CAP reforms

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)

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 • Tight budget limits established on CAP expenditure • As negotiations proceeded, overall gain to Ireland

9. Commission’s 2002 Mid-Term Review proposals • CMO changes (mainly in arable sector) • Dairy regime • Decoupling of direct payments • Strengthened eco-conditionality • Modulation of direct payments from first to second pillars

10. Decoupling: rationale • Simplification of payment arrangements • Encourages greater market orientation • Reduces pressure on environment through intensification • Improves efficiency of income transfer to farmers • Makes it easier to extend CAP to accession countries • Makes it easier to defend payments in WTO

11. 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 a reference year

12. 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)

13. 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

14. 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

15. Eco-conditionality • 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? • The monitoring of standards: introduction of farm audits • Mandatory for producers receiving more than $5,000 in direct payments • Financial aid for audits to be available

16. Decoupling: the effects • Output effects • By how much will output fall • Environmental benefits arise through more extensive production… • …but danger of land abandonment in marginal farming areas • Long term sustainability?

17. Mid-Term Review • The story continues…. • Mediterranean products (2003) • Sugar (2005) • Fruits and vegetables (2006) • Explanatory guide – Department of Agriculture and Food website • European Commission DG Agriculture and Rural Development website