The European Commission has proposed a set of reforms of the Common Agricultural Policy (CAP) of the EU that needs to be implemented by January 1, 2014. The European Parliament will debate the Commission’s proposal, craft final legislation and send it to the European Council, the government leaders of the 27 member countries, for approval. As the world’s largest agricultural importer at a 23 percent share and similar to NAFTA in agricultural exports at a 22 percent share, the EU debate will be closely watched to judge the international market impacts of any changes.

 

The CAP, begun in 1962, had three principles: common financing, common prices and community preference. The goals of CAP reform as identified by the Commission are to: 1) better address the challenges of food security, canvi climàtic, sustainable management of natural resources and keeping the rural economy alive; 2) help the farming sector become more competitive and deal with unstable farm-gate prices; and, 3) make policy fairer, greener, more effective and more understandable.

The Commission released in late June “A budget for Europe 2020including the Multiannual Financial Framework for 2014-2020 and the budgetary outline for the CAP. Outlays for the CAP have historically accounted for about 40 percent of the EU budget and some analysts expected a reduction in outlays. Proposed CAP outlays for the seven years are 436 billion Euros, $602 billion at current exchange rates, up about 15 billion Euros from the current seven years, but down about 15 percent after adjusting for price level changes. Payments to farmers and market interventions under Pillar I will be funded at 317.2 billion Euros and rural development under Pillar II will be at 101.2 billion Euros. Funding is provided by the EU budget, but managed by the 27 member governments.

Direct payments will continue to get most of the attention with a new Basic Payment Scheme to begin reducing the differences between payments received by individual farmers, regions in a country and member countries. Those receiving less than 90% of the EU average payment per hectare will receive more so the gap between expected payments and 90% of the EU-27 average is reduced by one third by 2020. For example, payments at 75% of the EU average will be gradually increased to 80%. Member countries will be required to move to uniform payments within countries or regions by 2019. The Commission is committed to finding ways to move toward complete convergence of payments across the EU after 2020. Cross compliance would continue to be required for environmental and animal welfare programs. Water and pesticide use would be added to cross compliance.

Payments to any individual farm for the Basic Payment Scheme would be limited to 300,000 Euros per year ($414,000), and payments would be reduced by 70% for the part from 250,000-300,000 Euros, 40% for the part from 200,000-250,000 Euros, and 20% for the part from 150,000-200,000 Euros. Farmers would first deduct salaries in the previous year, including taxes & social security payments, before the reductions are applied. Funds saved (estimated at 2.5 billion Euros, $3.5 billion) would stay with each member country and be transferred to rural development programs for use to spur innovation & investment by farmers, and the European Innovation Partnership operational groups.

In addition to the basic payments, farmers would receive payments for agricultural practices of benefit to the climate and environment. Member countries would be required to use 30% of the funds received from the EU to pay for such practices. These include maintaining permanent pasture, crop diversification (producing at least three crops with the largest no more than 70 percent of the area and the smallest at least 5 percent) and maintaining an “ecological focus areaof at least 7 percent of the farmland, excluding permanent pasture.

Milk production quotas are set to expire when the current CAP program ends at the end of 2013. If export prices and feed costs are profitable, more milk from the EU could enter the world market beginning in 2014. Some exporting countries already have long-term plans to expand output. Quotas on planting grapes for wine production are also expiring. Under the Commission proposal, the sugar quota system would end on September 15, 2015. Under current WTO rules, exports are limited for countries with quotas. Developing countries have unlimited access to the EU sugar market, and the Commission believes the only way to balance the market is to export. Sugar would become eligible for private storage assistance.

Any policy undertaking of this size will have its critics. Payments to farmers remain large, even with the capping of per farm payments. A quarter of the largest farmers receive about 75 percent of the payments to farmers under the current programs because payments are generally tied to the amount of production resources. The programs are to be more environmentally friendly, but farm payments would still be tied to production capability. EU exports will continue to compete in developing country markets. Farmers see the changes as reducing incentives to produce food by lowering payments and increasing regulations.

The proposed reforms do not move away from the market opening measures developed under CAP over the last 20 ans. One unintended consequence of the reforms may be the intensification of agricultural production to offset the loss of direct payments and the increasing costs of government regulations. The requirements to set aside additional land and diversify crops may lead to more production of higher valued crops to maintain existing revenue levels.

As noted earlier, these recommendations will now move to the European Parliament and on to the European Council. They have two years to work through their debates and compromises. At the same time, the economic policy environment will continue to change with the debt crisis, slow economic growth and the need to remain competitive in international markets for agricultural and industrial products. These conditions will all be reflected in the debate in EU Parliament and how the Council views EU agriculture’s role in the world marketplace.

Ross Korves is the Economic Policy Analyst for Truth About Trade and Technology.