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Agriculture is the only sector of the European Union
(EU) where there is a common policy. Agricultural policy
is proposed by a supranational authority—the European
Commission, agreed to or amended by agricultural ministers
of EU member nations, and reviewed by the European Parliament.
Historically, the EU's Common Agricultural Policy (CAP)
has played a critical role in connecting very diverse
European countries and, thus, has helped solidify national
commitment to the EU.
Initiated in 1962, the CAP is a domestically oriented
farm policy based on three major principles:
- a unified market in which there is a free flow of
agricultural commodities with common prices within the
EU;
- product preference in the internal market over foreign
imports through common customs tariffs; and
- financial solidarity through common financing of
agricultural programs.
The primary objectives of CAP are to:
- increase agricultural productivity;
- ensure a fair standard of living for farmers;
- stabilize markets;
- guarantee regular food supplies; and
- ensure reasonable prices to consumers.
Policy Instruments
The CAP's main instruments include agricultural price
supports, direct payments to farmers, supply controls,
and border measures. Because of policy reforms in 2003
and 2004, farmers must more fully comply with environmental,
animal welfare, food safety, and food-quality regulations
in order to receive direct payments.
Major reform packages have significantly modified the
CAP since the mid-1990s. The first reform, adopted in
1992 and implemented in 1993/94, began the process of
shifting farm support from prices to direct payments.
The 1992 reforms reduced support prices and compensated
farmers for lower prices with direct payments based on
historical yields, and introduced new supply control measures.
These reforms affected the grain, oilseed, protein crop
(field peas and beans), beef, and sheepmeat markets, but
farmers had to produce the commodity to receive a payment.
The second reform, Agenda 2000, was implemented beginning
in 2000 in preparation for accession of 10 new members
(mostly from Central and East Europe) in May 2004. Similar
to the first CAP reform, Agenda 2000 used direct payments
to compensate farmers for half of the loss from new support
price cuts. Again, payments depended on production. Agenda
2000 reforms focused on the grain, oilseed, dairy, and
beef markets.
A midterm review of Agenda 2000 resulted in a third major
set of reforms in June 2003 and April 2004. The reforms
represented a degree of renationalization of farm policy,
as each member state had discretion over the timing (from
2005-07) and method of implementation. The 2003 reforms
allow for decoupled payments—payments that do not
affect production decisions—that vary by commodity.
Called single farm payments (SFP), these decoupled payments
are based on 2000-02 historical payments and replace the
compensation payments of the 1992 reform.
Compliance with EU regulations regarding environment,
animal welfare, and food quality and safety are required
for agricultural producers to receive SFPs. Moreover,
land not farmed must be maintained in good agricultural
condition. Coupled payments, which can differ by commodity
and require planting a crop, are allowed to continue to
reinforce environmental and economic goals in marginal
areas. In practice, coupled payments are only used by
a few member states. Cuts in intervention prices were
made for rice, butter, and skim milk powder, which began
in 2005. Intervention support for storage was limited
for rice and butter and eliminated for rye in 2004. In
addition, increases in the CAP budget ceiling have been
limited to 1 percent annually during 2007-13, and—if
market support and direct payments combine to come within
300 million euros of the budget ceiling—SFPs will
be reduced to stay within budget limits.
A reform of hops and Mediterranean products—cotton,
tobacco, and olive oil—was completed in April 2004.
These reforms follow the logic of the 2003 reforms, with
decoupled payments based on historical payments and compliance
with EU regulations. Sugar reform came into force in July
2006.
Domestic price support. Domestic price supports were
the historical backbone of CAP farm support, but have
been largely replaced in this decade by direct payments,
which now account for around 70 percent of the CAP budget.
Prices for major commodities such as some grains (barley,
bread wheat, and corn), oilseeds, dairy products, beef
and veal, and sugar still depend on the intervention price
as a guaranteed floor price, but at much lower levels
than before the reforms. If world prices are high, then
intervention in the market is not needed.
Other mechanisms, such as subsidies to assist with surplus
storage and consumer subsidies paid to encourage domestic
consumption of products like butter and skimmed milk powder,
also support domestic prices. The 2003 reforms, however,
cut storage subsidies by 50 percent. Some fruits and vegetables
are withdrawn from the market in limited quantities by
authorized producer organizations when market prices fall
to specified levels. Reforms have lowered the cost of
the CAP to consumers, as intervention prices have been
reduced. However, taxpayers now bear a larger share of
the cost because more support is provided through direct
payments.
Direct payments. While price support remains a means
of maintaining farm income, payments made directly to
producers provide substantially more income support. The
payments specified in the 2003 reform are made to farmers
based on the average level of payments made during 2000-02,
and no production is required. In the livestock sector,
headage payments (payments per animal) are made in the
beef and sheep sectors based on 2000-02 average payments,
with no production required. Other special payments are
made, but they are relatively minor in value.
Supply control. The 1992 reforms instituted a system
of supply control—through a mandatory, paid set-aside
program to limit production—that has been maintained
through subsequent reforms. To be eligible for direct
payments, producers of grains, oilseeds, or protein crops
must remove a specified percentage of their area from
production. Agenda 2000 set the base rate for the required
set-aside for arable crops at 10 percent. Producers with
an area planted with these crops sufficient to produce
no more than 92 metric tons of grain are classified as
small producers and are exempt from the set-aside requirement.
Supply-control quotas have been in effect for the dairy
and sugar sectors for two decades.
Border measures. The CAP maintains domestic agricultural
prices above world prices for most commodities. In preferential
trade agreements, such as those with former colonies and
neighboring countries, the EU satisfies domestic consumer
demand while protecting high domestic prices through import
quotas and minimum import price requirements. The CAP
also applies tariffs at EU borders so that imports cannot
be sold domestically below the internal market prices
(intervention prices) set by the CAP. Although the Uruguay
Round Agreement on Agriculture (URAA) called for more
access to the EU market, market access to the EU's agricultural
sector remains highly restricted in practice.
The URAA also limited the value and quantity of EU export
subsidies. Bulk commodities continue to receive export
subsidies that allow the EU to remain competitive in world
markets. But because of reductions in CAP price supports,
export subsidies have declined considerably. EU exports
of processed products that contain a portion of a CAP-supported
commodity also receive an export subsidy, based on the
proportion of the commodity in the product and the difference
between the average cost of the raw material and the world price.
Additional aspects of 2003 reform. Important components
of the 2003 reform reflect a philosophical change in the
approach to EU agricultural policy. For the first time,
much of the pressure to reform the CAP came from environmentalists
and consumers. The requirement to comply with environmental
and animal welfare standards to qualify for the SFP reflects
these pressures. Moreover, farmers must meet food-quality
and food-safety regulations for payments to continue.
Another important feature of the 2003 reforms is the
move from a price support policy to an income support
policy through decoupled payments. EU farmers will have
more choices in their planting decisions because of decoupled
payments. Commodity support prices continue to exist,
but at lower levels, while direct payments to farmers
without requirements to plant a crop are more widespread.
There is also a marked shift in the way rural development
is treated. The 2003 CAP reforms established two pillars
in the budget: Pillar I for direct payments and market
and price support policies and Pillar II for rural development
policies. In the reforms, a ceiling was imposed on Pillar
I spending; increases are limited to 1 percent per year
in nominal terms from 2007-13. The budget for rural development
was intended to more than double by 2013, but budget restrictions
have substantially limited Pillar II spending. In addition,
in a concept called modulation, SFP payments greater than
5,000 euros are reduced by 5 percent, while farmers whose
SFP is less than 5,000 euros are not penalized. The budget
funds saved through modulation are transferred to the
Pillar II rural development fund. At least 80 percent
of the funds from the penalties will remain in the country
where the SFPs were reduced and are to be used for rural
development purposes.
Commodity Regimes
Grains. The CAP regime covers most grain produced by
and imported into EU countries (bread wheat, barley, and
corn). However, high prices for some grains indirectly
raise the prices of unsupported grains, principally feed
wheat. As with other commodities, grain support mechanisms
include a mixture of price supports and supply controls,
as described above. CAP reforms have affected the grain
regime mainly by requiring grain farmers to remove a percentage
of their arable cropland from production in order to receive
direct payments in compensation for reduced price supports.
The 2003 reforms abolished intervention support for rye
and require a decoupled payment of at least 75 percent
for arable crops. Since a decoupled payment does not require
a crop to be planted or produced, farmers are free to
plant whatever crop they want or to not plant at all.
Durum wheat was allowed a 40-percent coupled payment in
traditional areas, while support for durum in nontraditional
areas was abolished. In addition, storage payments for
grains were cut by 50 percent. Nevertheless, most EU grain
prices will likely remain above world prices most of the
time, requiring export subsidies—within World Trade
Organization (WTO) limits—to remain competitive
on the world market.
Rice. Rice policy was radically altered by the 2003 reform. The rice intervention price was reduced by 50 percent and annual intervention purchases were limited to 75,000 metric tons. Direct payments were introduced to compensate for 88 percent of the price reduction. Part of the payment
was included in the SFP and part converted to crop-specific
aid to assist farmers in transition to alternative crops.
Intervention stocks had been growing rapidly and the Everything
But Arms (EBA) trade agreement with 49 least-developed
countries allows imports of unmilled rice, with duties
decreasing to zero in 2009 (see Regulations Limit Use
of African Growth and Opportunity Act and Everything But
Arms, May 2005).
Dairy. The dairy regime is dominated by a quota system
that is established at national levels. Dairy production
above the quota is subject to prohibitive fines called
"super levies." Products covered by the CAP
dairy regime include fresh, concentrated, and powdered
milk; cream; butter; cheese; and curd. Dairy production
is protected through tariffs on dairy product imports
and supported by export subsidies and surplus intervention
purchases of dairy products. The 2003 reforms cut butter
prices by 25 percent and milk powder prices by 15 percent
over 2005-07. Intervention purchases of butter are limited
to 30,000 metric tons annually. Compensation for dairy
price cuts was incorporated into the SFP beginning in
2006-07.
Beef and veal. The beef and veal regime relies on price
support, export subsidies, and high tariffs to keep EU
market prices above world prices. Most direct payments
to beef producers are based on historical numbers of male
bovines, suckler cows (cows with calves), a special slaughter
payment for heifers, and "extensification" of
livestock production, whereby producers must observe maximum
stocking rates (livestock units per hectare) to qualify
for payments. As part of Agenda 2000, support prices for
beef were reduced by 20 percent from 2000 to 2003, but
were partially offset by higher direct payments. The 2003
reforms provide member states with alternatives for supporting
beef and veal: a 100-percent decoupled payment based on
2000-02 historical payments, a 100-percent coupled payment
for the number of suckler cows (with the maximum percentage
of heifers who may receive the suckler cow premium set
at 40 percent), a 100-percent coupled payment for slaughter
of heifers, and/or a 75-percent coupled payment for special
male bovines. These reforms have resulted in the EU becoming
a net beef importer when it was previously the world's
largest exporter.
Oilseeds. A relatively low level of self-sufficiency
characterizes the EU oilseed sector, largely due to adverse
climate and soil conditions in Europe. There is a zero
tariff on soybeans and soy meal and a low or nominal tariff
on vegetable oils other than olive oil because of a 1956
agreement within the General Agreement of Tariffs and
Trade, precursor of the WTO. Compensatory payments are
made to growers of rapeseed, sunflower seed, and soybeans
for prices that had been supported through payments to
oilseed crushers. The area of subsidized oilseed production
is limited by the terms of the 1994 U.S.-EU "Blair
House" Agreement, and oilseed producers (unless they
are small producers) are required to set aside land at
the same rate as for all arable crops. Agenda 2000 set
compensatory payments for oilseeds at the same level as
those for grains. While the 2003 reforms do not directly
affect oilseeds, producers have more freedom to make planting
decisions, which could affect oilseed production through
a reallocation of area and resources.
Sugar. Sugar production in the EU has been supported
through a mixture of price supports and supply controls.
CAP support of sugar is restricted to production within
a quota, which raises sugar prices for consumers. Intervention
buying of processed products (raw or white sugar) supports
the price of the raw commodity (mostly sugar beets). Producers
also pay to dispose of surpluses. The principle of producers
paying for surplus disposal, called the "co-responsibility
principle," has been most rigorously applied to sugar
producers, who bear the full cost of disposal. Imports
to the EU are effectively blocked by high tariffs. However,
there is unusual liberalized access at zero duty within
a quota for raw sugar from former African, Caribbean,
and Pacific (ACP) colonies, and raw sugar duty-free imports
will be phased in for least-developed countries in 2009
under the EBA trade agreement.
In February 2006, the EU adopted a reform of the EU sugar
sector, which went into effect in July 2006. The reform
provides a 36-percent cut in the guaranteed minimum sugar
price and compensates farmers for loss of income. More
notably, it creates a restructuring fund with financial
incentives to encourage uncompetitive sugar producers
to leave the sector or diversify to other commodities.
An expected decrease in its sugar exports should allow
the EU to meet its WTO commitments. For more information,
see The EU Sugar Policy Regime and Implications of Reform (July 2008).
Fruits and vegetables. The fruit and vegetable regime
includes all fruits and vegetables grown in the EU, with
the exception of potatoes, peas and beans for fodder,
wine grapes, olives, sweet corn, and bananas, for which
separate arrangements operate. Market prices are supported
by a system of compensation for limited withdrawals of
produce from the market, as needed to maintain prices
at desired levels. Due to product perishability, the price
support system is not designed to achieve a guaranteed
price over periods of excess and shortage as it is with
some other commodities subject to intervention. Rather,
it acts as a safety net for producers in times of oversupply.
Seasonal tariffs and tariff-rate quotas in over 100 preferential
trade agreements are the principal means of import protection.
Processors of some products also receive processing subsidies
to help defray the high costs of buying EU raw materials.
Mediterranean products and hops. In April 2004, cotton,
olive oil, tobacco, and hops were reformed along the lines
of the 2003 reforms. Decoupled payments of varying amounts
were incorporated into the SFP. A brief summary follows:
- Cotton. A decoupled payment of at least 65 percent
of the 2000-02 historical payment began in 2006. Coupled
payments of up to 35 percent are allowed, with a maximum
base of 455,360 hectares split between Greece, Portugal,
and Spain.
- Tobacco. A decoupled payment of at least 40 percent
of the 2000-02 historical payment will be made during
2006-09. The share increases to 100 percent from 2010
onward. Fifty percent of the payment will go into the
SFP, with the remainder transferred to a restructuring
fund. During 2006-09, 60 percent of the payment can
be coupled, with any remainder going to improve quality.
- Olive oil. A decoupled payment of at least 60 percent
began in 2006. Countries could choose 2 years from 2000-03
for the historic period. Payment is only for areas planted
before May 1, 1998. Member states may use up to 10 percent
of their national olive oil envelopes (total national
payment level) to improve oil quality.
- Hops. A decoupled payment of at least 75 percent
of the 2000-02 historical payment began in 2005. Up
to 25 percent of the payment may be coupled and paid
directly to farmers or through producer groups.
For More Information, See…
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