CAP reforms

Economics of Food Markets

Lecture 8

Alan Matthews

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)

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

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

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

Post-GATT Uruguay RoundCAP mechanisms

export subsidy

world price world price

threshold price

intervention price

target price

Import Internal Export

Volume and value capped and reduced

over time

Domestic support capped and

reduced over time

tariffs fixed and reduced

over time

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

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

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

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

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

• 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

Decoupling - rationale

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

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)

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

Calculation of entitlements

• Historic payment schemeSFP 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 rateSFP aid per hectare = (Average Sum of aid in

region 2000-02 / Average eligible hectares in region 2000-02) * payment rate

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

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

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

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 Directives apply as implementedas implemented by MS by MS

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

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

Budget year 2005 2006 2007 2008 to 2013

Farms with up to €5,000 direct payments

0% 0% 0% 0%

Above € 5 000 3% 4% 5% 5%

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

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

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