CAP Reform Ref: CAPreform feb07 Introduction Original system – problematic Pressure for reform – Budget – External – Consumer – Environmental Fig1: welfare consequences – Compare CAP with.
Download ReportTranscript CAP Reform Ref: CAPreform feb07 Introduction Original system – problematic Pressure for reform – Budget – External – Consumer – Environmental Fig1: welfare consequences – Compare CAP with.
CAP Reform Ref: CAPreform feb07 Introduction Original system – problematic Pressure for reform – Budget – External – Consumer – Environmental Fig1: welfare consequences – Compare CAP with self sufficiency under free trade ( consider Pw & P intv) If exported outside EU, export restitution = area abcd ( + storage costs) Fig1 CAP:Impact on consumer surplus & producer surplus loss of consumer surplus (CS) – area A gain in producer surplus (PS) – areas B + A P Pintv Pw a d S b c D Q Fig1 CAP:Impact on consumer surplus & producer surplus loss of consumer surplus (CS) – area A gain in producer surplus (PS) – areas B + A P Pintv Pw a d S b c D Q Fig1 CAP:Impact on consumer surplus & producer surplus loss of consumer surplus (CS) – area A gain in producer surplus (PS) – areas B + A P Pintv a S b A Pw d c D Q Fig1 CAP:Impact on consumer surplus & producer surplus loss of consumer surplus (CS) – area A gain in producer surplus (PS) – areas B + A P Pintv a A Pw d S b B c D Q Early 1980s ‘Guidelines for European Agriculture’ – Aim: reduce production & prices – Partially implemented, not significant Reform: Milk Quotas 1984 Marketing quotas imposed – Large surpluses – EU budget problems – Milk accounted for30% of EAGGF – Price support maintained but excess production ‘taxed’ (super-levy) Fig 2: Milk quota EU saves areas C+D – CS - no change – PS – loses area C Fig2 CAP:Milk quota Quota P S Pintv C D Pw D Qs Q Assume quota allocated efficiently between farmers, if not ….. EU direct control over output Effective as ‘bottleneck’ in production – Monitor Ineffective for other products eg.cereals – Other methods used which may also penalise over production • Co-responsibility levies • Budgetary stabilisers – Not so effective Quotas v Reduction in price support Fig 3: Reducing price support (Pintv to P1intv) instead of introducing quotas Increase in CS: area F Fall in PS: areas F + G Net welfare loss: area G Argued reducing price support more beneficial than intro quotas Fig3 CAP: Alternative - price support reduction v quota P S Pintv P1intv Pw D Q Fig3 CAP: Alternative - price support reduction v quota P S Pintv P1intv F F Pw D Q Fig3 CAP: Alternative - price support reduction v quota P S Pintv P1intv F F G Pw D Q McSharry Reforms Most radical yet – International pressure – Partial change Aims incl. – Reduce support prices • Increase competitiveness • Control production & increase demand – Protect environment – Improve international relations How – Reduce price support • Eg intitial 30% for cereals • See fig 3 for benefits – Introduce DIRECT INCOME PAYMENTS to farmers to compensate potential loss of income – SET ASIDE for cereals • Now price supp. & income payments • Partly DECOUPLED farm income supp. • Slippage may be a problem – Early retirement • Consolidation of holdings – Environment: Discourage intensive production methods • Subsidies no longer depend upon output alone • Cross-compliance – Exclude small farms Choice: Set-aside or not? Depends upon market price for cereal & yields Choice – (1) use all arable acreage & receive lower price – (2) set-aside & receive 2 components • compensation payment + higher (‘original’) price Fig 4 – Assume • All farmers participate in set-aside scheme • All farmers are equally efficient New supply curve Ssa If direct compensation equals at least area H, rational farmer will set-aside Greater complexity – Farms not equally efficient – Prices change after S shifts to Ssa – See additional handout Fig4 CAP: Choice - set aside or not? Ssa P Pintv a S b Pw D Qsa Q Fig4 CAP: Choice - set aside or not? Ssa P S b H Pintv a Pw D Qsa Q Further Reform WTO Agenda 2000 – 2000 onwards – Still 2 systems • Continued move to price supp. – Milk unchanged – Greater emphasis on environment – Greater burden on States • subsidiarity CAP reform, June 2003 2003-2013 Further development of 1993 reforms CAP comprises 2 pillars – Pillar 1: Market support measures & direct subsidies – Pillar 2: Rural development programmes/policy Pillar 1 spending 1% growth ceiling (nominal terms) –Brussels Ceiling 2002 Move to single farm payment decoupling • based on value of previous output Payment linked to environment/food safety/animal welfare standards - cross compliance Direct payments (Pillar 1) reduced, switch funding to (Pillar 2) Rural Devt. Programmes (RDP) – modulation: transfer funds direct payments to RDPs – incremental Pillar 2 supports – Agriculture as provider of public good – Development of rural areas Exemptions, eg. cereals 25% payments linked to production (France) 2007-2013 Financial Perspective – Allocates more to Pillar 1, but Brussels Ceiling. - Pressure! – Proposed expenditure for both pillars CAP down to 26% of EU budget (2013) Source: House of Lords EU Committee, The Future Financing of the CAP, session 2005-06 UK linked further CAP reform to the UK budget rebate (2005) Conclusions CAP has achieved some of it’s objectives Move from price support since McSharry, but now more complex with 2 systems CAP expenditure as part of budget lower Conflict with single market? Political & social aspects Fraud Enlargement Further reform required