Lecture 7

• Common Agricultural Policy (CAP) is expensive, politically sensitive, and complex
• the common agricultural policy makes up about 1/3 EU budget, so is expensive
• the CAP is politically sensitive, as its about food, and everyone in the agricultural sector is affected
• there are 9 goals to the CAP, which are dealt with either centrally or nationally. this makes it very complex
• the CAP goals include ensuring a fair income and increasing competitiveness
• the first CAP system kept agricultural prices high and stable through market intervention
• the CAP goals include promoting climate change action and ensuring environmental care
• the second CAP system pays landowners to farm in ways that promote the CAP goals.
• early CAP was designed to ensure farmers got a minimum price using a price floor
• the early CAP worked by using a tariff to raise the domestic price of goods, as the EU was a net importer
• the early CAP meant consumers paid for the price floor in the form of higher prices
• direct payments, where farmers get given a transfer that brings them to the minimum price level can be win-win, as prices are kept at the market price
• the Early CAP had unevenly distributed impacts, as EU farms are heterogenous and have big size differences, and bigger farms got more of the benefits
• 3% biggest farms in the EU own half of all the land used for farming, so would receive half of the direct transfer money, and smaller farms would not have been as well supported
• price floors in the early CAP help all farmers, but the biggest gains went to large farmers who were already richer
• common agricultural policy can help address externalities, and promote social goals (biodiversity) by encouraging good behaviour
• in the early CAP, consumers compensate for the producers loss
• The early CAP ignored rules of supply and demand, resulting in the EU having to buy excess goods to maintain price floors.
• the early CAP contributed to environmental damange, and was hugely expensive.
• farms have lots of political power, so getting rid of price floors is unfeasible, as it would mean small farmers would be driven out of farming, and people structured their farming around the CAP
• opinion polls show that most EU citizens support the CAP
• in the new CAP, 'decoupled direct payments' not based on food production would be used
• in the new CAP, prices would be lowered to world price levels, while farms are still supported
• in the new CAP, payments would be linked to social concerns, to encourage positive externalities, and discourage negative ones.
• in the new CAP, taxpayers take over the producers loss
• the McSharry reforms introduced the shift towards payments to encourage good behavior and direct payments
• when the EU expanded, there was a shift toward structural spending in poorer countries
• todays CAP has more equal alloactions across member states and across farmers within each member state
• todays CAP ties direct payments to environmental goals
• the old CAP worked well in the 1960s
• the CAP initially made people happy due to farmers having stability, lower dependence on food imports, and empathy toward farmers
• the 'green revolution' involved a growth in the agricultural sector, because guaranteed high prices encouraged investment, and output rose more than consumption
• increased output during the green revolution meant that the EU became a net exporter of goods, and the price floor could no longer be maintained with a tariff to reduce imports
• because EU farmers increased production so significantly, the EU had to buy surplus food and either store it, destroy it or dump it on other countries, which made the agricultural sector in those countries also suffer
• the green revolution meant the CAP went from 8% of the EUs budget in 1965 to 80% in 1979, and even then the wages of farmers were less than half of the average overall income within the EU
• the green revolution allowed for an industrialisation of farming; which had negative environmental externalities like mad cow disease
• the food dumping that occured as a result of the green revolution and the CAP meant that developing countries became less competitive in the agricultural sector, which was a problem as their incomes were heavily reliant on it