lecture7 cap

8/3/2019 Lecture7 CAP

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The CAP: origins, institutions and

financing

Economics of Food Markets

Lecture 7

Alan Matthews



Objectives

• The complex structure of EU agriculture

• The decision-making processes in the CAP

• How the CAP price support mechanisms work • Characteristics of individual common market organisations

• The budgetary framework for CAP expenditure

• The ‘green money’ mechanism

• A critical assessment of the consequences of the CAP



Reading

• Ackrill, R. 2000 The Common Agricultural Policy

• Tracy, M., 1997 Agricultural Policy in the European Unionand other Market Economies

• Fennell, 1997, The Common Agricultural Policy:

continuity and change• Shucksmith, M., Thompson, K and Roberts, D., 2005,

CAP and the Regions: the territorial impact of the CAP

• Grant, W. 1997, The Common Agricultural Policy

• Ingersent, Rayner and Hine, 1998, The Reform of theCommon Agricultural Policy.

• Commission DG Agriculture and Food website



Source: European Commission, The CAP Explained

Differing agricultural structures



Employment Gross domestic product

1950 1973 1999 1950 1973 1999

EU-15 : : 4.5 : : 1.8

Belgium 12 3.9 2.4 8.8 4.2 1.2

Denmark 22 9.4 3.3 20.0 9.0 2.0

Germany 23 7.3 2.9 12.3 3.5 0.9

Greece 54 : 17.0 33.5 : 7.1

Spain 49 : 7.4 35.0 : 4.1France 32 11.9 4.3 : 6.5 2.4

Ireland 40 25.1 8.6 31.3 19.0 2.9

Italy 39 16.3 5.4 29.5 9.9 2.6

Netherlands 19 6.6 3.2 12.9 5.8 2.4

Austria 32 : 6.2 16.4 : 1.2

Portugal 47 : 12.7 26.8 : 3.3

Finland : : 6.4 : : 0.9

Sweden 18 : 3.0 7.0 n.a. 0.7

UK 5 2.9 1.2 6.0 3.0 0.9



Number of farms

Averagefarm size

Averagefarm size

Per cent of farms > 50

ha

Per cent of farms < 10

ha

1997 1987 1997 1997 1997

‘000ha ha % %

EU-15 6,989.1 : 18.4 8.6 68.6

Belgium 67.2 17.3 20.6 10.0 44.2

Denmark 63.2 32.5 42.6 27.8 19.5

Germany 534.4 17.6 32.1 14.1 45.6

Greece 821.4 5.3 4.3 0.4 90.0

Spain 1,208.3 16.0 21.2 8.2 69.0

France 679.8 30.7 41.7 29.7 35.3

Ireland 147.8 22.7 29.4 14.1 19.8

Italy 2,315.2 7.7 6.4 1.8 87.4

Netherlands 107.9 17.2 18.6 7.1 46.4

Austria 210.1 : 16.3 4.0 46.4

Portugal 416.7 8.3 9.2 2.3 87.5

Finland 91.4 : 23.7 8.8 24.2

Sweden 89.6 : 34.7 20.2 29.8

UK 233.2 68.9 69.3 33.7 26.8



Brief history of CAP origins

• Article 33 (ex 39) set out objectives, but left open means toachieve these objectives

• Note all original member states already had protectionist

agricultural policies, so EC was not starting with a cleanslate

• Key decisions on market mechanisms taken in January1962, though common prices not achieved until 1968

• Principles establishedMarket unity

Community preference

Financial solidarity

(Producer co-responsibility)



CAP objectives and instruments

• CAP objectives set out in Article 33 (ex 39) – to increase agricultural productivity

– to ensure a fair standard of living for the agricultural community

– to stabilise markets

– to ensure the availability of supplies – to ensure that supplies reach consumers at reasonable prices

– Note no mention of environment, food safety or rural development

• Two broad policy instruments

– Price policy implemented through market organisation measuresand funded by the Guarantee Section of EAGGF (FEOGA)

– Socio-structural measures funded by the Guidance Section of FEOGA

– Original expenditure ratio of 2:1 envisaged, in practice turned outto be nearer 95:5.



Agricultural decision-making in the EU

• Distribution of powers between EU institutions: – originally Commission proposes, Council disposes, Parliamentadvises, and Court rules

• Greater EP powers of co-decision – but only consultative powers on CAP expenditure, will change

with Reform Treaty• Role of member states and lobby groups

– Formalised through management and advisory committees

• Majority voting and the Luxembourg compromise – Consensus decision-making encouraged by willingness of some

member states to form a blocking minority when ‘vital interests’ of another are at stake. Of doubtful current relevance

• Annual price review

– Based on formula approach in the past, now of much lesssignificance because Commission’s powers to manage markets

increased under the Financial Perspective.



Price policy mechanisms

• Cereals taken as the prototypical regime but eachcommodity regime has its own characteristics

• Three support pillars of import levies, intervention buyingand export subsidies.

• Additional support through consumer subsidies, aids toprivate storage, withdrawals, deficiency payments

• Objective has been to provide price stability as well asprice support, hence variable nature of trade instruments

• Mechanisms are in theory neutral as between farmers andconsumers although price levels in practice set very high

• Support provided at wholesale, not farm, level. Assumescompetition in commodity markets to reflect support back to farmers.



Pre-GATT Uruguay Round

CAP mechanisms

variable levyexport subsidy

world price world price

threshold price

intervention price

target price

Import Internal Export



The green money (agri-monetary) system

• CAP prices fixed in ecus (euros), require conversion rates

to national currencies

• Conversion rates used administered (green) exchange rates

• Devaluation should raise domestic prices, revaluation

should lower domestic prices

• Governments manipulated green rates to prevent these

market effects from occurring, thus causing market prices

within the EU to diverge

• Differences compensated for by border taxes and subsidies

(MCAs monetary compensatory amounts)



The green money (agri-monetary) system

• Introduction of ‘switchover system’ in 1984 at Germaninsistence to prevent a cut in German nominal supportprices meant a hidden upward push to support prices in

that decade across the EU (extra 21% by 1992)• Consequences of green money system and MCAs

– While intended to prevent trade distortions, created additionaldistortions due to limited coverage, inadequate compensation andpossibilities of fraud

• Changes consequent to single market 1 January 1993 – Abolition of MCAs and the switchover system

– Compensatory aid to farmers if prices cut by currency revaluation

– Now relevant only to countries outside euro zone



Budget impact of the CAP

• The role of the EU’s ‘own resources’ – currently customs

duties, VAT-based contribution and the GNP resource

• Overall EU budget very small, but share of CAP spending

very high

• Transfers between member states arising from common

financing of the CAP inequitable and a source of

controversy

• Attempts to control budget expenditure have been a

significant driver of CAP reform



Consequences of EU price support policies

• Growth in self-sufficiency due to supply outrunning

demand

• Unforeseen reliance on intervention mechanisms, although

currently much reduced

• Uneven levels of protection across commodities,

particularly for cereals/oilseeds and cereal substitutes

• Regional disparities in support – the North/South divide

within the EU

• Introduction of milk quotas 1984 (until then, sugar was

only CMO using quotas)



Problems of agricultural price policy at

beginning of the 1990s

• an uncommon market – a single agricultural market was created, but ...

– green currencies kept prices different and...

– veterinary and plant health rules kept the market fragmented

• growing overproduction and intervention overload ...

• … leading to growing budget costs

• the inefficiency of CAP price policy – large transactions costs incurred to transfer income support

• the inequity of CAP price policy – larger farmers benefit at the expense of low income consumers,

and more advantaged regions attract higher levels of support

• environmental costs of the CAP price policy – higher prices encouraged intensification and greater input use

lecture7 cap

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