Cap reform
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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)

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CAP Reform

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Cap reform

CAP Reform

Ref: CAPreform feb07


Introduction

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)


Cap reform

Fig1 CAP:Impact on consumer surplus & producer surplus

loss of consumer surplus (CS) – area A

gain in producer surplus (PS) – areas B + A

P

S

a

b

Pintv

Pw

c

d

D

Q


Cap reform

Fig1 CAP:Impact on consumer surplus & producer surplus

loss of consumer surplus (CS) – area A

gain in producer surplus (PS) – areas B + A

P

S

a

b

Pintv

Pw

c

d

D

Q


Cap reform

Fig1 CAP:Impact on consumer surplus & producer surplus

loss of consumer surplus (CS) – area A

gain in producer surplus (PS) – areas B + A

P

S

a

b

Pintv

A

Pw

c

d

D

Q


Cap reform

Fig1 CAP:Impact on consumer surplus & producer surplus

loss of consumer surplus (CS) – area A

gain in producer surplus (PS) – areas B + A

P

S

a

b

Pintv

B

A

Pw

c

d

D

Q


Cap reform

  • Early 1980s ‘Guidelines for European Agriculture’

    • Aim: reduce production & prices

    • Partially implemented, not significant


Reform milk quotas 1984

Reform: Milk Quotas 1984

  • Marketing quotas imposed

    • 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


Cap reform

Fig2 CAP:Milk quota

Quota

P

S

Pintv

C

D

Pw

D

Q

Qs


Cap reform

  • 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

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


Cap reform

Fig3 CAP: Alternative - price support reduction v quota

P

S

Pintv

P1intv

Pw

D

Q


Cap reform

Fig3 CAP: Alternative - price support reduction v quota

P

S

Pintv

F

F

P1intv

Pw

D

Q


Cap reform

Fig3 CAP: Alternative - price support reduction v quota

P

S

Pintv

F

G

F

P1intv

Pw

D

Q


Mcsharry reforms

McSharry Reforms

  • Most radical yet

    • International pressure

    • Partial change

  • Aims incl.

    • Reduce support prices

      • Increase competitiveness

      • Control production & increase demand

    • Protect environment

    • Improve international relations


Cap reform

  • 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


Cap reform

  • Environment: Discourage intensive production methods

    • Subsidies no longer depend upon output alone

    • Cross-compliance

  • Exclude small farms


Choice set aside or not

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


Cap reform

  • Fig 4

    • 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


Cap reform

Fig4 CAP: Choice - set aside or not?

Ssa

P

S

a

b

Pintv

Pw

D

Q

Qsa


Cap reform

Fig4 CAP: Choice - set aside or not?

Ssa

P

S

a

b

Pintv

H

Pw

D

Q

Qsa


Further reform

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

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


Cap reform

  • 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


  • Cap reform

    • 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)


    Cap reform

    Source: House of Lords EU Committee, The Future Financing of the CAP, session 2005-06


    Cap reform

    • UK linked further CAP reform to the UK budget rebate (2005)


    Conclusions

    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


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