Tag Archives: subsidies

EU’s uncommon Common Agricultural Policy

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 known as the common agricultural policy – CAP. Throughout most of its four decades of existence, the CAP has had a very poor public relations image. It is extremely unpopular among consumers, and on a number of occasions it has all but bankrupted the EU. The EU’s seven year budget (2021-2027), also known as the ‘multi-annual financial framework (MFF) is currently being discussed and agricultural subsidies are once again a controversial issue although have been reduced from previous years – 70% of the EU budget in 1980 to 37% in 2018 – see graph right from The Economist.

The aim of discussions is to reduce the amount to between 28% and 31% of the MFF. EU support levels are very high when compared to other countries. The graph below shows the support that other countries receive – producer support estimate (PSE), as a share of total farm income. EU is 20.% (2018) above the OECD average and well ahead of China, USA, Russia, Canada, Brazil, and Australia. Norway is at 62.36% whilst New Zealand is 0.48%.

Source: https://www.cgdev.org/publication/new-estimates-eu-agricultural-support-un-common-agricultural-policy

Who gets what from EU farm subsidies?

Source: https://www.cgdev.org/publication/new-estimates-eu-agricultural-support-un-common-agricultural-policy

There is wide variation in the support provided to agriculture within the “Common” agriculture policy. Latvia does the best of any country in the EU with a lot of other more recent eastern European entrants into the EU – of the top 10 Greece and Finland are the only non East European countries. The Netherlands gets a mere 7% of their income from EU support and traditional supporters of agriculture spend like Ireland, Luxembourg, Italy, and Poland are all below the EU average

  • Despite being a vocal critic of the CAP (and receiving a separate rebate) UK support is broadly the same as the EU average
  • France’s support is only just above average, while Germany’s is in the bottom quarter
  • In terms of the “market price support” element—which inflates EU food prices—Belgium, Hungary, Malta, Poland, and UK producers benefit most

The variation seen here reflects a combination of factors, few of which relate to a policy objective. Most payments are distributed on the basis of a farm’s size in hectares—though per hectare rates vary and were often based on the historical value of production. Other payments relate to sustainability of farming methods, numbers of young farmers, or how much farms produce. With agriculture seen as a significant contributor to global emissions should subsidies be tied to those farmers reducing their impact on climate change?

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:

  1. It encourages an increase in European production. Consequently, output is raised to 0Qs1.
  2. 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.
  3. 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.
  4. There is a contraction in domestic consumption to 0Qd1
    Consumers 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.

Sources:

  • https://www.cgdev.org/publication/new-estimates-eu-agricultural-support-un-common-agricultural-policy
  • The Economist: 23-11-19 – Milking taxpayers

Poland – EU subsidies delay farm reforms

The recent ‘Special Report’ in The Economist outlined the benefits of Poland’s membership of the EU to the agricultural sector. Agriculture is the biggest beneficiary and ironically farmers were some of the most committed opponents of EU entry. They suggested that only 600,000 of the country’s 2m farms would survive entry. But their mood changed when Polish agriculture received 40 billion in 2007-13 and another 42.4 billion from 2014 – 2020. From the EU funds farmers’ incomes have tripled since entry, with half of the money coming from direct cash payments, regardless of need. But the agricultural subsidies are a mixed blessing as it encourages inefficiency in the sector as half the farms that receive assistance are just subsistence plots, and 92% of them are less than 20 hectares. But Polish agriculture accounts for only 3.4% of GDP but 12.4% of employment. However the rural population makes up about 39% of the total so therefore farmers are an important political constituency. The graph below shows the impact of the price support system.

CAP Int Price

New Zealand agricultural sector – lowest subsidies amongst OECD

Having just taught the Developing Economies topic at the UNITEC A2 revision course I couldn’t help noticing this graph that was in The Economist last week. This was extremely useful when you look at how developing nations are locked out of the trading system by the subsidies given to those developed nations agricultural sectors. For years the World Bank and the IMF have forced developing nations to stop subsidising their agricultural sector.

Government support for agriculture in the mostly rich countries of the OECD amounted to $252 billion in 2011, or 19% of total farm receipts. Although there is a move away from support linked directly to production, it is still about half of the total. The general trend is downwards: compared with the second half of the 1990s subsidies fell in all countries. But levels of support vary widely. In Norway, Switzerland and Japan, more than half of gross farm receipts in 2009-11 came from support policies; for producers in Australia, Chile and New Zealand, it was less than 5%. Commodity prices will stay high for some time, suggests the OECD, so markets will provide the farm income that many governments have tried to prop up.

UK to remove agricultural subsidies

There is mention in political circles that the UK is keen to abolish subsidies to its agricultural sector. They have already insinuated that they intend to freeze agricultural spending at 2013 levels until 2020 with the long-term goal of eventually abolishing all assistance to farmers. The EU currently spends €55bn for the farm budget each year and this accounts for 40% of its total budget – more than any other sector.

This action would certainly put New Zealand on a level playing field with the UK and make its produce much competitive than previously. With New Zealand going through the same process of removing subsidies nearly two decades, the UK will agricultural sector will find it difficult to adjust. However it has allowed New Zealand farmers to be far more focused on the essentials of the market rather than being driven by the subsidies from government. Farms became bigger and more efficient as economies of scale became hugely important in maintaining a competitive edge. What the subsidies did in New Zealand was to encourage people to develop land that was not really suitable for any agricultural use. However as they got a subsidy from the government efficiency or quality didn’t feature as a major factor in maintaining competitiveness. Here is what happens when the subsidies are taken away – supply curve to the left.