Lecture 5: Common Agricultural Policy Cont Based on Sloman Chapter 3.4; Chapter 8, Baldwin & Wyplosz and Chapter 8, Swann

AGRICULTURE AND AGRICULTURAL POLICY Subsidies effects on price and output the incidence/cost of a subsidy Cost falls directly on Government/EU Alternative - High minimum prices Also known as price supports or price floors Was main form of EU assistance 8

Minimum price where some of the product is imported EU supply P Pw EU demand O QS1 Qd1 Q Imports

Minimum price where some of the product is imported EU supply P Pt Import levy Pw EU demand O QS1 Qd1 Q

Minimum price where some of the product is imported EU supply P Pt Import levy Pw EU demand O QS1 QS2 Qd2 Qd1 Q Imports

Minimum price where some of the product is imported EU supply P Pt Import levy Extra amount paid By consumers Pw EU demand O QS1 QS2 Qd2 Qd1 Q Imports

Minimum price where some of the product is imported EU supply P Pt AMOUNT PAID IN IMPORT LEVIES to Govt Extra amount paid to farmers Import levy Pw EU demand O QS1 QS2 Qd2 Qd1 Q Imports

But over time effect of subsidies and price floor’s means supply rises – so need to look at Minimum prices for a product where the country is self-sufficient P SEU a b Pw DEU O Qd1 QS1 Q Exports

Minimum prices for a product where the country is self-sufficient SEU Pi a b Pw DEU O Qd1 QS1 Q

Minimum prices for a product where the country is self-sufficient SEU e d Pi a b Pw DEU O Qd2 Qd1 QS1 QS2 Q Surplus

Minimum prices for a product where the country is self-sufficient SEU e d Pi f a b c Pw Amount bought into intervention DEU O Qd2 Qd1 QS1 QS2 Q Surplus

Minimum prices for a product where the country is self-sufficient SEU e d Pi f a b c Pw COST OF BUYING THE SURPLUS DEU O Qd2 Qd1 QS1 QS2 Q Surplus

Minimum prices for a product where the country is self-sufficient SEU e d Pi NET COST f a b c Pw REVENUE FROM SALE OF SURPLUS ON WORLD MARKET DEU O Qd2 Qd1 QS1 QS2 Q Surplus

CAP EU was net importer of most food, so could support price via tariff: technically known as a ‘variable levy’. Costs borne largely by consumers,

+DROW = DW DEU SW SEU SROW Effect of EU price supports and export subsidies on world market. BEFORE P +DROW = DW DEU SW Pw SEU SROW O QW Q EU Imports ROW Exports

DROW DW DEU SW S*EU S*W SEU SROW Effect of EU price supports and export subsidies on world market. AFTER P DROW DW DEU SW PEU S*EU S*W Pw SEU P*W SROW Lower World Price Lower ROW World Supply V. Bad for poor ROW DEU SEU O Q Dumping on ROW EU Dumping

Follow-on Problems of Oversupply EU switches from net food import to exporter in most products. Source; Baldwin and Wyplosz

The cost to the taxpayer of high fixed prices Pe D O Q

The cost to the taxpayer of high fixed prices Pi Pe D O Q

The cost to the taxpayer of high fixed prices b Pi Pe D Qd Qs O Q Surplus

The cost to the taxpayer of high fixed prices b Pi Pe COST TO THE TAXPAYER D d c Qd Qs O Q Surplus

The cost to the taxpayer of subsidies Pe D Q1 O Q

The cost to the taxpayer of subsidies Pf Pe Subsidy S2 b Pc D Q1 Q2 O Q

The cost to the taxpayer of subsidies Pf COST TO THE TAXPAYER Pe b Pc D Q1 Q2 O Q

The cost of price and other market support for agriculture in the EU

AGRICULTURE AND AGRICULTURAL POLICY Justification of the CAP assured supplies of food support for farm incomes growth in agricultural productivity stable agricultural prices reasonable prices for consumers 10

AGRICULTURE AND AGRICULTURAL POLICY Criticisms of the CAP agricultural surpluses static costs dynamic costs irrational relative prices removes disciplines of markets redistributive effects 11

Other CAP Problems The farm income problem: average farm incomes fail to keep up despite huge protection and budget costs most of money goes to big farms that don’t need it: CAP makes some farmers/landowners rich keeps average (i.e. small) farmer on edge of bankruptcy farmers continue to exit farming (2 per cent per year).

Effects on the Environment: Factory farming: pollution animal welfare Other CAP Problems Effects on the Environment: Factory farming: pollution animal welfare nostalgia. Bad for ‘image’ and thus public support for CAP. Effects on Rest of the World Lowers Prices and supply Affects poor countries very badly

AGRICULTURE AND AGRICULTURAL POLICY Possible reforms of the CAP price reductions production quotas set aside diversification low-intensity farming income support the MacSharry and other reforms 11

CAP Reforms Supply control attempts: 1980s, experimentation with ad hoc and complex set supply ‘controls’ to discourage production e.g. Milk quotas and cereal ‘set-aside’ generally failed; technological progress and high guaranteed prices overwhelmed supply controls.

CAP Reforms 1992: MacSharry Reforms: basic idea: cut prices supports to near world-price level and compensate farmers with direct payments was essential to complete the Uruguay Round worked well.

Effect of the MacSharry reforms on cereal surpluses b P1 D d c Qd1 Qs1 O Q Original surplus

Effect of the MacSharry reforms on cereal surpluses Reduction in intervention price S1 a b P1 P2 D d c Qd1 Qs1 O Q

Effect of the MacSharry reforms on cereal surpluses b P1 P2 Effect of Set-aside D d c Qd1 Qs1 O Q

Effect of the MacSharry reforms on cereal surpluses b P1 a¢ b¢ P2 D d c¢ c Qd1 Qd2 Qs2 Qs1 O Q Reduced surplus

Capped agriculture budget for first time Further CAP Reforms Agenda 2000 MacSharry Mark II, lower price floors and more de-linked direct payments |Prices in 2002 only 73% of 1990 levels and more proposed Rural development policy switching towards specialist provision (herbs, organics) and alternative local services and industry Capped agriculture budget for first time

June 2003 Reforms; essential to Doha Round: implementation 2004-7 Phase out price supports completely Cap on contribution to large farms (EU 300K) Cap on spending on new members 10 countries share 3.7 b -4.1 in 2006 But average spend is 172 per farm in Easter Europe compared to 5000 in EU15

Evaluation of Today’s CAP Supply problems and food ‘mountains’: left figure: massive shift to direct payments Source; Baldwin and Wyplosz

Evaluation of Today’s CAP price cut reduced EU buying of food: right figure shows important drop in EU storage of food EU dumping of food on world market also dropped. Source; Baldwin and Wyplosz

Farm Incomes and CAP Support Inequity DIRECT PAYMENTSMostly to big, rich farmers: payments intended to compensate, so inequity continued. Half the payments to 5 per cent of farms (the largest). Half the farms (smallest) get only 4 per cent of payments. Most payments also go to wealthy regions

Farm Incomes and CAP Support Inequity Recent studies show that only about half of these payments go to farmers: rest to non-farming landowners and suppliers of agricultural inputs (seed, fertilisers, agri-chemicals, etc.) Should not be overly surprising

Source; Baldwin and Wyplosz CAP Support Inequity Source; Baldwin and Wyplosz

Future Challenges Eastern Enlargement: number of farms will rise from 7 million to 30 million farmland rise from 130 million hectares to 170 million.

EU Newcomers: Farm Facts Source; Baldwin and Wyplosz

Cairns Group http://www.cairnsgroup.org/  Doha Round WTO round: Agriculture key Cairns Group http://www.cairnsgroup.org/ Argentina Australia Bolivia Brazil Canada Chile Colombia Costa Rica Guatemala Indonesia Malaysia New Zealand Paraguay Philippines South Africa Thailand Uruguay Failure in Cancun after African countries walk-out. EU now offering significant cuts