Common agricultural policy Eleni ILIOPULOS PSE, University of Paris 1
Lecture 6
E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
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This lecture
Aim of this Lecture: Outline the historical development of the CAP and its driving forces understand the main problems and economic mechanisms at work Structure: 1
The price ‡oor instrument
2
CAP problems
3
CAP reforms
4
The CAP today
E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
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Common agricultural policy
E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
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The CAP: price ‡oor The CAP – early days:
Hard to understand without seeing how it developed CAP started as simple price support policy in 1962 (recall: it was not agreed in the ToR) EU was net importer of most food ! price support via tari¤ possible Main instrument: price ‡oor
Technically ‘variable levy’(varied daily (!) with world price to keep price ‡oor constant – ended with Uruguay Round) EU prices about 50-100% of the world prices
E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
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CAP: price ‡oor
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CAP
Lecture 6
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CAP: price ‡oor Welfare:
Price ‡oor supported by tari¤ is like free trade combined with (i) a consumption tax equal to T (ii) a production subsidy equal to T price, quantity, revenue and welfare e¤ects are identical consumers are the ones who pay for a price ‡oor enforced with a variable levy part goes to domestic farmers (area A) part goes to the EU budget (area B) part of it wasted (areas C1 and C2)
E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
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CAP: price ‡oor
E. ILIOPULOS (PSE, University of Paris 1)
CAP
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CAP: price ‡oor CAP impact on di¤erent …rm types:
- Di¤erent farm types are a¤ected di¤erently by the CAP - Stylized example: commercial farms vs. family farms
E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
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CAP: price ‡oor
The di¤erential impact of the CAP: graph: very di¤erent e¤ect on the surplus of the di¤erent farm types pre-CAP reform: 20% of farms received 80% of funds example: 1987: 23 billion e spent on 6.9 million farms 1.38 mil farms (20%) received on average 13.333 e per farm 5.52 mil farms received on average 833e per farm Also consumers are a¤ected di¤erently by the CAP
E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
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CAP: price ‡oor CAP as ‘regressive taxation’on consumers:
Consumers pay the high CAP price, but di¤erent consumers are a¤ected di¤erently Progressive taxation: tax payments increase disproportionally with income (generally considered ‘fair’) CAP works as a ‘regressive taxation’i.e. low income households pay more. reason: food demand is very inelastic (price elasticity of bread?) Poor households spend a larger fraction of their income on food
! stronger impact of the arti…cially high prices
E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
10 / 26
CAP: problems
First years: politicians and voters satis…ed with CAP (income increased faster than food prices, short supply of food during WW2 ! acceptance for regulation, empathy with farmers) Over time: di¤erent problems caused by the CAP 1
the supply problem
2
the disposal problem
3
dumping on international markets
4
budget problems
5
farm income
6
industrialization of farming
E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
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CAP: problems The supply problem:
-Many other problems are related to the supply problem -n the 1960s Europe was net importer of agricultural products domestic supply < domestic demand
Productivity shock to the farming sector: the ‘green revolution’: Post-war period: new technologies boosting farm productivity (new strains of crops, pesticides, herbicides, chemical fertilizers, e¤ective and a¤ordable farm machines) large increases in output possible basic economics: prices should fall. Impossible due to CAP
What are the incentives for farmers given the CAP price ‡oor?
E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
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CAP problems: The supply problem (continued):
- The CAP supported output ! incentive to use the new technologies to increase output - Between 1961 and 1971 wheat yield rose by 50% (!) E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
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CAP: problems: The supply problem (continued):
Given the price ‡oor, the EU becomes a net exporter beginning of the 1980s Now things start getting bad: before: price guaranteed by tari¤s not su¢ cient anymore because supply (at the guaranteed price) exceeds demand what can be done to keep the price at the price ‡oor? ! buy the surplus ! subsidize exports (pay the di¤erence between world market price and price ‡oor to exporters)
E. ILIOPULOS (PSE, University of Paris 1)
CAP
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CAP: problems:
E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
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CAP: problems
Most problems of the CAP are related to the supply problem Grain, beef and butter mountains: CAP had to buy the excess supply at the price ‡oor Problem: what to do with it? Beginning: excess supply seen as temporary ! stock and sell later
problem: supply continued to rise 1985: EU had 18.5 million tones of wheat stored (70kg per citizen!) ! spoilage: big PR problem for the CAP
Alternative: exporting?
E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
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CAP: problems Dumping:
Dumping: For exporting, CAP had to pay exporters the di¤erence between the world market price and the price ‡oor (‘restitution’; ‘export refunds’) Problem: this is dumping! (selling at a price below production cost) Food exporters outside the EU did not like this (at all!) CAP became a major problem in all WTO negotiations (still today)
E. ILIOPULOS (PSE, University of Paris 1)
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CAP: problems
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CAP
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CAP: problems
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CAP: problems The farm income problem:
Inelastic demand ! farm sector’s total income falls with prices ! either average farmer income must fall, or ! the number of farmers must fall
In EU: average farm incomes fail to keep up despite huge protection and budget costs Most of the money goes to big e¢ cient farms that do not need it: CAP makes some farmers/landowners rich (the Queen receives over e1 million a year) Keeps average (i.e. small) farmer on edge of bankruptcy
! Farmers continue to exit farming (about 2% per year for last 4 decades).
E. ILIOPULOS (PSE, University of Paris 1)
CAP
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CAP: problems Change in the number of EU10 farms 1979-1987:
E. ILIOPULOS (PSE, University of Paris 1)
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CAP: problems Industrialization of Farming:
By guaranteeing minimum prices the CAP created an incentive to increase production (killing the counterbalancing e¤ect of increased supply lowering the price) Obvious issues: pollution (e.g. pesticides, herbicides, chemical fertilizers. . . ) food quality animal welfare
! Reforms were necessary but: very powerful interest groups
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CAP
Lecture 6
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CAP: Reforms Supply control attempts: 1980s, experimentation with ad hoc & complex set supply ‘controls’ to discourage production Generally failed; technological progress & high guaranteed prices overwhelmed supply controls
1992: MacSharry Reforms: Basic idea: CUT PRICE supports to near world-price level & COMPENSATE farmers with direct payments Uruguay Round almost failed in 1990 when EU refused to liberalize agriculture Pressure by interest groups by non-agricultural exporters led to the reform Reform passed in 1992 , Uruguay Round succeeded 18 month later E. ILIOPULOS (PSE, University of Paris 1)
CAP
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CAP: Reforms June 2003 Reforms:
Essential to Doha Round Implementation 2004-2007 Similar to MacSharry reforms in spirit Doha round has come to a halt in 2008 because of disagreement on . . . guess what . . . agriculture
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CAP
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CAP today - massive shift to direct payments (left graph) - Price cut reduced EU buying of food (right graph) - Less dumping
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CAP today (see you book for a complete update) Problems remain:
Reformed CAP (post MacSharry) support still goes mostly to big, rich farmers. Payments intended to compensate, so inequity continued Half the payments to 5% of farms (the largest) Half the farms (smallest) get only 4% of payments Recent studies: only about half of these payments go to farmers Rest to non-farming landowners (Queen) and suppliers of agricultural inputs (seed, fertilisers, agri-chemicals, etc.) Doha Round, Eastern Enlargement
E. ILIOPULOS (PSE, University of Paris 1)
CAP
Lecture 6
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