Common Agricultural Policy
Sectors covered by the CAP
The common agricultural policy price intervention covers only some agricultural products, which are, by mutual agreement, subject to the organisation of the EU market:
- cereal, rice, potatoes
- dried fodder
- milk and milk products, wine, honey
- beef and veal, poultry meat and eggs, pig meat, sheep / lamb meat and goat meat
- fruit and vegetables
- peas, field beans
- sweet lupins
- olive oil
- seed flax
- fibre flax
- flowers and live plants
- animal feed stuffs
The coverage of products in the external trade regime (EU) is more extensive than the coverage of the CAP regime. This is to limit competition between a CAP product or any EU product with added-value produced from a CAP covered product with an external product (for example, litchi juice could potentially compete with orange juice).
The creation of a common agricultural policy was proposed in 1960 by the European Commission. It followed the signature of the Treaty of Rome in 1958, which established the Common Market. The six member states were to be strongly affected by State intervention, in particular in regards to what was produced, intervention prices and farm structures.
Some Member States, in particular France, and all farming professional organisations wanted to maintain strong state intervention in agriculture, however, some of the policies had to be transferred at the European Community level.
In 1962, general orientations of the CAP were set, built upon three major principles:
- market unity
- Community preference
- financial solidarity
Since then, the CAP has been a central element in the European institutional system.
The initial objectives were set out in Article 39 of the Treaty of Rome:
- to increase productivity, by promoting technical progress and ensuring the optimum use of the factors of production, in particular labour;
- to ensure a fair standard of living for the agricultural Community;
- to stabilise markets;
- to secure availability of supplies;
- to provide consumers with food at reasonable prices.
The CAP recognised the need to take account of the social structure of agriculture and of the structural and natural disparities between the various agricultural regions and to effect the appropriate adjustments by degrees.
The CAP is an integrated system of measures which works by maintaining commodity price levels within the EU and by subsidising production. There are three principal mechanisms:
- Import Tariffs are applied to specified goods imported into the EU. These are set at a level to raise the World market price up to the EU target price.
- An internal intervention price is set. If the internal market price falls below the intervention level then the EU will buy up goods to raise the price to the intervention level. The intervention price is set lower than the target price. The internal market price will vary in the range between the intervention price and target price.
- A system of production subsidies. Historically these have been set at different levels for different crops, but a flat-rate subsidy per productive hectare is being phased in. There are additional subsidies for environmentally beneficial farming methods.
The CAP also uses external trade policy and legislative harmonisation within the Community. Some non member countries have negotiated quotas which allow them to sell particular goods within the EU without tariffs. This applies to some countries which had a traditional trade link with a member country.
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An obstacle to Community trade is the diversity of national laws regarding production or trade. Examples are the use of preservatives, coloring agents, hormones and disease control (e.g.during the foot and mouth disease outbreak in the United Kingdom, Ireland and the Netherlands). In spite of a harmonization process, it is far from complete and some issues are still to be resolved.
The CAP is funded by the European Agricultural Guidance and Guarantee Fund (EAGGF) of the EU. CAP reform has steadily lowered its share of the EU budget but it still accounts for nearly half EU expenditure. In recent years the biggest beneficiary of these subsidies has been France. The new accession countries 2004 have large farm sectors and would have overtaken France as chief beneficiary. This would have placed an unsupportable strain on the budget and led to French concessions on reform of the CAP.
Criticism of the CAP has united some supporters of globalization with the anti-globalisation movement in that it is argued that these subsidies, like those of the USA and other Western states, add to the problem of what is sometimes called Fortress Europe; The West spends high amounts on agricultural subsidies every year, which amounts to unfair competition. The OECD countries' total agricultural subsidies amount to more than the GDP of the whole of Africa.
Moreover it is argued that in creating an oversupply of agricultural products which are then sold in the Third World and simultaneously preventing the Third World from exporting its agricultural goods to the West, the CAP increases Third World poverty by putting Third World farmers out of business.According to the Human Development Report 2003 in 2000 the average dairy cow in the EU received $913 in subsidies, compared with an average of $8 per person in Sub-Saharan Africa.
The CAP is seen as a social tool to assist economically deprived areas and preserve the rural environment. Changes in the last decade began to switch subsidy towards land set aside out of cultivation and for improving the rural landscape. Current changes to the system have switched money away from payments for planting specific crops to flat-rate payments for any land capable of cultivation. This is intended to encourage alternative non-production land use and allow farmers more freedom in choosing crops. A maximum amount was placed on the subsidy payable to any single farm. This seeks to increase the proportion going to smaller farmers, though the largest single amounts continue to go to those who already have the scale benefits of large operations.
There is a significant public will for land to be maintained in its current state for recreational purposes. This essentially means that people are willing to pay farmers a subsidy simply to maintain the landscape. Such benefit is difficult to quantify when assessing the 'cost' to the EU of farm subsidy.
Inflated food prices in EU
CAP price intervention causes artificially high food prices throughout the EU. Some have suggested that Europeans pay about 25% higher prices for food than they would without the CAP, whereas the Timbro research institute has counted figures reaching over 80%. Some commodities have even more inflated prices: European sugar costs more than three times the global market price. This subsidy is estimated to cost each EU citizen on average £16 or €24 per week although intervention costs and subsidy are decreasing.
Equity among member states
The agricultural sector is greater in certain areas of the EU, notably France, Spain, and Portugal and consequently, these areas receive more money under the CAP. Other countries have greater net contributions, such as Germany and the Netherlands (the biggest contribution per head in the EU budget). Under the common rules for all countries, the UK would be contributing considerably more. This was a factor in Margaret Thatcher's successful negotiation of a special annual "rebate" in 1984, along with the fact that the UK was the third poorest member state at that time.
Some major critics of the Common Agricultural Policy reject the idea of protectionism, either in theory, practice or both. Free market advocates are among those who disagree with government intervention because, they say, a free market (one without such intervention) will allocate resources much more efficiently. Subsidies allow many small farms to continue to operate which would not otherwise be viable. A straightforward economic model would suggest that it would be better to allow the market to find its own price levels, and for uneconomic farming to cease. Resources used in farming would then be switched to more productive operations.
Many economists believe that the CAP is unsustainable in an enlarged EU. The inclusion of ten additional countries on May 1, 2004 has obliged the EU to take measure to limit CAP expenditure. Poland is the largest new member and has two million smallhold farmers. However, reform of the programme has proven difficult because of political constraints in the form of strong agricultural lobbies.
Reforming the CAP
The CAP has always been a difficult area of EU policy to reform; this is a problem that began in the 1960s and one that continues to the present day, albeit less severely. It can be described as a "path dependant" institution due to the institutional make-up of the policy; the Agricultural Council is the main decision-making body for CAP affairs and is dextrously manipulated by those states that hold the CAP most dearly, such as France. Above all, however, unanimity is needed for most serious CAP reform votes, resulting in rare and gradual change. Outside Brussels proper, the farming lobby's power has been a factor determining EU agricultural policy since the earliest days of integration. Once a mighty force to be reckoned with, this lobby's power has decreased markedly since the 1980s, but even today, some attempts at reform are stymied by this group.
In recent times, however, change has been more forthcoming, due to external trade demands and the intrusion in CAP affairs by other members of the EU policy framework, such as consumer advocate working groups and the environmental departments of the Union.
Helping to keep the CAP intact, though, is the normative background of the policy. Farming is regarded as "special". A part of Europe's shared heritage is farming, food production and even fine dining; all of these are used as rationales for keeping the CAP strong. It is not simply just another industry, hence its massive prescence in the EU psyche (and the EU budget.) Finally, the aim of self-sufficiency and a "shared larder" in Europe, a particularly salient concern in the post-war years, lingers to this day.
With the above in mind, it is clear that reform was as infrequent as it was underwhelming until fairly recently. Early attempts at reforms, such as the Mansholt Plan, tended to fail. The Mansholt Plan was a 1960s idea that sought to remove small farmers from the land and to consolidate farming into alarger, more efficient industry. Farming's special status, and above all the extremely powerful farming lobbies across the Continent saw the Plan disappear from the Union's objectives.
Bruised by the failure of Mansholt, would-be reformers were mostly absent throughout the 1970s, not least due to the various financial crises that rocked the union in this decade, such as oil supply problems and the depression in the United Kingdom. A system called "Agrimoney" is introduced as part of the fledgling EMU project, but is deemed a failure and does not stimulate further reforms.
The 1980s was the decade that saw the first true reforms of the CAP, foreshadowing further development from 1992 onwards. The influence of the farming bloc declined, and with it, reformers were emboldened. Environmentalists garnered great support in reining in the CAP, but it was financial matters that ultimately tipped the balance: the UK's notorious demand for an EU budget rebate made CAP expenditure untenable. These factors combined saw the introduction of a quota on dairy production in 1984, and finally, in 1988, a ceiling on EU expenditure to farmers. However, the basis of the CAP remained in place, and not until 1992 did CAP reformers begin to work in earnest.
In 1992, the MacSharry reforms (named after the European Commissioner for Agriculture, Ray MacSharry) were created to limit rising production, while at the same time adjusting to the trend toward more free agricultural markets. The reforms reduced levels of support by 29% for cereals and 15% for beef. They also; created 'set aside' payments to withdraw land from production; payments to limit stocking levels; and introduced measures to encourage retirement and forestation.
Since the MacSharry reforms cereal prices are closer to the equilibrium level, there is greater transparency in costs of agricultural support and the 'de-coupling' of income support from production support has begun. However, the administrative complexity involved invites fraud, and the associated problems of the CAP are far from being corrected.
It is worth noting that one of the main catalysts behind the 1992 reforms was the need to pacify the EU's external trade partners at the Uruguay round of the GATT trade talks with regards to agricultural subsidies. This set the tone for later reforms which were more often than not direct responses to external pressures on the Union, as opposed to a genuine and spirited response to the various anti-CAP groups existing within the EU.
On 26 June 2003, EU farm ministers adopted a fundamental reform of the CAP, based on almost entirely "decoupling" subsidies from a particular crop. (Though Member States may choose to maintain a limited amount of specific subsidy.) The new "single farm payments" are linked to respect of environmental, food safety and animal welfare standards. The aim is to make more money available for environmental, quality or animal welfare programmes by reducing direct payments for bigger farms.
Details of the UK scheme were still being decided at its introductory date May 2005. Details of the scheme in each member country may be varied subject to outlines issued by the EU. In the UK the single payment scheme provides a single flat rate payment of around £230 per hectare for maintaining land in cultivateable condition. This will be phased in from 2005 to 2012 such that each year an increasing proportion of subsidy is paid under the new scheme. The remaining proportion will be paid under the pre-2005 scheme which provided different subsidies for different crops. The new scheme allows for much wider non-production use of land which may still receive subsidy. Additional payments are available if land is managed in ecologically friendly ways.
The overall EU and national budgets for subsidy have been capped so that actual payment per hectare will depend upon the total number of hectares each year for which subsidy claims are made.
The reforms enter into force in 2004-2005. (Member States may apply for a transitional period delaying the reform in their country to 2007 and phasing in reforms up to 2012) 
EU expansion 2004
The expansion of the EU in 2004 increased the number of farmers from 7 to 11 million, increased the agricultural land area by 30% and crop production by 10-20%. The 2004 entrants into the EU have immediate access to price support measures (export refunds, intervention buying). However direct payments will be phased in over 10 years (2004-2014), starting at 25% of what existing countries get. The 2004 entrants to the EU have access to a rural development fund (for early retirement, environmental issues, poorest areas, technical assistance) with a €5bn budget.
The current areas that are issues of reform in EU agriculture are: Lowering prices, food safety and quality, and stability of farmers incomes. Other issues are environmental pollution, animal welfare, and finding alternative income opportunities for farmers. Some of these issues are the responsibility of the member states.
Sugar regime reform 2005
One of the crops subsidised by CAP is sugar, produced from sugar beet; the EU is by far the largest sugar beet producer, with annual production 16m - 18m tons. This compares to the levels produced by Brazil and India (the two largest producers of sugar from sugar cane).
Sugar was not included in the 1992 MacSharry reform, or in the 1999 Agenda 2000 decisions; sugar was also subject to a phase-in (to 2009) under the Everything But Arms trade deal giving market access to least developed countries. In 2005 the European Commission is planning to cut the minimum beet price by 39% from 2006, over two years. Under the Sugar Protocol to the Lome Convention, nineteen ACP countries export sugar to the EU, and will be affected by price reductions on the EU market.
These proposals followed the WTO appellate body largely upholding on 28 April 2005 the initial decision against the EU sugar regime.