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