The CAP: origins, institutions and
financing
Economics of Food Markets
Lecture 7
Alan Matthews
Objectives
•
•
•
•
•
•
•
The complex structure of EU agriculture
The decision-making processes in the CAP
How the CAP price support mechanisms work
Characteristics of individual common market organisations
The budgetary framework for CAP expenditure
The ‘green money’ mechanism
A critical assessment of the consequences of the CAP
Reading
• Ackrill, R. 2000 The Common Agricultural Policy
• Tracy, M., 1997 Agricultural Policy in the European Union
and other Market Economies
• Fennell, 1997, The Common Agricultural Policy:
continuity and change
• Shucksmith, M., Thompson, K and Roberts, D., 2005,
CAP and the Regions: the territorial impact of the CAP
• Grant, W. 1997, The Common Agricultural Policy
• Ingersent, Rayner and Hine, 1998, The Reform of the
Common Agricultural Policy.
• Commission DG Agriculture and Food website
Differing agricultural structures
Source: European Commission, The CAP Explained
Employment
Gross domestic product
1950
1973
1999
1950
1973
1999
:
:
4.5
:
:
1.8
Belgium
12
3.9
2.4
8.8
4.2
1.2
Denmark
22
9.4
3.3
20.0
9.0
2.0
Germany
23
7.3
2.9
12.3
3.5
0.9
Greece
54
:
17.0
33.5
:
7.1
Spain
49
:
7.4
35.0
:
4.1
France
32
11.9
4.3
:
6.5
2.4
Ireland
40
25.1
8.6
31.3
19.0
2.9
Italy
39
16.3
5.4
29.5
9.9
2.6
Netherlands
19
6.6
3.2
12.9
5.8
2.4
Austria
32
:
6.2
16.4
:
1.2
Portugal
47
:
12.7
26.8
:
3.3
Finland
:
:
6.4
:
:
0.9
Sweden
18
:
3.0
7.0
n.a.
0.7
UK
5
2.9
1.2
6.0
3.0
0.9
EU-15
Number of
farms
EU-15
Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Netherlands
Austria
Portugal
Finland
Sweden
UK
1997
‘000
6,989.1
67.2
63.2
534.4
821.4
1,208.3
679.8
147.8
2,315.2
107.9
210.1
416.7
91.4
89.6
233.2
Average
farm size
1987
ha
:
17.3
32.5
17.6
5.3
16.0
30.7
22.7
7.7
17.2
:
8.3
:
:
68.9
Average
farm size
1997
ha
18.4
20.6
42.6
32.1
4.3
21.2
41.7
29.4
6.4
18.6
16.3
9.2
23.7
34.7
69.3
Per cent of Per cent of
farms > 50 farms < 10
ha
ha
1997
1997
%
%
8.6
68.6
10.0
44.2
27.8
19.5
14.1
45.6
0.4
90.0
8.2
69.0
29.7
35.3
14.1
19.8
1.8
87.4
7.1
46.4
4.0
46.4
2.3
87.5
8.8
24.2
20.2
29.8
33.7
26.8
Brief history of CAP origins
• Article 33 (ex 39) set out objectives, but left open means to
achieve these objectives
• Note all original member states already had protectionist
agricultural policies, so EC was not starting with a clean
slate
• Key decisions on market mechanisms taken in January
1962, though common prices not achieved until 1968
• Principles established
Market unity
Community preference
Financial solidarity
(Producer co-responsibility)
CAP objectives and instruments
• CAP objectives set out in Article 33 (ex 39)
–
–
–
–
–
to increase agricultural productivity
to ensure a fair standard of living for the agricultural community
to stabilise markets
to ensure the availability of supplies
to ensure that supplies reach consumers at reasonable prices
– Note no mention of environment, food safety or rural development
• Two broad policy instruments
– Price policy implemented through market organisation measures
and funded by the Guarantee Section of EAGGF (FEOGA)
– Socio-structural measures funded by the Guidance Section of
FEOGA
– Original expenditure ratio of 2:1 envisaged, in practice turned out
to be nearer 95:5.
Agricultural decision-making in the EU
• Distribution of powers between EU institutions:
– originally Commission proposes, Council disposes, Parliament
advises, and Court rules
• Greater EP powers of co-decision
– but only consultative powers on CAP expenditure, will change
with Reform Treaty
• Role of member states and lobby groups
– Formalised through management and advisory committees
• Majority voting and the Luxembourg compromise
– Consensus decision-making encouraged by willingness of some
member states to form a blocking minority when ‘vital interests’ of
another are at stake. Of doubtful current relevance
• Annual price review
– Based on formula approach in the past, now of much less
significance because Commission’s powers to manage markets
increased under the Financial Perspective.
Price policy mechanisms
• Cereals taken as the prototypical regime but each
commodity regime has its own characteristics
• Three support pillars of import levies, intervention buying
and export subsidies.
• Additional support through consumer subsidies, aids to
private storage, withdrawals, deficiency payments
• Objective has been to provide price stability as well as
price support, hence variable nature of trade instruments
• Mechanisms are in theory neutral as between farmers and
consumers although price levels in practice set very high
• Support provided at wholesale, not farm, level. Assumes
competition in commodity markets to reflect support back
to farmers.
Pre-GATT Uruguay Round
CAP mechanisms
target price
threshold price
intervention price
variable levy
export subsidy
world price
Import
world price
Internal
Export
The green money (agri-monetary) system
• CAP prices fixed in ecus (euros), require conversion rates
to national currencies
• Conversion rates used administered (green) exchange rates
• Devaluation should raise domestic prices, revaluation
should lower domestic prices
• Governments manipulated green rates to prevent these
market effects from occurring, thus causing market prices
within the EU to diverge
• Differences compensated for by border taxes and subsidies
(MCAs monetary compensatory amounts)
The green money (agri-monetary) system
• Introduction of ‘switchover system’ in 1984 at German
insistence to prevent a cut in German nominal support
prices meant a hidden upward push to support prices in
that decade across the EU (extra 21% by 1992)
• Consequences of green money system and MCAs
– While intended to prevent trade distortions, created additional
distortions due to limited coverage, inadequate compensation and
possibilities of fraud
• Changes consequent to single market 1 January 1993
– Abolition of MCAs and the switchover system
– Compensatory aid to farmers if prices cut by currency revaluation
– Now relevant only to countries outside euro zone
Budget impact of the CAP
• The role of the EU’s ‘own resources’ – currently customs
duties, VAT-based contribution and the GNP resource
• Overall EU budget very small, but share of CAP spending
very high
• Transfers between member states arising from common
financing of the CAP inequitable and a source of
controversy
• Attempts to control budget expenditure have been a
significant driver of CAP reform
Consequences of EU price support policies
• Growth in self-sufficiency due to supply outrunning
demand
• Unforeseen reliance on intervention mechanisms, although
currently much reduced
• Uneven levels of protection across commodities,
particularly for cereals/oilseeds and cereal substitutes
• Regional disparities in support – the North/South divide
within the EU
• Introduction of milk quotas 1984 (until then, sugar was
only CMO using quotas)
Problems of agricultural price policy at
beginning of the 1990s
• an uncommon market
– a single agricultural market was created, but ...
– green currencies kept prices different and...
– veterinary and plant health rules kept the market fragmented
• growing overproduction and intervention overload ...
• … leading to growing budget costs
• the inefficiency of CAP price policy
– large transactions costs incurred to transfer income support
• the inequity of CAP price policy
– larger farmers benefit at the expense of low income consumers,
and more advantaged regions attract higher levels of support
• environmental costs of the CAP price policy
– higher prices encouraged intensification and greater input use