Common Agricultural Policy (CAP) Flashcards
Why was CAP 1963 controversial (4)
Large % of budget
High prices for EU consumers, and
RoW negatively impacted
Original CAP harmed the environment (early 90s, 40% farmland signs of over-fertilisation)
CAP principles (3)
Community preference i.e buy EU food
Free trade (in EEC)
Shared financial responsibility
Main objectives of CAP (5)
Raise productivity (issue as increases S1 and surplus to pay in diagram)
Fair standard of living for workers
Stabilise markets
Assure supplies
Reasonable prices for consumers
Problems in agriculture (2)
Cobwebs theory - time lags e.g if wheat price high now, it takes time to grow, by then price may have dropped
Inelasticity of demand creates price instability - if demand inelastic, a change in supply will lead to larger change in price.
Price support mechanism diagram
Ptarg is the target price (high since area of shortest supply)
Pe is equilibrium price
World price is below
Threshold price (Pth) is target price - transport cost (i.e getting from Germany shortest supply area to Rotterdam the largest port in EU)
Pinv - minimum price of 16; i.e if no one buys, surpluses are bought by the EU (contributed to CAP high budget expenditure)
Aim of a threshold price
Aim is to ensure imports do not flood into the EU
Since world price is only 8, it means now they have to pay 18 since it goes through the Rotterdam port
How to apply and ensure threshold price is applied to world price
Variable levy (VL) (i.e tariff)
Pthreshold - Lowest world price = 10
Intervention price (Pinv )
Minimum price - based on the place with the most supply
(Meet aim of fair prices for farmers)
EU budget: where do they get revenue from
Own resources (most EU pay 2% GDP)
Examples of own sources
Agricultural levies
Customs duties
As EU became more self sufficient replaced with
VAT resources
GNP based
EU revenue breakdown in 2015
Now GNI based contribution 74% of EU revenue
VAT 2nd with 13%
(Little from customs duties now)
CAP % of EU expenditure in 2015
CAP took 40% of EU budget expenditure
Following enlargement, without reform it could’ve increased to 70%
Why was this cost dampened for UK in particular
UK rebate 1984 , given refunds since were main net contributors towards EU.
(Contentious as other countries pay for it
CAP did increase productivity. How much did cereal production increase between 1960 and 1980?
Why was high productivity an issue….
(Use diagrammatic proof to help)
Doubled - 61m tons to 120m tons
B) High productivity increases surpluses, thus CAP expenditure!!!
8% of EU spending on agriculture is fraudulently taken.
Name an example of fraud in CAP
Dizzy pig syndrome
Exporting pigs to UK got subsidy, would sneak pigs back across border, and export again!!
Contributed to high expenditure too
CAP was also inequitable within the EU.
How so for consumers and producers?
High prices - Regressive - hits poor worst
Producers - small farms received 20% CAP funding, large farms got 80%
(Solved in 2014 reform - limited 300k cap per farm, and also reserved 30% for environmentally friendly farms)
How was CAP made even more complex and eval
B) summary of extra issues of CAP considered (4)
Green money - artificial exchange rates to help CAP functioning.
Eval: introduction of euro alleviated this since only one exchange rate
B) So fraud, green money and high productivity, inequitable was also an issue
Diagram of CAP to show CS and pS
Which 2 prices do we use for simplification
Only use world price and intervention (minimum) price, and this time let world price = equilbrium price
Loss of CS = -a (since higher prices)
PS = a+b (can produce more)
Surplus is a to b: leads to overproduction since EU will buy up the surplus (either to store or dump on world markets)
How much does it cost the EU if the surplus is exported outside of the EU
B) what if EU buy ALL the surplus (to dump or store)
Since outside the EU they will export it at Pw (8) and pay the other 8, so cost to EU is abcd. (For covering/paying farmers the difference between world price and intervention price)
B) abfe
What was the first reform of CAP introduced in 1980s
B) how much more milk was EU producing than required
Quotas - milk in particular was successful
B) EU was producing 30% more than needed
Milk quota diagram - and effects (PS, CS etc)
Just use Pw and Pint (min price)
Instead of producing at Qint, produce at Qs
C+D is expenditure saved (since EU no longer have to pay for the surplus)
C is also loss in producer surplus
No change in CS - still pay high prices Pint
Purple marks where EU are still paying to subsidise (cover difference between Pw Pint)
Why was milk quotas successful
B) so taxed for overproduction. Name of taxes
As milk production has bottlenecks in production, so easy for EU to monitor milk
B) coresponsibility levies
Which were quotas ineffective for
Cereals since more difficult to monitor supply chain e.g could sell anywhere
Mcsharry reforms 1992 - largest reforms of CAP
What was it driven by tho
International pressure - countries fed up of EU protectionism e.g their NTBs and subsidising EU exports on world markets
So what was the main idea of McSharry
Reduce intervention price - more effective than quotas
(Reduces surpluses, export subsidies stopped by 2010)
E.g cereals Pint was reduced by 30%
Mcsharry reform diagram - a fall in intervention price
Effect
CS - increases since Pint falls.
G = net welfare loss
CS+G = loss in producer surplus
Fall in surplus - EU dont have to spend so much on buying up, and also avoids them upsetting RoW via dumping
How did EU compensate farmers for the loss in PS (CS+G)
Gave them direct payments if they give up 15% of their land! To stop overproduction
4.3m hectares given up by 1995!
BUT PROBLEMS TO THIS, COMING UP
Mcsharry aims via the reducing Pint (3)
Increase competitiveness - lower Pint incentivise to become more efficient to maintain profit margins, and increase demand since cheaper which reduces surplus)
Protect environment (from avoiding overproduction)
Improve international relations (since less surplus, less dumping and upsetting RoW
Problem of direct payments (2)
Hint: technical terms
Decoupling - breaks link between production and payment.
Slippage - may just set aside their land which was unable to produce on, thus overproduction may remain
How did Macsharry address environment
Cross compliance - discourage intensive production methods, get money for environmentally friendly behaviour
Reforms 2000 onwards had 2 systems:
Reduce intervention price still (building on from Macsharry)
Environment emphasis - decoupled payments from production (no longer payments if 15% arable land set aside) now more based on environmental goals
How did they improve environment ?
Subsidiary principle (states do more on a localised level)
Fischler reform 2003-13: 2 pillars
Pillar 1: Marker support measures and direct subsidies (McSharry)
Pillar 2: Rural development policy
Pillar 1 was reduced (direct payments) and funding moved more to pillar 2
Pillar 2: what did it support and why
Agriculture as a public good through…
Development of rural areas, and try find alternative sources for income for farmers e.g shearing wool from sheep.
Pillar 1 Pillar 2 allocations 2014-2020
75% of budget 71% being direct payments
Pillar 2 25%
CAP spending as a % of EU GDP 1993 - 2016
B) when were export subsidies (restitution) phased out completely from expenditure
Gone from 0.65% to 0.35%
B) by 2010 (surpluses not being bought up/paid the difference anymore, replaced with increased direct payments and rural development)
Reforms 2014 continued with 2004-13 but with greater emphasis on.. (2)
Greening *(environment again)
Securing food supply
DIRECT PAYMENTS ARE MORE LINKED TOWARD FARMS MEETING ENVIRONMENTAL SUSTAINABILITY
Measures (2)
Address inequity in CAP: cap on what they can pay farms 300k euros to farm per year (since big farms used to get a lot of funding, while small didn’t)
Reserve 30% of CAP funding for environmental friendly farms
Order of reform
CAP 1963
1980s milk quota
McSharry 1992 (reduce Pint - more effective than quota)
2000 reform (continue to reduce Pint + environment)
Fischler 2003 - Direct payments + rural development
2014 reform - greening + secure food supply (300k limit and 30% funding for environmentally friendly farms)
When did CAP’s price support mechanism induce overproduction and become a key issue
B) technical terms used for 2 goods (2)
1970s (hence why quotas followed in 1980s and Mcsharry 1992)
B) butter mountains and wine lakes - refer to large surpluses of overproduction
Mcsharry made direct payments for farmers that gave up 15% arable land.
How much (in hectares) were given up by 1995
4.3M hectares (good as reduced overproduction)
Eval: remember decoupling and slippage
CAP cause harm to environment. By early 1980s, what % of farmland was over-chemically fertilised?
40% of farmland had signs of over-fertilisation)
Ackrill : how much did CAP guarantees (direct payments) cost up till 2006
Thus what did he conclude was the best reform from there
312.5bn (to farmers to stop them overproducing)
B) degressivity - reduce direct payments to large firms (since recognises they have EOS)
Direct payment still carry on today, more linked towards firms being environmental. Export subsidies (paying surpluses) phased out by 2010.
