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PART I: WHAT IS THE COMMON AGRICULTURAL POLICY?
A. Introduction to the CAP
Agriculture has been a central concern of European policy makers
since the early days of the European Union. The Treaty of Rome
in
1957,
which established the European Union, defined the overall
objectives of a common agricultural policy for the six original
founding countries (Belgium, France, Germany, Italy,
Netherlands, and Luxembourg). At that time, Europe was still
haunted by the memory of the food shortages which followed World
War II, and each country had developed its own policies for
agriculture, regulating what was produced, setting prices,
controlling the marketing of products and defining the structure
of farms. It seemed evident that if Europe was to develop a
prosperous agricultural sector, a unified approach to
agricultural policy was needed.
The
Common Agricultural Policy
(usually abbreviated as CAP) evolved over the years
that followed. It consists of various rules and regulations that
govern agricultural activities in the European Union (commonly
called the EU), and it has been in place for the more than
40
years. The principle feature of the Common Agricultural Policy
is a system of subsidies that are paid to farmers. The subsidies
are intended to ensure minimum levels of production, so that
Europeans have enough food to eat, and a fair standard of living
is guaranteed for those whose livelihood depends on farming. The
CAP rules are common to all the member states of the EU and
cover a wide range of topics, including granting financial
support to farmers, production methods, marketing and the
overall quantities of food that can be produced by different
agricultural sectors. By managing more than
55%
of the entire EU territory, the CAP has had a profound economic,
social and environmental effect, not only in Europe, but also in
the entire world.
Agriculture was one of the original sectors of the European
Union economy to have a common policy. Other areas with common
policies are fisheries, forestry and transport. As a common
policy, agricultural policy is made by a supranational
authority. The European Commission proposes policy changes.
These changes are subject to agreement by the agricultural
ministers of the EU member nations and sometimes require
approval by the European Parliament.
Many
people consider the CAP to be the most important common policy
of the European Union. It is a central element in the EU
institutional system and has been the forerunner of the single
market, which ensures free movement of goods, services, capital
and people in the member states of the EU, which were increased
to
25
states on May
1,
2004.
It is part of the political and economic glue, which binds the
various segments of the community together.
B. Sustainability and Agriculture
Since
the adoption of Agenda
2000,
the European Union has emphasized sustainable agriculture and
sustainable rural development. Sustainable development has been
defined as development, which meets the needs of the present
without compromising the ability of future generations to meet
their own needs. The term sustainable agriculture refers to the
desired relationship between agriculture and the environment.
The concept entails the management of natural resources – land,
soils, and water - in a way, which ensures that the benefits of
farming will also be available for future generations. In a
broader sense, sustainability extends to the protection of
landscapes, habitats, and biodiversity, and to the protection of
the quality of drinking water and air.
C. Origins of the CAP
(Note:
This section briefly reviews the origin, principles, objectives,
and policy instruments of the Common Agricultural Policy. A more
detailed explanation of the operation of the CAP is presented in
Part II.
The
Common Agricultural Policy was born during the reconstruction
period that followed World War II. During the
1950s,
food was scarce in Europe, it was expensive, the quality was
poor and the selection was limited. The Common Agricultural
Policy was intended to overcome these difficulties by
establishing a uniform approach to agriculture for all the
members of the European Union.
The
basic objectives of the Common Agricultural Policy were set
forth in the Treaty of Rome
of
1957.
Article
33
of the treaty provided that the CAP should:
-
increase agricultural productivity by promoting technical
progress and ensuring the rational development of agricultural
production and the optimum use of the factors of production,
particularly labour;
-
ensure a fair standard of living for farmers by increasing the
incomes of people engaged in agriculture;
-
stabilise markets;
-
assure the availability of supplies; and
-
ensure that food supplies reach consumers at reasonable
prices.
The
Stresa Conference
in Italy in July
1958,
refined the objectives for CAP and provided the substance of the
programme.
The CAP foundation rests
on the following four principles:
-
a
single agricultural market,
which allows products to move freely between member states,
and a common frontier exists for goods imported into the EU;
-
uniform prices;
-
a common preference for European products
over imported ones;
-
financial solidarity,
wherein all member states share alike in the costs and
benefits of the CAP.
Ιn
addition, the CAP has common sanitary and veterinary
regulations, common prices and rules of common competition.
The
free flow of agricultural commodities within the EU is ensured
by (a) common prices in a common currency, the euro, (b) a
general prohibition on levies or subsidies by national
governments, and (c) the harmonisation of technical regulations.
Community preference refers to the price advantage granted to EU
produce. The prices of agricultural products within the EU have
traditionally been higher than those on the world market.
Therefore, to achieve this principle, custom duties are imposed
on imported agricultural products to bring them closer to EU
prices. In parallel, export refunds have compensated the
difference between EU prices and those on the international
market and have thus helped European products remain
competitive.
Financial solidarity
means that all member states contribute to the costs and share
in the benefits of the CAP. A common fund was established for
this purpose, financed through member state assessments and
revenues from certain levies.
The
main mechanisms to implement the CAP were created on the basis
of these principles. In
1960,
the CAP mechanisms were adopted by the six founding Member
States and two years later in
1962,
the CAP came into force. The original mechanisms are basically
still in place today.
The
Common Market Organisations,
or CMOs, are organisations not of people but of the regulations
that cover the different agricultural products. Their purpose is
to support the markets through appropriate mechanisms that vary
according to the product covered. Initially, a CMO was set up
for approximately half of the agricultural products.
This
number has progressively grown, and today there are
15
CMOs covering virtually all agricultural products except
potatoes, honey and certain spirits.
The
European Agricultural
Guidance and Guarantee Fund, or EAGGF, is the
agricultural budget, an essential component of the principle of
financial solidarity. It is financed by the overall budget of
the EU, and is used to finance all the expenses of the CAP as
well as certain expenses for rural development.
Under
the original provisions of the CAP, economic support to farmers
was given in proportion to the amount of production. Livestock
farmers were paid according to the number of cattle, sheep or
pigs they reared. Arable farmers were paid per hectare of land
on which they grew crops on with the payment rate determined in
relation to regional crop yields. This formula later changed
with the adoption of reforms to the CAP in
1992
and especially,
2003.
The
main policy instruments used by the EU to attain these
objectives include agricultural price supports, direct payments
to farmers, and supply controls. The CAP
recognises the need to take account of the social structure of
agriculture and of the structural and natural disparities
between the various agricultural regions. Ιt seeks to make the
appropriate adjustments by degrees. The six main mechanisms are:
·
Price support,
which guarantees minimum prices for products as set by the
agricultural ministers;
·
Import taxes
to
protect EU farmers and ensure that external prices cannot
undercut EU prices;
·
Intervention
in
the market by selling or storing surpluses;
·
Stock disposal
to dispose of surpluses by other means such as the Free Food
Scheme;
·
Subsidised exports,
resulting in the sale of surplus produce mainly to third world
countries;
·
Production control
including quotas (e.g. on milk) and set aside of land.
Dramatic changes in farming practices and output resulted from
the CAP subsidies for farm production. Farmers intensified their
farming methods in order to produce more and so gain bigger
financial support from the EU. Many farms became more
specialised and traditional family farming gave way to
“industrial-style agriculture” across large areas. Rather than
growing a variety of crops and raising livestock, many farmer
specialized in a single product. Today, about a third of EU farm
income comes from subsidies.
D. Evolution of the CAP
The
Common Agricultural Policy has changed over the years since
being established in
1962.
It has been revised several times in response to changing
social, economic and political pressures. The CAP has been
enormously successful in terms of food production, initially
enabling the EU countries to overcome the food shortages of the
1950s
and to achieve self-sufficiency. Later, surplus quantities were
produced. The concern about food scarcity was therefore replaced
by other issues. Meanwhile, technological advances in
agriculture resulted in a reduction in the number of farm
workers from about
20%
of the population to about
4%.
Public concerns about the quality of the environment and food
safety increased due to evidence of declining wildlife species,
air and water pollution, degradation of soils and incidents of
animal epidemics such as Mad Cow disease. In a recent European
opinion poll,
91%
of EU respondents said that they wanted agricultural policy to
provide safe food, while
89%
said they wanted it to ensure environmental protection as well.
All these factors have influenced the revisions of the CAP. The
CAP of today is moving increasingly towards direct payments to
farmers in order to guarantee farm incomes, ensure food safety
and quality, while at the same time promoting environmentally
sustainable production.
In
the meantime, the European Union has grown from the original six
states in
1957
(Belgium, France, Germany, Italy, Netherlands, and Luxembourg)
to
25
in
2004.
The following summarizes the stages of growth of the EU:
·
1973:
Denmark, Ireland and the United Kingdom joined the EU, bringing
the total to nine states;
·
1981:
Greece brought the total to ten states;
·
1986:
twelve states (Spain and Portugal);
·
1995:
fifteen states (Austria, Finland and Sweden);
·
2004:
twenty-five states (Cyprus, Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia).
Agriculture is a major component of the economies of most of the
central and eastern European countries that joined the EU in
2004,
and it is not considered as advanced as in the west. Special
measures are being implemented by the EU in order to smooth the
transition of a
25-state
economy.
E.
1992
CAP Reform
A
number of proposals to reform the CAP were made in the
70s
and the
80s
in order to make agriculture more efficient and to bring supply
and demand for products into better balance. However, the first
major reform of the CAP was not undertaken until
1992
under Agriculture Commissioner Ray MacSharry. The main elements
of the
1992
CAP reform were as follows:
-
agricultural prices were reduced in order to render them more
competitive in the internal and world market;
-
farmers were compensated for loss of income resulting from the
new price structure;
-
new
market mechanisms were adopted; and
-
measures to protect the environment were added.
Reduction in Support Prices
This
reform was implemented in
1993/94,
and it began the process of shifting support from market prices
to direct payments.
The
1992
reforms reduced support prices, created the corresponding direct
compensation payments, and introduced new supply control
measures. The reforms modified the common market organizations,
the set of policy instruments for each commodity, for grains,
oilseeds, protein crops, tobacco, beef, sheep, and dairy
products. The reforms affected
75%
of EU crop production. Cereal prices were by reduced
30%,
beef prices
15%,
and dairy product prices by
5%.
Compensatory Payments
Farmers received compensatory
payments linked to land use in order to make up for
price reductions. A mandatory
land set-aside
programme was instituted which provided payment to producers of
grains, oilseeds and protein crops for land removed from
production.
Agri-environmental Programme
Under
the Agri-environmental
Programme, farmers were paid additional subsidies
when they incorporated measures to protect the environment into
their practices. These included reductions in the use of
nitrogen-based fertiliser and pesticides, the use of better
application techniques for fertiliser, positive measures for
protecting nature, and conservation of the landscape.
World Trade
Additional changes to the CAP were implemented in
1995
as part of the EU's commitments in the
Uruguay Round Agreement on
Agriculture, including conversion of variable import
levies to tariffs.
F. Agenda
2000
(Note: See Part IV For a more detailed review of the
2003
CAP Reforms which implemented Agenda
2000.)
The
second major reform of the CAP began with
Agenda
2000
and
culminated in the CAP reforms adopted on June
26,
2003.
Agenda
2000
was a blueprint for future EU policy in light of the anticipated
enlargement of the union. Agenda
2000
was initially adopted by the EU in March
1999.
In July
2002,
the EU issued its mid-term review proposals for CAP reform.
These were followed by the adoption of the June
2003
reforms.
The
2003
CAP reforms are considered the most far-reaching changes that
have been made to the CAP. They shifted EU agricultural policy
away from price supports to direct payments, and the modified
supply control measures. Production subsidies were curtailed in
favour of direct payments to farmers, and the eligibility for
those payments was linked to compliance with rules on
environmental protection, animal welfare, hygiene standards and
preservation of the countryside. Agenda
2000
called for an end to the growing CAP budget by freezing it at
the
1999
level for seven years.
Specifically, Agenda
2000
included the following measures:
Cereals and oilseeds
-
A
15%
reduction in grain support price to be phased in over two
years, partially offset by an increase in direct payments;
-
A
33%
reduction in direct payments to oilseed producers over three
years, equalling the payment for grains in
2002;
-
A
10% base
rate for the required land set-aside for arable crops for the
period
2000-2006.
Beef
-
A
20%
reduction in the support price for beef to be phased in over
three years, partially offset by direct payments.
Dairy
-
A
1.2%
increase in the dairy quota in the first two years, with the
increase going to specified deficit countries;
-
Starting in
2005,
an additional
1.2%
increase in the dairy quota over three years for the remaining
countries;
-
A
15%
decrease in support prices over three years after
2005/06.
Direct payments to farmers can be made conditional on a farmer’s
performance with regard to environmental protection measures.
Rural Economic Development
Rural economic development
became the second pillar
of the EU’s agricultural policy under Agenda
2000,
alongside farming. The objective was to adopt a comprehensive
and consistent policy for rural development. The policy included
a number of measures to make agriculture more efficient, while
strengthening environmental protection and phasing out less
productive areas. The following measures are included in the new
rural development policy:
-
EU
support for investment in agricultural facilities that improve
agricultural production;
-
early retirement for farmers over
55
years of age, who have farmed at least
10
years but have not yet reached retirement age;
-
EU
support for farmers who adopt practices which protect the
environment;
-
EU
support for farmers of areas less favourable for agriculture,
such as mountains;
-
EU
aid for young farmers (defined as under
40
years of age); and
-
vocational training for persons engaged in agriculture.
Expenditures for rural development have been increased, with
about €
4.3
billion allocated for the period
2000
to
2006.
Assistance for farmers to improve their agricultural holdings
includes grants of up to
40%
of the investment (50%
in less-favoured areas). These grants could be applied for
reducing the costs of production, improving or diversifying
agricultural activities, promoting the quality of products,
aiding the natural environment and improving health and hygiene
conditions for animals. In addition to the above subsidy amount,
young farmers may be eligible for an additional
5%
of the investment costs for improving agricultural holdings.
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