4a: European Agricultural Policy Flashcards
What is the CAP?
- system of policy intervention in the European agricultural market
- Rooted in the 1960s, system rewards farmers for the output they produce (through subsidies) and protects the EU agricultural market from external trade (through tariffs)
- The programme is the most expensive scheme in the EU - accounting for 42% of EU budget, most controversial
Objectives of CAP
(Treaty of Rome)
- Improvement of efficiency and productivity
- Maintenance of a certain degree of self-sufficiency
- Stabilization of markets (prices)
- Guarantee fair standard of living for the agricultural community
- Agreement that supplies reach the consumer at reasonable prices
Underlying Principle of CAP
Establishing a single market
- Removing distortions
- Harmonizing legislation
- operating a common intervention system
Community preferences for domestic production by reducing international competition through protection
Founding financial solidarity in support of the agricultural sector
- Sharing the cost of the CAP between the member states and centralizing the necessary funding
- European Agricultural Guidance and Guarantee Fund (EAGGF)
The beginnings of the CAP
- As a result of the introduction of the CAP, several positive effects became visible:
- Stable prices for farmers
- Increased food production
- Social cohesion“ between rural and urban Europe increased
- Tariffs also generated profits for the EU budget
- First steps towards a common European market
- The main negative effects – price increases – were at the time disguised by the post-war effects.
Supply of Agricultural Products
Short-term fluctuations
- Natural conditions (soil, climate, weather)
- Pests and diseases affecting crops and animals
- Biological constraints
Long-term trends
- Technological innovation (e.g. limits the need of land)
- Economic improvement (e.g. economies of scale)
–> Cost reductions through CAP do not necessarily lead to more profits or higher wages, but to lower prices for consumers
Demand of Agricultural Products
- Low price elasticity: at a given income, a fall in the price of a commodity will induce a proportionally smaller increase in the quantity bought
- Low income elasticity: at a given commodity price, as economic growth raises personal incomes, the demand shifts increasingly against the purchase of basic food
Agricultural income:
- Farm prices and incomes are very sensitive to supply shocks
- Technical progress causes rapid growth in the supply
- Agricultural incomes lag behind the rate of growth of national income
Problems of the CAP as a Consequence of the Supply Problem
Mountains of butter:
- Even with no imports, production > consumption
Dumping:
- EU price > world price (payment of export subsidy)
- Drives world price even lower
- Budget implications
- WTO
Subsidy distribution:
- Price support keeps smallest farms in business, but most of the incomes goes to the largest, richest farmers
- 35% get 78% benefits (mid 1980s)
- 20% get 80% benefits (1992)
- Reforms (1995)
Other Problems with CAP
Environment:
- High stable price for output led to:
- Intensification (more fertilizers and pesticides)
- Specialization (crops and animals separate)
Factory Farming:
- Increase in agricultural pollution
- Aim of preservation of rural area / landscape is not fulfilled
- Animal welfare decreased
Solutions of CAP Problems
- price floor needed to be eliminated -> difficult
- solution: price decoupling
- other supply control attempts
- 92: MacSharry Reform
- 03 Reforms
CAP Today Pillar I
Single Payment System
- Payment to farmers is decoupled from their production.
- The subsidies are directly tied to cross compliance. That is, farmers need to comply with the EU and national rules on environmental impact, European food safety and animal welfare.
- some exceptions (wine, olives, milk and most importantly: sugar)
CAP Today Pillar II
Rural Development
- Wide ranging development schemes are subsidized:
- New quality incentives for farmers
- New support to help farmers meet standards
- Farm Advisory System
- Animal Welfare costs
The current aim of the rural development policy for 2007-2013 is based on…
- Improving agricultural competitiveness
- Rendering agriculture more environment-friendly
- An improvement of living standards in rural areas.
