Thursday, August 21, 2008

Common Agriculture Policy: Schemes & Flaws (Unit 2/5B/ 6)

Common Agriculture Policy (CAP) is a form of European Union agricultural subsidies programmes. It represents 47% of EU budget

The initial objectives of CAP were set out in Article 39 of the Treaty of Rome:
(a) To increase productivity, by promoting technical progress & modern farming and ensuring the optimum use of the factors of production especially labour

(b) To ensure a fair standard of living for the agricultural community;

(c) To stabilise markets

(d) To secure availability of supplies

(e) To provide consumers with food at reasonable prices

The most important goal is however to increase farmers’ income (2nd point), based on the following reasons:

(1) The farming sector has always experienced lower incomes, causing relative poverty in national economies. This is very true in nations that have high proportion of its people working on farm like France, Germany, Spain & Italy. One reason to explain this is that agriculture goods have low income elasticity of demand. That is having YED<1, an increase in demand will be less than proportionate of the increase in income

(2) Demand for food is inelastic. With variations in supply conditions (up & down), it means prices for agriculture good will suffer from wild fluctuations. Therefore interventions are needed to stabilise farm incomes

(3) Also since its demand is inelastic, government needs to intervene to prevent problems like current global food shortage which may happen in EU. Also it is aim to ensure that food prices are not that high

(4) Farming is more susceptible to problems caused by bad weather & disease compared to other sectors. Drought & BSE or commonly known as Mad-Cow Disease could easily wipe off farmers’ income

Economic effects of different schemes:

(1) Minimum guaranteed prices. The government will set a higher than equilibrium price. This will result in surplus as consumers tend to buy lesser while farmers have the incentive to produce more. If without further intervention, there will be strong pressure for them to sell below minimum price & therefore prices will fall until market is cleared. To ensure effectiveness of minimum price, government must buy up the surplus & store it or sell it to other countries

(2) Buffer stocks. Often use together with minimum guaranteed price. It seeks to stabilise the market price of agriculture products by buying up supplies when harvests are plentiful & selling stocks of the product into market when supplies are low. By doing so price will increase or decrease to the targeted level (It works the same way, when Bank Negara intervened in the foreign exchange market to buy or sell RM so as to maintain it at RM3.80 = $1 USD)

(3) Import taxes. Imposing tariffs on agricultural goods produced outside EU, causes these cheap goods to become expensive once entering EU. Farmers benefit because the market price inside EU will remain high due to the absence of price competition. There are also many other type of barriers other than tariffs for e.g. EU has been accused of using safety & welfare standards to keep cheap imports out of EU area (Could the recent ban threat on Malaysian seafood imports has connection with this? To protect their fishery industry)

(4) Export subsidies. From (1) & (2), any surplus will be purchased by government to meet possibility of shortfall in future. Sometimes, the amount purchased exceeds storage capacity. To deal with this, the government can either increase storage capacity with additional cost, disposing it or dump it in Third World countries by giving export subsidies to EU farmers. With this, agricultural produce can be sold at much cheaper price & the gap is covered by subsidy. Farmers can still enjoy the high price

Good examples are dumping of sugar that damages Mozambique economy & dumping of dairy produce that hurt the Indian economy though both have comparative advantage in it

(5) Quotas. Quotas on milk production were introduced in 1984. Each member country of EU was given a maximum amount of milk that can be produced. This was then divided between farmers. Quotas were transferable. In other words, a dairy farmer can sell all or part of it to another farmer. The intention of quota is to restrict supply thus raising the equilibrium price.

(6) Set aside schemes. Was introduced in 1992 under Macsharry Reform. Introduced onto cereal farmers. They were paid for setting aside a certain proportion of their land. Those lands have to be rotated every year to avoid setting aside the least productive land. In other words preventing farmers from using only the best land to produce, which may ends up with greater surplus. By reducing the lands in used supply of cereals will fall, thus an increase in its price. Also farmers received payment from EU for each acre set-aside

What supporters of CAP have to say?

(1) EU farmers had created Europe which is broadly self-sufficient in food. In times when a country was at war, food self sufficiency was a strategic objective

(2) EU farmers provide high quality of food with minimum guaranteed levels on animal welfare. By implication some food that is imported to the EU is below acceptable standards & comes from unacceptable farming practices

(3) Farmers help to preserve the rural environment & preserving it for future generations

(4) Supporters argued that it is needed to preserve rural economy. Without CAP, some rural areas would become completely depopulated because there were no jobs or income in the area. When more people left to find jobs in towns & cities, there would be more pressure on the urban environment which would have to expand to accommodate these migrants

(5) Supporters argued that EU is still somehow major importer of food from countries round the world including poorer developing countries. The EU has helped millions of farmers establish a market fro their products

(6) Radical reforms have taken place & will continue for the next 10 years. Any further quickening pace of reform will have serious consequences for the farming sector & rural economy

What critics have to say? (Point 1-6 is to equivalently counter point 1-6 above)

(1) Critics point out that in no other commodity does the EU attempt to be self sufficient. There are no objectives to be self sufficient in production of television sets, microchips, clothes or foreign holidays. In an era of globalisation, self sufficiency in food could be argued to be an outdated goal

(2) Critics argue that the quality of food produced in the EU is on average no better than that produced elsewhere in the world. To be sold in EU, imported goods have to follow certain standards anyway. EU can also impose wide variety of conditions upon meat imported to EU & also has the power to prohibit imports if there are good reasons to do so (like current EU ban on Malaysian seafood)

(3) Critics said that agricultural sector is the major polluter of environment. Animals are the major source of methane gas which contributes greatly to global warming. Farmers are said to use fertilisers & pesticides that pollute the environment. In southern European, farmers overuse the scarce water resource for irrigation which could later turn to environmental problem

(4) Urban areas have been expanding to take in people from rural area for centuries. If towns & cities created large costs for their inhabitants, people would not have migrated to them in first place

(5) EU is accused of damaging farming markets around the world. 2 reasons to explain this. First, through its system of protection for farmers, EU has denied access to farmers outside EU to export themselves out of poverty. Second, dumping of large surplus onto world markets at low prices has hurt small time farmers in a way that they are not being able to compete in terms of pricing

(6) Pace of reform is too slow & timid. There are many areas which include dairy sector, wine, fruit & vegetables where there are no current plans to for reform. Exports subsidies & tariffs on imported food remain too high. Consumers are paying more than they should & this result in allocative inefficiency. Also taxpayers have to pay for the heavy costs of running the CAP

(7) Quotas on milk production is ineffective as it had been set higher than the ‘self-sufficient’ level. As a result, this will still cause overproduction & it defeats the original purpose to cut surplus

(8) CAP has caused farmers to be inefficient in their production owing to the reason that there is a ready market for their produce & that is the government. As such there is little incentive to improve their production method which often resulted in higher costs. Also there is a tendency to overproduce due to the high guaranteed price

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