THE COMMON AGRICULTURAL POLICY

OUTLINE

What is Common Agriculture Policy?

Establishment

Pressures to reform CAP

CAP reforms over time

IT consequences

Africa & CAP

WHAT IS COMMON AGRICULTURE POLICY?

System of European Union agricultural subsidies and programs

42 % of the EU's budget and still decreasing

Practices: Trade controls

Price-support measures

Income transfers

Production subsidies

Health regulations

EU BUDGET

Source: EU budget 2009; Sustainable development and innovation at the core of the EU budget

ESTABLISHMENT

after World War II - part of the Treaty of Rome

(signed in 1957, came into force in 1958)

1962: went into effect – 4 BASIC PRINCIPLES:

A unified market for the free movement of agricultural products in the European Union

Financial solidarity

Community preference

Parity and productivity

PRESSURES TO REFORM CAP

Budgetary pressures

Pressures from consumers

External pressures

Environmental pressures

CAP REFORMS OVER TIME

Introduction of milk quotas in 1984

Mac Sharry reform in 1992

The Agenda “2000”

The 2003 reform

CAP “Health Check” 2008

IMPORT TARRIF EFFECT

MILK PRODUCTION & CONSUMPTION BEFORE THE

QUOTAS

SITUATION BEFORE THE MILK QUOTAS

EU was exporter of diary products

Subsidization of diary farmers (per produced output) motivated farmers to produce more.

Overproduction led to export subsidies and consequently to dumping.

Results:

Producer surplus= a+b+c

Consumer surplus= -(a+b)

Gov. Revenue = -(b+c+d+f+g+h)

+ High storage costs (not depicted)

Export subsidy case

INTRODUCTION OF MILK QUOTAS IN 1984

Total guaranteed quantity: the quota of each country

The references quantities: the producers’ and/or purchasers’ quotas

The milk tax: Taxes if producers exceed their reference quota - (superlevy)

IMPACT ON INTERNATIONAL TRADE

End of overproduction of diary products

Reduction of the production from 103.7 million tons in 1984 to 96 million tons in 1992

Thus decrease in EU diary export as result of abolishment of large production subsidies (=export subsidies)

Side-effect – higher import of cows for beef (especially from Brazil)

Decrease in storage costs

MAC SHARRY REFORM IN 1992

Pressures from other agricultural exporting countries

From price support to income support

The beginning of direct payments

compensation for the decrease of the price support

New subsidies to farmers for good environmental practices

„Set-aside land“

EXPORT SUBSIDIES

IMPACT ON INTERNATIONAL TRADE

Lower export subsidies

Higher direct payments

IMPACT ON INTERNATIONAL TRADE

EU prices closer to world prices

International agricultural trade liberalization

Fall in cereal prices by 50%

Fall in income of African countries, which were making profits on selling goods to Europe (under Lomé convention)

An increase in the export price competitiveness of basic EU food and agricultural exports for African countries

FURTHER REFORMS

The Agenda 2000

“multi-functionality” of farming activities

The reform in 2003

A reduction in direct payments for bigger farms to finance the new rural development policy

CAP “Health Check“ 2008

Increase of milk quotas, ...

„CAP VS. AFRICA“ CASE

African exporters seem to be sensitive to EU reforms

Pros and cons of CAP reforms (from African point of view)

Future prospects

PROS AND CONS

+ Large food surpluses exported

to Africa as a food aid (before Mac Sharry)

Certain African (sugar) exporters profited from Lomé convention (€500 mil. in 99/2000)

— 2001: free access to the market

granted to the least developed countries under „Everything Buts Arms“ initiative.

Problem? – sugar, rice and bananas excluded

After Mac Sharry reform, EU price reductions drove some African exporters out of the EU market

Undermining of African markets by price-competitive EU goods (wheat) – „markets of last resort“

EU policy emphasis shift – „from quantity to quality“

lower value food

hig

her

valu

e fo

od

Ql

Qh

PPF

SITUATION WHEN AFRICA REJECTS TO

TRADE WITH EU

Africa

TRADING SITUATIONRICARDIAN MODEL

Africa has comparative advantage in producing lower value food

lower value food

hig

her

val

ue f

ood

Africa EU

hig

her

val

ue f

ood

lower value food

PPF

PPF

IA

IFT

TT TT

Ql

QH QH

QH

IFT

IA

PA = CA

PFT

CFT

PA = CA

PFT

CFT

FUTURE PROSPECT

African exporters:

lower value food and agricultural products distributors

European exporters:

higher value food and agricultural products

CONCLUSION

Trend in reforms of CAP – lower direct payments

Decoupling:

↑ economic prosperity

↓ negative impacts on the environment

From import levy to direct subsidies – before and after Mac Sharry reform

Africa has to trade with lower value food

Petra AndrlíkováRadovan Parrák

REFERENCES

Institure for Agriculture and Trade Policy: The Common Agricultural Policy: A Brief Introduction, Prepared for the Global Dialogue Meeting (May 14 and 15, 2007, Washington, D.C.)

European Economic Policies: Common Agricultural Policy; Laurent Weill: Université de Strasbourg, Charles University - Prague , April 2009

Policy Notes 2009/7: The Impact of Common Agricultural Policy (CAP): Reformon Africa-EU Trade in Food and Agricultural Products

http://ec.europa.eu/budget/index_en.htm