Post on 28-Mar-2015
CAP Reform
Ref: CAPreform feb07
Introduction Original system – problematic Pressure for reform
– Budget– External – Consumer– Environmental
Fig1: welfare consequences– Compare CAP with self sufficiency under
free trade ( consider Pw & P intv) If exported outside EU, export
restitution = area abcd ( + storage costs)
P
Q
D
S
Pw
Pintv
Fig1 CAP:Impact on consumer surplus & producer surplus
loss of consumer surplus (CS) – area Again in producer surplus (PS) – areas B + A
a b
cd
P
Q
D
S
Pw
Pintv
Fig1 CAP:Impact on consumer surplus & producer surplus
loss of consumer surplus (CS) – area Again in producer surplus (PS) – areas B + A
a b
cd
P
Q
D
S
Pw
Pintv
Fig1 CAP:Impact on consumer surplus & producer surplus
loss of consumer surplus (CS) – area Again in producer surplus (PS) – areas B + A
a b
cd
A
P
Q
D
S
Pw
Pintv
Fig1 CAP:Impact on consumer surplus & producer surplus
loss of consumer surplus (CS) – area Again in producer surplus (PS) – areas B + A
a b
cd
A B
Early 1980s ‘Guidelines for European Agriculture’– Aim: reduce production & prices– Partially implemented, not significant
Reform: Milk Quotas 1984 Marketing quotas imposed
– Large surpluses– EU budget problems– Milk accounted for30% of EAGGF– Price support maintained but excess
production ‘taxed’ (super-levy) Fig 2: Milk quota EU saves areas C+D
– CS - no change– PS – loses area C
P
Q
D
S
Pw
Pintv
Fig2 CAP:Milk quota
Quota
Qs
CD
Assume quota allocated efficiently between farmers, if not …..
EU direct control over output Effective as ‘bottleneck’ in production
– Monitor Ineffective for other products eg.cereals
– Other methods used which may also penalise over production
• Co-responsibility levies• Budgetary stabilisers
– Not so effective
Quotas v Reduction in price support Fig 3: Reducing price support (Pintv to
P1intv) instead of introducing quotas Increase in CS: area F Fall in PS: areas F + G Net welfare loss: area G Argued reducing price support more
beneficial than intro quotas
P
Q
D
S
Pw
P1intv
Pintv
Fig3 CAP: Alternative - price support reduction v quota
P
Q
D
S
Pw
P1intv
Pintv
Fig3 CAP: Alternative - price support reduction v quota
FF
P
Q
D
S
Pw
P1intv
Pintv
Fig3 CAP: Alternative - price support reduction v quota
FF G
McSharry Reforms Most radical yet
– International pressure– Partial change
Aims incl.– Reduce support prices
• Increase competitiveness• Control production & increase demand
– Protect environment– Improve international relations
How– Reduce price support
• Eg intitial 30% for cereals• See fig 3 for benefits
– Introduce DIRECT INCOME PAYMENTS to farmers to compensate potential loss of income – SET ASIDE for cereals
• Now price supp. & income payments• Partly DECOUPLED farm income supp.• Slippage may be a problem
– Early retirement• Consolidation of holdings
– Environment: Discourage intensive production methods
• Subsidies no longer depend upon output alone• Cross-compliance
– Exclude small farms
Choice: Set-aside or not? Depends upon market price for cereal &
yields Choice
– (1) use all arable acreage & receive lower price
– (2) set-aside & receive 2 components• compensation payment + higher (‘original’)
price
Fig 4– Assume
• All farmers participate in set-aside scheme• All farmers are equally efficient
New supply curve Ssa If direct compensation equals at least
area H, rational farmer will set-aside Greater complexity
– Farms not equally efficient– Prices change after S shifts to Ssa– See additional handout
P
Q
D
S
Pw
Pintv
Fig4 CAP: Choice - set aside or not?
a b
Ssa
Qsa
P
Q
D
S
Pw
Pintv
Fig4 CAP: Choice - set aside or not?
a b
Ssa
H
Qsa
Further Reform
WTO Agenda 2000
– 2000 onwards– Still 2 systems
• Continued move to price supp.
– Milk unchanged– Greater emphasis on environment– Greater burden on States
• subsidiarity
CAP reform, June 2003 2003-2013 Further development of 1993 reforms CAP comprises 2 pillars
– Pillar 1: Market support measures & direct subsidies
– Pillar 2: Rural development programmes/policy
Pillar 1 spending 1% growth ceiling (nominal terms) –Brussels Ceiling 2002
Move to single farm payment - decoupling
• based on value of previous output
Payment linked to environment/food safety/animal welfare standards - cross compliance
Direct payments (Pillar 1) reduced, switch funding to (Pillar 2) Rural Devt. Programmes (RDP)– modulation: transfer funds direct payments
to RDPs– incremental
Pillar 2 supports– Agriculture as provider of public good– Development of rural areas
Exemptions, eg. cereals 25% payments linked to production (France)
2007-2013 Financial Perspective – Allocates more to Pillar 1, but Brussels
Ceiling. - Pressure!– Proposed expenditure for both pillars
CAP down to 26% of EU budget (2013)
Source: House of Lords EU Committee, The Future Financing of the CAP, session 2005-06
UK linked further CAP reform to the UK budget rebate (2005)
Conclusions CAP has achieved some of it’s objectives Move from price support since McSharry, but
now more complex with 2 systems CAP expenditure as part of budget lower Conflict with single market? Political & social aspects Fraud Enlargement Further reform required