After 47 years the UK has now left the EU and with it the Common Agricultural Policy (CAP). At the outset of the EU, one of the main objectives was the system of intervention in agricultural markets and protection of the farming sector.
The economics behind CAP intervention price
An intervention price is the price at which the CAP would be ready to come into the market and to buy the surpluses, thus preventing the price from falling below the intervention price. This is illustrated below in Figure 1. Here the European supply of lamb drives the price down to the equilibrium 0Pfm – the free market price, where supply and demand curves intersect and quantity demanded and quantity supplied equal 0Qm. However, the intervention price (0Pint) is located above the equilibrium and it has the following effects:
- It encourages an increase in European production. Consequently, output is raised to 0Qs1.
- At intervention price, there is a production surplus equal to the horizontal distance AB which is the excess of supply above demand at the intervention price.
- In buying the surplus, the intervention agency incurs costs equal to the area ABCD. It will then incur the cost of storing the surplus or of destroying it.
- There is a contraction in domestic consumption to 0Qd1Consumers pay a higher price to the extent that the intervention price exceeds the notional free market price.
Figure 1: The effect of an intervention price on the income of EU farmers.
The increase in farmers’ incomes following intervention is shown also: as has been noted, one of the objectives of price support policy is to raise farmers’ incomes. The shaded area EBCFG indicates the increase in the incomes of the suppliers of lamb.
CAP and the UK
At considerable cost to the taxpayer the CAP has subsidised intensive farming methods that have impacted the British countryside and also increased the price of land making it harder to get into farming – since 2003 the price of land has risen from £4,500per hectare to £16,500 today. Subsidies also encourage farmers to develop land which is not suitable for farming and thus supports unproductive farms. The average English farm made a profit of just £6,200 in the tax year 2018-19 and being propped up by the subsidies has led to inertia and little or no innovation. Sheep farmers have especially struggled, in particular the 30% that are located in areas that are not conducive to farming – the Lake District, the Peak District, Exmoor and Dartmoor – but are seen by the public as picturesque walking areas. The issue being that farm income for grazing livestock in 2018-19 was approximately -£5,000 (lowland) and -£19,000 (upland) – see graph below.
New Zealand experience
New Zealand went through the process of removing the subsidies for farmers and in 1984 the Labour government ended all farm subsidies under the Lange Government and by 1990 the agricultural industry became the most deregulated sector in New Zealand. In the short-term there was considerable pain amongst the farming community and land values collapsed, inefficient farms went bust and the service sector that supports the industry. However to stay competitive in the heavily subsidised European and US markets New Zealand farmers had to increase efficiency, became more innovative and export-orientated – 95% of Fonterra’s produce (dairy) is exported. Compared to the UK, New Zealand does have a lower population density, weaker environmental standards and a different climate.
Post-CAP and the UK
In the Post-Brexit environment the UK government have pledged to keep overall subsidy levels although they will be replaced by the Environmentally Land Management Scheme (Elms) which is expected to be rolled out nationally by 2024 – the old subsidies will end in 2027. The Elms focuses on environmental benefits, such as flood mitigation and fostering wildflowers. Payments under Elms will initially be calculated on the basis of so-called “income foregone”, or what farmers could have otherwise made from farming on the same land, plus the estimated costs of the environmental work. The issue here is that a lot of this subsidy with go to the farmers who are already well off.
Agricultural support from the UK government is now focused on ‘public goods’ such as better air and water quality, thriving wildlife, soil health, or measures to reduce flooding and tackle climate change.