Transcript Folie 1 - Warsaw School of Economics

European Economic Integration – 110451-0992 – 2014
VI
Core Policy 2
Common Agricultural Policy (CAP)
CAP reform
Plan would revamp EU
agricultural policy to
secure food supply,
protect the environment
and ensure rural areas
are developed sustainably.
A taste for Europe
EU quality labelling systems protects
1000 names used to designate
traditional agricultural produce and
foods
Prof. Dr. Günter S. Heiduk
1
Europe is one of the largest producer of agricultural products and both
a major exporter and the world’s largest importer of food, mainly from
developing countries!
WORLD TOP 10: WHEAT PRODUCTION STATISTICS YEAR 2012
RANK
COUNTRY
MILLION METRIC TONS
1
China
125.6
2
India
94.9
3
United States
61.8
4
France
40.3
5
Russia
37.7
6
Australia
29.9
7
Canada
27
8
Pakistan
23.5
9
Germany
22.4
10
Turkey
20.1
European Union
approx. 133.0
Source: FAO??????
2
Wheat – Supply and Demand by Top 10 Producer Countries, 2010
(thousand metric tonnes)
120000
110000
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
China
India
USA
France
Production
Russia
Consumption
Canada Australia Germany Pakistan
Imports
Turkey
Exports
Source: http://www.spectrumcommodities.com/education/commodity/statistics/wheattable.html
European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
Utilised agriculture area, % EU-27, 2010
Utilised agriculture area by land use,
EU-27, 2010 (% share of utilised agr area)
4
European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
EU-27, production of selected agricultural products, 2010
European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
Index of the real income of factors in agriculture per annual work unit, 2005=100
120
100
80
60
40
20
0
2004
2005
2006
2007
2008
2009
2010
2011
European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
Trends in EU agricultural income per work unit, Indicator A, 2005-2012 (% change compared with previous year)
Source: EUROSTAT, aact_eaa06
European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
Share of exports/imports by Member States on extra-EU-27 trade in SITC 0-1, 2010
Exports
19%
29%
13%
7%
8%
France
Germany
14%
Imports
10%
Netherlands
Italy
UK
Spain
Rest
9%
26%
15%
10%
16%
15%
France
Germany
Netherlands
9%
Italy
UK
Spain
Rest
European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
Source: European Commission, The CAP towards 2020.
European Integration VI
Core Policy 2
Top 5 World Agricultural Exporters
EU-27 - Main Agricultural Exports, 2011
Common Agricultural Policy (CAP)
Top 5 World Agricultural Importers
EU-27 - Main Agricultural Imports, 2011
Source: http://ec.europa.eu/agriculture/publi/map/01_12_en.pdf
European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
Source: EUROSTAT (2011), External and Intra-EU Trade, edition 2010, p 21.
European Integration VI
Core Policy 2
EU-27 - Agricultural Exports by Destination
EU-27 – Trade with USA
Common Agricultural Policy (CAP)
EU-27 - Agricultural Imports by Origin
EU-27 – Trade with Russia
Source: http://ec.europa.eu/agriculture/publi/map/01_12_en.pdf
European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
13
European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
The member states of the EEC in Article 39 of the Treaty establishing the
European Community (signed on March 25, 1957) agreed that the objectives
of the Common Agricultural Policy (CAP) should be:
(a) “to increase agricultural productivity by promoting technical progress and
by ensuring the rational development of agricultural production and the
optimal utilization of the factors of production, in particular labor;
(b) thus to ensure a fair standard of living for the agricultural community,
in particular by increasing the individual earnings of persons engaged in
agriculture;
(c) to stabilize markets;
(d) to assure the availability of supplies;
(e) to ensure that supplies reach consumers at reasonable prices.”
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European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
The member states were aware of
(a)”the particular nature of agricultural activity, which results from the social
structure of agriculture and from structural and natural disparities between
the various agricultural regions;
(b) the need to effect the appropriate adjustments by degrees…” (Article 39, 2.).
The member states agreed that a common organization of agricultural markets
should be established. They opted for three different types depending on the
product:
(a) “common rules on competition;
(b) compulsory coordination of the various market organizations;
(c) a European market organization.” (Article 40, 2.)
The Common Agricultural Policy (CAP) was originally a market organization system
but later replaced the market mechanism by
- guaranteed administrative minimum prices, and
- protectionist trade barriers
This system contrasts to the direct income supporting system (US system).
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European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
In the case of administrative fixed prices, farmers are guaranteed a certain price
for their products, which lies above the world market price (otherwise the floor
price would not be binding). Such a support strategy can only be realized
through a combination of external and domestic measures: on the one hand,
cheaper imports, which might drive down the administrative price, have to be
prevented (by external measures such as tariffs). On the other hand, intervention
into the domestic market mechanism becomes necessary to maintain a given
price level (by domestic measures, e.g. intervention buying or output
restrictions).
In the EU the initial policy instrument was the setup of such an administrative
fixed market price above the domestic equilibrium price. For a long time,
there had been no output restrictions imposed because of the initial goal of selfsufficiency in food supply. As producers no longer bore a price risk this strategy
set an incentive to expand production to increase producer income (equal to the
fixed price times production quantity). If the price cannot react, the income
elasticity of the demand for agricultural goods is low and foreign markets are
relatively closed, surpluses are something like an inevitable result of such a
policy. These surpluses have to be taken from the market by policy intervention
to maintain the administrative price, e.g. by buying the surplus or by paying a
premium for discarding agricultural products. Governments can also attempt to
reduce surpluses by setting output restrictions in the form of positive incentives
for reductions or penalties for excessive production.
16
Effects of a fixed administrative (minimum) price
Price
D
Fixed admin.
minimum price Pa
S
C
P
R
d
c
a
b
Equilibrium
price Pe
E
QaC
0
Qe
QgP
Q aP
Quantity
1. Assumptions
 At the market equilibrium E, supply S equals demand D
 The market clearing price is Pe , the corresponding quantity is Qe
 The intervention agency sets a fixed minimum price P a
2. Purchase of surplus is guaranteed by the intervention agency at P a
3. Market effects
4. Welfare effects
 new equilibrium at P
 guaranteed purchase quantity by the intervention
agency: QaC QaP
 reduction in consumption: Q e QaC
 increase in production: Qe QaP




increase in farmers’ income: (P pa 0 QaP) – (E Pe 0 Qe)
gain in producers surplus: a + b + c + d
loss of consumer surplus: a + b
governments’ intervention expenditures: P C Q aC QaP (if
financed by taxpayers = consumers, the total consumer
loss amounts to a + b + P C QaC QaP)
 misallocation of resources: area b
5. Possible solutions   government sets production quota to decrease
government expenditures to R C QaC QgP
to diminish welfare
 consumers pay a + b + c + d directly to the
loss
producers (e.g. as income support)
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European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
If the domestic agricultural sector is open to the world market, which has a lower
price than the administrative one (and maybe also lower than the domestic
equilibrium price), this price can only be sustained by protectionist measures at the
border. The most common instrument to achieve this is a tariff, which increases
import prices by a certain percentage of import value. Domestic producers are
protected from foreign competition if the tariff is high enough to raise import prices
to the domestic price level. This means that with constant tariffs, declining world
market prices diminish protection. In that case, the administrative authority has to
bring the tariff in line with the new world market price. By setting up minimum prices,
inefficient domestic producers are sustained leading to a loss in international sector
competitiveness. Furthermore, this policy can lead to excess production. In order to
reduce surpluses the administrative authority can either purchase excess quantities
or subsidize their export. Such a strategy of tariffs and export subsidies is highly
trade distorting. On the one hand, imports are kept out of the market. Combined
with subsidized exports, this increases worldwide supply of agricultural products
driving world market prices down. Farmers in other export countries might lose their
competitiveness facing this new, artificially lowered price. Importing countries in
contrast are the winners.
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European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
Taken together, there are a number of winners and losers from such a
protectionist strategy.
On the winning side are:
farmers (higher incomes),
consumers outside the protectionist country (lower world market prices)
and to some extent the government itself (generating tariff revenue from
agricultural imports).
On the losing side, one finds:
consumers in the protectionist country (paying excessive prices and higher
taxes to finance market intervention),
farmers in this country (paying higher taxes to finance market intervention),
producers in exporting countries (lower world market prices, loss of the EU
as a major market) and
to some extent the government itself (facing higher expenditure from
market intervention).
Although exact quantities of welfare loss are difficult to determine, this short
overview already indicates that the overall welfare losses from such a
protectionist strategy exceed the gains (especially when considering that within the
EU, the group of main benefactors, i.e. farmers, is by far smaller than that of the
19
main ‘losers’, i.e. consumers).
Effects of a tariff in a large country
Home Country
Price
SH
DH
Foreign Country
Price
SF
DF
EH
PTH
P TH
a’
a
PW
d
b
tariff
c’
c
PTF
EF
QSH H
QS T
0
QCH
QCHT
Quantity
0
QCF
QCFT
QSF
QSFT
Quantity
1. Assumptions
 National equilibrium: EH in the home country, EF in the foreign country
 Equilibrium of both countries at free trade:
o world market price: PW
o import quantity of the home country Q SH QCH equals export quantity of the foreign
country QCF QSF
2. Introduction of a tariff by the home country: PTH PTF
3. Market effects
4. Welfare effects




decreased import quantity in home country: Q SHT QCHT
decreased export quantity in foreign country: Q CFT QSFT
increased price in the home country: P TH
decreased price in the foreign country: PTF






5. Redistribution effects
gain in producer surplus: area a’
loss in consumer surplus: area a’ + a + d + b
tariff income to the government: d + c
loss in allocation efficiency: areas a and b
gains of increased terms of trade: area c
net gain: c – (a+b)
 redistribution of consumers to producers: a’
 redistribution of consumers to government: d
Note: Both countries have to bear the price effect of the tariff. The home country has to bear a smaller part
if its elasticities of supply and demand are high and those of the foreign country are low.
20
Effects of export subsidies in a large country
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European Integration VI
Core Policy 2
Common Agricultural Policy (CAP)
Direct income payments of government to farmers are a completely different support system and can come
in a variety of ways. These range from direct payments (that can be headage payments or related to current
or historical input or output levels) to indirect payments (e.g. tax exemptions). They differ from guaranteed
price support systems insofar as, there is no necessity to protect the domestic market. This implies that they
are far less trade-distorting than the administrative price system (i.e. the negative welfare effects on nondomestic parties described above do not occur). If the market is open, the domestic price level equals the
world market level because otherwise imports would rise, thereby equalizing price levels. Direct income
payments then allow farmers to close the gap between their income at world market prices and production
costs. In the end, one has to take into account that these income payments have to be financed, e.g. by
taxes. In that case consumers and producers have to bear the costs. However, consumers benefit compared
to a minimum price because they can buy agricultural commodities at world market prices. Regarding
farmers, the support and protection function of direct income payments is less perfect than that of a combined
minimum price/tariff system: The exposure of the producers to price changes in the world market is relatively
high. Furthermore, the adaptability of subsidies to changes in the world market seems to be lower than the
adaptability of minimum prices and tariffs. From a welfare perspective this system of direct income payments
is less negative than the administrative minimum price: on the one hand, consumers no longer pay twice and
on the other hand, negative effects on other countries (through trade distortions) are reduced.
Although these two support systems are at the heart of agricultural support in industrialized countries, reality
is far more complex. Different factors contribute to the complexity of any analysis of agricultural markets:
Policies across different product categories and within the same country differ significantly. This
is why general statements about the agricultural market even within one country are difficult.
Policies within one product category differ internationally. This is why it is difficult to compare
levels of protection between countries.
Policies within one product category typically comprise a complex set of tools.
Policies have changed significantly throughout history.
22
Common Agricultural Policy (CAP)
The first model of European market organization
Price,
Border
Price,
Border
Demand curve at fixed import price
Supply curve
Target price
IMPORT
EXPORT
Threshold price
Variable levy
I
G
H
N
F
C
D
A
B
J
K
World market price
M
E
L
Export levy
Intervention price (=
market clearing price)
0
Quantity
Total domestic production
Total domestic consumption
Assumptions:

EU market price = threshold price

EU export price = intervention price

world market price = EU equilibrium price
Base case (export and intervention = red line)
storage costs = G I J N
intervention expenditures = A N J L
export subsidies = F N C D
producers’ export proceedings = D C A B
producers’ net gain = F N K
Alternative case 1 (no export)
storage costs = F H I J
intervention expenditures = B F J L
Alternative case 2 (only export)
no storage costs
export subsidies = D F J M
23
The evolving role of EU support prices - wheat
( in € per metric tonne )
250
200
150
100
50
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
EU intervention price
EU common wheat market price
US (SRW Gulf)
24
Source: Haniotis, T.
Three views of benefits and costs of the CAP
An evaluation of the effects of the CAP could be based on different approaches.
Firstly, the traditional analysis of trade distortions uses an efficiency-oriented
approach to quantify the welfare effects for domestic and foreign farmers as well
as consumers.
Players outside the agricultural market, their behavior and the effects on the pattern
of protection are excluded (e.g. tax payers).
Secondly, “political economy”-models of protection focus on distribution-oriented
considerations. The main players are political decision-makers and interest groups.
It is assumed that both groups pursue their own interests. Politicians use their
regulatory power to transfer income to the “clients” of the special interest groups,
e.g. to the farmers. Tariffs are seen as political instead of economic prices. Several
alternative models have been developed especially in the USA; some have been
tested successfully (Grossman/Helpman 1994; Baldwin/Magee 1998; Eicher/Osang
2002).
And thirdly, these two approaches might be supported by plausible intuition where
models resulting in exactly determined effects have its limits.
25
Three views of benefits and costs of the CAP
1. Market model view of tariffs as well as of price support (allocative efficiency)
Government
Producers
Consumers
Welfare
(=EU)
- increase in
increase in - loss in consumer surplus
Welfare according to figure 12
income from negative, if
Domestic
producer
- distribution of income to
tariffs
- tariffs are high
market
surplus
producers and government
- expenditures - elasticities are low
for support
- country is small
The difference of consumer
gain and producer loss
(including terms of trade effect)
increase in consumption, if
Foreign
loss in
is large if
the foreign country has to
market
production
_____
- tariffs are low,
bear a part of the tariff
- elasticities are high,
- tariff imposing country is
large
26
Three views of benefits and costs of the CAP
2. Political Economy view of protection (distributive efficiency)
Government (=Council of
Lobby on the EU
Producers
Agri Ministers)
Consumers
level
- loss of consumer
gain, if tariff
gain, if tariff
Inside
- gain, if re-elected
surplus
protection higher
increases
Pressure
- tariff income
- distribution of income
than costs for
to producers and
lobbying
government
foreign governments:
foreign lobbyists:
Outside
retaliation measures due to
stronger negotiation
_____
_____
pressure strong negotiation power of
power*
foreign lobbyists
27
Three views of benefits and costs of the CAP
3. Plausible intuition (no theoretical proof of allocative and distributional efficiency)
Domestic economy
Benefits
Foreign economies
- high degree of self-sufficiency
decreasing world
- gains from increased specialization possible
market prices if a
- income convergence in the EU agri. sector
large country
- price stability
provides export
- sustainable rural life
subsidies
WTO
_____
- misallocation of resources
- adverse specialization possible if worldwide share of
production of developed countries increases
- sectoral income inequalities because wages in the
Costs
subsidized sector could be higher
- structural distortions because large farms get a
relatively higher share of support
- environmental damages
- decreasing growth
- blocking liberalization
- loss of
- dispute settlements
competitiveness
procedures involving
- negative impetus
three parties (domestic
on growth
- unfair competition
government, foreign
government and WTO
staff)
28
Agricultural expenditures
CAP cost, 2008,
absolute terms
120
50%
100
80
60
CAP cost, 2008,
relative terms
40%
44% of EU
budget
30%
20%
40
10%
20
0.43% of
EU GDP
0%
0
% of GDP
Billion of euros
CAP expenditure
EU budget
CAP expenditure
All EU public expenditure
29
The CAP Reform
Markets
Direct payments
Rural
Development
Modulation
Haniotis, T, The CAP Reform Process in Perspective: Issues ot the Post-2013 Debate. European Commission
Slide 20-22.
30
The road of the EU’s CAP reforms: Decoupling production and support
The 1992 reform (MacSharry reform)
-reduction of intervention prices,
- increase in income supports under the condition of setting productive
land aside,
-discriminating the level of income support between large and small farms to
the advantage of the former,
-compensation for an early retirement of farmers older than 55 years,
-paying more attention to product quality,
-subsidies for farmers who have to cope with disadvantageous local
conditions,
- environmental improvements by taking into account that protection of
nature increases the quality of life.
31
Agricultural expenditures
billion €
70
2007 constant prices
% GDP
0,70%
0,50%
40
0,40%
30
0,30%
20
0,20%
10
0,10%
0
0,00%
Export subsidies
Decoupled direct payments
Other market support
Rural development
2002
2003
2004
2005
2006
2007
2008
50
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
0,60%
1980
1981
1982
1983
1984
1985
1986
60
Coupled direct payments
% of EU GDP
32
Cumulative reductions in EU price support
Cumulative % reduction in price support from 1991 to 2009
0
-20
-40
-60
-80
-100
Soft
wheat
Durum
wheat
Beef
Rice
In nominal terms
Butter
SMP
Sugar
In real terms
33
Impact of the CAP reform on expenditure structure in the cereals sector* A clear shift from market intervention (export refunds and storage intervention) to direct aid
100%
90%
80%
70%
93.7%
Export Refunds
Storage intervention
Direct aids
77.0%
64.0%
60%
50%
40%
32.8%
30%
16.7%
20%
11.5%
10%
2.1%
3.7%
0.5%
0%
1990
1994
1997
34
Impact of CAP reforms on EU net production surplus
Net production surplus as % of consumption
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
Wheat
Barley
Maize
Beef
Pork
Net production surplus: 1990/94 ol avg
Poultry
SMP
Butter
Cheese
Sugar
Net production surplus: 2004/08 ol avg
35
Recent evolution of agricultural input and output prices
( 2000 = 100 )
150
135
120
105
90
75
1996
1997
1998
1999
2000
Input prices (nominal) - EU-27
Input prices (deflated) - EU-27
2001
2002
2003
2004
2005
2006
2007
2008
Output prices (nominal) - EU-27
Output prices (deflated) - EU-27
36
CAP Reform 2014-2020
The CAP Post-2013: From Challenges to Reform Objectives
Source slides 37-45: EC (2013), Overview of CAP Reform 2014-2020, http://ec.europa.eu/agriculture/cap-post2013/
CAP Budget
Pillar 1: Direct payment and market-related expenditure
Pillar 2: Rural development
Pillar 1 and 2: 38.7% of total EU budget 2014-2020
Pillar 1: Minus 1.8%
Pillar 2: Minus 7.6%
CAP Actual Payments 1990-2012, Commitments for 2013 and the New MFF Ceilings 2014-2020
“The radical change in the orientation of the CAP is demonstrated by the evolution of expenditure,
echoing the policy shift since 1992, away from product based support towards producer
support and considerations for the environment.”
MFF = Multiannual Financial Framework 2014-2020 (EU Budget)
CAP 2014-2020
New Features
 Joint provision of public and private goods
“Farmers should be rewarded for the services they deliver to the wider public, such as
landscapes, farmland biodiversity, climate stability even though they have no market
value. Therefore, a new policy instrument of the first pillar (greening) is directed to the
provision of environmental public goods, which constitutes a major change in the
policy framework.”
 Efficient,
targeted and coherent
“Both pillars of the CAP are aimed at meeting all three CAP objectives more effectively,
with better targeted instruments of the first pillar complemented by regionally tailor-made
and voluntary measures of the second pillar. “
 New flexibility
“… in the budgeting and implementation of first Pillar instruments, acknowledging the wide
diversity of agriculture, agronomic production potential and climatic, environmental as
well as socio-economic conditions and needs across the EU.
This flexibility will however be framed by well-defined regulatory and budgetary limits in
order to ensure a level-playing field at European level and that common objectives are met.”
CAP 2014-2020
How the key objectives of the reform are addressed
 Enhanced competitiveness of EU agriculture
“Competitiveness is addressed directly by changes to market mechanisms, particularly the
removal of production constraints. All of the existing restrictions on production volumes for
sugar, dairy and the wine sector will end, allowing farmers to respond to growing world
demand.
Measures to facilitate producer cooperation under both pillars of the CAP should also boost
the competitiveness of farming by reducing costs, improving access to credit and adding
value to the primary sector.
A new crisis reserve (of EUR 400million per year in 2011 prices) is established to secure the
financial resources needed in case of crisis, through deductions from direct payments, with
unused amounts reimbursed to farmers in the consecutive budget years. “
 A more sustainable EU agriculture
CAP 2014-2020
 A more effective and efficient CAP
… through more targeted and equitable direct payments
New design of direct payments
CAP 2014-2020
“The performance of the CAP will also benefit from a more balanced,
transparent and more equitable distribution of direct payments among
countries and among farmers. The reduction in disparities of the level of
direct payments between Member States, known as external
convergence, will reinforce the credibility and legitimacy of the support
system at EU level.
Changes in the distribution of direct payments
Baseline: Average national payments per hectare by 2020 compared to teh status quo.
CAP 2014-2020
 …and a more strategic approach to R&D spending
Rural development policy
CAP 2014-2020
 Actions targeted under both pillars
CAP 2014-2020
SUMMARY