Common Agircultural Policy (CAP) Reforms

1. Common Agircultural Policy (CAP) Reforms Prof. Carlos San Juan Claudia Eigner Brian Kehoe Thomas Thalhammer

2. Outline • Background • CAP Reforms • CAP+WTO • Example (sugar industry) • Effects of 10 new member states • CAP in the future

3. Common Agricultural Policy • Created (Treaty of Rome) 1960 • 6 Member States • Principles: • Market Untiy • Community Preference • Finacial Solidarity

4. Reasons for Intervention • Economic,Social,Political and Strategic • CAP objectives: • Self sufficiency • Saving foreign exchange • Stabilise prices • Improve efficiency and productivity • Enviromental awareness (recent)

5. How the CAP works: • Import Tariffs • Import Calendars • Internal intervention • Subsidies • Quotas • External trade policy • Legislative harmonization • Funded: 44% EU´s Budget 2005 (€43 billion)

6. Problems • Anti development • average dairy cow in the EU received $913 in subsidies, compared with an average of $8 per person in Sub-Saharan Africa. • Inequality • 80% of funds go to the largest 20% of farmers, while the smallest 40% get only 8% of funds. • Artificially high food prices • Europeans pay about 25% higher prices for food • Equity among member States • State intervention

7. Reforms Pre-2003 • 1960s Mansholt Plan • Lobby groups (failure) • 1980s Problems highlighted • Expensive and wasteful • 1992 Mac Sharry Reforms • Euroscepticism and External trade demands • Limited production • Set aside and forestation programs • Reduced support

8. Supply Response of EU Agriculture to the Common Agricultural PolicyJosé A. Mendez, Ricardo Mora and Carlos San Juan • First, agricultural output is responsive to agricultural prices. • Second, the MacSharry reforms have been instrumental in restraining agricultural production. • Third, agricultural output would have been higher if the EU had not applied the CAP.

9. These results are important and have broad implications • First, they strengthen the position of those reformers both within and outside of Europe that argue for lower price supports as an appropriate policy for stemming European agricultural surpluses. • Second, they indicate that recent EU reforms, which have in effect extended the MacSharry reforms, are appropriate measures for curbing European agricultural surpluses.

10. CAP Reforms Post 2003 • 2003 Reforms • Single farm payment • Stronger rual develpment program • Financial discipline • Reduced intervention • Enviroment • 2004 Expansion (10 new members) • 2006 Sugar Reforms

11. According to the Commission, the key elements of the new reformed CAP-03 are, in a nutshell: • A single farm payment to be made to EU farmers, independent of production; • Limited coupled elements may be maintained to avoid abandonment of production, • This payment will be linked to respect for environmental, food safety, animal and plant health and animal welfare standards, • “cross-compliance”: the requirement to keep all farmland in good agricultural and environmental condition budget for the new rural development policy.

12. CAP-03 (cont.2) • A strengthened rural development policy using more EU budget. • “Modulation”: A reduction in direct payments for lager farms to increase the rural development budget. • Possibility to reach a WTO agreement

13. WTO & CAP • „ The World Trade Organisation is the only international organisation dealing with the global rules of trade between nations. It‘s main function is to ensure that trade flows as smoothly, predictably and freely as possible.“

14. WTO & CAP • WTO‘s Agricultural Agreements • Objectives: • Trade liberalization • Free market • Fair competition • Less distorted sector • Marrakesh Agreement of 1994

15. Situation before the reform of the sugar sector in the EU • A-quotas • B-quotas • C-quotas • Minimum-price • Intervention price • High import tariffs

16. Reasons for the sugar reform • EU‘s sugar price is three times as high as world market level • Protection • supply > demand  excess is dumped on the world market and subsidized very high • EU is accused for ist export policy • Current regulations run out on 30.6.2006 •  EU sugar reform come into force on 1.7.2006

17. Key aspects of the sugar reform • Price cut for sugar • by 36% over 4 years • Compensation for farmers • by about 60% of their income loss • by decoupled direct payments • Restructuring Fonds • Within a four year period

18. Key aspects of the sugar reform • Reduction of quotas • Within the first four years not compulsory • One single quota • Transmission mechanism • EU sugar production will decrease • Reduction of sugar export subsidies

19. Key aspects of the sugar reform • Supporting ACP-partners and least developed countries • ACP-countries  assistance scheme • Least developed countries  complete tariff elimination until 1.7.2009

20. Effect of 10 new member states • 1 May 2004 • From 380 to 454 million people • Larger internal market • Opportunities • Stable prices • Direct income support • Key challenges • Improve prosperity in agriculture and rural society (integration)

21. Effect of 10 new member states • Acceding countries • Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia (and now also) Bulgaria and Rumania • Candidate countries • Turkey but not yet in negotiations • Applicant countries • Croatia, Former Yugoslav, Republic of Macedonia

22. Effect of 10 new member states • Importance • Targeted rural development schemes • Sapard • European agreements • Double zero arrangement • Double profit arrangement Increased exports to EU • Single market • Goods, people, money + services

23. Effect of 10 new member states • Euro (single currency) • 12 EU countries • Austria, Belgium, Finland, France, Greece, Ireland, Luxembourg, the Nederlands, Portugal + Spain + Slovenia (from 2007) • National currency • Denmark, Sweden + United Kingdom

24. Effect of 10 new member states • On farmers • From 7 to 11 million • From 130 to 168 hectars (+30%) • +10-20% production • +6% gross value added of agriculture • Differences: new Member States - EU15 • High income consumers-demand high quality • Income growth-growing markets of meat, fruits+vegetables, fresh milk products+cheese • Fair change + equal market opportunities

25. Effect of 10 new member states • Benefit of the farmers in the new Member States • Free access to EU single market • Policies for development • Financial and other support • Modernisation and restructing • Gross value added 2002-2010: +35% • Significant disparities (lack of capital)

27. Funds and Instruments for New Member States 2004-06

28. CAP Budget • Overall EU budget: 106.5 billion € (2006) • 10 new Member States: 15% (16 billion €) • Agricultural and rural development: 40% (4,7 bn €) • Direct payments 1,7 bn € • Market expenditure 1,0 bn € • Rural developement 2,0 bn € • Rural Development is an imortant part: See next graph.

30. CAP in the future • Direct payments: • 10-year phase-in period until 2013 • Topping up options • Single Area Payment scheme (SAPS) • 8 New Member States (SAPS) • Malta + Slovenia (CAP)

31. Phasing-in of direct payments over 10 years • Farmers in the new Member States qualify to receive direct payments from their first year as members of the EU. • However, these will not be paid at the full rate applying in the EU-15 until the end of a 10-year phasing-in period. • By 2013 the direct payment rates of farmers in the new Member States will be aligned with those of the existing EU. See next graph.

32. Phasing-in of direct payments over 10 years The percentages of the EU-15 level present payment that apply in the new Member States in each year are shown in the graph below.

33. Topping up options • In order to bridge the difference in direct payment levels between the EU-15 and the new Member States during the phasing-in period. • The new Member States can (in agreement with the Commission) top up EU direct payments, using complementary national direct ayments, • via one of two options: (see next grph)

36. The rationale for offering this special scheme is that: • In the first years after accession the new members may opt to use a different type of direct aid scheme for their farmers – one that is not on offer in the EU-15. This different aid scheme is a simpler concept than schemes operating in the EU, or the single farm payment of the future. • The new Member States have little experience of complex farmer support systems; • Given the short time between conclusion of the accession negotiations and the accession itself it was difficult for national administrations to set up the necessary control systems for the standard EU schemes; • The new single farm payment poses a problem for the new Member States as it is not possible to calculate payment entitlements for their farmers on the basis of the same historical reference period as used in the EU-15 (2000-2002).

37. CAP in the future • EU‘s agricultural policy • Stable supply of food • Reasonable standard of living • Farming in all regions • Well-being of rural society • Quality • Safety • Protection of environment • Animal health + welfare conditions • Minimal cost

38. CAP in the future • Rural development programms • Investment and restructing aids • Temporary income support • CAP‘s mechanisms will not apply immediately • Time to adapt administrative procedures • Disparities – changes • Market support measures

39. CAP in the future • Increasing concern about food safety • Greater emphasis to rural development measures

40. CAP in the future • Reforming of sectors • Cotton, hops, olive oil + tobacco • Fruit, vegetables + sugar • Stronger agricultural player • Direct aids • Rural development programming • Structural funds programms • Good income prospects • New competitiveness (price+quality) • Investment for new standards+more market shares