The total EU budget in 2010 was €123 billion. Just under half of this (€58 billion) was spent on supporting agriculture. The programme of support – the Common Agricultural Policy (CAP) – has changed over the years. For a start, despite its being a large proportion of the EU budget, this proportion has actually been falling. In 1980, the CAP accounted for 69% of the EU budget; in 1990 it was 60%; in 2000 it was 52%; in 2010 it was 47%.
The types of support have also changed. The main method in the past was effectively to set minimum prices for various foodstuffs and for Intervention Boards to buy up any surpluses that arose from such prices being above the market equilibrium. Massive food ‘mountains’ resulted. Sometimes these surpluses were dumped on the world market; sometimes they were thrown away; sometimes they were simply kept in storage. Export subsidies and import levies (taxes) were also used to reduce surpluses. This, of course, was highly damaging to farmers in many countries outside the EU, especially in various primary exporting developing countries.
Reforms have taken place in recent years. The most important has been to replace high intervention prices with direct payments to farmers unrelated to current output. Whilst such payments still provide a substantial outgoing from the EU budget, being unrelated to current output, they do not encourage farmers to produce more and thus do not generate surpluses. Prices in most cases are allowed to be determined by the market.
The EU has just announced further reforms. These include:
• Capping total CAP spending at current levels until 2020
• Capping the total payment to any one farm to €300,000
• Relating subsidies to acreage rather than previous output
• Making 30% of the direct payments dependent on farmers meeting environmental criteria.
The following videos and articles examine the proposals and assess their likely benefits, their likely drawbacks and their likelihood of being implemented.
Videos
EU plans to reform Common Agricultural Policy for farmers BBC News, Jeremy Cooke (12/10/11)
EU unveils controversial agricultural reforms Euronews (12/10/11)
Towards a new Common Agricultural Policy Euronews (14/10/11)
Queen to lose out in shake up of Europe’s farm payments Channel 4 News (12/10/11)
Cautious welcome for EU agriculture policy shake-up STV News (12/10/11)
CAP reform proposals YouTube, Dacian Cioloş, European Commissioner for Agriculture and Rural Development (in French with English subtitles) (12/10/11)
Articles
EU farm chief: CAP plans represent profound reform Reuters, Charlie Dunmore (12/10/11)
UK to dismiss Common Agricultural Policy reforms as inadequate Guardian, David Gow (11/10/11)
EU Farm Policy Debate Pits Top Receiver France Against U.K. Bloomberg Businessweek, Rudy Ruitenberg (12/10/11)
EU plans CAP reforms for ‘greener’ farm subsidies BBC News (12/10/11)
Common Agriculture Policy farm subsidy plan unveiled BBC News (12/10/11)
Q&A: Reform of EU farm policy BBC News (12/10/11)
CAP reform: Shepherd and steward of the land BBC News, Jeremy Cooke (12/10/11)
EU agriculture policy ‘still hurting farmers in developing countries’ Guardian: Poverty Matters blog, Mark Tran (11/10/11)
EU aid to farmers to continue over next decade Financial Times, Joshua Chaffin (12/10/11)
EU publications
CAP Reform – an explanation of the main elements Europa Press Release (12/10/11)
The European Commission proposes a new partnership between Europe and the farmers European Commission Press Release (12/10/11)
EU farm policy after 2013: Commission proposals welcomed with reservations European Parliament Press Release (12/10/11)
Legal proposals for the CAP after 2013 European Commission: Agriculture and Rural Development (12/10/11)
Questions
- Explain why the old system of price support under the CAP led to food surpluses. Use a diagram to illustrate your analysis.
- What is the significance of price elasticity of demand and supply in determining the size of these surpluses?
- What reforms have been introduced to the CAP in recent years? What effects have these had?
- Explain the new proposals for the CAP after 2013.
- What are the likely benefits of these proposals?
- What are the likely drawbacks of the proposals?
Families in the UK seemed to have been squeezed in all areas. With incomes flat, inflation rising, petrol and bills high, there seems to be a never ending cycle of price rises without the corresponding increase in incomes. This has been confirmed by the latest figures released from the big six energy companies, whose profit margins have risen from £15 per customer in June to £125 per customer per year. This is assuming that prices remain the same for the coming year.
The regulator, Ofgem has said that profit margins will fall by next year and that they are ensuring that price comparisons between the big energy companies become much easier to allow consumers to shop around. It is a competitive market and yet due to tariffs being so complicated to understand, many consumers are simply unable to determine which company is offering them the best deal. There is certainly not perfect knowledge in this market. Tim Yeo, the Chair of the Energy and Climate Change Committee said the profit margins were:
‘Evidence of absolutely crass behaviour by the energy companies, with a jump in prices announced in the last few months ahead of what will be a winter in which most families face their highest ever electricity and gas bills’
Ofgem will publish proposals later this year with suggestions of how to make the market more competitive. We have already seen in the blog “An energetic escape?” how Ofgem is hoping to reduce the power of the big six by forcing them to auction off some of the electricity they generate. The aim is to free up the market and allow more firms to enter. With the winter fast approaching and based on the past 2 years of snow and cold weather, it is no wonder that households are concerned with finding the best deals in a bid to reduce just one of their bills. The following articles consider this issue.
Energy price hikes see profits soar The Press Association (14/10/11)
Energy suppliers’ profit margins eight times higher, says regulator Ofgem Telegraph (14/10/11)
Energy firms’ profit margins soar, Ofgem says BBC News (14/10/11)
Energy firms’ profits per customer rise 733%, says Ofgem Guardian, Dan Milmo and Lisa Bachelor (14/10/11)
Regulator proposes radical change to energy market Associated Press (14/10/11)
Energy bills face overhaul in first wave of reform Reuters, Paul Hoskins (14/10/11)
Ofgem tells energy companies to simplify tariffs Financial Times, Michael Kavanagh (14/10/11)
You can’t shop around in an oligopoly Financial Times, William Murray (13/10/11)
Questions
- What type of market structure best describes the energy market?
- Of the actions being taken by Ofgem, which do you think will have the largest effect on competition in the market?
- Are there any other reforms you think would be beneficial for competition?
- Why is transparency so important in a market?
- What barriers to entry are there for potential competitors in the energy market?
- Why do you think profit margins are so high in this sector?
The UK Supermarket industry is intensely competitive. It’s hard to slot it directly into a specific market structure, but it has many characteristics of an oligopoly – a market dominated by a few firms with intense competition, both price and non-price.
This competititve aspect of the market structure has become even more important as trading conditions become harsher. The latest development sees Sainsbury’s announcing its price promotion – it will match certain prices offered by Tesco and Asda in a bid to attract customers from its rivals.
The supermarket industry has a history of intense price wars and we can only expect them to increase. This is certainly in the interests of customers, as we face ever decreasing prices. It’s a market in which it certainly pays to shop around and compare prices. The following articles consider the latest developments in one of the most competitive markets out there.
Sainsbury’s joins price cut battle The Press Association (9/10/11)
Sainsbury’s follows rivals in price promotion BBC News (9/10/11)
Every basket helps, as supermarkets battle for shoppers Independent, Laura Chesters (9/10/11)
Sainsbury to extend price match trial Financial Times, Andrea Felsted (7/10/11)
Tesco profits grow but UK sales subdued BBC News (5/10/11)
Sainsbury’s to launch price match scheme The Telegraph, Harry Wallop (7/10/11)
Retail bully boys must not protect themselves unfairly Financial Times, Sarah Gordon (7/10/11)
Questions
- What are the characteristics of an oligopoly? To what extent do you think that the supermarket industry fits into an oligopolistic market structure?
- Are the price wars being carried out by Tesco, Sainsbury’s and Asda in the interests of consumers?
- What aspects of non-price competition have been undertaken by the big supermarket contenders? On what factors does the relative success of these pricing strategies depend?
- What might explain the growing presence of fast food companies in the top 100?
- How could the supermarkets use the concept of elasticity in determining the most effective pricing strategy?
- How has the economic climate affected the supermarket industry? Would you expect the impact to be smaller or larger than that in other sectors of the economy? Explain your answer.
Stock markets have been plummeting. The FTSE 100 index was 6055 on 7 July 2011; by 10 August, it was 17% lower at 5007. Since then it has risen as high as 5418, but by 13 September was down to 5092. Other stock markets have fared worse. The French index fell 30% between early July and September 13, and the German DAX index fell 32% over the same period.
These falls in share prices reflect demand and supply. Investors are worried about the future of the eurozone and the health of the European economy as Greek default looks more and more likely and as the debts of various other European countries, such as Portugal, Ireland and Spain, seem increasingly unsustainable in an environment of sluggish economic growth. They are also worried about high public-sector debt in the USA and the likelihood that global recovery will peter out.
The ‘bear’ market (falling share prices) reflects increased selling of shares and a lack of demand. Not only are investors worried about the global economy, they are also speculating that share prices will fall further, thereby compounding the falls (at least until the ‘bottom’ is reached).
But why have share prices fallen quite so much? And does it matter to the general public that this is happening? The following articles seek to answer these questions.
Articles
Shares tumble on fears over Greek default Guardian, Graeme Wearden (12/9/11)
European Factors-Shares set for steep fall on Greece worries Reuters (12/9/11)
Markets set for turmoil after G-7 letdown BusinessDay (South Africa), Mariam Isa (12/9/11)
What will happen if Greece defaults? The Conversation (Australia), Sam Wylie (12/9/11)
Germany and Greece flirt with mutual assured destruction The Telegraph, Ambrose Evans-Pritchard (11/9/11)
Market Swings Are Becoming New Standard New York Times, Louise Story and Graham Bowley (11/9/11)
The next bull market The Bull (Australia) (12/9/11)
Prepare For Recession And Bear Market Forbes, Sy Harding (9/9/11)
Eurozone crisis: What market turmoil means for you BBC News, Kevin Peachey (8/9/11)
Stock market indices
FTSE 100: historical prices, 1984 to current day Yahoo Finance
Dow Jones Industrial Average: historical prices, 1928 to current day Yahoo Finance
Nikkei 225 (Japan): historical prices, 1984 to current day Yahoo Finance
DAX (Germany): historical prices, 1990 to current day Yahoo Finance
CAC 40 (France): historical prices, 1990 to current day Yahoo Finance
Hang Seng (Hong Kong): historical prices, 1986 to current day Yahoo Finance
SSE Composite (China: Shanghai): historical prices, 2000 to current day Yahoo Finance
BSE Sensex (India): historical prices, 1997 to current day Yahoo Finance
Stock markets BBC
Questions
- What factors have led to the recent falls in stock market prices? Explain just why these factors have contributed to the falls.
- What is likely to happen to stock market prices in the coming weeks? Why is it difficult to predict this?
- What is meant by the efficient capital markets hypothesis? If markets were perfectly efficient, why would it be impossible to predict future movements in stock market prices? Why may stock markets not be perfectly efficient?
- What factors determine stock market prices over the longer term?
- How are share prices influenced by speculation? Distinguish between stabilising and destabilising speculation.
- Explain the various ways in which members of the general public can be affected by share price falls. Are you affected in any way? Explain.
- If Greece defaults, what will determine the resulting effect on stock markets?
- To what extent does the stock market demonstrate the ‘brutal face of supply and demand’?
Whilst perhaps not an essential in the sense of needing it to live, petrol is about as close as you can get to a ‘non-essential necessity’ these days. Most families have a car (many have more than one) and despite the hikes in petrol prices we’ve seen across the UK, demand for petrol has remained high: it is a prime example of a good with a highly inelastic demand.
Over the past few years many families have chosen to forego their holidays abroad and instead have taken to summer vacations across the UK in a bid to save money. However, with the summer season approaching and families beginning to think about where to go or plan their trips, one thing that should be considered is the cost of travel. Petrol prices across Europe have risen faster than those in the UK over the past year and this may pose a significant cost and possibly deterrent to European travel. As Sarah Munro of the Post Office said:
‘The high fuel price increases in Europe mean that UK holidaymakers should plan their routes carefully in advance to cut costs’.
Petrol prices were found to be the lowest in Luxembourg at 128p per litre and the highest in Norway at 182p – a definite deterrent to filling up your tank in Scandinavia. Despite motorists’ constant exclamations of the price of petrol in the UK, of the 14 countries surveyed the UK came in as the 4th cheapest at 136p. It also had the smallest increase since 2010 of 14p, compared to the average of the countries surveyed of 27.8p.
Although the higher fuel prices have been fuelled (no pun intended) by rising wholesale oil prices, when crude prices started to fall, petrol prices didn’t decline to match. This has sparked an inquiry into petrol prices, with demands for more transparency into the price setting behaviour of firms. The British Petrol Retailers’ Association is planning on referring its concerns to the Office of Fair Trading. So the moral of the story: petrol prices are high in the UK, but if you’re going on holiday this summer, you’ll probably find that many other countries across Europe have even higher prices, so planning is essential.
Holiday hike: European petrol prices soar by up to 35 per cent Daily Mail Online, Sarah Gordon (10/6/11)
UK holidaymakers ‘face high petrol prices’ BBC News (10/6/11)
Petrol prices are 35% higher in Europe than last summer Mirror, Ruki Sayid (10/6/11)
Motoring coalition calls on EU to investigate soaring price of petrol Telegraph, Rowena Mason (10/6/11)
Motoring groups demand petrol price investigation BBC News (30/5/11)
Questions
- How are European petrol prices set?
- Why does the exchange rate against the dollar have a big impact on oil prices?
- Why have petrol prices in the UK not increased by as much as other European countries over the past year?
- Why is there likely to be an investigation into how prices are set? Which factors do you think will be considered?
- The Telegraph article talks about the sport market. What is this and how does it affect how petrol prices are set?
- Why does petrol have such inelastic demand?
- If a higher tax is imposed on petrol, why is it that much of the cost will be passed on to consumers in the form of a higher price? Illustrate this on a diagram.