Understanding CAP Reform: Past, Present, and Future Prospects

1. CAP Reform Ref: CAPreform feb07

2. 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)

3. 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

4. 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

5. 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

6. 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

7. Early 1980s ‘Guidelines for European Agriculture’ • Aim: reduce production & prices • Partially implemented, not significant

8. 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

9. Fig2 CAP:Milk quota Quota P S Pintv C D Pw D Q Qs

10. 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

11. 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

12. Fig3 CAP: Alternative - price support reduction v quota P S Pintv P1intv Pw D Q

13. Fig3 CAP: Alternative - price support reduction v quota P S Pintv F F P1intv Pw D Q

14. Fig3 CAP: Alternative - price support reduction v quota P S Pintv F G F P1intv Pw D Q

15. 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

16. 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

17. Environment: Discourage intensive production methods • Subsidies no longer depend upon output alone • Cross-compliance • Exclude small farms

18. 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

19. 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

20. Fig4 CAP: Choice - set aside or not? Ssa P S a b Pintv Pw D Q Qsa

21. Fig4 CAP: Choice - set aside or not? Ssa P S a b Pintv H Pw D Q Qsa

22. 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

23. 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

24. 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

25. 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)

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

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

28. 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