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

2. 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

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

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

5. 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

6. 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

7. 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

8. 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

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

10. 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

11. 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

12. 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

13. 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

14. 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,

15. +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

16. 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

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

18. The cost to the taxpayer of high fixed pricesPe D O Q

19. The cost to the taxpayer of high fixed pricesPi Pe D O Q

20. The cost to the taxpayer of high fixed pricesb Pi Pe D Qd Qs O Q
Surplus

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

22. The cost to the taxpayer of subsidiesPe D Q1 O Q

23. The cost to the taxpayer of subsidiesPf Pe
Subsidy S2 b Pc D Q1 Q2 O Q

24. The cost to the taxpayer of subsidiesPf
COST TO
THE TAXPAYER Pe b Pc D Q1 Q2 O Q

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

27. 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

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

29. 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).

30. 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

31. 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

32. 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.

33. 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.

34. Effect of the MacSharry reforms on cereal surplusesb P1 D d c
Qd1
Qs1 O Q
Original surplus

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

36. Effect of the MacSharry reforms on cereal surplusesb P1 P2
Effect of
Set-aside D d c
Qd1
Qs1 O Q

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

38. 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

39. June 2003 Reforms; essential to Doha Round:
implementation
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

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

41. 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

42. 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

43. 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

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

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

46. EU Newcomers: Farm Facts
Source; Baldwin and Wyplosz

47. Cairns Group http://www.cairnsgroup.org/
 Doha Round WTO round:
Agriculture key
Cairns Group
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