Common Agricultural Policy

What is the Common Agricultural Policy?

The key objectives of the Common Agricultural Policy (CAP), as enshrined in the EU treaties, is to:

Increase agricultural productivity thus to ensure a fair standard of living for agricultural producers

Stabilise markets

Assure availability of supplies

Ensure reasonable prices to consumers

In fact, with countries outside the EU generally able to produce agricultural products at far lower prices than member states - either because of the enormous size and the scale of their industries (eg the USA, Canada) or because of lower standards (eg the developing world) - the EU is largely keeping prices up.

The price support system dominates the CAP debate, mainly because of its expense. It comprises:

A target price: a price at which it is hoped farmers will be able to obtain on the open market

A threshold price: the price to which imports are raised when world prices are lower than EU prices

A guaranteed or intervention price: the price at which the Commission will take surplus product off the market by stepping in and buying it up

Some 90 per cent of EU produce is protected in some way by the CAP, with some 70 per cent in receipt of support prices. It is the EU's biggest single spending commitment, absorbing between 40 and 50 per cent of the entire EU budget.


Background

Agriculture, and the CAP, is the area where European integration has arguably proceeded further than any other.

Agriculture has been at the heart of the EU project since the very outset, and its privileged position is widely viewed as part of a 'deal' between France and Germany. Concerned that it would lose out in a common free market in industrial products, France demanded a common market for agricultural products that did not open up competition, but rather protected its farmers from it. The deal was popular at the time, due to food market instabilities, the disproportionate influence of food prices on inflation and a need to maintain domestic food industries for political reasons.

The CAP was established in 1957.

By the 1980s, the CAP's financial incentives for food production and investment led to massive overproduction, forcing the EU to accumulate notional 'butter mountains' and 'wine lakes' by buying up surplus produce to maintain prices. In addition, the focus on production and the use of chemicals and heavy machinery led to concerns about environmental degradation.

There were also frequent accusations of CAP corruption and fraud, and in the early 1980s, the cost of CAP was seen as threatening to destabilise the whole community.

The McSharry reforms of 1992 went a long way to replacing guaranteed prices with a new system of direct payments of compensation to farmers if prices fell below a certain level. The McSharry reforms also offered compensation for farmers who pursued environmentally friendly practices.

The 1999 Berlin Council reformed the CAP further, under Agenda 2000. These reforms, which came into effect in March 2003, replaced production subsidies with a scheme of direct payments linked directly to compliance with a set of standards on food safety, animal rights and environmental concerns. The most fundamental new element is the new 'Single Farm Payment' that replaces the vast array of existing direct payment schemes. The key thrust of the reforms has therefore been to break the link between subsidies and production, so that farmers produce for the market and not to gain financial support.

100 per cent decoupling will be in place by 2005 - except for in France, which has been given until 2007.

The UK receives relatively little money from the CAP, because of its smaller agricultural sector. As a result, in 1984, Margaret Thatcher secured a substantial rebate for the UK on its EU budget contribution.


Controversies

The CAP has been criticised for its large budget and for supporting inefficient agricultural practices. The 1990s reforms are accused of so far having done little to reduce its cost, and of leaving agricultural prices unnecessarily high at the expense of the consumer.

By encouraging overproduction, the CAP forced the EU to buy up surplus produce, which it then sold on cheaply in the developing world - undercutting local producers and damaging local economies. 'Dumping' of this sort, combined with high external tariffs for food imports, led to considerable international criticism of the CAP, notably at the Doha World Trade Organisation talks in 2003.

Attempts to reduce overproduction by paying farmers to 'set aside' land are thought to have mitigated but not eleminated the problem. Set aside also risked colouring the public's perception of farmers - who the public thought were being paid to do nothing.

Furthermore, by encouraging farm 'modernisation', the CAP was blamed for environmental damage caused by the increase of agricultural chemicals and intensive farming methods. Some have blamed the CAP for the practices that led to a series of food safety scares during the 1980s and 1990s, chief among them being BSE.

It is also claimed that the distribution of funds under the CAP is unfair - with some 20 per cent of farms, primarily the larger ones, receiving 70 per cent of the subsidies.

There is also CAP fraud in some member states, where levels of diligence to prevent fraud reflect different levels of effectiveness from different member states' agriculture ministries.

EU enlargement poses a serious challenge to the CAP: the economies of some of the accession states due to join in 2004 - notably the largest, Poland - are heavily agrarian. The massive cost of including these new states in prevailing CAP terms led to France and Germany developing a deal to freeze CAP spending between 2006 and 2013, and phasing in payments to the new members, in 2002. The accession states were outraged, and successfully secured additional payments, in spite of the Berlin Council's commitment to stabilise CAP spending.

However, the Common Agricultural Policy has contributed to an improvement in European agricultural efficiency by promoting modernisation and rationalisation. Average agricultural incomes have risen roughly in line with other sectors, markets have been stablised, and the EU has been rendered virtually self-sufficient in all foodstuffs that its climate permits to be cultivated.


Statistics

CAP cost around €40 billion in 2000, of which about €10.8 billion went on market price support, €25.5 billion on direct payments and €4.2 billion on rural development and agri-environment schemes

In 2000, the CAP cost European consumers an extra €48 billion in food costs

The cost of the CAP has declined as a proportion of the EU budget - dropping to slightly over 40 per cent in 2003, down from 68 per cent in 1988

Statistics 1: (Source: DEFRA, 2004); Statistic 2: (Source: OECD, 2000); Statistic 3: (Source: European Commission, 2004)


Quotes

"The current CAP is not delivering what farmers, the rural economy or the environment need. It is an extremely expensive policy and is insufficient to meet the challenges posed by the World Trade Organization and the enlargement of the EU."

DEFRA, 2003

"Europe will plough on with its farm reforms."

Franz Fischler, Farming and Fisheries Commissioner, February 2004