Common agricultural policy

What is the Common Agricultural Policy (CAP)?

Although farmers in many European Union countries are efficient and produce high yields, land, input and fuel costs make them uncompetitive with farmers elsewhere. Without additional financial support, many farmers would be unable to sustain their businesses and the overall rural economy would suffer significantly.

As a result, the EU operates the Common Agricultural Policy, which supports farmers by providing a range of price guarantees, direct payments and other instruments, including quotas and tariffs on some imported produce. By setting this up on a pan-European basis, national governments can no longer provide separate direct support for their agricultural sectors, but instead administer funds distributed via the CAP.

A brief history

The CAP was one of the original pillars of the European Community, comprising France, Germany, Italy, Netherlands, Belgium and Luxembourg. The treaty of Rome set out its basic principle and objectives:

1. To increase productivity, by promoting technical progress and ensuring the optimum use of the factors of production, in particular labour
2. To ensure a fair standard of living for the agricultural Community
3. To stabilise markets
4. To secure availability of supplies
5. To provide consumers with food at reasonable prices

Those objectives were written in 1958 and have never been amended. The Lisbon Treaty who will amend existing European Union and European Community treaties does not revise the objectives.

An increasingly complex system of quotas and support prices was set up, with further crops included as the European Community expanded. This basic system led to the infamous "butter mountains" and "wine lakes" of the 1980s, with farmers being paid to produce goods for which there was no market and which were then bought up for intervention storage and later sale at (lower) global market prices.

Additional instruments such as quotas for milk and other produce were introduced to limit production. "Set aside" was another innovation, with farmers being paid to keep a certain percentage of their land out of production.

The CAP has always been the most expensive of the EC's (later EU's) policies, accounting for about half of total central funds for many years. With successive waves of enlargement, it has become a less dominant part of the overall budget and a decreasing proportion of GDP.

The CAP today

Despite a reduction in the percentage of the overall budget assigned to the CAP, it cost €49.8bn – 46.7% of the budget – in 2006. The plan is that total spending should peak in 2008/9 and then decline until 2013, when the next major revision is due. In addition to the direct cost, it is estimated that European consumers pay approximately €50bn more in higher food costs.

Although originally a system of direct production subsidies and export subsidies, the CAP has been transformed since the early 1990s into one where farmers are given direct payments not tied to production. This is known as "decoupling". Payments are also increasingly being linked to animal welfare and environmental targets. A key factor recently has been the major reform of the sugar regime, which cuts guaranteed prices and aims to reduce overall production significantly. Sugar beet in Europe cannot compete with sugar cane growers overseas without a large subsidy.

Who benefits?

France is – and always has been – the largest recipient of CAP funds (20% of the total in 2006), with Spain, Germany, Italy and the UK all also receiving significant amounts (two-thirds of the total between these five countries). Although getting smaller absolute amounts, Greece and Ireland receive the largest per capita payments.

Newer Member States get a less generous deal, initially 25% of the rate of the established countries. However, payments will converge by 2013, when countries such as Poland with important farming sectors will become major beneficiaries. As total spending will not rise, the net payments to the current major beneficiaries will decline to some extent.

Across the whole EU, it is the bigger farmers who are the greatest beneficiaries, with 20% of farmers estimated to receive 74% of funding.

The CAP and world trade

The European system of price support and import barriers has in the past distorted trade patterns, often to the disadvantage of developing countries. In particular, EU farmers have been heavily subsidised (until recently) to grow sugar beet, whereas free trade would dictate that sugar would be imported from countries which can grow it at lower cost.

Europe is not unique in subsidising farmers and distorting markets. The USA – a major exporter of agricultural produce – also subsidises the sector. One of the key objectives of the (now stalled) Doha round of WTO negotiations has been to reach a deal on reduction or elimination of agricultural subsidies in order to benefit developing world farmers.

The CAP from 2103

Reform of the CAP has already happened to some extent, but on a piecemeal basis. Countries such as the UK, where farming is generally intensive and relatively efficient have pushed for more radical reform for a number of years. However, this has been strongly resisted by other Member States, particularly France, which have larger farming sectors and want to protect their rural economies.

The CAP "Health Check", agreed under the French presidency in late 2008, is a political compromise which will introduce significant reforms to the CAP, particularly after 2013. According the Commission, "The Health Check will modernise, simplify and streamline the CAP and remove restrictions on farmers, thus helping them to respond better to signals from the market and to face new challenges."

The main provisions are:

• Phasing out milk quotas by 2015
• Removing nearly all the remaining production-related direct aid payments and incorporating them into the decoupled Single Payment Scheme
• Increasing the flexibility for Member States to give assistance to sectors with special problems eg, production in disadvantaged areas. This so-called Article 68 provision leaves open a degree of direct production support, albeit managed on a national basis.
• Providing an additional €90 million for the 12 most recent accession states in the transition to the direct payment scheme for their farmers.
• Increasing the percentage of higher direct aid payments (above €5,000) diverted to the Rural Development budget. Some of this money will be spent to support young farmers, to reduce the number of farmers moving away from the sector.
• Abolishing the set-aside requirement for cereal farmers.
• Intervention to buy up surpluses will be restricted further.

However, the CAP will remain the largest single part of the EU budget, and there will inevitably be pressure from some Member States for further reform.