sou · GLB3151 · 1998-01-01 00:00:00 — 2.1Objectives for the Common Agricultural Policy The objectives for the Common Agricultural Policy (CAP) were formulated in the in 1957. Article 39 of the treaty states the aims of the CAP to be: ·to increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour; ·thus to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture; ·to stabilise markets; ·to assure the availability of supplies; ·to ensure that supplies reach consumers at reasonable prices. of also states that in determining policy and the special measures necessary to implement it, attention should be paid to: ·the particular nature of agricultural activity, which results from the social structure of agriculture and from structural and natural disparities between the various agricultural regions; ·the need to effect the appropriate adjustments by degrees; ·the fact that in the Member States agriculture constitutes a sector closely linked with the economy as a whole. When the objectives were drawn up the six Member States (, , and the countries) were net importers of most agricultural products. The objectives drawn up, which have been in force since that time, concentrated on production. Improved productivity and increased agricultural production were seen as reasonable and meaningful needs in the light of the situation of Europe after the war. Stable supplies on the domestic market were important. The objective for income assumed an important role and agriculture was the main occupation of almost a quarter of the population. 18 Current Common Agricultural Policy The agricultural policy objectives of the have not been changed, despite the major economic changes which have taken place. However, the goals may be said to have changed indirectly in that new instruments have been created, especially for structural, environmental and regional measures. The economic role of agriculture in society has decreased. In 1993 agriculture accounted for approx. of GDP and approx. of employment in the current EU15 (1995). 2.2Former Swedish agricultural policy objectives The objectives for Common Agricultural Policy have remained unchanged since the 1950s. A comparison with Swedish agricultural policy shows that the objectives in have changed more and that their relative significance has altered. In the immediate aftermath of the second world war also had a need to build up its food production. The goal of production was therefore pivotal. In the 1960s there was a strong demand for labour in the industry and the goal for food production in was of lower priority. At the beginning of the 1970s there were indications of world food shortages and production reassumed its central role. This was given less importance again in the 1980s as the consumer objective grew in importance and new environmental objectives were introduced. The agricultural policy decision in 1990 placed further emphasis on consumer, environmental and regional issues. Objectives relating to consumers can be briefly summed up as follows: Production should be driven by consumer demand. Consumers should be afforded ample opportunity to choose between different types of food. As regards the environment, the following is stated: The environmental objective is to conserve a rich and varied farming landscape and to minimize the environmental harm caused by agriculture. 1989/90:146) The majority of the EUs objectives for the CAP are centred on production, such as productivity objective, income objective and price stability objective. The emphasis is thus on the supply side. In the structure of objectives remained roughly the same until the middle of the 1980s when consumer objectives, i.e. the demand side, grew in significance. The decision of the Swedish parliament in 1990 placed consumer objectives in a central position alongside environmental issues. Current Common Agricultural Policy 19 In 1995 became a member of Union, and for this reason the implementation of the 1990 agricultural policy decision was never completed. 2.3.1 Development of the CAP The formal objectives of the Common Agricultural Policy have remained unchanged from the beginning. However, the CAPs instruments have changed over the years, something which can be seen as an evolutionary rather than a revolutionary development. The various rules have been gradually changed and new rules have been introduced when required. It has, however, been rare for any instruments to disappear. For this reason, the instruments have become increasingly complex and difficult to grasp. An important explanation for this is the nature of the decision making process, in which the often disparate interests of different members can lead to compromises and package solutions. From the outset the CAP was aimed at securing food supply through stimulation of production. EU farmers received prices for their production higher than world market prices thanks to market price support in the form of administrative prices such as inter alia intervention prices and border protection. This market price support was developed to include more products and more or less special solutions were often formulated for each sector. Several intervention measures were introduced and export refunds were applied to exports outside Union. The high levels of market price support together with technical and economic developments led to an increase in agricultural production within Union. However, consumer demand within Union did not increase at the same rate. In the 1970s Union changed from being a net importer to a net exporter of a number of agricultural products, especially crop and animal products for which Union provides high levels of support. On the other hand Union is still a major net importer of, for example, fruit and vegetables, for which EU support levels are relatively low. Union is also a net importer of oilseeds and protein feed. Furthermore, Union imports large quantities of agricultural products from developing countries, such 20 Current Common Agricultural Policy as coffee, tea and cocoa, which are not subject to EU market regulations. As a result of major production surpluses of certain goods, production quotas became a new element of the CAP in the 1980s. These were first introduced on milk production. From the beginning the Common Agricultural Policy lacked the means to deal with structural, environmental and regional issues. At the start of the 1970s the so-called were introduced. These come only partly under the CAP, and it was not until 1989 that allocations to these funds increased significantly. Structural policy, like the CAP in general, has become more complex over the years. Characteristic of structural and regional policy is that it has changed each time new Member States have joined Union. As recently as 1995 a new support to sparsely populated regions was introduced (objective 6), specially adapted for and . Environmental measures were first introduced into the CAP to a significant degree in 1992. In 1992 decisions were taken on the most far reaching change of the CAP to date. The background to the decision was primarily criticism of increasing surpluses and subsequent increases in budget costs. The measures to limit production introduced during the 1980s had proved to be insufficient. The Policys inability to handle cases of income distribution and effects on the environment were also cited as motivating factors. At the time of the reform there was also international pressure for changes to the CAP from the on-going round of the negotiations. The basic changes to the CAP agreed on in 1992 were to: ·lower the administrative prices, ·compensate farmers for lower prices via direct payments, ·introduce production limitations, ·introduce environmental payments and other so-called accompanying measures. The sectors affected by the 1992 reform were cereals, oilseeds, protein crops and beef. The reform meant that levels of border protection, export refunds, intervention prices, etc. were lowered and that these instruments thereby became of reduced importance in the sectors affected. In order to compensate for these lower prices, direct support per livestock unit or per hectare, i.e. headage and area payments, was introduced. However, direct support led to over compensation since market prices have not fallen to the same extent as the administrative Current Common Agricultural Policy 21 The reform also included so-called accompanying measures, covering measures for agri-environment, afforestation and early retirement support. Since the 1992 reform of the CAP, other reforms have been carried out affecting various sectors such as rice and fruit and vegetables. There are on-going discussions on changes to the regulations applying to wine, tobacco and olive oil. Discussions have also been initiated on the subject of future changes in the regulations pertaining to beef, milk and cereals. The instruments currently used in the CAP are chiefly ·internal market price support (mainly export refunds, production limitations and intervention measures), ·direct support (area and headage payments) ·border protection (mainly tariffs, in certain cases reduced by trade agreements), ·regional and structural support. The internal market price support, direct payments and border protection are all part of the so-called market regulations. These forms of support place a burden on the EU budget and are paid out by the EAGGFs (European Agricultural Guidance and ) Guarantee Section. Environmental payments, partly paid from national funds, is also paid for by the Guarantee Section. On the other hand structural and regional measures in the agricultural section are mainly paid for from funds in the EAGGFs Guidance Section together with national funds. In addition to these there are which are outside the agricultural fund. 22 Current Common Agricultural Policy Figure 1 EU agriculture budget divided into various measures of support 1996 * These measures are also part financed by respective Member States Source: European Commission, 1997 (a,b). Figure 1 shows EAGGF expenditure for 1996 divided into various measures of support. This is a way of gaining an impression of the significance of the various components of the CAP. However, in order to gain an understanding of the significance which various adjustments have on the market and prices, the producers and consumers, attention should not only be paid to budget. Calculations of this kind are presented in section 3.1. In 1996 EU spending on the CAP amounted to ECU 43 billion (Around billion, at a rate of exchange of 1 ECU = SEK 8.70). This was a major increase compared to 1995 when spending was at ECU 37 billion (around billion). This budget increase was,however, mainly brought about by the enlargement of Union from 12 to 15 countries in 1995, which had a clear effect on expenditure in 1996. Of the 1996 expenditure went to direct payments and to market price support. The proportion of direct payments has increased since they were introduced in 1992, and in 1996 they amounted to ECU19 billion (around billion). EU expenditure of some ECU 18 billion (billion) on market price support in 1996 was, however, lower than anticipated owing to high world prices for cereals. The EU expenditure on the accompanying measures doubled between 1995 and 1996 from ECU 0.8 billion to ECU 1.8 billion (from billion to billion) of which environmental payments in 1996 was at ECU 1.4 million. Current Common Agricultural Policy 23 expenditure on regional and structural support has also increased, and amounted to ECU 3,8 billion (appr. billion) in 1996. The accompanying measures, along with structural and regional support, are partly financed by the Member States. 2.3.2 CAP market regulations Current CAP market regulations Three basic principles were established when the first market regulations were introduced in the 1960s. These are still in force: ·a common market with free movement for agricultural products with common administrative prices, ·Union preference, i.e. goods produced within the Union are to be given priority over imported goods, The Common Market inside Union has been created by the removal of tariffs, export subsidies and other kinds of competition distorting subventions between Member States. Common prices mean that administrative prices determined in ECU apply throughout the entire Union. Such a price is the intervention price. Export refunds, tariffs and support are also common throughout the Union. On the other hand, market prices can differ inside the Union, inter alia because of the size of regional production in relation to demand. The Union preference means that goods inside Union are given preference on the market above goods from a third country. This functions in that agricultural goods from third countries are subject to border protection, chiefly tariffs. Other aspects of market regulation also lead to the maintenance of a higher price level inside Union than the prices which apply outside. Joint financing means that measures of the market regulations are financed with money from the EU budget. EU budget revenues consist of tariffs, sugar duties and fees from Member States. In 1995 fees represented approx. of EU budget revenue. Market regulations comprise a wide variety of instruments including export refunds and tariffs on trade with third countries together with intervention measures and production quotas inside the Union. These instruments support a generally higher level of prices inside the 24 Current Common Agricultural Policy European Union compared to the world market, as can be seen from Figure 2. Figure 2 Diagram showing how EU market regulation affects the prices of agricultural goods Imports to EU: Export from EU: * WM price = World market price Source: Own adaptation. Export refunds, intended to compensate for the difference between the EU price and the world market price for exports to third countries, are paid out for EU exports to such countries. Export refunds, which apply to the majority of agricultural goods produced inside Union, help to boost prices inside the Union. Export levies may be applied if world market prices are higher than EU prices. This keeps the level of prices in the internal market down, to the benefit of consumers inside Union. In recent years this has been applied to cereals. Imported goods from third countries attract tariffs, or some other kind of border protection. This also has the effect of prices inside Union at a higher level than on the world market. As a consequence of the agreement from the Round - the UR Agreement - the former variable levies have been replaced by tariffs. Despite the UR Agreement, however, there is still variable border protection for certain agricultural products, inter alia fruit and vegetables. Current Common Agricultural Policy 25 Various kinds of production limitations in form of different quotas have become more common within the CAP. By limiting production of a certain product the supply inside the Union is limited and prices can thereby be kept up. To what extent production limitations control the supply, and thereby the price, varies between the different products. Production limitations are for instance applied to the milk and sugar sectors. For milk, quotas effectively mean that production in excess of the permitted level is impossible, since production in excess of quota is subject to a charge which is higher than the corresponding producer price. For sugar, production which exceeds A- and B-quotas , i.e. C- sugar, is not covered by EU market regulation and must therefore be exported from Union without any export refunds. Inside Union a number of intervention measures are also applied in order to support a high price level. When there is a risk of the price falling below a certain level Union can intervene with buying in for intervention. Intervention measures also include consumption stimulation measures in the form of price discounts and measures to support markets. Product support is mainly applied to agricultural goods for which Union, because of trade policy commitments, does not have any border protection. Support is paid out per kg of product supplied. In general supply is stimulated by this type of support. The majority of direct payments have been introduced to compensate for reduced price support and consequently lower prices. Direct payments which are paid per hectare or livestock unit do not have the same direct effect on supply and prices as export refunds, intervention and other forms of market price support. However, direct payments can be said to have an indirect production stimulating effect. Table 1 shows the market regulating measures which now apply to the most important product sectors. Most processed food is also affected by EU market regulations through export refunds and border protection. This is due to the fact that these regulations affect the price of the agricultural products used by the food industry. 26 Current Common Agricultural Policy Table 1 EU market regulating measures for various agricultural products Flax(fibre) Sheep/Goat meat Source: SOU 1996:136. Prior to 1992 there were only a handful of environmental measures inside the CAP. With the 1992 reform of the CAP, Union introduced environmental payments in the agricultural sector to supplement the market regulations and to make them more environmentally friendly. However, there is still a lack of formal environmental objectives within the CAP. Union has established a framework for environmental payments, whereas the details are determined at national level subject to EU approval. Payments are partly financed by respective Member States. The purpose of these payments is inter alia to encourage less intensive production methods, promote environmentally friendly extensification, promote the use of agricultural land which pays attention to protection and improvement of the environment, the countryside, the landscape, natural resources and biological diversity, promote organic Current Common Agricultural Policy 27 farming and encourage long term removal of agricultural land from production for environmental reasons such as wetland conservation and protection of areas sensitive to erosion. EU environmental payments is dealt with more fully in section 3.3.3. 2.3.4 Structural and regional policy Structural policy in Union started to take shape at the beginning of the 1970s when funding was made available to the so-called . In the beginning there were only modest appropriations. With the Single European Act of 1987 the objective for economic and social unity, i.e. the will to reduce the differences between different regions, was written into the . The result was a thorough reform which came into effect in 1989 together with a significant increase in money made available from the . , and Agricultural Guidance and Guidance Section and a fourth fund for fishing, were co-ordinated and the current format, with a limited number of principal objectives, was introduced. Following the latest reform of structural and regional policy in 1993, the following five main objectives were set up for the period 1994-1999: 1.economic development of regions whose development is lagging behind 2.economic regeneration of regions with declining industrial activity 3.combating long-term unemployment and facilitating the integration into working life of young people and of persons exposed to exclusion from the labour market 4.preventive measures against unemployment (training) 5.promotion of rural area development, by (a)speeding up the adjustment of agricultural structures (b)facilitating the development and structural adjustment of rural areas. As a result of the entry of and as members of the EU, objective 6 was created to assist regions with low population density. As far as the agricultural sector is concerned, the relevant objectives are 5a, 5b and 6. Objective 5a concerns support for re-structuring of agriculture and forestry: (it also includes fishing, although this is financed from the 28 Current Common Agricultural Policy fishery fund). Measures which can be financed by this type of support include investment support, setting-up aid for young farmers, setting-up aid for fruit and vegetable producers organizations, support on improving the processing and marketing condition for agriculture and forestry products, and support to less favoured areas (LFAs). Support, which is voluntary, is financed both by the EU agricultural fund and by the concerned. Objective 5b is intended to increase diversity and vitality in rural areas. Efforts are chiefly concentrated on projects which are deemed to contribute to development in rural areas. Examples of recipients are measures for competence development in tourism, small and medium size companies or in area-dependent industries, whether or not they operate in the agricultural sector. A prerequisite to be included in objective 5b is that a region have a low GDP per capita and a high percentage of the population employed by the agricultural sector as well as low incomes from agriculture. The support is financed by a combination of the EU agricultural fund, regional fund and social fund, together with national funding from respective Member States. Objective 6 is intended for regions of extremely low population density with a maximum of 8 inhabitants per km². As mentioned above, Objective 6 was introduced when and became members of the Union and was created to be able to use some of the support in a limited geographical area which was deemed to be justified, but which for various reasons would not be applicable under conditions prevailing at the time. Inside the target area, which in consists of the inner areas of and parts of north west , the can finance projects which contribute to the development of the area, including measures covered under Objective 5a, i.e. measures aimed at agricultural companies and rural development. 3 CAP facing the future 3.1The CAP, consumers, taxpayers and producers. With the help of border protection, chiefly tariffs, and other market regulating measures, such as measures of intervention, production limitations and export refunds, the prices for agricultural goods inside Union are generally kept at a level which exceeds world market prices. The differences in price inside and outside Union are determined in principle by the level of the export refunds for the products exported by Union and by the level of tariffs on goods imported into Union. In recent years, following the 1992 reform some of the CAPs expenditure has been shifted from the consumer to the taxpayer. The reform meant lower market price support and thereby lower market prices for consumers, especially for cereals. By way of compensation the producers receive direct payments which come from the EU budget. Production limitations are being used increasingly in order to limit budget expenses. 3.1.2 Effects of the CAP on producers Economic effects on producers Producers in Union receive support for their production through a combination of prices which are higher than on the world market and direct support. Each year the works out PSE data (Producer Subsidy Equivalent) which compares the level of support with the total value of production. Where Union is concerned, environmental payments are not part of the PSE calculations. There is some degree of uncertainty in the calculations inter alia world market prices are different in different places and changing exchange rates affect results. The PSE should therefore be seen as a means of describing trends and approximate levels of support. On the other hand, 30 CAP facing the future