Common Agricultural Policy

Common Agricultural Policy (CAP), policy supporting and regulating agriculture in the member countries of the European Union (EU).

The Treaty of Rome, which established the European Economic Community (now the EU) in 1957, made explicit provision for a common agricultural policy. The objectives of the policy were to increase agricultural productivity, thus to ensure a fair standard of living for those working in agriculture, stabilize markets, ensure security of food supplies, and make food available to consumers at reasonable prices. In 1958 a meeting of European Economic Community agriculture ministers agreed on three guiding principles for the operation of the CAP. First, there was to be a single agricultural market within which commodities could move freely. Secondly, there would be preference for commodities produced in the European Economic Community, at the expense of those produced outside the European Economic Community. Thirdly, there would be financial solidarity: all member states had to share in the costs arising from the CAP. The first farm commodities were subjected to a common set of market rules in 1962. Common prices were established for most commodities (with some notable exceptions, such as potatoes) by 1968.

Despite the intention of providing a fair standard of living to farmers through improved productivity, in reality agricultural support in the EU has been achieved by raising prices, and more recently by direct subsidy payments to farmers. Price support results in higher prices to consumers whereas direct subsidy costs are largely borne by the taxpayers of the EU. Decisions on the level of price support are taken annually by the Council of Agriculture Ministers on the basis of the proposals of the European Commission (the executive branch of the EU). For many commodities, support includes a minimum buying-in price that prevents prices falling below a certain level. To ensure EU preference, charges are levied on imported commodities so that they enjoy no price advantage over those produced within the EU. The export of commodities is made possible by the payment of export subsidies to enable EU exporters to sell on world markets at the going price. Market support arrangements are financed by the guarantee section of the European Agricultural Guidance and Guarantee Fund, and historically this has been the main budgetary cost of the CAP. The guidance section of the fund is becoming more important with increasing emphasis on structural measures to promote rural development in the 21st century.

As agricultural production under the CAP increased, reflecting technical progress, greater farming efficiency, and the high level of price support, consumption within the EU remained broadly static. By the early 1980s this had resulted in large surpluses of certain products—the much-publicized beef and butter mountains, and milk and olive oil lakes—subsidized storage or disposal of which (often using export subsidies) placed increasing strain on the EU budget, some two thirds of which was accounted for by agricultural spending. Reforms to the CAP to curb overproduction were introduced in the 1980s and 1990s; at first the idea was to reduce the amount of production eligible for support, for example by placing maximum limits, or “quotas”, on how much milk could be produced. A voluntary set-aside policy was introduced in 1988. In 1992 reforms were introduced that reduced support prices while partially compensating farmers with direct subsidy payments. In order to receive compensation, farmers had to set-aside land or restrict the number of livestock on their farms. The objective was to bring food production more in line with demand and to meet international trade obligations. In 2000, the Agenda 2000 reforms led to further cuts in price support and an increase in direct subsidy payments. However, none of these reforms fully dealt with the fundamental cause of the excess production—that the market was not allowed to clear at a price where supply and demand were equal.

The CAP has long been a contentious issue in international trade relations as it encourages supply in the EU while reducing EU demand for imports. The net effect is to reduce the size of the EU market to agricultural exporters and the price that they receive for their exports. In 1995, as a result of the Uruguay Round of the GATT (General Agreement on Tariffs and Trade) negotiations, the EU committed itself, over a six-year period, to substantially reduce its agricultural import charges and domestic price support, to cut the value of its export subsidies, and to reduce the volume of its subsidized agricultural exports. The European Commission re-addressed the subject of domestic farm support in the Mid-Term Review of Agenda 2000 proposals, which were agreed by agriculture ministers in 2003. The thinking behind the Mid-Term Review is that farmers should be allowed to respond to unsupported market prices when deciding what to produce and that more money should be made available for rural development and the environment. All direct payments for relevant crops and livestock are to be converted into a single farm payment that in theory is unlinked, or “de-coupled”, from production. This will help in future trade negotiations, as with de-coupling, supply of agricultural commodities from the EU should fall. However, the Mid-Term Review has had little effect on some commodities, such as milk and sugar beet, where EU production is still supported and imports restricted. Expansion of the EU to include ten new countries in 2004 will also provide a test for the CAP, although efforts have been made to reduce costs by phasing in support payments over a ten-year period, starting at 25 per cent of the level received by farmers in existing member states.