• Policy Instruments
• Commodity Regimes

Agriculture is the only sector 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 with common prices 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 since the mid-1990s. 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 compensated farmers for lower prices with direct payments based on historical yields, and introduced new supply control measures. These reforms affected the grain, oilseed, protein crop (field peas and beans), beef, and sheepmeat markets, but farmers had to produce the commodity to receive a payment.

The second reform, Agenda 2000, was implemented beginning in 2000 in preparation for accession of 10 new members (mostly from Central and East Europe) in May 2004. Similar to the first CAP reform, Agenda 2000 used direct payments to compensate farmers for only half of the loss from new support price cuts. Again, payments depended on production. Agenda 2000 reforms focused on the grain, oilseed, dairy, and beef markets.

A midterm review of Agenda 2000 resulted in a third major set of reforms in June 2003 and April 2004. The reforms represented a degree of renationalization of farm policy, as each member state had 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 are based on 2000-02 historical payments and replace the compensation payments of the 1992 and Agenda 2000 reforms.

Compliance with EU regulations regarding environment, animal welfare, and food quality and safety are required for agricultural producers 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. In practice, coupled payments are only used by a few member states. Cuts in intervention prices were made in 2005 for rice, butter, and skim milk powder. Intervention support for storage was limited for rice and butter and eliminated for rye in 2004. In addition, increases in the CAP budget ceiling have been limited to 1 percent annually during 2007-13, 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. These reforms follow the logic of the 2003 reforms, with decoupled payments based on historical payments and compliance with EU regulations. Sugar reform came into force in July 2006. Wine reform was begun in 2008 and completed in 2009.

Domestic price support. Domestic price supports were the historical backbone of CAP farm support, but have been largely replaced in this decade by direct payments, which now account for around 70 percent of the CAP budget. Prices for major commodities such as some grains (barley, bread wheat, and corn), dairy products, beef and veal, and sugar still depend on the intervention price as a guaranteed floor price, but at much lower levels than before the reforms. If world prices are high, then intervention in the market is not needed.

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 means of maintaining farm income, payments made directly to producers provide substantially more income support. The payments specified in the 2003 reform are 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) are 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.

Supply control. The 1992 reforms instituted a system of supply control-through a mandatory, paid set-aside program to limit production-that was maintained until the reforms of 2008 when set-aside was abolished. To be eligible for compensation payments in the 1992 reform, producers of grains, oilseeds, or protein crops had to 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. 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 were exempt from the set-aside requirement. While set-aside is no longer used, it could be re-established if conditions such as over supply returned. Supply-control quotas have been in effect for the dairy and sugar sectors for two decades.

Border measures. The CAP maintains domestic agricultural prices above world prices for many commodities. In preferential trade agreements, such as those with former colonies and neighboring countries, the EU satisfies domestic 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 (intervention prices) set by the CAP. Although the Uruguay Round Agreement on Agriculture (URAA) called for more access to the EU market, market access to the EU's agricultural sector remains highly restricted in practice.

The URAA also limited the value and quantity of EU export subsidies. Bulk commodities can receive export subsidies that allow the EU to remain competitive in world markets. But because of reductions in CAP price supports, export subsidies have declined considerably. EU 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 average cost of the raw material and the world price.

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, there was significant pressure to reform the CAP from environmentalists and consumers in addition to external pressures. 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 a decoupled income support policy consisting of single farm payments based on the average historical payments for the 1999-2001 period. EU farmers now have more choices in their planting decisions because of the 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 direct payments and market and price support policies and Pillar II for rural development policies. In the reforms, a ceiling was imposed on Pillar I spending; increases are limited to 1 percent per year in nominal terms from 2007-13. The budget for rural development was intended to more than double by 2013, but budget restrictions have substantially limited Pillar II spending. Additionally, 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.

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 allowing farmers to produce for the market while receiving direct payments to support income.

The 2003 reforms abolished intervention support for rye and require a decoupled payment for at least 75 percent of an arable crop. Since a decoupled payment does not require a crop to be planted or produced, 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 to retain people on the land, while support for durum in nontraditional areas was abolished. In addition, storage payments for grains were cut by 50 percent. Nevertheless, EU grain prices will likely remain above world prices most of the time, but stocks will not accumulate as often as before because the grain goes to the market, with small amounts going to intervention.

Rice. Rice policy was radically altered 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 were introduced to compensate for 88 percent of the price reduction. Part of the payment was included in the SFP and part 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 (see Regulations Limit Use of African Growth and Opportunity Act and Everything But Arms , May 2005).

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 cut butter prices by 25 percent and milk powder prices by 15 percent over 2005-07. Intervention purchases of butter are limited to 30,000 metric tons annually. Compensation for dairy price cuts was incorporated into the SFP beginning in 2006-07. The Health Check of 2008 allows for an annual 1-percent increase in the dairy quota from 2009-13. The proposal also calls for an abolition of the dairy quota in 2015.

Beef and veal. The beef and veal regime relies on price support, 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 (with the maximum percentage of heifers who may receive the suckler cow premium set at 40 percent), a 100-percent coupled payment for slaughter of heifers, and/or a 75-percent coupled payment for special male bovines. These reforms have resulted in the EU becoming a net beef importer when it was previously the world's largest exporter.

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 oils other than olive oil because of a 1956 agreement within the General Agreement of Tariffs and Trade, precursor of the WTO. While the 2003 reforms do not directly affect oilseeds, producers have more freedom to make planting decisions, which could affect oilseed production through a reallocation of area and resources. A biofuels directive was passed in 2008 mandating that 10 percent of EU transport fuels be composed of renewable fuels by 2020. Since rapeseed oil is the main feedstock used to produce biodiesel in the EU, expansion of rapeseed production has increased and will likely continue into the future within agro-climatic limits.

Sugar. Sugar production in the EU has been 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 were phased in for least-developed countries in 2009 under the EBA trade agreement.

In February 2006, the EU adopted a reform of the EU sugar sector, which went into effect in July 2006. The reform provides a 36-percent cut in the guaranteed minimum sugar price and compensates farmers for loss of income. More notably, it creates a restructuring fund with financial incentives to encourage uncompetitive sugar producers to leave the sector or diversify to other commodities. An expected decrease in its sugar exports should allow the EU to meet its WTO commitments. Since the reform, the EU has moved from a large net exporter of sugar to a net importer. For more information, see The EU Sugar Policy Regime and Implications of Reform (July 2008).

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, as 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 were incorporated into the SFP. A brief summary follows:

• Cotton. A decoupled payment of at least 65 percent of the 2000-02 historical payment began in 2006. Coupled payments of up to 35 percent are allowed, with a maximum base of 455,360 hectares split between Greece, Portugal, and Spain.
• Tobacco. A decoupled payment of at least 40 percent of the 2000-02 historical payment will be made during 2006-09. The share increases 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 began in 2006. Countries could choose 2 years from 2000-03 for the historic period. Payment is 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 began in 2005. Up to 25 percent of the payment may be coupled and paid directly to farmers or through producer groups.

For More Information, See…

• European Commission, Agriculture and Rural Development
• European Commission, Monitoring Agri-Trade Policy
• Historic information on EU agricultural and trade policy, enlargement, and monetary union is available in the archived European Union, 2001-07 Briefing Room

Last updated: Wednesday, May 30, 2012

For more information contact: Nancy Cochrane