropean integration;

• The CAP is the first (and for a long time the only)common policy;

• For at least two decades, the CAP is considered thecorner-stone of EU.

The CAP objectives• Income support for a large population of family farms;

• Increase in production and productivity;

• Food security (increase in self-sufficiency ratio);

• Market stability;

• Consumers protection(adequate standard of living).

The CAP instrumentsPrice support and market intervention policy:

• very strong for the key sectors (cereals, beef, milk),• weaker for the Mediterranean crops (wine, fruits & vegetables);

The base-mechanism of price support:

▫ minimum guaranteed price;▫ Open ended intervention of buying agencies;▫ Import taxation and export subsidies.

The ”structural” policy (aids to investments in farming) isweak and residual: only the 5% of the total agriculturalexpenditure.

Price support and market intervention▪ For each agricultural product is defined by a special regulation the

common market organization (CMO)(from 2007 one CMO for all the agricultural products);

▪ CMO represents the only one juridique frame of agricultural market;

▪ The operating mechanism is based on four price categories defined annually:

Target price indicated by the Community ;

Intervention price or minimum guaranteed price;

Admission price for imports;

Restitution price return for the export (of surplus products).

▪ Application of the principle of automatic guarantee and unlimited.

The coupled model of CAP• The support given by price policy is ”coupled” to

the quantity of production:

▫ It supports the generic ”status” of agricultural producer;

▫ It cannot target the support to specific goals, since it cannot ”select” among different farmers, areas, production modes;

▫ It implies all the protection needed to keep domestic prices well above world prices.

• It is socially uneven and economicallyinefficient.

The coupled model of CAP

• The distribution of the benefit of coupled supportamong farmers is uneven:

▫ 10% of farms (the largest, and less in need for income support) capture 80% of the total support

• The distribution of the cost is uneven as well:

▫ it is paid by consumers;▫ It acts as a digressive tax (Engel's law);▫ (The poorest) consumers support (the richest) farmers.

The coupled model of CAP

The support is inefficient

▫It is an incentive to over-produce;

▫It is an incentive for low quality and not environmentallyfriendly production;

▫It insulates domestic market from international markets;

▫It distorts both production and consumption;

▫It could be see by the farmers as substitute of structuraladjustment.

The coupled model of CAP• The support is uneven and inefficient, but it is

“winning” on the political market:

▫ It benefits a large population of farmers (more o less, but to everybody);

▫ Its cost is ”hidden” in the ”market” price;

▫ Consumers don’t realize the bill they are paying, and they are not organized as a pressure group;

▫ Its implementation is easy and its administrative cost relatively low, at least until the EU is a net importer.

The crisis of the coupled model• During the eighties:

▫ Growing surpluses (milk, cereals, beef, wine);

▫ Growing expenditure and financial unbalances among membercountries (UK’s rebate: financial mechanism reducingcontribution) ;

▫ Environmental (in)sustainability;

▫ International (in)sustainability (trade disputes and GATT UruguayRound);

▫ Decline of political importance of agriculture;

▫ Deterioration of CAP “reputation” within EU: from corner-stone to thumb-stone.

The influence of GATT Uruguay Round

• Until the 1986 agricultural has been excluded fromGeneral Agreement on Tariff and Trade(GATT);

• In 1986 the structure of the CAP is put in the indictmentduring the GATT Uruguay Round ended in 1994;

• The effects of the CAP are not in line with the multilateralagreements on trade in which is inserted agriculture;

• The Uruguay Round states the incompatibility of allsubsidies to agricultural production except those that meetthe principle of decoupling.

The CAP reform in the ’80s

• The first approach to CAP reform is based onadministrative measures ( defensive and gradualist) :

▫ ”Cautious” price fixing;

▫ New structural policy (less intensive farming);

▫ Reconsidering the principle of unlimited guarantee, introduction ofquotas mechanism (milk quotas);

▫ Co-responsibility principle(penalize those in the previous campaign hasexceeded certain levels of production).

• The ”core” of the CAP (price policy) is not discussed; all themeasures are aimed at smoothing its undesiredconsequences.

The CAP reform in the 80s:administrative

measures in practice

• Co-responsibility principle: modest reduction inguaranteed prices (2%) and recovery of financial resourcesfor the management of excess production;

• Limited guarantee: introduction of limits on the unlimitedguarantee on prices;

• Production control based on an individual referencequantity above which applied sanctions against themanufacturer,

• Budget stabilizers: automatic and progressive reduction ofthe minimum price guarantee.

The CAP reform in the ’80s:new structural

policy• Numerous Community Initiatives on agro-environmental;

• Granting of an annual premium per hectare to farmers who

operate in environmentally sensitive areas;

• Interventions in support of extensification of crops and livestock,

and set-aside land;

• Overall agricultural policies based on requirements and

constraints and incentives.

The Mac Sharry reform - 1992 ( first step

towards de-coupling)

• The Mac Sharry package:

▫ 30% reduction in support prices (cereals and beef);

▫ Set aside (exemption for small farmers);

▫ Compensatory payments for price reduction (fixed aids per hectare, partially de-coupled, based on a historical yield);

▫ ”Accompanying” measures (agro-environment).

• The reform is accepted by the US and ratified by GATT Agreement (1994): decoupling principle applied to the ”green box”/ compensatory payments in the ”blue box” (exempted).

The Mac Sharry Reform

• The Mac Sharry reform is a turning point:

▫ It gives a clear signal about the decline of the old CAP, paving the way for a de-coupled model;

▫ It launches a new set of measures(accompanying measures), in the middle between market intervention and rural development;

• But only a first, timid and transitional step:

▫ Its budget cost is very high;

▫ It leads to extra-compensations and tend to “freeze” the uneven distribution of the support among farmers;

▫ Its main role is to close the GATT negotiation.

Agenda 2000(Strategic document)

• The driving forces:

▫ Eastward enlargement (incompatibility of the old CAP in anenlarged EU);

▫ Implementation of the GATT Agreement (CAP reform”locked in” by International commitments);

▫ Growing importance of Consumers’ interests on new issues(quality, safety, environment);

▫ Further decline of the ”old CAP” in the process of Europeanintegration (from Economical Union to Political Union);

▫ Rural development Vs Market intervention (Corkdeclaration).

Agenda 2000

• The general objective of Agenda 2000 has beenpreparing the ground for the Enlargement:

▫ screening the economic and social situation of the candidates;▫ reviewing all the policies of the EU, in order to promote their

adaptation;

• The most sensible issue is agriculture and, inparticular, the need of a radical CAP reform;

• For the first time the entire set of objectives of the CAPis under discussion:

• The new magic word is the multi-functionality ofEuropean agriculture.

Agenda 2000 :the objectives

• Increase the capability to compete of Europeanagriculture;

• Sustain agricultural income and employment (but inthe context of rural development);

• Promote quality (no quantity);

• Compensate the production of Public goods, in theinterest of consumers and citizens:▫ Environment;▫ Food safety (in place of food security);▫ Animal welfare.

Agenda 2000 : the instruments

• Less Market intervention(first pillar), more funds torural development(second pillar);

• Ulterior price reduction;

• Ulterior market orientation;

• More decoupled aids (only partially compensatingprice reductions);

• Simplification of bureaucratic procedures.

Fischler mid term reform – 2003

:completing the decoupling process

• The support passed definitively from product toproducer (totally decoupled aid);

• The main form of support becomes the Single FarmPayment (income support for farmers);

• Cross - compliance: payments could be conditionedto proper environmental behavior of farmers;

• CAP charges no longer dependent on consumers buttax payers;

• Consequence: obligation to justify the expenditure onagriculture by the EU institutions.

Fischler reform – 2003 :completing the

decoupling process

• Modulation mechanism(reduction of incomesupport of greater farms:2%) to obtain resources forrural development;

• Integration between the two pillars in order to makeacceptable policy to support agriculture;

• The reform is set in the sign of themultifunctionality of the primary sector despite thefinancial commitment is still insufficient;

• No more single policy with unique instrument butearly differentiation .

CAP Health check – 2008:objectives

• Collect a number of considerations on the review clauses ofthe 2003 CAP reform;

• Propose changes that do not constitute a new reform;

• Adapt the 2003 reform to the period 2009-2012;

• Contribute to the discussion on future priorities in the fieldof agriculture;

• Finalize current impact analysis of alternative options.

CAP Health check – 2008:actions

• Integration into the single payment of all coupledpayments in 2012;

• Creating national ceiling for specific support;

• Ulterior reduction of market support;

• Increasing the modulation of 10% by 2012;

• The modulation funds are devoted to achieving specificenvironmental goals: the contrast in climate change,renewable energy, water management, biodiversity.

CAP 2014-2020• Confirmation of the joint in two pillar;• The first pillar direct payments completely decoupled;• No more single payment but seven types of payment;• The policies of the first pillar shall be established at

Community level and are fully funded;• The second pillar relates to the rural development

policies;• The policies of the second pillar are managed and

programmed at the National and / or Regional levelco-financed by the Member States;

• Integration and complementarity with the territorialcohesion policies.

CAP OVERALL EVALUATION

• The decline of the old CAP has been ratified;

• Rural development has been simplified (thematicpriorities and not measures);

• Multifunctionality is still considered not as moderndimension of European Agriculture but as alternativesolution to the development of traditional productionactivities;

• Links stringent and complementarity between the first andsecond pillar;

• Differentiation of payments may result in the risk ofbureaucratization.

The influence of CAP Reform at global level:

effects • The CAP reform tends to eliminate the weight of the

mechanisms of production support;

• The CAP reform shifts the interest towards a type ofagricultural activity to more functions;

• The CAP reform has been the key reference point ofnegotiation strategy within the WTO;

• With the revision of the agricultural policy the EU hascomplied with the requirements of the WTO byreducing trade distorting domestic support;

• Are seconded the constraints imposed by the WTO;

• EU attended to the pressures of DevelopingCountry(blue box favourite Developed Countries).

The influence of CAP Reform at global level

Given the multiple aspects of the effects of reform andconsidering the different positions at the International levelit is detected:

1. An EU agricultural market far from being open toCountries in the Developing world;

2. An EU agricultural policy increasingly moved to ruraldevelopment;

3. An EU budget distributed in such a way as to beclassified as a type of support progressively exempt fromreductions made by the WTO.

The influence of CAP Reform at global level

4. The financing of rural development by shifting theincome assistance appears feasible in DevelopedCountries;

5. The concept of multifunctionality disagreesDeveloping countries ;

6. The Developing Countries have difficulty infinancing policies non commercial ;

7. For this reason: opposition at multilateral level andstrict control of subsidies and payments toagriculture.

The influence of CAP Reform at global

level

• The multifunctional approach is considered restrictivetowards a progressive opening of markets;

• The multifunctional approach is seen as an internalgoal of the EU to overcome their trade-distortingpolicies;

• The multifunctional approach is seen as poorlyapplicable in less developed Countries.

The influence of CAP Reform at global

level• Need for a sharing of the multifunctional approach in

order to find convergence policies;

• Need of partial solution of trade and economic relationswith Developing Countries;

• Financial reinforcing of specific actions to policies forintegrated development of rural areas homogeneous ascompensation of lost political support to producers;

• North South conflict resolved through a significantincrease in financial resources to support the agricultureand contribute to the development.

Sources• EC DG Agriculture :Agenda 2000 CAP for the future;

http://ec.europa.eu/agriculture/publi/review99/08_09_en.pdf

• EC COM (2010) 672 The CAP towards 2020: meeting the food, natural resources and territorial challenges of the future ;

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:0672:FIN:en:PDF

• EC (2014) The EU’s common agricultural policy (CAP): for our food, for our countryside, for our environment;

http://ec.europa.eu/agriculture/cap-overview/2014_en.pdf

• EC (2012) The Common Agricultural Policy a story to be continued;http://ec.europa.eu/agriculture/50-years-of-cap/files/history/history_book_lr_en.pdf

• EC (2005) Fischler CAP Reform 2003;http://bookshop.europa.eu/en/the-2003-cap-reform-pbKF6004733/?CatalogCategoryID=un8KABstLQ4AAAEjIYcY4e5K

• EC COM(1991) 379 Reform of the Common Agricultural Policy (Mac Sharry)

http://ec.europa.eu/agriculture/cap-history/1992-reform/com91-379_en.pdf

• EC (2008) Health check of Common Agricultural Policy;

http://ec.europa.eu/agriculture/healthcheck/index_en.htm

• The Treaty of Rome 1957

http://www.epg.acp.int/fileadmin/user_upload/rometreaty2.pdf

Sources

• EC (2014) Overview of CAP Reform 2014-2020

http://ec.europa.eu/agriculture/policy-perspectives/policy-briefs/05_en.pdf

• EEC Reg.26/1962

http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:31962R0026&from=EN