Critical Evaluation of the CAP Reforms

The CAP has its roots in 1950s Western Europe, whose societies had been damaged by years of war, and where agriculture had been crippled and food supplies could not be guaranteed. The CAP aimed at encouraging better productivity in the food chain, ensuring fair standard of living to the agricultural community, market stabilization and ensuring the availability of food supplies to EU consumers at reasonable price. The agricultural policy set up market regimes that guaranteed supports and high purchase (community intervention) prices for the farmers, encouraging them to increase their production. Financial aids were provided for restructuring farming. Farmers were able to expand their farms, to take part in education on farming and available technologies. Early retirement programs and vocational training was also part of the package. The goal of the agricultural policy was to set up a farming system that complies with the economic and social demands of that time.

Thanks to these incentives, efficiency improved, and farms became so productive that they grow more food than needed. The surpluses usually were purchased by community intervention (in order to avoid the collapse of producer prices), were then stored, all that finally led to ‘food mountains’. By the 1980s the EU had to contend with almost permanent surpluses of the major farm commodities, some of which were exported (with the help of subsidies), some of it had to be stored or disposed of within the EU. These measures had a high budgetary cost, distorted the world markets, did not always serve the best interests of farmers and became unpopular with consumers and taxpayers. At the same time society became increasingly concerned about the environmental sustainability of agriculture. Several

measures were introduced to bring production levels closer to what the market needed and to halt the rise of budgetary expenses. In 1988, the budgetary guidelines set a maximum ceiling for the CAP budget based on: 'stabilizers' that set a maximum limit on quantities guaranteed to receive support payments, and a new approach to Community structural policy that favored a more effective global strategy for rural and less favored areas and a closer coordination between the Guidance Section and other Structural Funds.

Since 1992 price support mechanisms (product support) have been gradually replaced by decoupled direct payments (producer support) that relieved the negative side effects of the CAP. The current agricultural policy has less distorting effect on European and global markets, less detrimental to the poor farmers in developing countries, and does not encourage production that is harmful for the environment. Despite of these positive impacts, the CAP endows very uneven benefits on member states and individual farmers and is really not fulfilling any clear income distribution, rural development, or environmental protection objectives. The support of rural development and environment protection is often partly, or wholly unjustified and the implementation is not effective. Furthermore, remaining elements of the CAP’s old market support mechanisms are considered problematic by the EU’s trading partners (for example export subsidies on dairy products, and high import tariffs), weakening the EU’s negotiating position in its efforts to dismantle excessively protective policies worldwide and secure a successful conclusion to the Doha Round (Zahrnt, 2009).

Budgetary constraints in the EU and especially on the agricultural expenditure, along with the WTO negotiations affect the development of agricultural and rural development supports. The traditional CAP objective of food security will of course continue to play an important role. Partly due to the latest enlargement of the EU, the increasing economic, socio-cultural and natural diversity of the European Community requires a rural policy approach that in its broader single framework provides diverse implementation. Sustainability is also a requirement to be met by the future CAP, including landscape protection, conservation of natural resources and biodiversity, and food-safety issues.

With the ongoing urbanization in the European society rural areas are considered to be areas in which population is declining, due to the outward migration of younger age-groups, low natural growth due to population imbalance, and the consequent ageing of the population.

Rural population thus has an ever shrinking impact in policy making and on the outcome of elections (less votes). Despite of this, land use, and conservation of valuable natural resources (such as water, soil and biodiversity) is still the responsibility of the rural society. Food, however, is much more than mere commodity. A major challenge for the food-chain – including farmers – to convince European consumers that the various food they produce is safe for consumption, and of good quality.

Analyses of fiscal federalism argue that budgetary expenditures should focus on financing European public goods¹³, as they cannot be provided in sufficient extent by the Member States. The common budget is an important source in supporting human capital (particularly in higher education), research and innovation. Joint infrastructure programs have cross-border effects (citizens of other member states also can benefit from them). Additional

13 Public goods are non-rival and non-excludable goods in consumption. It means that all individuals together may consume one and the same good and there is no way (or it would be very expensive) to exclude anybody from it. Public goods are one-to-many relations. While all consumers are provided with the same amounts of public goods, irrespective of whether they have paid for them or not, public goods will only be supplied if the sum of each individual's contribution to pay for the public good covers the marginal cost of producing it. State financing, or some kind of collective action is therefore necessary. European public goods are those public goods that derive form the functions that European polices have for all EU citizens.

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areas for harmonized European actions include climate change, and energy security.

Community policy aims to improve economic efficiency and to improve cohesion. The European solidarity means income redistribution from the rich European countries to the poor Member States. Cohesion is also a public good, as it contribute to the harmonious development of the EU essential to social stability (structural policy is part of the cohesion).

The latest major budgetary reform of the EU took place more than two decades ago, in 1988. Despite the major changes in the European economy and society, the global crisis (climate change), and the failure of the Lisbon Strategy (by 2010 the EU would be the world’s most competitive and dynamic knowledge-based economy), budgetary expenditures continue to redistribute incomes and unfortunately are not so supportive of economic growth and improving efficiency of the EU. Initially, the vast proportion of the Community budget, at times more than two-third of it, was spent on the agricultural policy. Although the CAP has undergone several reforms, still accounts for about 40 % of the EU budget and nearly half of the legislation (Figure 5.1.). The debate on the future of the CAP strongly relates to the review of the community budget, as the global crisis, namely the food and financial crisis, and the climate change enforce the best utilization of the scarce financial resources.

90 % of the EU territory is rural area, and more than half of it is farmed. Since the CAP reform in 1992, the EU has been supporting agri-environment measures. Agri-environment measures are designed to encourage farmers to protect and enhance the environment on their farmland. It provides payments to farmers in return for a service.

Programs are announced by the Member States and farmers sign contract with the authorities and commit themselves for a minimum period of at least five years. Programs are co-financed by the EU and the Member States. The rural area is home to more than 56 % of the EU's population, and rural development, of course, is a vitally important policy area.

In rural areas agriculture and forestry are the main activities concerning land use. It follows that these activities have an important role in the rural communities, as these are the foundations of the structure of the society, of economic viability, of natural resource management and landscape conservation. The EU’s rural development policy aims to improve the quality of life in rural areas and to encourage diversification of the rural economy, as well as to improve the quality of the environment and countryside, and to improve the competitiveness of the agricultural and forestry sector. LEADER (’Links between the rural economy and development actions') is one of the four initiatives financed by EU structural funds and is designed to help rural actors consider the long-term potential of their local region. It is actually a local development method which allows local actors to develop their area by using its endogenous development potential

Figure 5.1: CAP Budget (1980-2009)

*2007 prices

Source: European Commission (2011)

The EU has improved food safety significantly since the food scares in the 1990s, by introducing hygiene measures, rules on animal and plant health and checks on pesticide residues and additives in food, to give only a few examples. It is an objective to protect and raise the health status and welfare of animals in the Community, in particular of food-producing animals, whilst permitting intra-Community trade and imports of animals and animal products in accordance with the appropriate health standards and international obligations. The Community legislation concerning the welfare conditions of farm animals lays down minimum standards. Responsibility is placed on owners and keepers of animals to ensure the welfare of animals under their care and prevent unnecessary pain, suffering or injury. It also lays down other general principles, such as regular inspection, rapid treatment for sick animals, recording of veterinary treatment and mortality, general provisions with regard to livestock buildings, outdoor shelter, feed and water. Animal welfare measures are answers to consumers’ demand. However, changes in farm animal welfare standards impact first on production costs in livestock, and it can be expensive, so farmers are usually rewarded if farming practices go beyond minimum standards.

5.2.1. Goals and Tools

In the last 50 years the Common Agricultural Policy has been the European Union's most important common policy. This explains why traditionally it has taken a large part of the EU's budget, although the percentage has steadily declined over recent years. Starting from the 1980s, increasing proportion of the community supports was market related subsidy.

Heavy export subsidies and growing market supports helped to maintain relatively high producer prices, but it put a heavy burden on the budget. On the other hand, trade partners became increasingly disgruntled with EU dumping, and protested against export subsidies.

Responding to both internal and external pressures, the EU finally accepted the first major reform of the CAP in 1992.

0 10 20 30 40 50 60 70

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

billion EUR

Export refunds Other market measures Coupled payments Decoupled payments Rural development

The CAP started as a strong price (product) supporting policy, applied heavy export subsidies and high tariffs. Then in 1992 sector specific direct supports were introduced which was followed by setting up decoupled payments in 2003 (to receive a payment under the Single Payment Scheme farmers must follow a variety of regulations on the environment, public health, animal health, plant health, animal welfare and land maintenance. This system is known as Cross Compliance.). From 2003, direct payments were gradually decoupled from farmers’ production decisions. Today, farmers’ decisions are based on supply and demand, i.e. on the market: 90 percent of the direct payments are decoupled and famers have no obligation to produce: they are free to respond to market signals and adapt farming accordingly. Producer prices have been influenced since 1992 increasingly by the changes in demand and supply. The decrease in institutional prices induced loss of revenue, which was compensated by direct payments tied to certain commodities (Cereals, oilseeds, protein and fiber crops, cattle, sheep and goat). So, the structure of direct payments has changed as market support decreased and the proportion of direct supports increased.

While analyzing the use of supports, we can discover that the purposes of the CAP are not at all clear. If the goal is to support (low) incomes, then why big and rich farmers are the most supported? Today 20% of farmers receive 80% of the aids, which can be explained by the fact that 20% of farmers own 80% of farmland. If the goal is the protection of the environment, then why the CAP supports large farms applying farming practices harmful to the environment? If the goal is to ensure food-security, food-safety and food-quality, then why should the CAP apply decoupled payments? As mentioned above, 90% of the direct payments are decoupled from production. A further argument for maintaining current support system is that direct payments are paid for the fulfillments of EU standards. However many other industries apply even sticker standards without supporting their accomplishment.

Former EU commissioner (1970-1974), Ralph Gustav Dahrendorf’s 40 years old statement on the CAP is still deemed to be correct. As he commented: “(the CAP) is little more than an instrument for Ministers of Agriculture to get for their farmers in Brussels and in the name of Europe what they would not get at their national Cabinet tables” (Wickman, 2003). Home politicians today report on their Brussels negotiations with the same attitude when interviewed by the written and electronic media.

CAP supports are primarily not for encouraging the production of externalities and public goods. Payments are equally decoupled from the production of commodities and public goods and they are fully financed by the Community. Support that do have a more direct encouraging effect on the production of European public goods, however mostly are only co-financed through the second pillar of the CAP (Pillar 2, Rural Development). Bearing that in mind we can state, that the present agricultural support system is primarily an income redistribution system, above all in the first pillar of the CAP, but in the case of several measures of Pillar 2, too. Whereas CAP expenditure is largely a redistribution, it is important to know who the beneficiaries are. In examining the redistribution of direct payment across Member States it is apparent that most Pillar 1 supports goes to the richer Member States, to regions, with lower unemployment rate and stronger economic growth. Pillar 1 is inconsistent with the objectives of cohesion, while Pillar 2 is more consistent with cohesion objectives within the Member States, but not in between them. On the whole, however Pillar 2 is not sufficient to address marginalization of lagging behind regions, and focus more on symptoms than on underlying causes: remoteness, low productivity, lack of qualified labor and services.

Both Pillar 1 and Pillar 2 supports are favoring the more economically viable and growing areas of the EU (Shucksmith et al., 2005). As direct payments add up to the 75% of the CAP budget, most of the money paid by European taxpayers’ go to a few and rich farmers. This is

hardly cohesion, as poor tax payers also contribute to the support (Baldwin, 2005). The CAP is irrational about how money is raised and how it is spent. There is no clear link between the wealth of a country and the amount it receives from the CAP.

Maintaining fair producer prices were one of the aims of the CAP in the case of some important land-based commodities such as cereals, dairy products, and beef. In contrast to this objective, commodity markets that are less dependent on land size, such as pig and poultry sector, have been influenced primarily by market conditions (market oriented sectors) and without much community intervention. No surprise, that starting as early as the 1960s significant progress in terms of techniques have taken place in the pig and poultry sector and producer prices have decreased in nominal terms. Contrary to that, the beef sector (and in cereals production) experienced strong community interventions. Producer prices significantly increased till the end of the 1980s because of the less intensive technical progress and, consequently, the persisting low efficiency. The international competitiveness of the most supported sectors (cattle and cereals) steadily deteriorated, and at the same time the EU had to contend with almost permanent surpluses of these commodities, some of which were exported (with the help of subsidies), others of which had to be stored or disposed of within the EU. At the same time, the competitiveness of the less regulated pig and poultry sector, despite the limited community attention – shows a much better picture and the sectors’

surpluses have not reached 10% since the 1990s (Figure 5.2.). Still, the EU’s food and agricultural trade remained relatively balanced, mainly because of the growth of secondary processed commodity export.

Figure 5.3: Impact of CAP reforms on EU net production surplus

Source: Haniotis (2009)

In international comparison, the agriculture of the EU operates at higher cost compared to other agricultural exporter countries. This can be explained by the higher production costs (wages, input prices, tax) and by the strict environmental and animal welfare obligations. As supports have been decoupled from production, in many Member States

farmers can no longer generate positive gross margin in cattle, sheep and goat farming, as farmgate prices have not risen in the same extent as in the cereals sector. Thus, higher fodder prices led to higher production costs. Farmers however did not give up livestock farming, as direct payments continued to flow. What is more, in livestock production is not so easy to give up production in a short time, and the hope in the rise of animal product prices encouraged farmers to continue their activity. The biggest incentive are those coupled payments though, that are still applied in some Member States. Decoupled payments along with the relatively strong import (tariffs) protection contribute to maintaining the present level of agricultural production.

The legitimacy of the decoupled payments (Single Payment Scheme, SPS¹⁴) is questionable, as historical entitlements lead to support levels that may vary from sectors to sectors and from area to area (the single payment is calculated on the basis of the aid received by farmers during a reference period and reference yield of cereals, protein, oilseed and fiber crops, or number of animals). Even after the setting up the SPS system it is true that market oriented production doesn’t affect the sum of the support, therefore the introduction of decoupling, though in a smaller extent, does not harmonize with market oriented decision making, and has a distortion effect on the market. Previous reforms introduced direct payments on the basis of historical and/or regionalized options, with the aim of avoiding directly distorting decisions on the total production or choice of product by farmers. Using historical production as a basis for defining payment levels had the advantage that it reflected, to some extent, the conditions for agricultural production in a specific region. It was therefore politically realistic at the time to allow for the link between decoupled payment levels and historical support levels, especially since not all sectors were reformed at the same time.

Today, as adjustments in all sectors have taken place and since twelve more Member States have joined the European Union with a substantially different production and support history, differences in support levels based on historical references cannot be justified on a long term.

Even more so, farm structures and production pattern have of course changed since the

Even more so, farm structures and production pattern have of course changed since the