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CAP reforms

This lecture provides a comprehensive discussion of the key reforms in the Common Agricultural Policy (CAP) including the MacSharry reform, Agenda 2000, and the 2003 Mid-Term Review. It also explores the economic implications of these reforms on food markets.

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CAP reforms

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  1. CAP reforms Economics of Food Markets Lecture 8 Alan Matthews

  2. Objectives • To discuss the elements and significance of: • The 1992 MacSharry reform • [1994 conclusion of the Uruguay Round] • The 1999 Agenda 2000 reform • The 2003 Mid-Term Review (Luxembourg Agreement)

  3. Reform landmarks • 1968 the Mansholt Plan • 1977 prudent pricing policy and abandonment of the 'objective method' of price setting • 1984 milk quotas • 1988 agricultural stabilisers • 1992 MacSharry reform • 1999 Agenda 2000 • 2002 Commission's proposals for the Mid-Term Review of Agenda 2000 • 2003 Luxembourg Agreement (ongoing reforms in sugar, Mediterranean products and fruit and vegetables) • 2007-08 CAP Health Check

  4. MacSharry reform • MacSharry reforms cut support prices for cereals (29%) and beef (15%) in return for increased direct payments as compensation to farmers • First time nominal cuts in support prices were introduced • Accompanying measures • Consequences • Greatly increased significance of direct payments • Extended role of supply management policies • Initial over-compensation of farmers • Permitted Uruguay Round to be concluded

  5. Uruguay Round Agreement 1994 • Disciplines on agricultural support policies were a key negotiating item in the Uruguay Round of trade negotiations launched in 1986 • Final agreement 1994 • Converted import barriers into tariffs and reduced them by 36% • Set limits on the volume and value of export subsidies • Set and bound ceilings on the total amount of trade-distorting support each country could provide to its farmers

  6. Volume and value capped and reduced over time tariffs fixed and reduced over time Post-GATT Uruguay RoundCAP mechanisms target price threshold price intervention price export subsidy Domestic support capped and reduced over time world price world price Import Internal Export

  7. Agenda 2000 • Part of wider EU package to prepare for enlargement • But also to prepare EU for further round of WTO talks as well as integrate environmental and rural development concerns • New statement of agricultural policy objectives • Greater emphasis on the promotion of the European model of agriculture • Rationale for farm transfers changing from income support to remuneration for provision of ‘multifunctional’ public goods

  8. Agenda 2000 • Further reductions in support prices for cereals (15%), beef (20%) and, for the first time, milk (15%), again with increased partial compensation to farmers • Stronger emphasis on rural development as ‘second pillar’ of the CAP to complement the ‘first pillar’ of market price support • Set real financial ceiling on CAP Pillar 1 spending for first time • As negotiations proceeded, overall gain to Ireland

  9. Source: US FAS Gain Report No. 34044 CAP Reform 2003

  10. The MTR Agreement • Much more than a Mid Term Review! • June 2003 Agreement • Intervention price cuts (rice, dairy) • Decoupling • Cross-compliance • Modulation • Mediterranean package April 2004 • Sugar November 2005

  11. Intervention price cuts – dairy and sugar • Dairy quotas will be maintained until the 2014/15 season. • Asymmetric price reductions for butter and SMP of 25% and 15% respectively. Compensation payments are provided to milk producers as part of the Single Farm Payment • Sugar prices cut by 36%, buyout scheme to close down production capacity

  12. Decoupling - rationale • Simplification of payment arrangements • Encourages greater market orientation • Will reduce pressure on environment • Will improve efficiency of income transfer to farmers • Will make it easier to extend CAP to accession countries • Will make it easier to defend payments in the WTO

  13. Decoupling: the mechanics • Paid irrespective of production • Though subject to requirement that land is maintained in good condition • Eventual agreement allowed some partial coupling to be retained • Eligibility determined by payments received in the reference years 2000-2002

  14. Decoupling: the options • Start date: After Jan 2005 but Jan 2007 by latest • Design • Basic (historic) approach • Regional (flat rate) approach • Mixed models (static and dynamic hybrids) • Level of pasture must be maintained • Not allowed to grow permanent crops, fruits and vegetables, ware potatoes on eligible land • New Member States have option to continue with Single Area Payment Scheme (uniform payment per ha of agricultural land)

  15. Decoupling: the options • Partial decoupling allowed under strict conditions • Cereals (25% of arable aid); Beef (100% suckler cow premium, up to 40% of slaughter premium), Sheep 50% of ewe premium • Olive oil and cotton • Payment entitlements can be transferred • Financial discipline mechanism

  16. Calculation of entitlements • Historic payment scheme SFP aid per hectare = (Sum of farmer’s individual aid 2000-2002 / average of farmer’s eligible hectares 2000-2002) * payment rate for 2002 Deductions made for national reserve • Regional Aid – flat rate SFP aid per hectare = (Average Sum of aid in region 2000-02 / Average eligible hectares in region 2000-02) * payment rate

  17. Payment options in the UK • Northern Ireland – static vertical hybrid • Consists of a flat rate, area based payment topped up on historic basis for individual farmers • Scotland – historic entitlements • Top slice the payment using the National Envelope mechanism to provide specific support to beef • Wales • Adopted the historic model • England – dynamic hybrid • Moving to a flat rate system from historic entitlements over a transition period to 2012. Two regions defined with different flat rate entitlements

  18. The Single Farm Payment in Ireland • Financial ceiling applicable to each Member State – Ireland €1,322m (including dairy premium) • Where sum of entitlements exceed ceiling linear % reduction applies • 3% reduction for modulation, increasing to 5% - €5,000 threshold (85% of modulated funds remain in Ireland for Rural Development) • Up to 3% reduction for National Reserve • Entitlements can be leased with land, and sold with or without land • Stacking of entitlements allowed in some circumstances

  19. Cross-compliance • Already introduced in Agenda 2000, but suspicions about the commitment of Member States to enforcing this • Proposals cover: • The scope of standards: to cover environmental, food safety, animal health and welfare, occupational safety • The level of standards: meeting mandatory standards or applying good farming practice? • Farmers - as all citizens - expected to respect legislation without support. So payments cannot be justified on multifunctionality grounds that society is paying farmers for unpriced services valued by society

  20. Statutory Management Requirements (SMRs) • From 19 Community legislative acts • 5 directives on environment • Wild Birds, Groundwater,Sewage Sludge, Nitrates and Habitats • 4 Directives/Regulations on the identification and registration of animals • 7 Directives on public, animal and plant health • 3 Directives on animal welfare Directives apply as implemented by MS

  21. Modulation: budget rebalancing • Problem was how to increase funding of the second pillar within constraint of fixed overall agricultural budget • Modulation already introduced as voluntary option for MS in Agenda 2000 • Commission’s proposal to make modulation compulsory opposed: • Leads to redistribution within farming • Leads to redistribution between member states • Countries find it difficult to find the counterpart funds • Second pillar schemes have high transactions costs • Agricultural Ministers not necessarily keen on second pillar spending • Problems in finding sufficient worthwhile rural development projects

  22. Modulation decision • Distribution of funds raised through modulation • One percentage point will remain in the Member States where the money is raised • Remaining amount will be allocated among Member States according to: • criteria of agricultural area • agricultural employment • GDP per capita in purchasing power • Every Member State will receive at least 80% of its modulation funds in return

  23. Financial Perspective 2007-2013 • Embodied Berlin October 2002 agreement on ceiling on CAP Pillar 1 expenditure (constant nominal value plus 1% for inflation) • Net contributors wanted lower overall budget ceiling, which meant squeezing Pillar 2 spending to respect the Oct 2002 agreement • Blair link between CAP reform and UK budget rebate; got EU budget review in return

  24. Financial discipline • Direct support will be adjusted from 2007 when forecasts indicate that CAP Pillar 1 expenditure comes to within €300 million of the ceiling set out in the Financial Perspectives • Expectation that this will be needed to cover costs of Bulgarian/Romanian accession (7%) plus possible costs of any further CAP reform

  25. Towards the Health Check • The story continues…. • Mediterranean products (2003) • Sugar (2005) • Fruits and vegetables (2006) • Wine (2007) • Explanatory guide – Department of Agriculture and Food website • European Commission DG Agriculture and Rural Development website

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