The EU’s CAP and the likely impact of a Doha Agreement Lecture 24. Economics of Food Markets Alan Matthews

Why focus on Doha? Composition of operating surplus in agriculture Premia and arable aid Market returns Rural development payments € million Decoupling WTO reduced protection Rural development

Export Subsidies January 2003: EU initially offered to reduce aggregate expenditure limits by 45% –but in 2001/02 only used 35% of entitlement In July 2004 Framework Agreement, EU signed up conditionally to full elimination Importance of ‘credible date to be agreed’ –Blair has called for end by 2010 It may be that policy change will eliminate the commodity export surplus: but what about Non- Annex I goods, i.e. the food industry?

Domestic support – EU situation 2001 (before Mid-Term Review) Amber BoxUS dollars Bound AMS65,383 Market Price Support25,085 Direct Payments12,117 less De Minimis411 Current AMS36,791 Degree of AMS Overhang44% Blue Box $ Millions21,262 % Value of Agricultural Production7% Green Box19,452 Overall Distorting Support (ODS) Bound ODS87,056 Current ODS58,464 Degree of ODS Overhang33%

Market access Effect on tariff cut on beef price EU support price (basic intervention price) €2,224 Estimated world market price€1,200 Current EU import tariff€1,922 Possible tariff cut which does not impact on EU market price (tariff overhang) 40%

Market access Effect on tariff cut on beef price EU market price€2,700 Estimated world market price€1,200 Current EU import tariff€1,922 Possible tariff cut which does not impact on EU market price (tariff overhang) 16%

Market access Effect of tariff cuts on butter prices, €/tonne Unfavourable world market Favourable world market EU market price (2008)€2,247 Estimated world market price 1,1701,575 Current EU import tariff1,896 Possible tariff cut which does not impact on EU market price (tariff overhang ) 36%54%

Market access Effect of tariff cuts on SMP prices, €/tonne Unfavourable world market Favourable world market EU market price (2008)1,782 Estimated world market price 1,6501,800 Current EU import tariff1,118 Possible tariff cut which does not impact on EU market price (tariff overhang ) 55%64%

Effect of tariff cuts on white sugar price EU support price (based on Commission July 2005 reform proposal) €386 Estimated world market price€210 Current EU import tariff€419 Possible tariff cut which does not impact on EU market price (tariff overhang ) 63%

Export Subsidies January 2003: EU initially offered to reduce aggregate expenditure limits by 45% –but in 2001/02 only used 35% of entitlement In July 2004 Framework Agreement, EU signed up conditionally to full elimination Hong Kong 2005 agreed to end date of 2013, with substantial progress in early years Only important now for dairy and sugar exports, but implications for Non-Annex I goods, i.e. the food industry?

The EU’s AVEs (ad valorem equivalents of specific rates), excluding sugar Note many of the highest tariffs are actually on processed foods (e.g. yogurt, whey) rather than bulk commodities

Comparison of EU banded offer with Swiss 60 formula

Market access Effect on tariff cut on beef price EU support price (basic intervention price) €2,224 Estimated world market price€1,200 Current EU import tariff€1,922 Possible tariff cut which does not impact on EU market price (tariff overhang) 40%

Market access Effect on tariff cut on beef price EU market price€2,700 Estimated world market price€1,200 Current EU import tariff€1,922 Possible tariff cut which does not impact on EU market price (tariff overhang) 16%

Market access Effect of tariff cuts on butter prices, €/tonne Unfavourable world market Favourable world market EU market price (2008)€2,247 Estimated world market price 1,1701,575 Current EU import tariff1,896 Possible tariff cut which does not impact on EU market price (tariff overhang ) 36%54%

Market access Effect of tariff cuts on SMP prices, €/tonne Unfavourable world market Favourable world market EU market price (2008)1,782 Estimated world market price 1,6501,800 Current EU import tariff1,118 Possible tariff cut which does not impact on EU market price (tariff overhang ) 55%64%

Effect of tariff cuts on white sugar price EU support price (based on Commission July 2005 reform proposal) €386 Estimated world market price€210 Current EU import tariff€419 Possible tariff cut which does not impact on EU market price (tariff overhang ) 63%

Domestic support - EU situation 2001 (end Uruguay Round, before Mid-Term Review) Amber BoxUS dollars Bound AMS65,383 Market Price Support25,085 Direct Payments12,117 less De Minimis411 Current AMS36,791 Degree of AMS Overhang44% Blue Box $ Millions21,262 % Value of Agricultural Production7% Green Box19,452 Overall Distorting Support (ODS) Bound ODS87,056 Current ODS58,464 Degree of ODS Overhang33%

Fischler reforms (EU15): Switch 90%? of existing blue box expenditure into the green box Shift €4.2 billion (cotton, tobacco, etc.) from amber to blue/green Milk reforms strip €1.9 billion from amber box, and add (dairy premium) €0.4 billion to blue/green Sugar reforms strip €3.5 billion from amber box, and add €1.3 billion to blue/green (EU15 income support) Rice, fruit and vegetables…..

Commitments on blue and amber boxes: EU will make the biggest AMS cuts under the tiered formula – could afford up to 70% Blue box limited to 5% of value of agricultural production –achievable, provided most of the Single Payment is in the green box Overall limit on all trade-distorting support (80% of base entitlement): achievable for EU15 Product specific AMS limits

Source: Kutas, G. EU Negotiating Room in Domestic Support after the 2003 CAP Reform and Enlargement

Does the Single Payment fit in the green box? Restrictions on fruit and vegetables: see Upland Cotton Annex 2, 6(d): ‘The amount of such payments in any given year shall not be related to, or based on, the factors of production employed in any year after the base period’ –But an annual claim on farmland in agricultural production or kept in good environmental condition

Future challenges for Irish agriculture Decoupling WTO reduced protection Rural development