Common Agricultural Policy
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. In its most recent version (2023–27), the EU’s Common Agricultural Policy (CAP) relies on Member States’ own strategic plans framed by 10 key objectives. Historically, CAP has played a critical role in connecting very diverse European countries, thus, it has helped solidify national commitment to the EU.
Initiated in 1962, 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 10 key objectives of CAP are:
- to ensure a fair income for farmers;
- to increase competitiveness;
- to improve the position of farmers in the food chain;
- climate change action;
- environmental care;
- to preserve landscapes and biodiversity;
- to support generational renewal;
- vibrant rural areas;
- to protect food and health quality; and
- fostering knowledge and innovation.
Policy Instruments and CAP Reform
The Common Agricultural Policy's (CAP) main instruments include agricultural price supports, direct payments to farmers, supply controls, and border measures. Successive rounds of policy reforms in 2003, 2013, and up to the current version requires farmers to 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 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, 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 sheep meat 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 the accession of 10 new members (mostly from Central and Eastern 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 (2005–2007) and method of implementation. The 2003 reforms allowed for decoupled payments (payments that do not affect production decisions) that vary by commodity. These payments are known as single farm payments (SFP) and these decoupled payments are based on 2000–2002 historical payments, which replaced 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 that is 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.
The 2003 CAP reforms also marked a shift in the way rural development is treated, as it 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, while the budget for Pillar II rural development was intended to more than double by 2013. However, budget restrictions substantially limited Pillar II spending, with a concept called modulation implemented to increase available Pillar II funds. In this way, SFP payments greater than 5,000 euros were reduced by 5 percent and these funds transferred to Pillar II, while farmers whose SFP is less than 5,000 euros were not penalized. 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.
The 2003 reforms were revisited in 2008 to make the implementation of the CAP easier. At this time, modulation rates were increased to generate additional Pillar II funds. Another major development was to phase out the milk quota system by 2015, which had been in place since 1984.
Before the current CAP (2023–27), a round of reforms in 2013 generated the version that was in place through 2022, CAP 2014–20. The key concept applied during these reforms was multifunctionality that introduced a system of payments in stages to address multiple components. These included basic support payments, as well as environmentally and structurally focused payments with some limited coupled payments. These further environmental reforms were introduced under the concept of ‘greening’ CAP. Other principle reforms focused on measures to balance payments across EU producers in the Member States, with attention paid to farm size and young farmers. Equitability in direct payments was addressed by shifting the basis from historical levels to flat rate farm payments set at Member State or regional values. This change was phased in from 2015 to 2020 as this was the intended timeframe of the CAP. However, this version was extended by 2 years because of delays to the subsequent 2023–27 CAP related to elections and Brexit negotiations over the United Kingdom’s (U.K.) departure from the EU.
CAP 2023–27 builds upon the 2003 reforms to provide Member States with greater autonomy over the application of CAP. Each Member State completed a national strategic plan that was subject to review and approval by the commission. This gave Member States greater flexibility to design and implement policies to address their unique needs and challenges while following the overarching principals and objectives of CAP.
Domestic Price Support
Domestic price supports were the historical backbone of CAP farm supports but have been largely replaced by direct payments, which now account for approximately 70 percent of the CAP budget. Major commodity prices such as some grains (i.e., barley, bread and durum wheat, and corn), beef and veal, rice, butter, and skimmed milk powder 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. However, the 2003 CAP reforms 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 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.
Although price support remains as a means of maintaining farm income, payments made directly to producers provide substantially more income support. The payments specified in the 2023–27 CAP reform are made to farmers based on general conditions for support and the Member State plan according to the shared management principle and no production is required. In the livestock sector, headage payments (i.e., payments per animal) can be made in the beef and sheep sectors, with no production required. Other special payments are made, but they are relatively minor in value. Further conditionality on CAP payments introduced during recent rounds of reform include cross-compliance measures that are based on environmental aims or ‘greening’.
The 1992 Common Agricultural Policy (CAP) reforms instituted a system of supply control, through a mandatory, paid set-aside program to limit production, that was maintained until the CAP 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. Although set-aside is no longer used, it could be re-established if conditions, such as over supply, returned.
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. CAP also applies tariffs at EU borders so that imports cannot be sold domestically below the internal market prices (intervention prices) set by 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.
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 the 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.