The Common Agricultural Policy (CAP): Did the CAP learn from its past experience and its mistakes?

Essay , 2018 , 10 Pages , Grade: 1,3

Economy - Environment economics

This essay deals with the question, whether the Common Agricultural Policy (=CAP) learned from its past experience and its mistakes.

This raises the subquestions if the new system improved in comparison to the old system and if fundamental changes happened. To answer these questions, firstly the CAP will be defined shortly, its historical development and data related to it will be analysed.

Secondly, the economic instruments behind the measures of the CAP will be explained to understand the logic of the development and its consequences. Thirdly, possible solutions are pointed out and a short conclusion sums up the main points and refers again to the main question.

The Common Agricultural Policy, short CAP, is a set of policies with the original main objective of raising farm incomes in the European Union (=EU). Other basic goals have been the creation of a common policy to secure the provision of food at reasonable prices, the stabilization of agricultural markets and to support the efficiency of agriculture.

Nowadays the objectives enlarged to the preservation of natural resources, environment, animal welfare and the support of the rural development. The regulation of the policy, directives and financing through the multiannual financial framework, is set by the EU and today the CAP amounts for nearly 40% of the EU budget.

Table of contents

1 Introduction

2 Historical development

3 Economic instruments

4 Possible solutions

5 Conclusion

Bibliography

Appendix

1 Introduction

The question to be answered in this essay is if the Common Agricultural Policy (=CAP) learned from its past experience and its mistakes. This arises the subquestions if the new system improved in comparison to the old system and if fundamental changes happened. To answer these questions, firstly the CAP will be shortly defined, its historical develop­ment and data related to it will be analysed. Secondly, the economic instruments behind the measures of the CAP will be explained to understand the logic of the development and its consequences. Thirdly, possible solutions are pointed out and a short conclusion sums up the main points and refers again to the main question.

2 Historical development

The Common Agricultural Policy, short CAP, is a set of policies with the original main objective of raising farm incomes in the European Union (=EU). Other basic goals have been the creation of a common policy to secure the provision of food at reasonable prices, the stabilization of agricultural markets and to support the efficiency of agriculture. Now­adays the objectives enlarged to the preservation of natural resources, environment, ani­mal welfare and the support of the rural development. The regulation of the policy, direc­tives and financing through the multiannual financial framework, is set by the EU and today the CAP amounts for nearly 40% of the EU budget.¹

The past from 1950 to 2013 is marked by some important milestones. The prevalent im­portance of agriculture in terms of Gross Domestic Product (=GDP) and employment in especially the 1950s as well as the memory of food scarcity after the second world war lead to the first definition of objectives and principles of a European agricultural policy in the Treaty of Rome in 1957. In 1962 the CAP was implemented with the concept of price floors for stable and high minimum prices what increased the economic growth rate in the 1960s. From 1970 to 1980 the so-called ‘green revolution’, implying new and more productive farming methods through chemicals and new planting and harvesting ma­chines started the process of turning the agricultural sector in ‘factory farming’, exacer­bating environmental and animal welfare conditions and firstly calling ethical issues into question. As the EU turned out to be the net importer of agricultural products till 1970, the ‘green revolution’ caused a change to a net exporter due to the so-called ‘wheat, beef and butter mountains’, the surplus production in the 1980s. The EU set product quotas to try to control the supply and had to purchase a part of the overproduction and finance the export subventions at the same time. Trade conflicts arose through dumping prices of the EU and especially developing countries lost their competitiveness. The MacSharry re­form, as the first significant change in 1992, adapted the EU prices to the world prices and reduced the price support and introduced direct payments tied to the production. The Agenda 2000 introduced the two-pillar model with the new focus on the second pillar of the rural development. With it the term ‘cross compliance’ arose, implying the compli­ance of environmental and animal welfare standards to further receive the direct pay­ments. In 2003 most of the payments were decoupled from the production, tied to the size of hectares and in 2008 the ‘health check’ continued the decoupling, reduced the direct payments and the ‘modulation’, shifting payments to the second pillar, became manda­tory.²

Today’s CAP from 2014 to 2020 is influenced by the so-called ‘greening’ measures, di­rect payments per hectare tied to conditions of food safety, protection of animals and environmental protection, which were introduced in 2015. 30 % of payments are tied to the greening measures to especially foster more diversification and prevent monocultures. Nowadays, one important objective is ‘convergence’ which aims at a more equal distri­bution and allocation of support, especially the payments in the different EU member states through e.g. already supporting smallholder farmers, young farmers and deprived areas or land with natural constraints or introducing uniform payments of at least 196 € per hectare till 2019.³

Comparing agriculture’s share of employment and GDP from 1955 to 2009, the number of farms and farm workers strongly declined and the attractivity of the sector shrunk. Problematic is the fact that only 3 % of farms own 50% of land so large farms benefit much more from the direct payments. In addition, the payments to recipients as rich land­owners or people not directly related to agriculture, decreases the trust in the CAP. More­over, the bureaucracy deters farmers and the possible reduction of the expense for the second pillar does not foster the improvement of ecological problems. At least the direct payments have been seen as a temporary solution and a limited amount is still tied to the production of specific products so coupled payments still exist.⁴

3 Economic instruments

The economic instrument of the so-called ‘price floors’ is the most important instrument to be understood. Setting a tariff T in form of a consumption tax for consumers and a subsidy for producers is a way of artificially rising the existing world market price Pw and increasing the farmers’ income, the difference between the tax and the subsidy even created a tariff revenue for the state. The difference between the consumption Cf and the production Zf had to be imported (see appendix, figure l).⁵

But the problem of price supports shows in the supply curves of small and large farms. As small farms have higher marginal cost at any level of output, their efficiency will never be as high as the one of large farms. So essentially the price floorjust supports large farms through their higher efficiency and lower costs because the subsidies are proportionally tied to the level of production (see appendix, figure 2).⁶

The green revolution caused general lower marginal cost what shifted the supply curve. As the production Z’ went beyond the consumption C, the surplus created a negative tariff in form of export subventions to pay and to cushion the low dumping prices abroad (see appendix, figure 3).⁷

This changed through the price cuts with compensation, so the price floor was lowered to the world price or rather eliminated to allow the free-market price and the compensation was paid through direct payments decoupled from the production level. The ‘reduced’ price increased the consumption C’ but lowered the production Z’ so that export and dumping was not necessary anymore (see appendix, figure 4).⁸

Still problematic is the so-called ‘farm income problem” which arises through a dispro­portionate shift of the supply and demand curve. Even if the supply significantly increased through the technological process, the demand especially for food just slightly increased and increases as the share of the income spent on food declines through rising average incomes. So even if the farmers sell a higher amount (e.g. 3.000 t instead of 2.0001) the lower price (e.g. 100 € instead of 200 €) decreases their average income (see appendix, figure 5).⁹

4 Possible solutions

Firstly, the interaction and consideration of ecological and economical measures should lead to an ecologic surplus to secure the climate protection and consequently the earth. At the same time, economically seen the producers should get more incentives by getting paid more for ecological performance and/or improvements and more money should be invested in the first pillar to rise farmers’ income. Moreover, an implementation of a compulsory limit for the direct payments of large farms and at the same time increasing the subsidies for the (first) hectares of land from small farmers could strengthen the fair­ness of the policy. Analysing or examining the real recipients and prevent inadequate payments could increase the transparency of the whole policy and foster the trust of farm­ers. At least the phase-out of bureaucracy could be another incentive to motivate the farmers to continue their businesses and the adaption of direct payments between member states could improve the situation inasmuch as a sense ofjustice would arise.¹⁰

5 Conclusion

In summary, the progress of the CAP can be seen as piecemeal development which could continue in future due to its slow change process. The system improved but the fact that still price support and coupled payments are prevalent and the distribution of direct pay­ments still proceeds in an uneven way makes it a marginal improvement. Although the ecological aspects are given a higher priority than in the past, the author is of the opinion that no fundamental changes in the system happened. All in all, the CAP learned from its past experience and its mistakes but has to try to adapt more to the current and future challenges of the agricultural sector to maintain a further development in future.

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¹ Compare Maas, S., Schmitz, P. M., CAP, 2007, p. 94; compare Baldwin, R., Wyplosz, C., Economics, 2015, p. 218; compare https://www.bmel.de/DE/Landwirtschaft/Agrarpolitik/_Texte/GAP- FAQs2018.html#docl0945774bodyText3, accessed on 27/10/2018; compare https://www.bundes- finanzministerium.de/Content/DE/Standardartikel/Themen/Europa/EU_auf_einen_Blick/Poli- tikbereiche_der_EU/EU_ftgrarpolitik/2012-03-21-ueberblick-gemeinsame-agrarpolitik.html, accessed on 27/10/2018.

² Compare Maas, S., Schmitz, P. M., CAP, 2007, p. 94 et seqq.; compare Baldwin, R., Wyplosz, C., Eco­nomics, 2015, p. 218, 224-225, 227-228, 229-233, 235.

³ Compare Baldwin, R., Wyplosz, C., Economics, 2015, p. 236; compare https://www.bundesfinanzminis- terium.de/Content/DE/Standardartikel/Themen/Europa/EU_auf_einen_Blick/Poli- tikbereiche_der_EU/EU_jigrarpolitik/2012-03-21-ueberblick-gemeinsame-agrarpolitik.html, accessed on 27/10/2018; compare https://www.bmel.de/DE/Landwirtschaft/Foerderung-Agrarsozialpoli- tik/Direktzahlungen/direktzahlungen_node.html', accessed on 27/10/2018.

⁴ Compare Tangermann, S., Direct payments, 2014, p. 24, 38; compare Baldwin, R., Wyplosz, C., Eco­nomics, 2015, p. 218-219, 222-224, 236-238; compare Link, C., CAP reform, 2018, p. 4.

⁵ Compare Baldwin, R., Wyplosz, C., Economics, 2015, p. 220 et seq.

⁶ Compare Baldwin, R., Wyplosz, C., Economics, 2015, p. 223 et seq.

⁷ Compare Baldwin, R., Wyplosz, C., Economics, 2015, p. 225.

⁸ Compare Baldwin, R., Wyplosz, C., Economics, 2015, p. 232.

⁹ Compare Mankiw, N. G., Taylor, M. P., Economic Basics, 2014, p. 127 et seqq.; compare Baldwin, R., Wyplosz, C., Economics, 2015, p. 228.

¹⁰ Compare Link, C., CAP reform, 2018, p. 4.

• College: University of Applied Sciences Stuttgart
• Grade: 1,3
• Publication Year: 2018
• Pages: 10
• Catalog Number: V1129928
• ISBN (eBook): 9783346490834
• Language: English
• Tags: common, agricultural, policy