European Studies

European Studies SUBJECT : EUROPEAN STUDIES A TITLE : Discuss the relative merits/demerits of an agricultural policy oriented to price reform rather than one based upon structural reorganisation GRADE : First Honour AUTHOR’s COMMENTS : I think it’s pretty okay. Email if anyine has any comments @ TUTOR’S COMMENTS: Excellent essay! Indepth, critical analysis. Watch length!! “The common market shall extend to agriculture and trade in agricultural products. Agricultural products means the products of the soil, of stock-farming and of fisheries and products of first-stage processing directly related to these products…The operation and development of the common market for agricultural products must be accompanied by the establishment of a common agricultural policy among the Member States (1) From the beginning of the European Union, EU policy has given emphasis to the agricultural sector. To this end, a Common Agricultural Policy (CAP) was established in 1963. (2) Provisions for this policy were made in the Treaty of Rome. The aims of this policy were to increase agricultural productivity, to ensure a fair standard of living for the agricultural community, to stabilise markets and to ensure reasonable prices for the consumer.

(3) This is unusual in the context of the Treaty of Rome which provided for free trade and movement of resources. Agriculture was ill-adapted for this approach. Protection was given, not only by customs duties, but also by a variety of agricultural policies. This essay will discuss the merits and demerits of a the pre-1992 CAP with its emphasis on price reform, in comparison with the post-1992 CAP which was oriented to structural reform. It cannot be denied that there were merits of the pre-1992 price reform policy. There was a bountiful food supply with an increased variety and quantity of food. Farmers yields increased, particularly the large farmers. Producers were protected from the external market due to community preference and, therefore, domestic agriculture could develop. There were also spin offs in food production. Although some of the policies created good returns for farmers, the demerits of said policies far outweighed any advantages they had.

The core-periphery divide was widened, quantity became more important than quality and consumers had to pay higher prices. Agricultural practices caused damage to the environment and international trading relations were strained. Until 1993 the EU rarely supported farmers by paying them direct subsidies from the taxpayers. (4) Instead the 30 billion ECU (and often more) was spent in the buying up of surplus commodities at minimum official prices and was also used to pay subsidies to traders to sell surpluses on the lower-priced world markets. (5) During the 1960s the price system was devised.

The first problem with price policies is that of fluctuating and differing exchange rates. Green Money was the first solution to be developed to counter the problem of differing exchange rates. This, however, could be manipulated by politicians to achieve different price levels in the member states than those indicated by the common price level. The lowering of the green currency towards a depreciating average rate, raised farms price levels in the national currency. (6) This meant that while regular citizens suffered from the devaluation of the currency, farmers were protected from this trend.

Also although the higher prices were an advantage for the farmer, they were a nuisance for consumers. Monetary Compensatory Amounts (MCAs) were used in the 1970s when devaluations by France and revaluations by Germany made Green Money redundant. MCAs operated as levies on the French exports and subsidies on French imports. The reverse was applied to Germany. (7) MCAs, while allowing Community trade to continue even though common pricing was never established, had more disadvantages than advantages.

They allowed the real level of prices to vary from country to country. This led to the distortion of production as farmers in the countries which have strong currencies, were paid more than farmers in countries with a weak currency. MCAs are also expensive to operate. MCAs were replaced in 1979 by the European Currency Unit (ECU) as part of the European Monetary system (EMS) which had been introduced in 1978. (8) An agricultural ECU which was 14% more valuable than the ECU was introduced. Until 1993 and 1995, when adjustments were made to this, vast amounts of officials were needed every day to administer the agri-monetary system and the monetary amounts had to be changed weekly.

(9) The original agricultural price policy in CAP had three main components. The first of these was the target price, which was the basis for establishing all other prices. It is meant to provide a satisfactory return for the farmer. Threshold prices are the minimum entry prices for imports (higher than EU prices for domestic products) and they also safeguard against the undercutting of target prices. An intervention price is used if the market prices fall.

If surplus production occurs, the commodities are bought by intervention agencies. This maintains a minimum market price level. Variable import levies were used to bring imports up to the threshold price and export refunds were used to remove the difference between the common market price and world price. (10) Variable levies are one of the most effective protective trade policies used. They protect domestic price guarantees from being defeated by trade flows.

They can sometimes generate revenues and funds for the central authority controlling the levies. They also can introduce price stability for internal markets. They have a number of disadvantages, however. The levy shrinks imports and losses to the consumer and efficiency are usually caused. Producer returns can fluctuate more wildly.

They can also strain international relations as the variable levy transfers domestic demand instability onto the world market. An administrative mechanism must also be implemented to bridge the gap between the higher price guarantee and the lower international price, and this can be expensive to operate as it depends on fluctuating prices, inflation and supply/demand. (11) The first problem posed by this three-tiered agricultural policy system, is the decision as to which system of pricing should be used. A compromise must be achieved between the highest prices and the lowest prices. If the highest prices are used production would be pushed to unacceptable levels. When this policy was first introduced, it was effective in the atmosphere of the time and production levels rose.

By 1968 however the first of the fundamental problems with this policy became apparent. If product prices are prevented from falling while supplies continue to increase in a competitive market place, costs will inevitably increase to meet prices and cut off the people and capital who want to become part of the industry. Price supports, therefore, increase the costs of production. The irony of this is that in order to deal with the effects of increased production costs, price supports must increase also. Although in a competitive unsupported market this process would mean lower prices for farmers and consumers, it would also mean hardship for the marginal farmer.

Attempts to stop this by implementing market support policies are bound to fail however, because the forces of competition are pushed in a different direction – they are not removed. The demand for, and the price of, land and equipment will increase as farmers profits increase. The end result is that farm costs and output prices increase in tandem. This marginalises the small farmer even more. Another effect of this market support policy is that production increases as industry becomes more productive.

This leads to large amounts of surpluses and therefore more subsidies are needed for these to be sold on the market. It also becomes more difficult to sell these products on a market flooded with already large amounts of these commodities The costs of the policy feed on themselves in order to increase. Any attempt to lower prices and cut costs, puts us back where we started. This is the fundamental fault with price policies in the CAP. The need for continually updating machinery and equipment for increased productivity means that much of the money intended for farmers often flows into ancillary industries and into the owners of assets who are employed in agriculture.

These policies also encourage increased competition between farmers, and the large farmer usually benefits at the expense of the small farmer. Therefore these policies exacerbate the inequalities in the farming sector. The rigidity of the uniform market price does not take the differences between various areas of the farming community into account. As well as this, if there was a difference in support for Less Favoured Areas (LFAs), then the question of who should pay would be an issue of some contention. Co-responsibility levies are also an integral part of CAPs price policies. The CAP had started its life with unlimited guarantees of support, regardless of the quantities produced. This led to a massive agricultural budget.

Support price decreases were introduced and this narrowed the gap between the EC price and the world market prices. This helped to reduce the EC budget and the intervention storage costs of the agricultural budget. This route was not successful for milk, however, and co-responsibility levies were introduced in 1977. (12) These were, for the most part, a success because the smaller farmer was then protected from these the full damage created by price cuts. There were also gains to the budget.

The advantageous effects of the levy were muted, however, by the tendency of the Council Of Ministers to raise support prices to offset the impact of levies. In 1982 the budget costs of CAP had jumped by 11% and the price policy was once again in crisis. Intervention stocks began to climb. Generous price rewards in 1981 and 1982 meant that production levels were high and world markets became saturated. (13) Quotas were introduced in 1984 to try and force production more in line with demand.

The super-levy was introduced alongside these quotas. Quotas and super-levies mean that at a wholesale level, responsibility for the super-levy is determined by the over-quota production at dairy level. This means generally that those farms who stayed within the quota would be subsidising those who over-produce. Quotas, in general, restrict imports in a given period below the amount which normally would occur. The disadvantages of quotas outweigh their advantages however.

They stint the domestic market of supplies. Internal prices rise and buyers curtail their purchases. Domestic producers expand their output, however, and a glut occurs on world markets which have depressed prices for affected commodities. Quotas, although insulating the domestic market from world price changes, can also amplify domestic price swings. Despite quota introduction, surpluses remained high and the cost of maintaining the dairy policy actually increased.

The quota levels agreed in 1984 were far too large and were set from 1983 production figures which were already 17% above domestic consumption. Also, as these quotas were only introduced for the dairy sector, production and surpluses in other areas continued to grow unchecked. Penalties for over-production were never really implemented and were easily avoided by raising prices and adjusting MCA rates. (14) An arable Set Aside policy was introduced in 1988. Producers can receive payment per hectare on each hectare taken out of production. Every producer must make more than a minimum area reduction of 20% to qualify.

(15) This was run on a voluntary basis and farmers received compensation for the land they didnt use. Small farmers were exempted from Set Aside. The programme resulted in only a 9% reduction of EU arable area. Production also increased and intensified as farmers concentrated their resources on their remaining land. Due to the land being left fallow, the following years production rates were high as the land was therefore more fertile.

More money than ever since the price cuts was now being spent on export subsidies. Relations between the EU and its global neighbours were strained by CAP. The dictates of the CAP have led to a series of trade problems. The use of border fluctuations on world markets has placed the Community in a difficult situation. The CAP protects internal producers from external competition to some extent. Also export subsidies ensure that the world market becomes flooded with cheap commodities which undermine other global commodities. Depressed world prices occur, interspersed by periods of high rises in prices. Variable levies were used to bring import prices to a level higher than that of EU products.

The Uruguay Round of world General Agreement on Trade and Tariffs (GATT) negotiations concluded by agreeing a 40% average reduction of tariffs. Domestic EU support must be reduced by 20% over six years based on total Aggregate Measure of Support (AMS). All import restrictions must be converted to tariffs and reduced by 36% over six years. The volume of subsidised exports must be reduced by 21% over six years. Budgetary expenditure on export subsidies must simultaneously be reduced by 36% over six years. (16) The absolute failure of the agricultural price policy of CAP forced the EU to implement fundamental reform. CAP was producing large amounts of surpluses and was failing to support the majority of EU landholders.

Support was being concentrated on 20% of the farmers who were responsible for 80% of the output. Intensive farming practices were damaging the environment. Since farmers received a subsidy per tonne produced, they intensified their farming practices to increase their output and income. Not only was this leading to surpluses and a massive EU budget, but also to the destruction of the environment. More fertilisers and pesticides were being used. There was an increase in the density of the livestock on the land. Enlargement of farms meant that the natural habitat was being destroyed and marshlands were being drained. Therefore in 1992 there was radical change from a price oriented policy to a structural policy.

There was also a move from price support to direct income support. It was generally recognised that a number of structural changes were required. These included the diversion of land to other uses, the conservation and protection of the environment, the integration of structural change with regional economic development and the implementation of direct income aids. (17) This impetus for change began, however, in 1988 when the Council of Ministers approved a regulation 2052/88 which was to reform the operation of the Structural Funds as part of the European Agricultural Guarantee and Guidance Fund (EAGGF). (18) This regulation marked an important shift in structural policy from the individual farmer, to the region and rural community. The regulation set out five objectives. Objective 1 status areas are those which lag seriously behind and need major development and structural adjustment.

These have a Gross Domestic Product (GDP) of less than 75% of the Community average. It was hoped to improve living and working conditions, to protect the environment and to improve processing and marketing of goods. (19) Objective 5b included areas that had a high share of agricultural employment and a low income level. (20) Objective 5a was a regrouping of measures which already existed in CAP i.e. funding for farm improvements, training and social assistance for farmers. (21) A number of reform and integration programmes were introduced.

Partnership was seen as the way forward and evaluation of policy success became more important. The effectiveness of these schemes is questionable however. In 1992 the MacSharry reforms were introduced. This had three main aims i.e. early retirement for farmers and farm workers, the promotion of the use of land for forestry and to promote environmentally friendly agricultural methods.

Farmers are permitted to retire at 55. They must then transfer their land to another farmer and will receive a pension from the EU. 50% of the cost of the pension is paid by the EU and 50% by the national government. (Although in Objective 1 areas the EU pays 75%.) (22) When land is not needed for agriculture or is of poor quality, an afforestation programme is implemented. Maintenance fees are paid. There is a maximum eligibility of 600 hectares and therefore the policy favours small enterprises.

Again, the EU pays 50% of the cost or 75% in Objective 1 areas. (23) The environment is now also seen as an important problem to be tackled. There have been attempts to reduce pollution e.g. the Nitrates Objective which tries to reduce the amount of nitrate pollution in EU waters. Extensification is encouraged to avoid the damage intensification and concentration have on the land. Long-term set-aside of 20 years has been proposed.

Grants for the education and training of farmers in environmentally compatible farming have been implemented e.g. the Rural Environmental Protection Scheme (REPS) in Ireland. Organic farming is being promoted and a reduction in the amount of fertilisers and pesticides used is being encouraged. There has also been a general move towards trying to ensure that small farmers are not pushed off the land by larger farmers and discriminating agricultural policies. Diversification in rural economies is being encouraged. Integrated rural development programmes have also been implemented.

Rural infrastructure has been improved. Attempts were made to improve research and development at a rural level. The EUs Structural Funds are clearly established as the key tenet of European level policy initiatives. The Fund consists of four separate funds – the European Regional Development Fund (ERDF), the Eur …