Lecture 10. CAP Health Check SS Economics of Food Markets

Objectives To describe the background to the CAP Health Check To understand the specific proposals likely to be put forward by the Commission To be able to evaluate the consequences of implementing these proposals over the period to 2013 To look forward to the future of the CAP after 2013

Literature Commission’s proposals due Nov (early draft and leaks available, see AgraFacts) IEEP analysis UK Vision for the CAP See website Also Mariann Fischer Boel speeches

Background Mid Term Review reforms only now being implemented –SFP only implemented in 2006 in 7 MS –Pillar 2 Rural Development Programmes only now being approved Doha Round trade negotiations –EU offer and likely compromise –Would it place additional constraints on CAP?

Background The Commission’s objectives No fundamental reform –Pillar 1 financial envelope agreed Oct 2002 –Specified reviews of the SPS –On-going reforms in market sectors –Health Check starts with simplification

CAP Health Check menu Development of SPS –Full decoupling, move to regional average payments Cross compliance conditions: increase or reduce? Cap SFP of any recipient More modulation: voluntary or compulsory? Change co-financing rules: more in P1 and less in P2? Abolish set-aside Future of milk quotas

Changes to SPS scheme End to most coupled payments Arguments for regionalisation –Inequitable between farmers – some had eligible payments in the past, others did not, yet all are required to meet same cross compliance requirements –Penalises extensive farming as against intensive farming who benefit most from historic basis –Used successfully in the NMS

Cross compliance Raise or lower requirements? Arguments in favour of adding requirements –Climate change related requirements –More purposive ‘greening’ of Pillar 1 payments Arguments in favour of reducing requirements –Very unpopular with farmers and MS

Capping payments to individual farmers Responds to public opinion incensed by very high payments to a small number of high income individuals and companiesvery high payments Opposed by countries with large farms which feel it discriminates against them Leaked Commission proposal attempts to address main criticisms –Not an absolute ceiling, but ‘degressive capping’ –Money retained by MS in Pillar 2 which loses it Effect will be largely optical as total amounts involved are small and avoidance measures will ensure that little is saved or switched Click on blog I wrote on the history of Commission proposals to introduce cappingblog

Modulation Modulation means reducing payments in Pillar 2 and transferring the funds to Pillar 2 Original Commission proposal for modulation rate of 13%; introduced at 5% with franchise (threshold) of €5,000 Commission likely to reintroduce proposal for higher rate of compulsory modulation –But would require revision of all RD programmes –Only 80% guaranteed to remain within MS Note that modulation with a franchise is very similar to Commission proposal on capping

Commodity regime issues Cereals –Permanent abolition of set-aside – but will lose environmental benefits –Removal of subsidy for energy crops Dairy – designing a soft landing for the phase out of milk quotas after 2014 –Gradually increase quota annually –Gradually reduce the ‘superlevy’ fine on farmers who exceed quota –Allow trading of quota between MS

The CAP after 2013 Current Financial Perspective runs In return for agreement to give concession on UK rebate, Blair got agreement on fundamental review of EU budget priorities after 2013 Budget consultation exercise now started, with decisions expected around 2010 With pressure on to find resources for EU policies such as the Lisbon agenda, addressing external threats and dealing with climate change, what funding will be available for the traditional CAP?

Justification for SPS after 2013 Compensation – but why pay in NMS, and even in old MS cuts took place long time ago income support - but highly unequal across farms, across regions and across farm types payment for public services – but flat rate payments result in major deadweight effects and low efficiency compensation for higher standards – cross compliance – but all of the standards are legal requirements in any case inefficient – most of payment still capitalised in land values, keeps land prices high hard to defend in period of high prices possibly WTO non compatible

Note unevenness of distribution of SFP/ha between different member states Source: Buckwell, 2007

Possible budget alternatives Raising MS co-financing of Pillar 1 (to reduce EU budget cost) Decreasing MS co-financing of Pillar 2 (to reduce resistance to switching

Future vision for CAP A. Defend status quo for –Seek arguments to justify SFP indefinitely B. Stick to current trajectory of CAP reform –Either green Pillar 1 or switch funds to Pillar 2 C. Rethink agricultural policy as a food and environmental policy –Dealing with issues of risk, animal disease, payments for public goods