Common Agricultural Policy (CAP)
Agriculture and transportation are the only two sectors of the
European Union (EU) where there is a common policy. Agricultural
policy is proposed by a supranational authority—the
European Commission, agreed to or amended by agricultural
ministers of EU member nations, and reviewed by the European
Parliament. Historically, the EU's Common Agricultural
Policy (CAP) has played a critical role in connecting
very diverse European countries and, thus, has helped
solidify national commitment to the EU.
Initiated in 1962, the CAP is a domestically oriented
farm policy based on three major principles:
- a unified market in which there is a free flow of agricultural
commodities within the EU;
- product preference in the internal market over foreign imports
through common customs tariffs; and
- financial solidarity through common financing of agricultural
programs.
The Primary objectives of CAP are to:
- increase agricultural productivity;
- ensure a fair standard of living for farmers;
- stabilize markets;
- guarantee regular food supplies; and
- ensure reasonable prices to consumers.
Policy Instruments
The CAP's main instruments include agricultural price
supports, direct payments to farmers, supply controls,
and border measures. Because of policy reforms in 2003
and 2004, farmers must more fully comply with environmental,
animal welfare, food safety, and food quality regulations
in order to receive direct payments.
Major reform packages have significantly modified the CAP over
the last decade. The first reform, adopted in 1992 and implemented
in 1993/94, began the process of shifting farm support from prices
to direct payments. The 1992 reforms reduced support prices and
created direct payments based on historical yields, and introduced
new supply control measures. These reforms affected the grain, oilseed,
protein crop (field peas and beans), tobacco, beef, and sheepmeat
markets.
The second reform, Agenda
2000, began implementation in 2000 in preparation for EU
enlargement. Similar to the first CAP reform, Agenda 2000 used
direct payments to compensate farmers for half of the loss from
new support price cuts. Agenda 2000 reforms focused on the grain,
oilseed, dairy, and beef markets.
The most recent reforms began as a midterm review of Agenda 2000
and resulted in a third major set of reforms in June 2003 and April
2004. The latest reforms represent a degree of renationalization
of farm policy, as each member state will have discretion over the
timing (from 2005-07) and method of implementation. The 2003 reforms
allow for decoupled payments—payments that do not affect production
decisions—that vary by commodity. Called single farm payments
(SFP), these decoupled payments will be based on 2000-02 historical
payments and replace the compensation payments begun by the 1992
reform.
When member states implement the reforms, compliance with EU regulations
regarding environment, animal welfare, and food quality and safety
will be required to receive SFPs. Moreover, land not farmed must
be maintained in good agricultural condition. Coupled payments,
which can differ by commodity and require planting a crop, are allowed
to continue to reinforce environmental and economic goals in marginal
areas. Cuts in intervention prices were made for rice, butter, and
skim milk powder, to begin in 2005. Intervention support for storage
was limited for rice and butter and eliminated for rye in 2004.
In addition, the CAP budget ceiling has been fixed from 2006-13,
and—if market support and direct payments combine to come within
300 million euros of the budget ceiling—SFPs will be reduced
to stay within budget limits.
A reform of hops and Mediterranean products—cotton, tobacco,
and olive oil—was completed in April 2004 (see below for further
details). These reforms follow the logic of the 2003 reforms, with
decoupled payments based on historical payments and compliance with
EU regulations. A proposal for sugar reform is expected to pass
before 2005.
The above reforms will have a direct impact on the 10
countries that joined the EU in May 2004 (see issues and
analysis, enlargement).
Domestic price support.
Domestic price supports are the historical backbone of CAP
farm support. Prices for major commodities such as grains,
oilseeds, dairy products, beef and veal, and sugar depend
on the EU price support system, although price support has
become less important for maintaining grain and beef farmers'
incomes under the CAP reforms. The major method of maintaining
domestic agricultural prices is through price intervention
and high external tariffs:
- Authorities buy surplus supplies of products when
market prices threaten to fall below agreed minimum
(intervention) prices.
- The CAP applies tariffs at the borders of the EU so
that imports of most price-supported commodities cannot
be sold in the EU below the internal market price set
by EU authorities.
Farmers are guaranteed intervention prices for unlimited
quantities of eligible agricultural products. This means
that EU authorities will purchase, at the intervention
price, unlimited excess products meeting minimum quality
requirements that cannot be sold on the market. The surplus
commodities are then put into EU storage facilities or
exported with subsidy. While less important from a budget
perspective, exports of processed products that contain
a portion of a CAP-supported commodity also receive an
export subsidy, based on the proportion of the commodity
in the product and the difference between the intervention
price and the world price.
Other mechanisms, such as subsidies to assist with surplus
storage and consumer subsidies paid to encourage domestic
consumption of products like butter and skimmed milk powder,
also support domestic prices. The 2003 reforms, however,
cut storage subsidies by 50 percent. Some fruits and vegetables
are withdrawn from the market in limited quantities by
authorized producer organizations when market prices fall
to specified levels. Reforms have lowered the cost of
the CAP to consumers as intervention prices have been
reduced. However, taxpayers now bear a larger share of
the cost because more support is provided through direct
payments.
Direct payments. While price support remains
a principal means of maintaining farm income, payments
made directly to producers provide substantial income
support. Compensation payments for price cuts generated
by the 1992 reform began in 1994 and were increased for
the price cuts of the Agenda 2000 reform. These compensation
payments were established on a historical-yield basis
for arable crops by farm, and farmers had to plant to
receive the payment. In contrast, the payments specified
in the 2003 reform will be made to farmers based on the
average level of payments made during 2000-02 and no production
is required. In the livestock sector, headage payments
(payments per animal) will be made in the beef and sheep
sectors based on 2000-02 average payments with no production
required. Other special payments are made, but they are
relatively minor in value. Direct payments currently account
for about 35 percent of EU producer receipts and for an
even higher percent of net farmer income (once input costs
are subtracted from receipts).
Supply control. The 1992 reforms instituted
a system of supply control—through a mandatory paid
set-aside program to limit production—that has been
maintained through subsequent reforms. To be eligible
for direct payments, producers of grains, oilseeds, or
protein crops must remove a specified percentage of their
area from production. Agenda 2000 set the base rate for
the required set-aside for arable crops at 10 percent.
The rate was reduced to 5 percent for 2003-04 because
of drought-reduced crops in 2002-03. Producers with an
area planted with these crops sufficient to produce no
more than 92 metric tons of grain are classified as small
producers and are exempt from the set-aside requirement.
Supply-control quotas have been in effect for the dairy
and sugar sectors for nearly two decades.
Border measures. The CAP maintains domestic
agricultural prices above world prices for most commodities.
In preferential trade agreements, such as those with former
colonies and neighboring countries, the EU satisfies consumer
demand while protecting high domestic prices through import
quotas and minimum import price requirements. The CAP
also applies tariffs at EU borders so that imports cannot
be sold domestically below the internal market prices
set by the CAP. Although the Uruguay
Round Agreement on Agriculture called for more access
to the EU market, market
access to the EU's agricultural sector remains highly
restricted in practice. In addition, the EU
subsidizes agricultural exports to make domestic agricultural
products competitive in world markets. The EU accounts
for about 90 percent of global agricultural export subsidies.
Additional aspects of 2003 reform. Important
components of the 2003 reform reflect a philosophical
change in the approach to EU agricultural policy. For
the first time, much of the pressure to reform the CAP
came from environmentalists and consumers. The requirement
to comply with environmental and animal welfare standards
to qualify for the SFP reflects these pressures. Moreover,
farmers must meet food quality and food safety regulations
for payments to continue.
Another important feature of the 2003 reforms is the move
from a price support policy to an income support policy
through decoupled payments. EU farmers will have more
choices in their planting decisions because of decoupled
payments. Commodity support prices continue to exist but
at lower levels, while direct payments to farmers without
requirements to plant a crop are more widespread.
There is also a marked shift in the way rural development
is treated. The 2003 CAP reforms established two pillars
in the budget: Pillar I for market and price support policies
and Pillar II for rural development policies. In the reforms,
a ceiling was imposed on Pillar I spending, while Pillar
II spending seems open-ended. The intended budget for
rural development will more than double over the next
10 years, while the CAP budget for Pillar I may only increase
by 1 percent per year in nominal terms from 2006-13. Moreover,
in a concept called modulation, SFP payments greater than
5,000 euros are reduced by 5 percent, while farmers whose
SFP is less than 5,000 euros are not penalized. The budget
funds saved through modulation are transferred to the
Pillar II rural development fund. At least 80 percent
of the funds from the penalties will remain in the country
where the SFPs were reduced and are to be used for rural
development purposes.
Analysis of the impacts of the latest reforms is difficult
because of all the options available to member states.
They can choose any year from 2005-07 to implement the
reforms and they can choose varying methods of payment
and degree of decoupling within agreed limits. The SFP
can be made on a regional per hectare historical base
or on a per farm basis. These implementation decisions
could have a significant influence on farmers' planting
decisions.
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Commodity Regimes
Grains. The CAP regime covers most grain
produced by and imported into EU countries (bread wheat,
barley, and corn). However, high prices for some grains
indirectly raise the prices of unsupported grains, principally
feed wheat. As with other commodities, grain support mechanisms
include a mixture of price supports and supply controls,
as described above. CAP reforms have affected the grain
regime mainly by requiring grain farmers to remove a percentage
of their arable cropland from production in order to receive
direct (coupled) payments in compensation for reduced
price supports.
The 2003 reforms abolished intervention support for rye
and require a decoupled payment of at least 75 percent
for arable crops. Since a decoupled payment does not require
a crop to be planted or produced to receive payment, farmers
are free to plant whatever crop they want or to not plant
at all. Durum wheat was allowed a 40-percent coupled payment
in traditional areas, while support for durum in nontraditional
areas was abolished. In addition, storage payments for
grains were cut by 50 percent. Nevertheless, most EU grain
prices will likely remain above world prices most of the
time, requiring export subsidies to remain competitive
on the world market.
Rice. Rice policy was the most radically
affected by the 2003 reform. The rice intervention price
was reduced by 50 percent and annual intervention purchases
were limited to 75,000 metric tons. Direct payments will
be introduced to compensate for the price reduction. Part
of the payment will be included in the SFP and part will
be converted to crop-specific aid to assist farmers in
transition to alternative crops. Intervention stocks had
been growing rapidly, and the Everything But Arms (EBA)
trade agreement with 49 least-developed countries allows
imports of unmilled rice, with duties decreasing to zero
in 2009.
Dairy. The dairy regime is dominated by
a quota system that is established at national levels.
Dairy production above the quota is subject to prohibitive
fines called "super levies." Products covered
by the CAP dairy regime include fresh, concentrated, and
powdered milk; cream; butter; cheese; and curd. Dairy
production is protected through tariffs on dairy product
imports and supported by export subsidies and surplus
intervention purchases of dairy products. The 2003 reforms
will cut butter prices by 25 percent and milk powder prices
by 15 percent over a 3-year period beginning in 2005.
Intervention purchases of butter will be limited to 30,000
metric tons annually. Compensation for dairy price cuts
will be incorporated into the SFP beginning in 2006-07.
Beef and veal. The beef and veal regime
relies on price support, export subsidies, and high tariffs
to keep EU market prices above world prices. Most direct
payments to beef producers are based on historical numbers
of male bovines, suckler cows (cows with calves), a special
slaughter payment for heifers, and "extensification"
of livestock production, whereby producers must observe
maximum stocking rates (livestock units per hectare) to
qualify for payments. As part of Agenda 2000, support
prices for beef were reduced by 20 percent from 2000 to
2003, but were partially offset by higher direct payments.
The 2003 reforms provide member states with alternatives
for supporting beef and veal: a 100-percent decoupled
payment based on 2000-02 historical payments, a 100-percent
coupled payment for the number of suckler cows, up to
40-percent coupled payment for slaughter of heifers, a
100-percent coupled payment for slaughter of heifers,
and/or a 75-percent coupled payment for special male bovines.
Oilseeds. A relatively low level of self-sufficiency
characterizes the EU oilseed sector, largely due to adverse
climate and soil conditions in Europe. There is a zero
tariff on soybeans and soy meal and a low or nominal tariff
on vegetable oil other than olive oil because of a 1956
agreement within the General Agreement of Tariffs and
Trade. Compensatory payments are made to growers of rapeseed,
sunflower seed, and soybeans for prices that had been
supported through payments to oilseed crushers. The area
of subsidized oilseed production is limited by the terms
of the 1994 U.S.-EU "Blair House" Agreement,
and oilseed producers (unless they are small producers)
are required to set aside land at the same rate as for
all arable crops. Agenda 2000 set compensatory payments
for oilseeds at the same level as those for grains. While
the 2003 reforms do not directly affect oilseeds, producers
will have more freedom to make planting decisions, which
could affect oilseed production through a reallocation
of area and resources.
Sugar. Sugar production in the EU is supported
through a mixture of price supports and supply controls.
CAP support of sugar is restricted to production within
a quota, which raises sugar prices for consumers. Intervention
buying of processed products (raw or white sugar) supports
the price of the raw commodity (mostly sugar beets). Producers
also pay to dispose of surpluses. The principle of producers
paying for surplus disposal, called the "co-responsibility
principle," has been most rigorously applied to sugar
producers, who bear the full cost of disposal. Imports
to the EU are effectively blocked by high tariffs. However,
there is unusual liberalized access at zero duty within
a quota for raw sugar from former African, Caribbean,
and Pacific (ACP) colonies, and raw sugar duty-free imports
will be phased in for least-developed countries in 2009
under the EBA trade agreement. Proposals for a reform
of the sugar regime have been made and must be complete
before 2005, but the favorable treatment given to ACP
countries complicates the reform.
Fruits and vegetables. The fruit and vegetable
regime includes all fruits and vegetables grown in the
EU, with the exception of potatoes, peas and beans for
fodder, wine grapes, olives, sweet corn, and bananas,
for which separate arrangements operate. Market prices
are supported by a system of compensation for limited
withdrawals of produce from the market needed to maintain
prices at desired levels. Due to product perishability,
the price support system is not designed to achieve a
guaranteed price over periods of excess and shortage as
it is with some other commodities subject to intervention.
Rather, it acts as a safety net for producers in times
of oversupply. Seasonal tariffs and tariff-rate quotas
in over 100 preferential trade agreements are the principal
means of import protection. Processors of some products
also receive processing subsidies to help defray the high
costs of buying EU raw materials.
Mediterranean products and hops. In April
2004, cotton, olive oil, tobacco, and hops were reformed
along the lines of the 2003 reforms. Decoupled payments
of varying amounts will be incorporated into the SFP.
A brief summary follows:
- Cotton. A decoupled payment of at least
65 percent of the 2000-02 historical payment will be
made beginning in 2006. Coupled payment of up to 35
percent will be allowed as an area-based subsidy with
a maximum base of 455,360 hectares, split between Greece,
Portugal, and Spain. In 2006, 22 million euros will
be moved from market support to a transitional restructuring
fund.
- Tobacco. A decoupled payment of at
least 40 percent of the 2000-02 historical payment will
be made from 2006-09, increasing to 100 percent from
2010 onward. Fifty percent of the payment will go into
the SFP with the remainder transferred to a restructuring
fund. During 2006-09, 60 percent of the payment can
be coupled, with any remainder going to improve quality.
- Olive Oil. A decoupled payment of at
least 60 percent will be made beginning in 2006. Countries
can choose 2 years from 2000-03 for the historic period.
Payment will be made only for areas planted before May
1, 1998. Member states may use up to 10 percent of their
national olive oil envelopes (total national payment
level) to improve oil quality.
- Hops. A decoupled payment of at least
75 percent of the 2000-02 historical payment will be
made beginning in 2005. Up to 25 percent of the payment
may be coupled and paid directly to farmers or through
producer groups.
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Effects of the CAP
Production increases. High CAP support
prices have provided strong incentives for investing in
EU agriculture, leading in turn to significant productivity
increases. At the same time, high EU prices have helped
slow the growth in consumption relative to production.
Strong production growth in agriculture combined with
slow consumption growth has increased the EU's self-sufficiency
in a number of agricultural commodities. Since 1970, the
EU has become one of the world's largest net exporters
of wheat, sugar, beef, pork, poultry, and dairy products.
Nevertheless, the EU remains the world's largest agricultural
importer.
High budget outlays. Supporting agriculture
has required large outlays from the EU's budget. EU
outlays for agriculture grew from 3 billion ECU (US$4
billion) in 1975 to its peak of 41 billion euros (US$51
billion) in 1996, excluding government spending on agriculture
by individual member countries. Because outlays were tied
to agricultural production and exports, and both production
and exports were increasing, outlays rose rapidly and
strained EU resources. Large outlays on agriculture precipitated
several budget "crises," which helped lead to
the policy reforms mentioned above. Previously, the CAP
had accounted for as much as 70 percent of the EU budget,
but CAP expenses have declined somewhat because of lower
support prices and export subsidies. In 2000, for example,
the CAP accounted for 51 percent of the EU budget.
The 2003 reforms included a financial discipline component
that limits CAP spending on market support to 1 percent
in nominal terms from 2006-13. If the budget reaches
a level within 300 million euros of the budget ceiling,
then the SFP for all EU farmers will be reduced to maintain
financial discipline. Spending on rural development,
however, is not constrained by this discipline.
High food prices. One effect of the CAP
has been to keep overall food prices relatively high
for EU consumers. Where most U.S. farm programs support
farm income in ways that do not directly raise consumer
food prices, the CAP primarily relied on high prices
to support farmers until compensation payments were
introduced as a result of the 1992 and 2000 reforms.
Despite price reductions, food is still more expensive
in the EU than the United States, and EU consumers spend
a larger share of their income on food and alcoholic
beverages than their U.S. counterparts. As CAP support
transitions from lower price guarantees to direct support
payments in 2005-07 and onward, EU food prices should
subsequently fall but remain above U.S. prices.
The difference in the percent of income spent on food
and alcoholic beverages between EU and U.S. consumers,
however, may be exaggerated by factors beyond the CAP's
high support prices. Generally, lower income consumers
spend a greater percent of income on food than higher
income consumers, and the United States has a higher
nominal (not adjusted for inflation) income than EU
countries. For example, since the United Kingdom's (U.K.)
nominal gross domestic product per capita was 30 percent
smaller than the United States' in 1999, it is not surprising
that U.K. consumers spent 10 percent more on food and
alcohol than U.S. consumers. Also, the disparity may
reflect: 1) EU preferences for high-quality food, and;
2) higher taxes on food and wages in the EU than in
the United States. Moreover, these data only represent
food consumed at home, and U.S. consumers tend to spend
more money on food outside the home than their EU counterparts.
Regardless, the CAP is partly responsible for relatively
high EU food prices.
Domination of agricultural spending by arable
crops and livestock products. In 2002, arable
crops (grains, oilseeds, and protein crops) accounted
for over half of CAP expenditures, followed by beef.
Arable crops and beef have commanded a larger share
of EU expenditures on agricultural supports since the
shift away from price support in favor of direct payments
funded by taxpayers. When direct payments to dairy farmers
begin in 2004 (with the implementation of the 2003 reform),
dairy's share will likely go up.
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References
Hasha, Gene, The
European Union's Common Agricultural Policy: Pressures
for Change-An Overview, Europe-International Agricultural
and Trade Report, USDA, ERS, WRS 99-2, October 1999.
Leetmaa, Susan, and Jason Bernstein, An
Analysis of Agenda 2000, Europe-International Agricultural
and Trade Report, USDA, ERS, WRS 99-2, October 1999.
Mitchell, Lorraine, and Mary Anne Normile, Consumer
Concerns Elicit Policy Changes, Europe-International
Agricultural and Trade Report, USDA, ERS, WRS 99-2,
October 1999.
Madell, Mary Lisa, CAP Reform: A New Era for EC Agriculture,
USDA, ERS, AIB-674, June 1993.
Jones, Elizabeth, and Jaclyn Y. Shend, eds., Review
of Agricultural Policies in Europe and the Former Soviet
Union. USDA, ERS AER-733, June 1996.
Europe-International
Agriculture and Trade Reports, USDA, ERS, WRS 97-5,
December 1997.
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