Common Agricultural Policy

Jan Fidrmuc

Brunel University

CAP CAP started as simple price support policy in

1962. Motivation: to support rural areas and farmers

and to ensure European countries produced enough food locally

EU was net importer of food so it could support prices by imposing a tariff (‘variable levy’).

At present, CAP accounts for close to 1/2 of EU budget

EU now is net exporter of agricultural products and most CAP expenditure is on subsidies to farmers

Simple price support with tariff

Q

priceHomeSupply

HomeDemand

Zf Cf

Price floor

Pw

Z CQ

priceHomeSupply

HomeDemand

Zf Cf

Price floor (Pw+T, or Pw’+T’)

Pw

Pw’

T’ T

Z C

Imports (with floor)

Imports (without price floor)

BA

C1 C2

pss

Welfare Effects Consumer surplus falls by

A+ C1+C2+B Producer surplus rises by A In addition, the EU as a

whole gains tariff revenue (not shown here)

Q

priceHomeSupply

HomeDemand

Zf Cf

Price floor

Pw

Z C

BA

C1 C2

Q

priceFamily farm supply curve

Q

price

Total supply curve

Q

priceCommercial farm supply curve

Pw

Pw+TAsmall Abig

Atotal

Zsmall Zbig Ztotal

B

Distributional Implications

Large and more efficient farms tend to gain more from CAP than small inefficient farms

Most of the gains accrue to those who are already rich

Farm size distribution in 1987 Very skewed ownership:

Biggest 7% of farmers owned ½ of the land. Smallest 50% of farmers owned only 7% of the land.

Farm size class (hectares)

Number of farms (millions)

Number of farms as share of total

Share of EU12 farm land in size class

Average farm size (hectares)

1 to 5 3.411 49.2% 7.1% 2.4

5 to 10 1.163 16.8% 7.1% 7.0

10 to 20 0.936 13.5% 11.5% 14.1

20 to 50 0.946 13.7% 25.7% 31.2

over 50 0.473 6.8% 48.6% 117.6

total 6.929 100% 115 (mill.ha) 16.5

CAP Problems: Supply

‘Green revolution’: technological improvements in agriculture

Agricultural output increased rapidly, faster than consumption

EU went from being a net importer of agricultural products to producing more than in needed

Solution 1: EU buys surplus output and ‘stores’ it Solution 2: Surplus output is exported; this requires

subsidies since the EU price floor exceeds the world price dumping

Q

price

ZfCf

Price floor

Pw

S’

HomeSupply

HomeDemand

EU purchase

Q

price

Price floorBA

C1 C2

S1

HomeDemand

S2 S4S3

p1

ss

p3

ss

p2

ss

p4

ssa b c d e

CAP Problems: Oversupply EU switches from being net importer to net

exporter in most agricultural products.

-20000

0

20000

40000

60000

80000

100000

120000

1961

1966

1971

1976

1981

1986

1991

1996

2001-1

0

1

2

3

4

5

6

7

Production (1,000 tons) Export-Imports (1,000 tons)

Area Harvested (1,000 ha.) Yield (tons/ha.), right scale

-40 -20 0 20 40 60

Wheat

Sugar

Beef

Pork

Poultry

Butter

Cheese

1967-70

1996-99

CAP Problems: World market impact EU is a major food buyer.

World MD shifts in (EU does not import food)

Some of EU surplus output is dumped on world market: world MS shifts out

CAP protection and dumping depresses prices on world markets. This harms non-EU food

exporters/producers.Worldimports

price

pwo

pw’

pw”

MD (no CAP)

MD (CAP)

MS (no dumping)

MS (with dumping)

X” X’ Xo

CAP Problems: Budget Buying and storing or dumping food increasingly expensive. EU no longer imports agricultural products no tariff revenue.

€0.0€1.0€2.0€3.0€4.0€5.0€6.0€7.0€8.0€9.0

€10.0

1961

1964

1967

1970

1973

1976

Mill

ion

euro

s

0%10%20%30%40%50%60%70%80%90%100%

Total CAP cost (mill.euros)

CAP's budget share (right scale)

€10

€15

€20

€25

€30

€35

€40

€45

1979

1982

1985

1988

1991

1994

1997

2000

Mill

ion

euro

s

0%10%20%30%40%50%60%70%80%90%100%

Total CAP cost (mill.euros)

CAP's budget share (right scale)

Other CAP Problems Most of money goes to big farms Small farmers continue to exit farming (see graph) Nostalgia: family farms disappear Pollution Animal welfare

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1 to 5 5 to 10 10 to 20 20 to 50 over 50 All farms

Change in number of EU10farms, 1970-1987

Solution: Decoupling

Subsidies paid regardless of production World price allowed to prevail: supply falls and

consumption rises Welfare effect

Consumers gain: a+b Farmers lose: -(a+b+c) Budgetary savings: b+c+d Net effect: b+d

Oversupply eliminated Farmers may need to be compensated for their

losses

Solution: Decoupling

Q

price

World Price

EU supply, S1

EUdemand

EU demand

ab

ZZ’

Price Floor

World Price + T

dc

surplus

CAP Reforms Supply control attempts:

1980s, experimentation with ad hoc supply ‘controls’ to discourage production.

Generally failed; technological progress & high guaranteed prices overwhelmed supply controls.

1992: MacSharry Reforms: Basic idea: CUT PRICES to near world-price level &

COMPENSATE farmers with direct payments. Worked well.

June 2003 Reforms Implementation 2004-2007. Similar to MacSharry reforms in spirit.

CAP Today

Two pillar structure:1. Direct payments and price support2. Rural Development

2007-2013: increasing role of second pillar Single Payment Scheme

Based on historical payments in EU15 Money per hectare in new member states with amount limited

by national ceilings Areas covered by second pillar:

Quality incentives and support to meet standards and covering of animal welfare cost, technical advice

Improving agricultural competitiveness, sustainable land management, improving quality of life in rural areas

Farm incomes & CAP inequity

Reformed CAP support still goes mostly to big farmers. payments intended to compensate, so inequity continued.

Half the payments to 5% of farms (the largest). Half the farms (smallest) get only 4% of payments. Recent studies show that only about half of these

payments go to farmers. Rest to non-farming landowners and suppliers of agricultural

inputs (seed, fertilisers, agri-chemicals, etc.) See: “Who Finances the Queen’s CAP payments?” http://shop.ceps.be/BookDetail.php?item_id=1285

CAP supports inequity