Tag: surpluses

The European Parliament, Council and Commission have agreed on reform to the Common Agricultural Policy as part of the EU’s long-term budget settlement for 2014–20. The CAP accounts for some 38% of the EU’s budget and, over the years, has drawn considerable criticism for resulting in food mountains and support being biased towards large intensive farms.

As section 3.5 in Economics (8th ed) explains, the CAP has been through a number of reforms since the early 1990s. Prior to that, the main form of support was that of guaranteed minimum prices backed up, where necessary, by levies (tariffs) on imported food. Any surplus of production at the minimum price was bought by the relevant EU Intervention Board and either stored or exported at world prices. The effect of minimum prices is shown in the diagram.

Assume that the EU demand is D_EU and that EU supply is S_EU. Assume also that the world price is P_w. This will be the equilibrium price, since any shortage at P_w (i.e. b – a) will be imported at that price. Thus before intervention, EU demand is Q_d1 and EU supply is Q_s1 and imports are Q_d1 – Q_s1.

Now assume that the EU sets an intervention price of P_i. At this high price, there will be a surplus of d – e (i.e. Q_s2 – Q_d2). Assume for the moment that none of this surplus is exported. It will all, therefore, be bought by the appropriate Intervention Board. The cost to the EU of buying this surplus is shown by the total shaded area (edQ_s2Q_d2: i.e. the surplus multiplied by the intervention price). Unless the food is thrown away, exported or otherwise disposed of, there will obviously then be the additional costs of storing this food: costs that were very high in some years as wine ‘lakes’ and grain and dairy ‘mountains’ built up. If, however, the surplus is sold on world markets at the world price P_w, this will earn the green area for the EU, leaving a net cost of just the pink area.

From 1992, there was a gradual move towards lowering intervention prices and paying farmers direct aid unrelated to current output. From 2004, the main form of support became these direct aid payments. Annual payments to each farm were based on the average support it had received over the three years from 2000 to 2002. At the same time, payments to large farms were gradually reduced, with 80 per cent of the money saved in each country being diverted to rural development. Payments were also made conditional on farmers making environmental improvements to their land.

A problem with this system is that farmers who had high average output in the years 2000–2 have been receiving the same large payments ever since, while farmers who had small yields in those years have received correspondingly small payments.

A proposal two years ago by Dacian Cioloş, the EU Commissioner for Agriculture, was for flat-rate payments per hectare. But objections were raised that this would benefit inefficient farmers who would receive the same as efficient ones. In the end a compromise agreement was reached which saw a capping of the amount of payment per hectare. The result is that the most intensive farmers will see a reduction in their payments by some 30% – a process that will happen gradually over the period 2014–19.

In addition it has been agreed that 30% of the direct aid payments will be conditional on farmers adopting various measures to protect the environment and wildlife.

Farmers will have to be ‘active’ producers to receive direct aid payments. This is designed to exclude businesses such as airports or sports clubs, some of which had been receiving support under the previous system.

It was also agreed to provide 25% extra support for five years to farmers under 35 in an attempt to attract more young farmers into agriculture. Other details of the settlement are given in the EU documents, videos and articles below.

Webcasts

The great shake-up of the Common Agricultural Policy EPP Group in the European Parliament (25/1/13)
Planned reforms of Common Agricultural Policy under fire BBC News, Roger Harrabin (24/6/13)
Mixed response to compromise CAP deal RTE News (26/6/13)
Farm reforms may not increase food production, warns MEP europeandyou, Diane Dodds MEP (26/6/13)

Articles

Big farms to see European subsidies slashed The Telegraph, Rowena Mason (26/6/13)
Common Agricultural Policy deal agreed at last RTE News, Damien O’Reilly (26/6/13)
CAP Reform: MEPs, Council and Commission strike deal FarmingUK (27/6/13)
EU agricultural overhaul puts onus on farmers to be green Financial Times, Joshua Chaffin (26/6/13)
CAP reform deal agreed in Brussels Farmers Guardian, Alistair Driver (26/6/13)
‘Bad for farmers and wildlife’ – CAP reform reaction Farmers Guardian, Alistair Driver (27/6/13)

EU documents

Political agreement on new direction for common agricultural policy Europa Press Release (26/6/13)
CAP Reform – an explanation of the main elements Europa Press Release (26/6/13)
Press release, 3249th Council meeting : Agriculture and Fisheries The Council of the European Union (25/6/13)

Questions