1:1 Why Governments have often intervened in Agricultural Markets in the EU
1:2 Extract B mentions 4 objectives of CAP as mentioned in the treaty of Rome. These include
i) ensure a fair living standard for farmers
ii) Stabilise markets
iii) Assure availability of supplies (and reduce dependence on imports)
iv) Ensure reasonable prices for consumers
1:3 The farming sector has often experienced lower incomes, causing relative poverty within national economies. One reason for this is that foodstuffs have a low income elasticity of demand. Therefore farmers do not benefit from rising incomes, as people do not buy more food
1:3 Farmers incomes can easily fluctuate due to variations in supply conditions. Demand for food is inelastic therefore an increase in supply can lead to a fall in revenues
1:4 Farming is more susceptible to problems caused by factors such as disease and bad weather. Disease such as BSE can wipe out a farmers income therefore requiring intervention (extract C)
1:5 Agricultural goods are essential goods for every one therefore govts often intervene to prevent shortages or prices rising too high.
2:0 What CAP intended to achieve
2:1 The main aim of CAP was to give farmers a target price for foodstuffs. This would enable them to gain a certain level of income from products which often had low prices.
2:2 Extract A explains how the CAP operated. To maintain these target prices it was necessary to do two things:
i) EU was to buy the surplus of food at the target price
ii) A variable import tariff was imposed on cheap imports to make imports as expensive as the target price
2:3 The diagram illustrates how the CAP worked in practice
2:4 At the target price the Supply was much greater than demand therefore there was a surplus of Q2 – Q1 this is the amount that the EU had to buy. This is what led to the creation of stocks of food such as “butter mountains”.
2:5 The target prices actually encouraged farmers to supply more through intensive farming methods. Therefore the amount of surplus often increased in different years.
3:0 Costs of CAP
3:1 Higher Prices encouraged extra supply, this resulted in a surplus of food. The EU had to buy this surplus. This is very inefficient and expensive. In 2000 CAP expenditure cost 36 billion Euros. In addition with the expansion of the EU it is likely to increase the cost to the EU budget
· However the cost of CAP has reduced as a % of the EU budget from 66% to about 46% now (Extract D)
3:1 To increase incomes of farmers consumers have had to pay higher prices. This is allocatively inefficient and also it increases inequality because low income groups pay a higher % of their income on food
3:2 CAP has caused economic difficulties for farmers in other countries
Firstly the excess supplies were dumped onto world markets. This caused prices to fall and lower revenues. Secondly the EU bought less imports because of the variable import levy’s Therefore demand fell from D1 to D2.
* The combined effect was to reduce farmers welfare in both the US and the developing world.
3:4 Because of this the CAP has been a major stumbling block to trade at the WTO. The US has retaliated against EU exports in response to the high degree of protection given to agriculture.
* However the EU is not the only place where large subsidies to farming occur. Extract D states that countries such as Japan and Korea have a high amount of subsidies given to farmers measured by Producer Subsidy Equivalents. PSE
3:5 CAP has harmed the environment as Extract B says. CAP has encouraged farmers to increase output with the use of artificial fertilizers and pesticides causing problems for the environment.
3:6 CAP has arguably not helped overcome poverty is some rural communities because subsidies have been directed to output rather than need. Extract D states that the fund primarily goes to large farmers and landowners. They have received more than they need but small farmers are still struggling e.g. hill farmers with a low number of sheep.
4:0 Benefits of CAP
4:1 CAP has achieved some of its original objectives such as securing food supplies and stabilising markets.
However this could easily have been done with much less cost and distortion of the market.
4:2 Extract C states how Agenda 2000 has helped introduce reforms to CAP to improve its operation. Now funds can be given to land devoted to “nature conservancy, encourage organic farming and the establishment of young farmers. Therefore CAP is now beginning to direct funds in a more beneficial way.
* However these reforms arguably do not go far enough and there is still a lot of economic distortion within CAP which leads to the disadvantages mentioned in section 3:0
5:0 How CAP should be reformed
5:1 It would be very beneficial to abolish all target prices for all products. This would have several benefits
i) It would lower prices for consumers
ii) It would help trade negotiations because EU would no longer have to impose variable import levy and therefore farmers in other countries would be better off
iii) It would eliminates all food surpluses
iv) It would be less costly for the EU as they would not have to buy the food.
v) It would reduce over supply and therefore discourage intensive farming and therefore improve the environment
5:2 The main disadvantage to this is that farmers would have a fall in income. However this can be overcome by more direct aid payments. In addition these can be more targeted to farmers who really need them rather than paying landlords who are already well off. A ceiling could be imposed on payment to farmers.
5:3 One reason for subsidising farmers mentioned in section 1 is that farming can have positive externalities therefore it makes sense for subsidies to be directed to these positive externalities . Therefore there could be an extension to aid for environmentally friendly measures such as organic farming.
5:4 A major advantage of these proposed reforms is that it should enable a reduction in the cost of CAP to the EU. Some farming pressure groups may be unhappy but there can be a clear gain to the EU because the money saved can be spent on more worthwhile projects such as subsidising depressed areas both rural and urban.
5:% CAP is still 44% of the EU budget therefore this is a potentially very significant policy for the EU. It is especially important given the expansion of the EU into the east.