The Common Agricultural Policy (CAP) of the EU

Posted on Oct 19, 2024 in Economy

The Common Agricultural Policy (CAP) is a key policy and one of the essential elements of the European Union’s institutional system. The CAP manages grants for agricultural production in the EU.

Background

The Treaty of Rome, which established the CAP, set out the following objectives for the EU:

  • Increase productivity
  • Ensure a fair standard of living for the agricultural population
  • Stabilize markets, ensure the security of supplies, and ensure reasonable consumer prices

History

For Spain, joining the EEC in 1985 meant full compliance with Community agricultural rules, particularly for Mediterranean products (citrus, olives, etc.).

Objectives under the Treaty of Rome

  1. Increase agricultural productivity
  2. Ensure a fair standard of living for farmers
  3. Stabilize agricultural markets
  4. Secure supply in EU markets
  5. Ensure reasonable prices for consumers

To achieve these goals, the CAP established three principles:

  1. Market Unit: Ensure free movement of goods within the internal market, eliminating fees.
  2. Community Preference: Prioritize the marketing of products from member states, protecting the internal market from global price fluctuations.
  3. Financial Solidarity: Joint participation of all member states in the two sections of the European Agricultural Guidance and Guarantee Fund (EAGGF).

Orientation

This section focuses on reforming agricultural structures, such as supporting livestock farms in mountain areas, modernizing farms, and improving farmers’ training.

Guarantee

This section funds common market organization (CMO) expenses. Despite budget reductions, it still absorbs most EAGGF resources.

EAGGF expenditures ensure the functioning of CMOs, which are market arrangements for each agricultural product or group of products.

Instruments of CMOs

CMOs are based on a common price system, with the following key elements:

  • Target Price: The desired price level for a product, ensuring adequate income for farmers.
  • Threshold Price: Calculated from the target price, minus domestic marketing expenses for imported products. It’s usually higher than the world market import price and sets the minimum import price.
  • Intervention Price: Often below the threshold price, it’s the price at which national agencies must buy a product if market prices fall below it. This mechanism has led to surpluses and applies to cereals.

Other Instruments

  1. Prélèvement: Applied to imported products, it’s the difference between the threshold price and the lowest world market price. This protects the European Commission (EC).
  2. Export Refunds: A subsidy for community exporters if they sell outside the EU at a lower price than the internal market price. The EC pays the difference.
  3. Deficiency Payment: A direct subsidy to producers, covering the difference between the guaranteed market price and the international market price. Producers receive a guaranteed price, allowing free imports within the EU. The producer receives the difference to lower product prices.

Problems of the CAP in the 1980s

  1. Supply and demand mismatch, leading to saturated markets and lack of demand growth.
  2. Imbalance between price/market policy and structural reforms, with over 90% of funds going to market support.
  3. Pricing policy benefited large farms more.
  4. Real agricultural income remained stable despite EAGGF budget increases.
  5. External pressure on the EC to reduce agricultural protection, with the GATT pushing for tariff abolition.

First Steps

  1. Farmer Responsibility: Farmers in surplus areas contribute to EAGGF expenditures.
  2. Production Quotas: Intervention tools are applied if production exceeds a certain quota.

Protectionist measures had limited success, necessitating further reform in the 1990s.

1990s Reform

  • Rebalance markets, even with higher prices
  • Promote extensive production with fewer fertilizers and reduced surpluses to protect the environment
  • Maintain enough farmers for production and environmental conservation

Consequence: smaller production surpluses.

Agenda 2000

  • Improve EU competitiveness with lower prices
  • Ensure food safety and quality for consumers
  • Create income and alternative employment for farmers and their families

These measures aimed to limit surplus production, affecting cereals, beef, and dairy products.

Price adjustments and the replacement of labor with capital were also factors.