Lecture 5: Common Agricultural Policy Cont

1
Lecture 5 Common Agricultural Policy Cont Based
on Sloman Chapter 3.4 Chapter 8, Baldwin
Wyplosz and Chapter 8, Swann
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AGRICULTURE AND AGRICULTURAL POLICY

• Subsidies
• effects on price and output
• the incidence/cost of a subsidy
• Cost falls directly on Government/EU
• Alternative - High minimum prices
• Also known as price supports or price floors
• Was main form of EU assistance

3
Minimum price where some of the product is
imported
EU supply
P
Pw
EU demand
QS1
Q
Qd1
O
Imports
4
Minimum price where some of the product is
imported
EU supply
P
Pt
Import levy
Pw
EU demand
QS1
Q
Qd1
O
5
Minimum price where some of the product is
imported
EU supply
P
Pt
Import levy
Pw
EU demand
QS2
QS1
Qd2
Q
Qd1
O
Imports
6
Minimum price where some of the product is
imported
EU supply
P
Pt
Import levy
Extra amount paid By consumers
Pw
EU demand
QS2
QS1
Qd2
Q
Qd1
O
Imports
7
Minimum price where some of the product is
imported
EU supply
P
Pt
AMOUNT PAID IN IMPORT LEVIES to Govt
Extra amount paid to farmers
Import levy
Pw
EU demand
QS2
QS1
Qd2
Q
Qd1
O
Imports
8
But over time effect of subsidies and price
floors means supply rises so need to look at
Minimum prices for a product where the country is
self-sufficient
P
SEU
a
b
Pw
DEU
QS1
Qd1
Q
O
Exports
9
Minimum prices for a product where the country is
self-sufficient
P
SEU
Pi
a
b
Pw
DEU
QS1
Qd1
Q
O
10
Minimum prices for a product where the country is
self-sufficient
P
SEU
d
e
Pi
a
b
Pw
DEU
QS2
QS1
Qd2
Qd1
Q
O
Surplus
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Minimum prices for a product where the country is
self-sufficient
P
SEU
d
e
Pi
a
b
f
c
Pw
Amount bought into intervention
DEU
QS2
QS1
Qd2
Qd1
Q
O
Surplus
12
Minimum prices for a product where the country is
self-sufficient
P
SEU
d
e
Pi
a
b
f
c
Pw
COST OF BUYING THE SURPLUS
DEU
QS2
QS1
Qd2
Qd1
Q
O
Surplus
13
Minimum prices for a product where the country is
self-sufficient
P
SEU
d
e
Pi
NET COST
a
b
f
c
Pw
REVENUE FROM SALE OF SURPLUS ON WORLD MARKET
DEU
QS2
QS1
Qd2
Qd1
Q
O
Surplus
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CAP

• EU was net importer of most food, so could
  support price via tariff
• technically known as a variable levy.
• Costs borne largely by consumers,

15
Effect of EU price supports and export subsidies
on world market. BEFORE
P
DW
DROW
DEU
SW
Pw
SEU
SROW
Q
QW
O
EU Imports
ROW Exports
16
Effect of EU price supports and export subsidies
on world market. AFTER
P
DW
DROW
DEU
SW
SEU
PEU
SW
Pw
SEU
PW
SROW
Lower World Price Lower ROW World Supply V. Bad
for poor ROW
SEU
DEU
Q
O
Dumping on ROW
EU Dumping
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Follow-on Problems of Oversupply

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

Source Baldwin and Wyplosz
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The cost to the taxpayer of high fixed prices
P
S
Pe
D
Q
O
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The cost to the taxpayer of high fixed prices
P
S
Pi
Pe
D
Q
O
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The cost to the taxpayer of high fixed prices
P
S
b
a
Pi
Pe
D
Qd
Qs
Q
O
Surplus
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The cost to the taxpayer of high fixed prices
P
S
b
a
Pi
Pe
COST TO THE TAXPAYER
D
d
c
Qd
Qs
Q
O
Surplus
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The cost to the taxpayer of subsidies
P
S
Pe
D
Q1
Q
O
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The cost to the taxpayer of subsidies
P
S
a
Pf
Subsidy
Pe
S2
b
Pc
D
Q2
Q1
Q
O
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The cost to the taxpayer of subsidies
P
S
a
Pf
COST TO THE TAXPAYER
Pe
b
Pc
D
Q2
Q1
Q
O
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The cost of price and other market supportfor
agriculture in the EU
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AGRICULTURE AND AGRICULTURAL POLICY

• Justification of the CAP
• assured supplies of food
• support for farm incomes
• growth in agricultural productivity
• stable agricultural prices
• reasonable prices for consumers

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AGRICULTURE AND AGRICULTURAL POLICY

• Criticisms of the CAP
• agricultural surpluses
• static costs
• dynamic costs
• irrational relative prices
• removes disciplines of markets
• redistributive effects

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Other CAP Problems

• The farm income problem
• average farm incomes fail to keep up despite huge
  protection and budget costs
• most of money goes to big farms that dont need
  it
• CAP makes some farmers/landowners rich
• keeps average (i.e. small) farmer on edge of
  bankruptcy
• farmers continue to exit farming (2 per cent per
  year).

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Other CAP Problems

• Effects on the Environment
• Factory farming
• pollution
• animal welfare
• nostalgia.
• Bad for image and thus public support for CAP.
• Effects on Rest of the World
• Lowers Prices and supply
• Affects poor countries very badly

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AGRICULTURE AND AGRICULTURAL POLICY

• Possible reforms of the CAP
• price reductions
• production quotas
• set aside
• diversification
• low-intensity farming
• income support
• the MacSharry and other reforms

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CAP Reforms

• Supply control attempts
• 1980s, experimentation with ad hoc and complex
  set supply controls to discourage production
• e.g. Milk quotas and cereal set-aside
• generally failed technological progress and high
  guaranteed prices overwhelmed supply controls.

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CAP Reforms

• 1992 MacSharry Reforms
• basic idea cut prices supports to near
  world-price level and compensate farmers with
  direct payments
• was essential to complete the Uruguay Round
• worked well.

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Effect of the MacSharry reforms on cereal
surpluses
P
S1
b
a
P1
D
d
c
Qd1
Qs1
Q
O
Original surplus
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Effect of the MacSharry reforms on cereal
surpluses
P
Reduction in intervention price
S1
b
a
P1
P2
D
d
c
Qd1
Qs1
Q
O
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Effect of the MacSharry reforms on cereal
surpluses
P
S2
S1
b
a
P1
P2
Effect of Set-aside
D
d
c
Qd1
Qs1
Q
O
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Effect of the MacSharry reforms on cereal
surpluses
P
S2
S1
b
a
P1
b
a
P2
D
c
d
c
Qd2
Qd1
Qs2
Qs1
Q
O
Reduced surplus
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Further CAP Reforms

• Agenda 2000
• MacSharry Mark II, lower price floors and more
  de-linked direct payments
• Prices in 2002 only 73 of 1990 levels and more
  proposed
• Rural development policy switching towards
  specialist provision (herbs, organics) and
  alternative local services and industry
• Capped agriculture budget for first time

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• June 2003 Reforms essential to Doha Round
• implementation 2004-7
• Phase out price supports completely
• Cap on contribution to large farms (EU 300K)
• Cap on spending on new members 10 countries share
  3.7 b -4.1 in 2006
• But average spend is 172 per farm in Easter
  Europe compared to 5000 in EU15

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Evaluation of Todays CAP
Supply problems and food mountains left
figure massive shift to direct payments
Source Baldwin and Wyplosz
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Evaluation of Todays CAP
price cut reduced EU buying of food right
figure shows important drop in EU storage of
food EU dumping of food on world market also
dropped.
Source Baldwin and Wyplosz
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Farm Incomes and CAP Support Inequity

• DIRECT PAYMENTSMostly to big, rich farmers
• payments intended to compensate, so inequity
  continued.
• Half the payments to 5 per cent of farms (the
  largest).
• Half the farms (smallest) get only 4 per cent of
  payments.
• Most payments also go to wealthy regions

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Farm Incomes and CAP Support Inequity

• Recent studies show that only about half of these
  payments go to farmers
• rest to non-farming landowners and suppliers of
  agricultural inputs (seed, fertilisers,
  agri-chemicals, etc.)
• Should not be overly surprising

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CAP Support Inequity
Source Baldwin and Wyplosz
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Future Challenges

• Eastern Enlargement
• number of farms will rise from 7 million to 30
  million
• farmland rise from 130 million hectares to 170
  million.

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EU Newcomers Farm Facts
Source Baldwin and Wyplosz
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•  Doha Round WTO round
• Agriculture key
• Cairns Group http//www.cairnsgroup.org/
• Argentina Australia Bolivia Brazil Canada
  Chile Colombia Costa Rica Guatemala Indonesia
  Malaysia New Zealand Paraguay Philippines South
  Africa Thailand Uruguay
• Failure in Cancun after African countries
  walk-out.
• EU now offering significant cuts