Common Agricultural Policy (CAP)

Question 1

Why was CAP 1963 controversial (4)

Answer 1

Large % of budget

High prices for EU consumers, and

RoW negatively impacted

Original CAP harmed the environment (early 90s, 40% farmland signs of over-fertilisation)

Question 2

CAP principles (3)

Answer 2

Community preference i.e buy EU food
Free trade (in EEC)
Shared financial responsibility

Question 3

Main objectives of CAP (5)

Answer 3

Raise productivity (issue as increases S1 and surplus to pay in diagram)
Fair standard of living for workers
Stabilise markets
Assure supplies
Reasonable prices for consumers

Question 4

Problems in agriculture (2)

Answer 4

Cobwebs theory - time lags e.g if wheat price high now, it takes time to grow, by then price may have dropped

Inelasticity of demand creates price instability - if demand inelastic, a change in supply will lead to larger change in price.

Question 5

Price support mechanism diagram

Answer 5

Ptarg is the target price (high since area of shortest supply)

Pe is equilibrium price

World price is below

Threshold price (Pth) is target price - transport cost (i.e getting from Germany shortest supply area to Rotterdam the largest port in EU)

Pinv - minimum price of 16; i.e if no one buys, surpluses are bought by the EU (contributed to CAP high budget expenditure)

Question 6

Aim of a threshold price

Answer 6

Aim is to ensure imports do not flood into the EU

Since world price is only 8, it means now they have to pay 18 since it goes through the Rotterdam port

Question 7

How to apply and ensure threshold price is applied to world price

Answer 7

Variable levy (VL) (i.e tariff)
Pthreshold - Lowest world price = 10

Question 8

Intervention price (Pinv )

Answer 8

Minimum price - based on the place with the most supply

(Meet aim of fair prices for farmers)

Question 9

EU budget: where do they get revenue from

Answer 9

Own resources (most EU pay 2% GDP)

Question 10

Examples of own sources

Answer 10

Agricultural levies
Customs duties

As EU became more self sufficient replaced with
VAT resources
GNP based

Question 11

EU revenue breakdown in 2015

Answer 11

Now GNI based contribution 74% of EU revenue
VAT 2nd with 13%

(Little from customs duties now)

Question 12

CAP % of EU expenditure in 2015

Answer 12

CAP took 40% of EU budget expenditure

Following enlargement, without reform it could’ve increased to 70%

Question 13

Why was this cost dampened for UK in particular

Answer 13

UK rebate 1984 , given refunds since were main net contributors towards EU.

(Contentious as other countries pay for it

Question 14

CAP did increase productivity. How much did cereal production increase between 1960 and 1980?

Why was high productivity an issue….
(Use diagrammatic proof to help)

Answer 14

Doubled - 61m tons to 120m tons

B) High productivity increases surpluses, thus CAP expenditure!!!

Question 15

8% of EU spending on agriculture is fraudulently taken.

Name an example of fraud in CAP

Answer 15

Dizzy pig syndrome
Exporting pigs to UK got subsidy, would sneak pigs back across border, and export again!!

Contributed to high expenditure too

Question 16

CAP was also inequitable within the EU.

How so for consumers and producers?

Answer 16

High prices - Regressive - hits poor worst

Producers - small farms received 20% CAP funding, large farms got 80%

(Solved in 2014 reform - limited 300k cap per farm, and also reserved 30% for environmentally friendly farms)

Question 17

How was CAP made even more complex and eval

B) summary of extra issues of CAP considered (4)

Answer 17

Green money - artificial exchange rates to help CAP functioning.

Eval: introduction of euro alleviated this since only one exchange rate

B) So fraud, green money and high productivity, inequitable was also an issue

Question 18

Diagram of CAP to show CS and pS

Which 2 prices do we use for simplification

Answer 18

Only use world price and intervention (minimum) price, and this time let world price = equilbrium price

Loss of CS = -a (since higher prices)
PS = a+b (can produce more)
Surplus is a to b: leads to overproduction since EU will buy up the surplus (either to store or dump on world markets)

Question 19

How much does it cost the EU if the surplus is exported outside of the EU

B) what if EU buy ALL the surplus (to dump or store)

Answer 19

Since outside the EU they will export it at Pw (8) and pay the other 8, so cost to EU is abcd. (For covering/paying farmers the difference between world price and intervention price)

B) abfe

Question 20

What was the first reform of CAP introduced in 1980s

B) how much more milk was EU producing than required

Answer 20

Quotas - milk in particular was successful

B) EU was producing 30% more than needed

Question 21

Milk quota diagram - and effects (PS, CS etc)

Answer 21

Just use Pw and Pint (min price)
Instead of producing at Qint, produce at Qs

C+D is expenditure saved (since EU no longer have to pay for the surplus)
C is also loss in producer surplus

No change in CS - still pay high prices Pint
Purple marks where EU are still paying to subsidise (cover difference between Pw Pint)

Question 22

Why was milk quotas successful

B) so taxed for overproduction. Name of taxes

Answer 22

As milk production has bottlenecks in production, so easy for EU to monitor milk

B) coresponsibility levies

Question 23

Which were quotas ineffective for

Answer 23

Cereals since more difficult to monitor supply chain e.g could sell anywhere

Question 24

Mcsharry reforms 1992 - largest reforms of CAP

What was it driven by tho

Answer 24

International pressure - countries fed up of EU protectionism e.g their NTBs and subsidising EU exports on world markets

Question 25

So what was the main idea of McSharry

Answer 25

Reduce intervention price - more effective than quotas (Reduces surpluses, export subsidies stopped by 2010) E.g cereals Pint was reduced by 30%

Question 26

Mcsharry reform diagram - a fall in intervention price Effect

Answer 26

CS - increases since Pint falls. G = net welfare loss CS+G = loss in producer surplus Fall in surplus - EU dont have to spend so much on buying up, and also avoids them upsetting RoW via dumping

Question 27

How did EU compensate farmers for the loss in PS (CS+G)

Answer 27

Gave them direct payments if they give up 15% of their land! To stop overproduction 4.3m hectares given up by 1995! BUT PROBLEMS TO THIS, COMING UP

Question 28

Mcsharry aims via the reducing Pint (3)

Answer 28

Increase competitiveness - lower Pint incentivise to become more efficient to maintain profit margins, and increase demand since cheaper which reduces surplus) Protect environment (from avoiding overproduction) Improve international relations (since less surplus, less dumping and upsetting RoW

Question 29

Problem of direct payments (2) Hint: technical terms

Answer 29

Decoupling - breaks link between production and payment. Slippage - may just set aside their land which was unable to produce on, thus overproduction may remain

Question 30

How did Macsharry address environment

Answer 30

Cross compliance - discourage intensive production methods, get money for environmentally friendly behaviour

Question 31

Reforms 2000 onwards had 2 systems:

Answer 31

Reduce intervention price still (building on from Macsharry) Environment emphasis - decoupled payments from production (no longer payments if 15% arable land set aside) now more based on environmental goals

Question 32

How did they improve environment ?

Answer 32

Subsidiary principle (states do more on a localised level)

Question 33

Fischler reform 2003-13: 2 pillars

Answer 33

Pillar 1: Marker support measures and direct subsidies (McSharry) Pillar 2: Rural development policy Pillar 1 was reduced (direct payments) and funding moved more to pillar 2

Question 34

Pillar 2: what did it support and why

Answer 34

Agriculture as a public good through… Development of rural areas, and try find alternative sources for income for farmers e.g shearing wool from sheep.

Question 35

Pillar 1 Pillar 2 allocations 2014-2020

Answer 35

75% of budget 71% being direct payments Pillar 2 25%

Question 36

CAP spending as a % of EU GDP 1993 - 2016 B) when were export subsidies (restitution) phased out completely from expenditure

Answer 36

Gone from 0.65% to 0.35% B) by 2010 (surpluses not being bought up/paid the difference anymore, replaced with increased direct payments and rural development)

Question 37

Reforms 2014 continued with 2004-13 but with greater emphasis on.. (2)

Answer 37

Greening *(environment again) Securing food supply DIRECT PAYMENTS ARE MORE LINKED TOWARD FARMS MEETING ENVIRONMENTAL SUSTAINABILITY

Question 38

Measures (2)

Answer 38

Address inequity in CAP: cap on what they can pay farms 300k euros to farm per year (since big farms used to get a lot of funding, while small didn’t) Reserve 30% of CAP funding for environmental friendly farms

Question 39

Order of reform

Answer 39

CAP 1963 1980s milk quota McSharry 1992 (reduce Pint - more effective than quota) 2000 reform (continue to reduce Pint + environment) Fischler 2003 - Direct payments + rural development 2014 reform - greening + secure food supply (300k limit and 30% funding for environmentally friendly farms)

Question 40

When did CAP’s price support mechanism induce overproduction and become a key issue B) technical terms used for 2 goods (2)

Answer 40

1970s (hence why quotas followed in 1980s and Mcsharry 1992) B) butter mountains and wine lakes - refer to large surpluses of overproduction

Question 41

Mcsharry made direct payments for farmers that gave up 15% arable land. How much (in hectares) were given up by 1995

Answer 41

4.3M hectares (good as reduced overproduction) Eval: remember decoupling and slippage

Question 42

CAP cause harm to environment. By early 1980s, what % of farmland was over-chemically fertilised?

Answer 42

40% of farmland had signs of over-fertilisation)

Question 43

Ackrill : how much did CAP guarantees (direct payments) cost up till 2006 Thus what did he conclude was the best reform from there

Answer 43

312.5bn (to farmers to stop them overproducing) B) degressivity - reduce direct payments to large firms (since recognises they have EOS)

Question 44

Direct payment still carry on today, more linked towards firms being environmental. Export subsidies (paying surpluses) phased out by 2010.