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)

Fig1 CAP:Impact on consumer surplus & producer surplus loss of consumer surplus (CS) – area A gain in producer surplus (PS) – areas B + A P a S b Pintv Pw d c D Q

Fig1 CAP:Impact on consumer surplus & producer surplus loss of consumer surplus (CS) – area A gain in producer surplus (PS) – areas B + A P a S b Pintv Pw d c D Q

A Fig1 CAP:Impact on consumer surplus & producer surplus loss of consumer surplus (CS) – area A gain in producer surplus (PS) – areas B + A P a S b Pintv A Pw d c D Q

B A Fig1 CAP:Impact on consumer surplus & producer surplus loss of consumer surplus (CS) – area A gain in producer surplus (PS) – areas B + A P a S b Pintv B A Pw d c D Q

Early 1980s ‘Guidelines for European Agriculture’ Aim: reduce production & prices Partially implemented, not significant

Reform: Milk Quotas 1984 Marketing quotas imposed Fig 2: Milk quota 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

Fig2 CAP:Milk quota Quota P S Pintv C D Pw D Q Qs

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

Fig3 CAP: Alternative - price support reduction v quota Pintv P1intv Pw D Q

F F Fig3 CAP: Alternative - price support reduction v quota P S Pintv Pw D Q

F G F Fig3 CAP: Alternative - price support reduction v quota P S Pintv F G F P1intv Pw D Q

McSharry Reforms Most radical yet Aims incl. 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 New supply curve Ssa 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

Fig4 CAP: Choice - set aside or not? Ssa P a S b Pintv Pw D Q Qsa

Fig4 CAP: Choice - set aside or not? Ssa P a S b Pintv H Pw D Q 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

Exemptions, eg. cereals 25% payments linked to production (France) 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