Common Agircultural Policy Common Agircultural Policy (CAP)(CAP)

Reforms Reforms

Prof. Carlos San JuanProf. Carlos San Juan

Claudia EignerClaudia Eigner

Brian KehoeBrian Kehoe

Thomas ThalhammerThomas Thalhammer

OutlineOutline

BackgroundBackground

CAP ReformsCAP Reforms

CAP+WTOCAP+WTO

Example (sugar industry)Example (sugar industry)

Effects of 10 new member statesEffects of 10 new member states

CAP in the futureCAP in the future

Common Agricultural Policy Common Agricultural Policy

Created (Treaty of Rome) 1960Created (Treaty of Rome) 1960

6 Member States 6 Member States

Principles:Principles:– Market Untiy Market Untiy – Community PreferenceCommunity Preference– Finacial SolidarityFinacial Solidarity

Reasons for InterventionReasons for Intervention

Economic,Social,Political and StrategicEconomic,Social,Political and Strategic

CAP objectives:CAP objectives:– Self sufficiencySelf sufficiency– Saving foreign exchangeSaving foreign exchange– Stabilise pricesStabilise prices– Improve efficiency and productivityImprove efficiency and productivity– Enviromental awareness (recent)Enviromental awareness (recent)

How the CAP works:How the CAP works:

Import TariffsImport Tariffs

Import CalendarsImport Calendars

Internal interventionInternal intervention

SubsidiesSubsidies

QuotasQuotas

External trade policyExternal trade policy

Legislative harmonizationLegislative harmonization

Funded: 44% EU´s Budget 2005 (€43 billion)Funded: 44% EU´s Budget 2005 (€43 billion)

ProblemsProblems

Anti developmentAnti development– average dairy cow in the EU received $913 in average dairy cow in the EU received $913 in

subsidies, compared with an average of $8 per subsidies, compared with an average of $8 per person in Sub-Saharan Africa. person in Sub-Saharan Africa.

InequalityInequality– 80% of funds go to the largest 20% of farmers, while 80% of funds go to the largest 20% of farmers, while

the smallest 40% get only 8% of funds. the smallest 40% get only 8% of funds.

Artificially high food pricesArtificially high food prices– Europeans pay about 25% higher prices for foodEuropeans pay about 25% higher prices for food

Equity among member StatesEquity among member StatesState interventionState intervention

Reforms Pre-2003Reforms Pre-2003

1960s Mansholt Plan 1960s Mansholt Plan – Lobby groups (failure)Lobby groups (failure)

1980s Problems highlighted1980s Problems highlighted– Expensive and wastefulExpensive and wasteful

1992 Mac Sharry Reforms1992 Mac Sharry Reforms– Euroscepticism and External trade demandsEuroscepticism and External trade demands– Limited productionLimited production– Set aside and forestation programsSet aside and forestation programs– Reduced supportReduced support

Supply Response of EU Agriculture to Supply Response of EU Agriculture to the Common Agricultural Policythe Common Agricultural Policy

José A. Mendez, Ricardo Mora and Carlos San JuanJosé A. Mendez, Ricardo Mora and Carlos San Juan

First, agricultural output is First, agricultural output is responsive to agricultural prices. responsive to agricultural prices.

Second, the MacSharry reforms Second, the MacSharry reforms have been instrumental in have been instrumental in restraining agricultural production.restraining agricultural production.

Third, agricultural output would Third, agricultural output would have been higher if the EU had not have been higher if the EU had not applied the CAP. applied the CAP.

These results are important These results are important and have broad implicationsand have broad implications

First, they strengthen the position of First, they strengthen the position of those reformers both within and outside those reformers both within and outside of Europe that argue for lower price of Europe that argue for lower price supports as an appropriate policy for supports as an appropriate policy for stemming European agricultural stemming European agricultural surpluses.surpluses. Second, they indicate that recent EU Second, they indicate that recent EU reforms, which have in effect extended reforms, which have in effect extended the MacSharry reforms, are appropriate the MacSharry reforms, are appropriate measures for curbing European measures for curbing European agricultural surpluses.agricultural surpluses.

CAP Reforms Post 2003CAP Reforms Post 2003

2003 Reforms2003 Reforms– Single farm paymentSingle farm payment– Stronger rual develpment programStronger rual develpment program– Financial disciplineFinancial discipline– Reduced interventionReduced intervention– EnviromentEnviroment

2004 Expansion (10 new members)2004 Expansion (10 new members)2006 Sugar Reforms2006 Sugar Reforms

According to the Commission, the key elements of According to the Commission, the key elements of the new reformed CAP-03the new reformed CAP-03

are, in a nutshell:are, in a nutshell:

A single farm payment to be made to EU farmers, A single farm payment to be made to EU farmers, independent of productionindependent of production; ; Limited coupled elements may be maintained to Limited coupled elements may be maintained to avoid abandonment of production, avoid abandonment of production, This payment will be This payment will be linked to respect for linked to respect for environmentalenvironmental, , food safety, , animal and plant health and animal welfare standards, , ““cross-compliance”cross-compliance”: the requirement to keep all : the requirement to keep all farmland in good agricultural and environmental farmland in good agricultural and environmental condition budget for the new rural development condition budget for the new rural development policy.policy.

CAP-03 (cont.2)CAP-03 (cont.2)

A strengthened A strengthened rural developmentrural development policy policy using more EU budget.using more EU budget.

““ModulationModulation”:”: A reduction in direct A reduction in direct payments for lager farms to increase the payments for lager farms to increase the rural development budget.rural development budget.

Possibility to reach a WTO agreementPossibility to reach a WTO agreement

WTO & CAPWTO & CAP

„ „ The World Trade Organisation is the only The World Trade Organisation is the only international organisation dealing with the international organisation dealing with the global rules of trade between nations. It‘s global rules of trade between nations. It‘s main function is to ensure that trade flows main function is to ensure that trade flows as smoothly, predictably and freely as as smoothly, predictably and freely as possible.“possible.“

WTO & CAPWTO & CAP

WTO‘s Agricultural AgreementsWTO‘s Agricultural Agreements– Objectives:Objectives:

Trade liberalizationTrade liberalization

Free marketFree market

Fair competitionFair competition

Less distorted sectorLess distorted sector

Marrakesh Agreement of 1994Marrakesh Agreement of 1994

Situation before the reform of the Situation before the reform of the sugar sector in the EUsugar sector in the EU

A-quotasA-quotas

B-quotasB-quotas

C-quotasC-quotas

Minimum-price Minimum-price

Intervention priceIntervention price

High import tariffsHigh import tariffs

Reasons for the sugar reformReasons for the sugar reform

EU‘s sugar price is three times as high as EU‘s sugar price is three times as high as world market levelworld market level– ProtectionProtection– supply > demand supply > demand excess is dumped on the excess is dumped on the

world market and subsidized very highworld market and subsidized very high– EU is accused for ist export policyEU is accused for ist export policy

Current regulations run out on 30.6.2006Current regulations run out on 30.6.2006 EU sugar reform come into force on EU sugar reform come into force on 1.7.20061.7.2006

Key aspects of the sugar reformKey aspects of the sugar reform

Price cut for sugarPrice cut for sugar– by 36% over 4 yearsby 36% over 4 years

Compensation for farmersCompensation for farmers– by about 60% of their income lossby about 60% of their income loss– by decoupled direct paymentsby decoupled direct payments

Restructuring FondsRestructuring Fonds– Within a four year periodWithin a four year period

Key aspects of the sugar reformKey aspects of the sugar reform

Reduction of quotasReduction of quotas– Within the first four years not compulsoryWithin the first four years not compulsory– One single quotaOne single quota– Transmission mechanismTransmission mechanismEU sugar production will decreaseEU sugar production will decrease

Reduction of sugar export subsidiesReduction of sugar export subsidies

Key aspects of the sugar reformKey aspects of the sugar reform

Supporting ACP-partners and least Supporting ACP-partners and least developed countriesdeveloped countries– ACP-countries ACP-countries assistance scheme assistance scheme– Least developed countriesLeast developed countries

complete tariff elimination until 1.7.2009complete tariff elimination until 1.7.2009

Effect of 10 new member statesEffect of 10 new member states

1 May 20041 May 2004From 380 to 454 million peopleFrom 380 to 454 million peopleLarger internal marketLarger internal marketOpportunitiesOpportunities– Stable pricesStable prices– Direct income supportDirect income support

Key challengesKey challenges– Improve prosperity in agriculture and rural Improve prosperity in agriculture and rural

society (integration)society (integration)

Effect of 10 new member statesEffect of 10 new member states

Acceding countriesAcceding countries– Cyprus, Czech Republic, Estonia, Hungary, Latvia, Cyprus, Czech Republic, Estonia, Hungary, Latvia,

Lithuania, Malta, Poland, Slovakia, Slovenia (and now Lithuania, Malta, Poland, Slovakia, Slovenia (and now also) Bulgaria and Rumaniaalso) Bulgaria and Rumania

Candidate countriesCandidate countries– Turkey but not yet in negotiationsTurkey but not yet in negotiations

Applicant countriesApplicant countries– Croatia, Former Yugoslav, Republic of MacedoniaCroatia, Former Yugoslav, Republic of Macedonia

Effect of 10 new member statesEffect of 10 new member states

ImportanceImportance– Targeted rural development schemesTargeted rural development schemes

SapardSapard

European agreementsEuropean agreements

Double zero arrangementDouble zero arrangement

Double profit arrangementDouble profit arrangement

Increased exports to EUIncreased exports to EU– Single marketSingle market

Goods, people, money + servicesGoods, people, money + services

Effect of 10 new member statesEffect of 10 new member states

Euro (single currency)Euro (single currency)– 12 EU countries12 EU countries– Austria, Belgium, Finland, France, Greece, Austria, Belgium, Finland, France, Greece,

Ireland, Luxembourg, the Nederlands, Ireland, Luxembourg, the Nederlands, Portugal + Spain + Slovenia (from 2007)Portugal + Spain + Slovenia (from 2007)

National currencyNational currency– Denmark, Sweden + United KingdomDenmark, Sweden + United Kingdom

Effect of 10 new member statesEffect of 10 new member states

On farmersOn farmers– From 7 to 11 millionFrom 7 to 11 million– From 130 to 168 hectars (+30%)From 130 to 168 hectars (+30%)– +10-20% production+10-20% production– +6% gross value added of agriculture+6% gross value added of agriculture

Differences: new Member States - EU15Differences: new Member States - EU15– High income consumers-demand high qualityHigh income consumers-demand high quality– Income growth-growing markets of meat, Income growth-growing markets of meat,

fruits+vegetables, fresh milk products+cheesefruits+vegetables, fresh milk products+cheese

Fair change + equal market opportunitiesFair change + equal market opportunities

Effect of 10 new member statesEffect of 10 new member states

Benefit of the farmers in the new Member Benefit of the farmers in the new Member StatesStates– Free access to EU single marketFree access to EU single market– Policies for developmentPolicies for development– Financial and other supportFinancial and other support– Modernisation and restructingModernisation and restructing

– Gross value added 2002-2010: +35%Gross value added 2002-2010: +35%– Significant disparities (lack of capital)Significant disparities (lack of capital)

Funds and Instruments for New Funds and Instruments for New Member States 2004-06Member States 2004-06

CAP BudgetCAP Budget

Overall EU budget: 106.5 billion € (2006)Overall EU budget: 106.5 billion € (2006)– 10 new Member States: 15% (16 billion €)10 new Member States: 15% (16 billion €)

Agricultural and rural development: 40% (4,7 bn €)Agricultural and rural development: 40% (4,7 bn €)– Direct payments 1,7 bn €Direct payments 1,7 bn €– Market expenditure 1,0 bn €Market expenditure 1,0 bn €– Rural developement 2,0 bn € Rural developement 2,0 bn €

Rural Development is an imortant part: See next Rural Development is an imortant part: See next graph.graph.

CAP in the futureCAP in the future

Direct payments:Direct payments:

–10-year phase-in period until 201310-year phase-in period until 2013

–Topping up optionsTopping up options

Single Area Payment scheme (SAPS)Single Area Payment scheme (SAPS)

–8 New Member States (SAPS)8 New Member States (SAPS)

–Malta + Slovenia (CAP)Malta + Slovenia (CAP)

Phasing-in of direct payments over 10 years

Farmers in the new Member States qualify to receive direct payments from their first year as members of the EU.However, these will not be paid at the full rate applying in the EU-15 until the end of a 10-year phasing-in period.By 2013 the direct payment rates of farmers in the new Member States will be aligned with those of the existing EU. See next graph.

Phasing-in of direct payments over 10 yearsThe percentages of the EU-15 level present payment that apply in the new Member States in each year are shown in the graph

below.

Topping up options

In order to bridge the difference in direct payment levels between the EU-15 and the new Member States during the phasing-in period.The new Member States can (in agreement with the Commission) top up EU direct payments, using complementary national direct ayments,via one of two options: (see next grph)

In the first years after accession the new members may opt to use a different type of direct aid scheme for their farmers – one that is not on offer in the EU-15. This different aid scheme is a simpler concept than schemes operating in the EU, or the single farm payment of the future.The new Member States have little experience of complex farmer support systems;Given the short time between conclusion of the accession negotiations and the accession itself it was difficult for national administrations to set up the necessary control systems for the standard EU schemes;The new single farm payment poses a problem for the new Member States as it is not possible to calculate payment entitlements for their farmers on the basis of the same historical reference period as used in the EU-15 (2000-2002).

The rationale for offering this special scheme is that:

CAP in the futureCAP in the future

EU‘s agricultural policyEU‘s agricultural policy– Stable supply of foodStable supply of food– Reasonable standard of livingReasonable standard of living– Farming in all regionsFarming in all regions– Well-being of rural societyWell-being of rural society

– QualityQuality– SafetySafety– Protection of environmentProtection of environment– Animal health + welfare conditionsAnimal health + welfare conditions– Minimal costMinimal cost

CAP in the futureCAP in the future

Rural development programmsRural development programms– Investment and restructing aidsInvestment and restructing aids– Temporary income supportTemporary income support

CAP‘s mechanisms will not apply CAP‘s mechanisms will not apply immediatelyimmediately– Time to adapt administrative proceduresTime to adapt administrative procedures– Disparities – changesDisparities – changes

Market support measuresMarket support measures

CAP in the futureCAP in the future

Increasing concern about food safetyIncreasing concern about food safety

Greater emphasis to rural development Greater emphasis to rural development measuresmeasures

CAP in the futureCAP in the future

Reforming of sectorsReforming of sectors– Cotton, hops, olive oil + tobaccoCotton, hops, olive oil + tobacco– Fruit, vegetables + sugarFruit, vegetables + sugar

Stronger agricultural playerStronger agricultural playerDirect aidsDirect aids– Rural development programmingRural development programming– Structural funds programmsStructural funds programms

Good income prospectsGood income prospects– New competitiveness (price+quality)New competitiveness (price+quality)– Investment for new standards+more market sharesInvestment for new standards+more market shares