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The Common Agricultural Policy


Agricultural subsidy is common in the industrialised world.  There have been many forms of such subsidy over the last century but large-scale subsidies to encourage increased production and to ensure a basic level of income to farmers became widespread after the Second World War.  A 2007 study by the OECD found that Norway, Iceland and Sweden provided the highest levels of subsidy to farmers.  In the case of Switzerland, it amounts to an average of 66 per cent of a farmer’s income - nearly double the EU average of 34 per cent. 

In this paper, which is longer than our papers usually are, we have given a brief account of how far the CAP has been reformed, the necessary steps to completing the reform and how the current review of the CAP (known as the “health check”) could lead to further changes.  After thirty years of food prices falling in real terms, over the last 18 months they have risen substantially; this development has significantly changed the context in which the CAP operates.  The causes of this steep rise in food prices lie in poor harvests in 2006 and 2007 in several major countries, rising demand for meat in India and China (as a result of changing tastes, greater prosperity and growing populations) and higher fuel costs.  Some critics claim that the switching of land from food production to the growing of biofuel crops is also to blame. 

When the United Kingdom joined the European Community in 1973 we accepted the existing Common Agricultural Policy (CAP), a policy which we had played no part in shaping.  The aim of the CAP, a policy devised in the 1960s but only fully implemented in 1970, was to create a single market in agricultural produce in the EC.  It also gave preference to EC produce over that from other countries with no barriers to trade in agricultural produce between Member States. 

For some of the most important agricultural products the CAP aimed to maintain a level of prices in the single market (determined by Agriculture Ministers in the Council) through the purchase and sale of products by government agencies, through variable levies on imports and through export subsidies.  The objective was to maintain a reasonable level of return for farmers and fair prices for consumers. 

It is important to remember that the policy was devised at a time when there were still food shortages in parts of Europe and when many farms were very small enterprises.  That is why the Treaty (Article 33) places ensuring the availability of supplies and a fair standard of living for the agricultural community amongst the objectives of the CAP.  Before the UK joined the EEC we had our own elaborate and expensive system of agricultural subsidy.  Increasing production was also the major objective of British agricultural policy at that time, with subsidies for converting grassland into more productive fields, for taking out hedges and for the use of fertilisers. 

Lakes & Mountains

As a result of the CAP, European farmers did well and were able to adapt to increased mechanisation as the number of those working in agriculture declined.  The volume and choice of food products in the shops improved enormously.  The EC achieved self-sufficiency in the critical products of beef, butter, cereals and sugar by 1979 and has largely remained so.

However, when prices were set above what the market would bear government agencies had to take stocks off the market in order to sustain the price.  The results were large surpluses of butter, wine, beef and other products which were either held in storage or sold overseas or in some cases destroyed.  The cost to the taxpayer of storage and export subsidies was high and consumers were also paying too much. The developing producing countries were angered by the dumping on global markets of heavily subsidised produce from Europe.  With the European Union being the leading campaigner for liberalising world trade in other goods and services, it was obvious that the protectionist element of the CAP was inconsistent with these important policy objectives and could not be sustained.

The CAP not only led to overproduction; it was also expensive.  By 1984, 70 per cent of the EC budget was spent on agriculture and quotas on milk production had to be introduced.  There was talk of EC bankruptcy as a result of the spiralling cost and the enlargement of the Community to include Mediterranean countries in 1986 placed further strain on the policy.  The result was a curb on agriculture spending in the 1988 budget and serious discussion of CAP reform began.

The Beginnings of Reform

The first step towards dismantling the old style production subsidies was taken in 1992 (the MacSharry reforms) when elements of market support were reduced for some products and farmers were compensated by direct grants.  In subsequent years support prices were frozen or reduced and some land was taken out of production through a scheme known as set-aside.  The result was a drop in the agricultural surpluses but no drop in farming incomes (in fact they rose) and the round of world trade talks (the Uruguay Round) was completed successfully, partly because of the reduction in EU export subsidies. 

However successful the MacSharry reforms were, they were not enough.  The prospect of enlargement into central and eastern Europe meant that further reform could not be avoided.  While only 5.3 per cent of the then 15 EU Member States’ workforce was in agriculture, the same figure was over 20 per cent in the applicant states.  In 1997 the Commission, which with Britain has been the main promoter of agricultural policy reform, proposed further changes in its document Agenda 2000. 

Part of the motivation was the concern that the CAP was out of line with the EU’s growing ambitions for the environment.  Concern about food safety, accelerated by the BSE crisis in the UK, provided further impetus for reform.

Heads of state and government finally decided at Berlin in March 1999 on a package of further CAP reforms.  The main elements were further price cuts with farmers compensated by direct payments, stronger measures in favour of the environment and wider rural development plans.  In particular, support prices for wheat and other cereals and for beef were cut by at least 15 per cent, although some reductions were phased in.   The British Government estimated that the overall economic benefit of the price reductions, when fully implemented, would be worth £1 billion a year in the United Kingdom alone.

Although the 1999 reforms were significant, they were not as substantial as many, particularly in the Commission and the UK, had wanted.  A powerful rearguard action by France had meant that there was not the radical shift away from price support mechanisms that was essential to achieve real reform, especially in the dairy sectorThe prospect of 10 new Member States joining in 2004 – most of them with large rural populations and many small subsistence farms - meant that the 1999 reforms became only an interim stage on the road to deeper reform.

The 2003 CAP Reforms

In June 2003 agreement was reached on a further package of fundamental CAP reforms.  The central element was the introduction, from 1 January 2005, of the single farm payment.  This gives farmers financial support but one not linked to the quantity they produce.  This approach, known as ‘decoupling’, was essential if the EU was to support farm incomes without stimulating over production.  The single payment requires farmers to observe rules about the environment, food safety and animal welfare.  Farmers now have an incentive to achieve the highest standards in these areas and a disincentive to compete by compromising standards. 

The new approach is one that allows the market to operate in agriculture with far less involvement by government, whether at EU, national or regional level.  Single payments cut down on bureaucracy, both for the farmer and for the Member States who administer the scheme.  Some financial links to land management will remain in order to ensure that sufficient land remains in cultivation.  Similar sectoral reforms in the areas of cotton, olive oil and tobacco were agreed in April 2004.  They have been followed by reforms to fruit and vegetable farming and to wine production.  In the latter case the route chosen was to abolish a raft of subsidies for different aspects of wine manufacture, to support a reduction in the number of producers with compensation for those ceasing to grow vines and measures to make the industry more competitive.

Agreement was finally reached under the UK 2005 Presidency on reform of the EU sugar regime from 2006 as part of wider WTO-inspired reform.  Sugar was one of the sectors which had escaped reform and which was of major interest to sugar producing developing countries. The effect will be a 36 per cent cut over 2006-10 in sugar prices and a voluntary restructuring scheme aimed at reducing production over this period.

Part of the new approach to agricultural policy has been to switch the emphasis of policy towards strengthening the rural economy as a whole.  Larger resources are now available for rural development through the EU Rural Development Fund and the EU has a rural development policy.  Schemes that are supported include helping young farmers to establish themselves, supporting farmers who want to diversify into non-food crops, modernising farm buildings and equipment and encouraging tourism. 

Following enlargement in 2004, the CAP is operating in different ways in the existing and new Member States.  As agriculture accounts for a larger proportion of the workforce in many eastern and central European states, extending the CAP in full and immediately to these countries would have been prohibitively expensive.  Instead direct payments are being phased in over 10 years until 2013 and funds are available to help turn farms that operate on a part subsistence basis to become commercially viable.  The new Member States are fully part, however, of the food safety and quality regime operated by the EU and must comply with the agreed standards. 

The 2003 reforms were essential to enable the EU to reduce its spending on agriculture and to bring to an end a market-distorting system of subsidy.  By 2008, 90 per cent of EU producer support was separate from any decision as to how much to produce.  The reforms were also necessary to enable the EU to achieve wider trade reforms in the WTO that would benefit other sectors of the European economy.  Agreements made at the December 2005 Hong Kong trade summit mean that – in principle - all export subsidies will have to be phased out by 2013.  This is a crucial step in improving the situation for developing countries so that they can have fair access to the world’s markets but remains dependent on a positive outcome to the Doha trade round negotiations.    

The 2007-08 CAP Heathcheck

In May 2008 the European Commission produced a substantial set of proposals for change to the CAP.  These proposals, which will require three separate legislative measures in order to implement and will be at least partly opposed by some Member States, reflect the outcome of consultation and the fast-changing global food market in which prices have been rising sharply.

Rising economic prosperity in India and China and a growing world population have contributed to a global shortage of food, notably cereals and rice.  Between September 2006 and February 2008, for example, the prices of wheat rose 96 per cent and dairy products by 30 per cent.  Although prices have been more variable in recent months, with some falls in wheat and dairy prices, price increases have become an issue for consumers across the world, made worse by the rising cost of energy to transport food.  The first part of the EU’s May 2008 package dealt with immediate measures to tackle the shortage of supply (and the concomitant rise in food prices).  These included lifting all tariffs on imported cereals, abandoning set aside for arable crops and the scrapping of milk quotas by 2015.

Essentially, the 2008 proposed reforms would continue the trend in EU agricultural policy of the last 15 years – away from direct supporter for producers (with incentives to increase production) and towards support for the environment and rural development.  Rising food prices are an opportunity to move away from producer support to a more market orientated system as higher prices make subsidies unnecessary in many sectors.  A strengthening of competition through the scrapping of things like milk quotas, the simplification of administration to reduce the bureaucratic burden on farmers and allowing Member States more flexibility in implementation would all help to reduce the regulatory impact of the CAP.

If adopted, further changes will mean a reduction in the number of very small farmers who receive subsidies; at present there are a large number who have less than a hectare of land and who receive a few hundred euros each year in payments that cost more to administer than they are worth. 

The Cost of the CAP

The CAP will continue to be a significant part of EU expenditure because, while consumers and developing countries will benefit from the changes, the direct payments to farmers are likely to be more expensive than the cost of intervention and export subsidies.  Although the agriculture policy represents roughly 40 per cent of the EU’s expenditure today, it is important to keep this in perspective: European Union spending on agriculture is less than half of one per cent of EU GDP and is falling.  Agricultural expenditure is expected to reach 0.33 per cent of GDP by 2013. 

In addition, between 2007 and 2013, agriculture spending cannot rise by more than one per cent a year from its 2006 level – a fall in real terms after inflation.  Once this expenditure ceiling is reached (probably in 2008), direct payments to farmers will fall.  In real terms, agricultural spending will fall.  A shift from EU to part national financing of agricultural expenditure could help to lighten the load on the EU budget and to constrain overall spending on agriculture.


Although the UK has never been keen on the CAP, because of its cost and its focus on supporting less efficient small farms, the policy has achieved its goal in improving Europe’s ability to feed itself and, in recent years, great progress has been made to make the policy more rational and less trade distorting.  The food mountains are long gone and direct payments no longer encourage wasteful production.  Farmers are now encouraged to contribute positively to environmental goals.  The EU now needs other industrialised countries – notably the USA – to make similar reforms.  With growing protectionist sentiment in the USA the chances of an early conclusion to the ‘Doha Round’ of WTO negotiations now looks slim but the case for world wide liberalisation in agriculture will remain.

Nor will it be easy to get agreement within the EU to the kind of further reforms put forward by the Commission.  France has already signalled its opposition and there will be other Member States anxious to protect the subsidies their farmers at present enjoy.  The UK will be in the lead among other member states wanting to see further reductions in CAP expenditure before the present funding arrangements expire in 2013.  The agreement that all forms of spending, including the CAP, should be reviewed as soon as the Commission has made its report on budget reform should provide the opportunity. 

April 2006; revised July 2008



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