Lecture 5: Common Agricultural Policy Cont Based on Sloman Chapter 3.4; Chapter 8, Baldwin & Wyplosz and Chapter 8, Swann Lecture 5: Common Agricultural.

Lecture 5: Common Agricultural Policy Cont

Based on Sloman Chapter 3.4; Chapter 8, Baldwin & Wyplosz and Chapter 8,

Swann

Lecture 5: Common Agricultural Policy Cont

Based on Sloman Chapter 3.4; Chapter 8, Baldwin & Wyplosz and Chapter 8,

Swann

AGRICULTURE AND AGRICULTURAL POLICYAGRICULTURE AND AGRICULTURAL POLICY

• SubsidiesSubsidies

– effects on price and outputeffects on price and output

– the incidence/cost of a subsidythe incidence/cost of a subsidy

– Cost falls directly on Government/EUCost falls directly on Government/EU

• Alternative - High minimum pricesAlternative - High minimum prices

• Also known as price supports or price Also known as price supports or price

floorsfloors

• Was main form of EU assistanceWas main form of EU assistance

Minimum price where some of the product is importedMinimum price where some of the product is imported

P

Q O

Pw

EU supply

QS1Qd1

EU demand

Imports

P

Q O

Pw

Pt

EU supply

QS1Qd1

EU demand

Imp

ort

levy


P

Q O QS2

Pw

Pt

EU supply

QS1Qd2

Qd1

EU demand

Imp

ort

levy

Imports


P

Q O QS2

Pw

Pt

EU supply

QS1Qd2

Qd1

EU demand

Imp

ort

levy

Imports


Extra amount paid Extra amount paid By By consumersconsumers

Extra amount paid Extra amount paid By By consumersconsumers

P

Q O QS2

Pw

Pt

EU supply

QS1Qd2

Qd1

EU demand

Imp

ort

levy

Imports


Extra amount Extra amount paid to farmerspaid to farmersExtra amount Extra amount

paid to farmerspaid to farmers

AMOUNT PAIDAMOUNT PAIDIN IMPORTIN IMPORT

LEVIES to GovtLEVIES to Govt

AMOUNT PAIDAMOUNT PAIDIN IMPORTIN IMPORT

LEVIES to GovtLEVIES to Govt

But over time effect of subsidies and price floor’s means supply But over time effect of subsidies and price floor’s means supply rises – so need to look at Minimum prices for a product where the rises – so need to look at Minimum prices for a product where the

country is self-sufficientcountry is self-sufficientP

Q O

Pw

SEU

QS1Qd1

DEU

a b

Exports

P

Q O

Pw

Pi

SEU

QS1Qd1

DEU

a b

Minimum prices for a product where the country is self-sufficientMinimum prices for a product where the country is self-sufficient

P

Q O QS2

Pw

Pi

SEU

QS1Qd2

Qd1

DEU

a b

de


Surplus

P

Q O QS2

Pw

Pi

SEU

QS1Qd2

Qd1

DEU

a b c

de

f

Amount bought into Amount bought into interventionintervention

Amount bought into Amount bought into interventionintervention


Surplus

P

Q O QS2

Pw

Pi

SEU

QS1Qd2

Qd1

DEU

a b c

de

f

COST OF BUYINGCOST OF BUYINGTHE SURPLUSTHE SURPLUS

COST OF BUYINGCOST OF BUYINGTHE SURPLUSTHE SURPLUS


Surplus

P

Q O QS2

Pw

Pi

SEU

QS1Qd2

Qd1

DEU

a b c

de

f

REVENUE FROMREVENUE FROMSALE OF SURPLUSSALE OF SURPLUS

ON WORLD MARKETON WORLD MARKET

REVENUE FROMREVENUE FROMSALE OF SURPLUSSALE OF SURPLUS

ON WORLD MARKETON WORLD MARKET

NET COSTNET COSTNET COSTNET COST


Surplus

CAPCAP

• EU was net importer of most food, so EU was net importer of most food, so could support price via tariff:could support price via tariff:

– technically known as a ‘variable levy’.technically known as a ‘variable levy’.

– Costs borne largely by consumers, Costs borne largely by consumers,

Effect of EU price supports and export subsidies on Effect of EU price supports and export subsidies on world market. BEFOREworld market. BEFOREP

Q O

Pw

QWEU Imports

+DROWDEU= DW

SEU

SROW

SW

ROW Exports

Effect of EU price supports and export subsidies on Effect of EU price supports and export subsidies on world market. AFTERworld market. AFTERP

Q O

Pw

EU Dumping

DROWDEU DW

SEU SROW

SW

S*WS*EU

PEU

P*W

Dumping on ROW

SEUDEU

Lower World Price

Lower ROW World Supply

V. Bad for poor ROW

Follow-on Problems of OversupplyFollow-on Problems of Oversupply

• EU switches from net food import to exporter in EU switches from net food import to exporter in most products.most products.

Source; Baldwin and Wyplosz

The cost to the taxpayer of high fixed pricesThe cost to the taxpayer of high fixed prices

P

Q O

Pe

S

D

P

Q O

Pe

Pi

S

D


P

Q O

Pe

Pi

S

D

ba

Qd Qs

Surplus


P

Q O

Pe

Pi

S

D

c

ba

d

COST TOTHE

TAXPAYER

COST TOTHE

TAXPAYER

Qd Qs

Surplus


The cost to the taxpayer of subsidiesThe cost to the taxpayer of subsidiesP

Q O

Pe

S

D

Q1

P

Q O

Pe

Pf

S

D

a

bPc

Subsidy

Q1Q2

The cost to the taxpayer of subsidiesThe cost to the taxpayer of subsidies

S2

P

Q O

Pe

Pf

S

D

a

bPc

COST TOCOST TOTHE TAXPAYERTHE TAXPAYER

COST TOCOST TOTHE TAXPAYERTHE TAXPAYER

Q1Q2

The cost to the taxpayer of subsidiesThe cost to the taxpayer of subsidies

The cost of price and other market supportThe cost of price and other market supportfor agriculture in the EUfor agriculture in the EU


• Justification of the CAPJustification of the CAP– assured supplies of foodassured supplies of food– support for farm incomessupport for farm incomes– growth in agricultural productivitygrowth in agricultural productivity– stable agricultural pricesstable agricultural prices– reasonable prices for consumersreasonable prices for consumers


• Criticisms of the CAPCriticisms of the CAP– agricultural surplusesagricultural surpluses

static costsstatic costsdynamic costsdynamic costs

– irrational relative pricesirrational relative prices– removes disciplines of marketsremoves disciplines of markets– redistributive effectsredistributive effects

Other CAP ProblemsOther CAP Problems

• The farm income problem:The farm income problem:– average farm incomes fail to keep up despite average farm incomes fail to keep up despite

huge protection and budget costshuge protection and budget costs– most of money goes to big farms that don’t most of money goes to big farms that don’t

need it:need it:CAP makes some farmers/landowners richCAP makes some farmers/landowners richkeeps average (i.e. small) farmer on edge of keeps average (i.e. small) farmer on edge of

bankruptcybankruptcy– farmers continue to exit farming (2 per cent per farmers continue to exit farming (2 per cent per

year).year).

Other CAP ProblemsOther CAP Problems

• Effects on the Environment:Effects on the Environment:

• Factory farming:Factory farming:

– pollutionpollution

– animal welfareanimal welfare

– nostalgia.nostalgia.

• Bad for ‘image’ and thus public support for Bad for ‘image’ and thus public support for CAP.CAP.

• Effects on Rest of the WorldEffects on Rest of the World– Lowers Prices and supplyLowers Prices and supply– Affects poor countries very badlyAffects poor countries very badly


• Possible reforms of the CAPPossible reforms of the CAP– price reductionsprice reductions– production quotasproduction quotas– set asideset aside– diversificationdiversification– low-intensity farminglow-intensity farming– income supportincome support– the MacSharry and other reformsthe MacSharry and other reforms

CAP ReformsCAP Reforms

• Supply control attempts:Supply control attempts:– 1980s, experimentation with 1980s, experimentation with ad hocad hoc and and

complex set supply ‘controls’ to complex set supply ‘controls’ to discourage productiondiscourage production

– e.g. Milk quotas and cereal ‘set-aside’e.g. Milk quotas and cereal ‘set-aside’– generally failed; technological progress generally failed; technological progress

and high guaranteed prices overwhelmed and high guaranteed prices overwhelmed supply controls.supply controls.

CAP ReformsCAP Reforms

• 1992: MacSharry Reforms:1992: MacSharry Reforms:– basic idea: basic idea: cut pricescut prices supports to near supports to near

world-price level and world-price level and compensatecompensate farmers farmers with direct paymentswith direct payments

– was essential to complete the Uruguay was essential to complete the Uruguay RoundRound

– worked well.worked well.

Effect of the MacSharry reforms on cereal surplusesEffect of the MacSharry reforms on cereal surpluses

P

Q O

P1

S1

Dc

ba

d

Original surplus

Qs1Qd1

P

Q O

P1

P2

S1

Dc

ba

d

Reduction inintervention

price

Qs1Qd1


P

Q O

P1

P2

S1

D

S2

c

ba

d

Effect ofSet-aside

Qs1Qd1


P

Q O

P1

P2

S1

D

S2

Qs2Qs1

Qd2Qd1

c

ba

d

a b

c

Reduced surplus


Further CAP ReformsFurther CAP Reforms

• Agenda 2000Agenda 2000– MacSharry Mark II, lower price floors and more MacSharry Mark II, lower price floors and more

de-linked direct paymentsde-linked direct payments– |Prices in 2002 only 73% of 1990 levels and |Prices in 2002 only 73% of 1990 levels and

more proposedmore proposed– Rural development policy switching towards Rural development policy switching towards

specialist provision (herbs, organics) and specialist provision (herbs, organics) and alternative local services and industryalternative local services and industry

– Capped agriculture budget for first time Capped agriculture budget for first time

• June 2003 Reforms; essential to Doha June 2003 Reforms; essential to Doha Round:Round:

– implementation 2004-7implementation 2004-7

– Phase out price supports completelyPhase out price supports completely

– Cap on contribution to large farms (EU Cap on contribution to large farms (EU 300K)300K)

– Cap on spending on new members 10 Cap on spending on new members 10 countries share 3.7 b -4.1 in 2006countries share 3.7 b -4.1 in 2006

– But average spend is 172 per farm in But average spend is 172 per farm in Easter Europe compared to 5000 in EU15 Easter Europe compared to 5000 in EU15

Evaluation of Today’s CAPEvaluation of Today’s CAP

Supply problems and Supply problems and food ‘mountains’:food ‘mountains’:left figure: massive left figure: massive

shift to direct shift to direct paymentspayments


Evaluation of Today’s CAPEvaluation of Today’s CAP

price cut reduced EU price cut reduced EU buying of food: buying of food:

right figure shows right figure shows important drop in EU important drop in EU

storage of foodstorage of food

EU dumping of food EU dumping of food on world market also on world market also

dropped.dropped.


Farm Incomes and CAP Support InequityFarm Incomes and CAP Support Inequity

• DIRECT PAYMENTSMostly to big, rich DIRECT PAYMENTSMostly to big, rich farmers:farmers:

– payments intended to compensate, so payments intended to compensate, so inequity continued.inequity continued.

• Half the payments to 5 per cent of farms Half the payments to 5 per cent of farms (the largest).(the largest).

• Half the farms (smallest) get only 4 per cent Half the farms (smallest) get only 4 per cent of payments.of payments.

• Most payments also go to wealthy regionsMost payments also go to wealthy regions

Farm Incomes and CAP Support InequityFarm Incomes and CAP Support Inequity

• Recent studies show that only about half of Recent studies show that only about half of these payments go to farmers:these payments go to farmers:

– rest to non-farming landowners and rest to non-farming landowners and suppliers of agricultural inputs (seed, suppliers of agricultural inputs (seed, fertilisers, agri-chemicals, etc.)fertilisers, agri-chemicals, etc.)

• Should not be overly surprisingShould not be overly surprising

CAP Support InequityCAP Support Inequity


Future ChallengesFuture Challenges

• Eastern Enlargement:Eastern Enlargement:

– number of farms will rise from 7 million number of farms will rise from 7 million to 30 millionto 30 million

– farmland rise from 130 million hectares farmland rise from 130 million hectares to 170 million.to 170 million.

EU Newcomers: Farm FactsEU Newcomers: Farm Facts


• Doha Round WTO round:Doha Round WTO round:• Agriculture keyAgriculture key

• Cairns Group Cairns Group http://www.cairnsgroup.org/http://www.cairnsgroup.org/

• Argentina Australia Bolivia Brazil Canada Argentina Australia Bolivia Brazil Canada Chile Colombia Costa Rica Guatemala Chile Colombia Costa Rica Guatemala Indonesia Malaysia New Zealand Paraguay Indonesia Malaysia New Zealand Paraguay Philippines South Africa Thailand Uruguay Philippines South Africa Thailand Uruguay

• Failure in Cancun after African Failure in Cancun after African countries walk-out.countries walk-out.

• EU now offering significant cutsEU now offering significant cuts

Lecture 5: Common Agricultural Policy Cont Based on Sloman Chapter 3.4; Chapter 8, Baldwin & Wyplosz and Chapter 8, Swann Lecture 5: Common Agricultural.

Documents

eu slide

eu p eu p

cap eu

d cost

effect of eu price

p q o pepe pipi s d

selfsufficient slide

p q o pwpw qwqw eu imports