Cultivating a Crisis:

The global impact of the

Common Agricultural Policy

by

Sir John S Marsh

Emeritus Professor, University of Reading, and

Secondo Tarditi

Director, Interdepartmental Centre on

Agri-food-environmental Policy,

University of Siena

March 2003

Acknowledgements

This report was commissioned by Consumers International and European Research into Consumer Affairs. The aim is to offer an independent and academically rigorous contribution to the debate on enlargement, the WTO and the CAP.

Written and researched by Professor Sir John Marsh, Emeritus Professor, University of Reading, UK and Professor Secondo Tarditi, CIPAS, University of Siena, Italy.

The views expressed in this report are those of the authors and do not necessarily reflect those of Consumers International or European Research into Consumer Affairs nor of the EU Commission Directorate General for Health and Consumer Protection which provided some financial support.

Co-ordinated by Heidi Ullrich, Consumers International and Ann Davison, European Research into Consumer Affairs.

Assisted by Marco Presutto, Consumers International.

Designed and produced by Steve Paveley.

Cover photos clockwise from top left:

Farm in Salut de Provence, France: Bullaty-Lomeo/Getty Images.

Cattle feeding: S.Meltzer/Getty Images.

Feeding station-Zimbabwe: Judith Melby/Christian Aid.

Woman shopping in supermarket: TRBfoto/Getty Images.

Copyright © Consumers International and European Research into Consumer Affairs, March 2003

ISBN 1-902391-41-1

Copies of this report can be downloaded from the Consumers International website at: www.consumersinternational.org

Alternatively, copies of the report are available from Lalani De Silva (ldesilva@consint.org) Consumers International. Our address and phone numbers are at the back of this report.

Preface

In 2004 the European Union (EU) will expand to 25 countries with the addition of the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia, and two Mediterranean islands, Cyprus and Malta. The benefits of enlargement are enormous, but some challenges remain. In particular, the EU has to determine how to integrate the Common Agricultural Policy (CAP) into the ten new member states without undermining the World Trade Organisation’s Doha Round negotiations, which seek lower protection for agriculture, and it needs to ensure that the problems of low income consumers of the ‘new Europe’ are fully taken into account.

Consumers International and European Research into Consumer Affairs have therefore commissioned an independent report by the eminent academics, Professor Sir John Marsh and Professor Secondo Tarditi, and are delighted to publish it as a contribution to the debate. We hope it will be a useful complement to the important policy work undertaken by the Bureau European des Unions des Consommateurs on behalf of EU consumer organizations and by Consumers International in its global campaigns.

Julian Edwards Ann Davison

Director General Manager

Consumers International European Research into Consumer Affairs

About the Authors

Professor Sir John S. Marsh

Sir John Marsh is Emeritus Professor in the Department of Agricultural and Food Economics at the University of Reading. He was educated at St. John’s College, Oxford and the University of Reading. He became successively Research Economist, Lecturer and Reader in Agricultural Economics at the University of Reading, and later was Professor of Agricultural Economics at the University of Aberdeen and Chairman of the Economics Group of the North of Scotland College of Agriculture. In 1984 he returned to Reading as holder of an established Chair in the Department serving as Head of the Department from 1985-1991 and Dean of Faculty of Agriculture and Food from 1986-1989. From 1990-1997 he was Director of the Centre for Agricultural Strategy based at University of Reading.

Sir John Marsh is President of the British Institute of Agricultural Consultants. He is Chairman of the Council of RURAL (the Society for the Responsible Use of Resources in Agriculture and on the Land). Additionally, he is a Fellow of the Royal Agricultural Societies and the Royal Agricultural Society of England.

Sir John Marsh may be contacted at: johnmarsh@adam15.demon.co.uk

Professor Secondo Tarditi

Secondo Tarditi is professor at the Faculty of Economics of the University of Siena, and Director of the Siena Interdepartmental Centre for Agri-food-environmental Policy (SICAP). He graduated with a degree in agriculture at the Catholic University of Milan and specialised in agricultural economics at the University of Naples. Professor Tarditi has served as associate professor in the Faculty of Agriculture at the Catholic University of Milan, as visiting professor of Microeconomics at the Faculty of Social and Behavioural Sciences of the University of Massachusetts, Amherst , as visiting professor of "Common Agricultural Policy" at the College of Europe, Bruges, and visiting fellow at the University of Oxford.

Professor Tarditi has served as a consultant to the FAO, the OECD, World Bank, European Commission, European Parliament and to the Italian Government. From 1995-1999 he was Special Adviser to the European Commission for Consumer Policy.

Professor Tarditi may be contacted at: tarditi@unisi.it

Authors' Acknowledgements

Useful comments to the draft report from Ann Davison, Julian Edwards, Robin Simpson, Heidi Ullrich, BEUC, Consumers' Association and the cooperation of Fabio Massimo Rapana in data collection and analysis are gratefully acknowledged. All responsibility for views expressed in the final report and for possible mistakes remain on the authors.

Table of contents

1. Executive Summary. 7

2. What this report is about 13

3. The WTO and Consumer Interests. 15

3.1. Why trade matters to consumers. 15

3.2. GATT and WTO.. 16

3.3. The Agreement on Agriculture. 18

3.4. The new negotiations. 22

4. The CAP and Consumer Interests. 25

4.1. A brief background. 25

4.2. Present debate on the reform of the CAP. 29

4.3. Do the CAP costs to consumers matter?. 32

5. The CAP and the New Members of the Union. 36

5.1. Basic features. 36

5.2. Current negotiations. 42

5.3. The impact of the CAP on the CEEC8. 43

5.4. Changes in agricultural support 45

5.5. Impact on consumers and producers. 51

5.6. Impact on international trade. 58

5.7. Impact on income distribution. 62

6. The costs of the CAP for consumers – the longer term perspective. 69

6.1. Structural adjustment 69

6.2. Public goods and the future of the CAP. 74

6.3. What do people want?. 76

6.4. How environmental preferences can be assessed. 77

6.5. Consumers and the application of Pillar II 80

7. Concluding remarks. 84

Table of Frames

Frame 3‑1 Producer Support in OECD Countries in year 2001 19

Frame 3‑2 Asistance to agriculture in OECD countries in 2001 (NA% and €mn). 20

Frame 3‑3 Value of production and support to agriculture in the European Union. 21

Frame 4‑1 The Commission’s proposals for degression and modulation. 30

Frame 4‑2 Falling share of Food and Drink in Consumer Expenditure. 32

Frame 4‑3 Share of food and beverages in consumer expenditure by country. 33

Frame 4‑4 The Greater weight of food expenditure in budgets of poorer households. 34

Frame 4‑5 EU, Development of Producer Assistance Coefficients (100% = border price). 35

Frame 5‑1 Population in candidate countries (mn inhabitants). 37

Frame 5‑2 Rates of change in Gross Domestic Product of CEEC8. 37

Frame 5‑3 Gross National Income ($) and Gross domestic Product (PPS) in year 2001. 38

Frame 5‑4 Gross National Income ($) and Gross Domestic Product (PPS) in 2001. 38

Frame 5‑5 Rates of inflation in CEEC8 (weighted average of national rates). 39

Frame 5‑6 Agriculture’s share of Gross Domestic Product 39

Frame 5‑7 Percentage of agriculture in total employment 40

Frame 5‑8 Importance of agriculture in trade. 40

Frame 5‑9 Transfers associated to agricultural policy in EU15 and CEEC8 in 2001. 41

Frame 5‑10 Share of 8 Central European Countries on total 10 new EU members. 44

Frame 5‑11 Commodity shares of the CEEC8 aggregate. 45

Frame 5‑12 Share of analysed commodities on the total production of new member states. 45

Frame 5‑13 Average support before and after CAP implementation. 46

Frame 5‑14 Trends in producer assistance to agriculture and policy options. 47

Frame 5‑15 Assistance coefficients (border price =100) before and after CAP implementation. 49

Frame 5‑16 Assistance coefficients (border price =100) by country. 50

Frame 5‑17 Impact of the CAP on CEEC8 consumption (1000 t). 51

Frame 5‑18 Change in consumer expenditure (at farm gate) (€mn and % ). 52

Frame 5‑19 Change in consumer expenditure by country and € per household (4 member). 54

Frame 5‑20 Changes in per unit revenues (change market price + payments per unit). 55

Frame 5‑21 Components of the Value of agricultural production by commodity. 56

Frame 5‑22 Components of value of agricultural production by country (€ mn). 57

Frame 5‑23 Change in producer revenue from public support (0% = free trade, no subsidies). 58

Frame 5‑24 Impact of CAP extension to CEEC8 on net trade, by country. 59

Frame 5‑25 Present production and quota agreed with CEEC8 for sugar and milk. 60

Frame 5‑26 Invisible trade balance transfers between the EU-15 and the CEEC8 in EU25. 61

Frame 5‑27 Producer aids granted by CEEC8 and foreseen by the EU Commission. 63

Frame 5‑28 Producer payments before and after adoption of the CAP (€mn). 64

Frame 5‑29 Income redistribution between consumers, taxpayers and producers. 65

Frame 5‑30 Income transfers per household. 65

Frame 5‑31 Cost for EU15 citizens as consumers and as taxpayers. 66

Frame 5‑32 Income transfers per hectare of land, and per agricultural worker. 67

Frame 5‑33 Estimated impact of CAP on agricultural income. 68

Frame 6‑1 EU15, year 1999/00, Gross Productivity of labour and distribution of farms per size class. 70

Frame 6‑2 Czech Republic, 2000/01, Gross productivity of labour and farm distribution by size. 71

Frame 6‑3 Utilised Agricultural Area per holding (ha). 72

Frame 6‑4 Output per employed in agriculture in 2001 (Euro per year). 73

Frame 6‑5 Assessment of Public Good Schemes. 79

1. Executive Summary

The Common Agricultural Policy (CAP) has to adjust to changes in the economic, political and technological environment. The Uruguay Round settlement has brought agricultural policy within the framework of international trade negotiation. The new Doha round negotiations should further liberalise agricultural trade. Enlargement to create a Community of 25 nations increases the number of European Union (EU) citizens who depend on farming. Changed policy priorities mean that citizens are more aware of the positive and adverse impact of some farming practices on the environment. The CAP has thus reached a point where more adjustment is needed.

1. Consumers are affected by the CAP in three ways - through its effect on food prices, its impact on the level of taxation and the contribution it makes (positive or negative) to enhancing the value of the environment.
2. According to Article 153 of the Treaty establishing the European Community, "Consumer protection requirements shall be taken into account in defining and implementing other Community policies and activities". In 1998, the Consumer Committee of the European Commission pointed out the lack of consistency between the present CAP and the main objectives of economic policy: efficiency, equity, sustainability, safety and security.

World Trade Organisation negotiations

3. Consumers have a profound interest in free trade. Trade enables resources to generate higher real incomes for all participants. However, these gains depend upon structural adjustments in both the importing and exporting countries. For businesses in importing countries this is painful and where, as in farming, there are large numbers of small producers who cease to be competitive, the political risks to governments are substantial. Thus whilst the interests of consumers lie in facilitating both trade and structural adjustment, agricultural policy has tended to obstruct trade and to impede structural change.
4. While the interests of consumers lie with facilitating trade and structural adjustment in the long run, this is a sensitive issue in developing countries where structural adjustment has left many already poor people with no jobs (and forced even subsistence farmers off the land) in circumstances where there is no social security and no alternative employment. They are thus disadvantaged as consumers at least temporarily by being excluded from the market economy altogether. To a certain extent, barriers to trade of agricultural goods generate legal and illegal migration to the EU, as it is the case for various Mediterranean countries.
5. Trade embodies market forces but it does not automatically recognise externalities. This may mean that the combination of outputs, and implied use of resources, derived from free trade does not always represent ‘best value’ for society as a whole. In the food and agriculture sector externalities carry considerable weight. Among the more important are landscape, animal and human disease risks, pollution and the contribution farming makes to distinctive local cultures. Ideally international trade agreements should recognise such externalities and embody them in fair trading rules. Thus far, attempts to incorporate externalities have been largely left to national governments who have found in them a justification for impediments to trade.
6. The Agreement on Agriculture (AoA) that formed a key feature of the 1994 Uruguay Round Settlement went beyond purely frontier measures, incorporating rules relating to internal agricultural policies. These were classified in ‘boxes’, green for those which had minimal impact on trade, blue for those that supported production but limited the amount produced and amber for output related support. The level of support was assessed in terms of an Aggregate Measure of Support (AMS). The settlement required this to be reduced over a six year period.
7. The 1992 MacSharry reforms allowed the Community to sign up to this package with minimal discomfort to farmers. However, the agreement required a review after six years, and the agreement to tolerate some residual practices which were not in line with WTO rules, the ‘Peace Clause’, expires in 2004. The Doha Round gives effect to this.
8. The outcome of the current negotiations is far from clear but the major themes likely to be involved can be identified. They include the future levels of tariffs on agricultural and food products, the future of the amber, blue and green boxes, export subsidies, the treatment of developing countries and a wide range of non trade issues, including environment, animal welfare, consumer information and labelling. There remains considerable protection for farming. OECD Support Estimates, which sum the cost of agricultural policies for consumers and taxpayers, show that in the EU total support to agriculture had remained rather stable in the nineties at about 54% of the value of agricultural production measured at border prices. Such cost is much higher than for agricultural exporting countries, such as the US, Canada, Australia and New Zealand.
9. The CAP is at present directly damaging to the interests of numerous developing countries, through the export of heavily subsidised surplus produce and through restrictions on imports. This damage is paid for by European consumers in taxation and in food prices well above world market levels. It is also a barrier to progress in trade liberalisation in other areas since reform has long been agreed but not delivered; developing countries will probably not negotiate on other issues without real change in agriculture.
10. For EU consumers the general thrust of trade liberalisation, removal of export subsidies and better access for developing countries, is welcome. Lower prices are of special importance for poorer families. At the same time, consumers need to be sure that the food they buy is safe, and many share concerns about animal welfare and the environment.

Reform of the CAP

11. In 1992 the MacSharry reform, taken further by Agenda 2000, reduced the impact of the CAP on consumers by lowering market price support. Further progress is still needed before consumers can enjoy unrestricted access to imported food supplies. However, whilst consumers benefited from lower prices, the returns to farmers have been maintained by ‘direct payments’, funded from taxation. According to OECD estimates, the total support to EU15 agriculture in 2001 accounted for € 110 billion, i.e. 45% of the value of production at farm gate prices, almost of the same size as the net value added of agriculture (€ 113 billion). Such support was not substantially reduced in the nineties, notwithstanding the MacSharry reform of the CAP and the GATT-WTO Agreement on Agriculture.
12. The current proposals for the reform of the CAP have to be judged in this context. Reform is still conditioned by the need to sustain the incomes of farmers. Past reforms have redistributed support rather than reduced it, despite the chronic tendency to surplus production. This political pressure is now expressed in a ‘cultural’ objective, that a major goal of policy is to preserve the ‘European Model of Farming’. In practice this means retaining small family farms rather than allowing structural adjustment to substantially reduce the number of farms, securing economies of scale and lower costs of production.
13. The main thrust of the Commission’s current proposals is to shift support from the product to the producer. It visualises doing this by a combination of lower prices and direct payments to farmers based on historic entitlements and subject to cross compliance linked to environmental criteria. The direct payments to larger producers will be reduced between 2006 and 2012 by 12%, a process known as ‘degression’. They will also be modulated, that is shifted to support other parts of the CAP, including Pillar II agricultural environment and development policies, and the reform of other product regimes. Of immediate interest to consumers is the proposal to extend the rural development aspects of past reforms to include food quality and animal welfare. The Commission’s proposals have yet to be negotiated through the Agricultural Council and the European Parliament. There is substantial opposition, particularly to the separation of payments from current production known as ‘decoupling’.
14. Despite this, some radical change seems inescapable. Agricultural anxieties cannot be allowed to prevent developments in the WTO that benefit the economy of the EU as a whole. Farming is now less than 2% of GDP. The rest of the economy requires access to trade. The Commission’s proposals create a basis for negotiating an agreed settlement. It will not be easy. The proposed ‘single income payment’ per farm may not be accepted by other countries as fully decoupled; it underpins continued farming so that EU output will be larger than under free trade assumptions. The agri-environment programme may be challenged as a mechanism for keeping non-competitive farms in business. There will be concern that in seeking, in the name of food safety, to raise standards, the EU may discriminate against food imports. However, other countries may be prepared to accept the reformed CAP, with some modifications, as the best deal likely to be on offer.
15. Consumers should share industry’s concern that the CAP does not prevent an agreement on the wider trade agenda. This does not mean that what is agreed for agriculture is of less importance. Food prices remain critical, especially for the welfare of poor people, families with many children, pensioners and those living on social security payment.
16. A correct knowledge of the effects of economic policies is necessary in order to assess their consistency and the attainment of stated policy objectives. The CAP is still non transparent. Notwithstanding numerous requests by consumer organizations and representatives, the EU Commission in its official documents does not yet mention the cost borne by consumers as a consequence of agricultural market price support. According to OECD estimates, such cost in the EU15 accounts for about 50% of the total support; it is incredible that such huge cost for citizens and its relative impact on income distribution is not even mentioned in documents dealing with the reform of the CAP and its enlargement to new Member States.

Enlargement of the European Union

17. The enlargement of the European Union presents fresh challenges for both the CAP and the negotiators in the WTO. In 2004 the Union will expand to 25 countries through the addition of the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia and two Mediterranean islands, Cyprus and Malta. In addition Bulgaria, Romania and possibly Turkey are expected to become members in the not too distant future. The agricultural area of the Union will grow by around a third and its agricultural population by nearly 60%. New members have to apply all the rules and agreements already agreed among the 15, the so called ‘acquis communautaire’. Transitional arrangements may ease the process. Additionally the existing Community of 15 has provided some assistance. Ultimately however, the CAP, in common with other Community policies, will have to be applied in the same way throughout the enlarged EU.
18. This is far from easy. From 1989, these countries experienced considerable economic trauma. Established trade with former partners in the Soviet Bloc was disrupted or simply disappeared. In the early nineties very high rates of inflation disrupted economic life. In most countries inflation has been brought under control by relatively painful policies. However, inflation remains substantially higher than in the EU15. Until 1993, GDP tended to fall and, despite some recovery, most countries still lag well behind current EU members. Per capita incomes in the 10 Candidate Countries (CC10) are low, only 21% of EU15 incomes, about 45% if measured in terms of Purchasing Parity Standards.
19. In the EU15 the share of household income spent on food is 16%, while is much higher in candidate countries. It is 29% on average for the 10 new Members, ranging from 19% in Slovenia to 39% in Lithuania. For these consumers, higher prices resulting from CAP threaten a larger proportionate loss of real income. In the EU25 prices will be at the level determined by the CAP. Thus consumers will face higher prices at once. This will reduce the quantity of agricultural commodities consumed, although increasing consumer expenditure in food. Income transfers from consumers to producers will increase substantially even if existing supply were constrained to present levels. For farmers, on top of market price increase, the terms for entry visualize a gradual introduction of direct payments, which will reach the level in the existing community in 2012.
20. Agricultural production is a larger part of the new entrant’s economies - some 17% of employment and over 4.2 % of GDP, compared with 3.1% of employment and 1.7% of GDP in the EU15. From the date of entry, trade can move freely between the new and old members subject to meeting EU consumer protection standards. Markets will be open to penetration from EU 15 farmers who benefit from the full amount of direct payments. Initially agriculture in the new Members will be less supported.

Impact of the CAP market policy on CEEC8 economies

21. An analysis of the effects of applying the CAP as it existed in 2001 to the Central and East European Countries 8 (CEEC8), (the new entrants apart from Cyprus and Malta) illustrates the impact of increased protection for agriculture. Market price support grows from 14% to 35% of the international value of agricultural production, whilst payments to producers rise from 10% to 36%. The distribution of support among commodities changes, cereal crops, milk and beef receiving more, whilst the support for egg production gets less. In all the acceding countries CAP 2001 offers producers higher levels of support than existing policies. The impact of these changes on consumer expenditure depends on how much prices rise and what changes take place in the volume bought. For the CEEC 8 as a group, this analysis suggests that consumers, although reducing the amount of agricultural commodities used in final food consumed, would spend 12% more on the market value of raw agricultural commodities.
22. For every product except eggs, pork and sugar, the 2001 CAP offers incentives to produce more. This has important implications for the EU25 as a whole. Given the limits on export subsidies in the Uruguay Round Settlement, higher production, and possibly reduced consumption, suggest significant ‘surplus’ production. This would affect both consumers and taxpayers in the EU15. An additional € 7.8 billion, under the assumption of unchanged supply, up to € 9.7 billion if a moderate expansion of supply is assumed would be required, mostly in the form of higher tax rather than increased prices. A household of four members would find the cost of support rising from some € 332 per annum to € 838 if supply will be totally constrained, up to € 967 per annum if a moderate expansion of domestic supply is assumed.
23. There would be higher revenues for producers in the new member countries with net transfers per employee rising from € 1675 to € 4600 in the case of fixed supply or to € 5380 with moderate expansion. However, it should not be assumed that this delivers an equivalent effect on producer income. Experience in the existing member countries suggests that much of the higher revenue would be swallowed up in higher costs, as the price of land and other inputs rises. Moreover such transfers will be much higher for farmers and landowners in large farms rather than in small farms.
24. The implications for trade are difficult. Applying the CAP of 2001 would lead to larger export surpluses for cereal crops, sugar, milk and beef. Such an outcome would be unacceptable to agricultural exporting members of the WTO. Export subsidies are expected to disappear not to grow. Any move in this direction would make it impossible to reach a settlement in the Doha Round. As a result farmers in the enlarged EU must anticipate lower prices or tighter quantitative restrictions on output, or possibly both.
25. It is against this background that the Commissions proposals for the CAP reform and the terms offered to the acceding countries need to be assessed. By reducing prices, introducing direct payments that are not specific to particular products and are subject to both cross compliance and degression, the volume produced should not increase within the existing member countries. By phasing in direct payments in the new members, the incentives to produce more in these countries will be diluted in time until 2013. The underlying principles of the Commission’s proposal include an assumption that support is required, that it should be for producers not for production, and that production should be subject to standards, for example, in relation to the environment, food safety and animal welfare. This is a highly dirigiste approach to agricultural policy. Its justification depends upon the extent to which it accurately remedies ‘market failure’ – the failure of the unregulated economy to deliver that bundle of outputs that a community values most highly. In the CAP this is represented by the shift from Pillar I (commodity support) to Pillar II (environment and development). For consumers there is a need to be certain that these payments really represent the best value for public expenditure. The retention of funds in CAP policies does not provide such justification. Many of the issues covered have local rather than continental significance. Many of the judgements made represent the preferences of articulate pressure groups. There is little evidence that consumers/taxpayers are made aware that they imply costs, in terms of fewer other goods and services, whether these are public or private. Consumer interests require that these issues should be fully debated and explored before reform becomes simply a shift from the frying pan of over production of Pillar I ‘food’, to the fire of over provision of Pillar II ‘environmental’ goods and services

Consumer strategy

26. The EU Commission in its Mid-Term Review document reaffirms the basic objectives of promoting a competitive agricultural sector, of implementing a more simple agricultural policy and of “justifying farm support through the provision of services that the public expects farmers to provide”.[1] Such objectives may be shared in principle by consumers, together with the other objectives dealing with production of environmentally friendly quality products and a fair standard of living and income stability for the agricultural community. The difficulties arise in putting them into practice.
27. This report shows that they are far from being achieved by the present CAP. Although the objectives of Mid-term Review may be widely shared, none of them will be reached in the most efficient way by the proposed policy changes. After the implementation of the Commission proposals in EU25 the burden for EU15 citizens in terms of higher food prices, higher taxes, worse income distribution, and wasted economic resources will not be substantially reduced, and these negative effects of the CAP will be extended to the new Members of the Union.
28. The overall interests of European citizens would be attained by a really simplified, transparent, efficient, equitable and sustainable agricultural policy, based on policies which allow market forces to transmit to producers the preferences of consumers. Market failures should be offset by providing adequate direct payments to producers, targeted to the attainment of specific positive externalities and public goods, thus “justifying farm support through the provision of services that the public expects farmers to provide”, as stated in the objectives of the Mid-Term Review.
29. The failures should be rapidly reduced, in not more than a decade. New Members should be asked to adopt an acquis communautaire which brings to them the benefits of the market economy, rather than dirigiste policy measures, production quotas, land set-aside, over-regulated production and market regimes. Such an approach, properly programmed over the next decade, is in the interest not only of EU consumers, but also, in the longer term, of agricultural producers and of a sustainable and progressive global economy.

2. What this report is about

This is a story about a stage in the life of the Common Agricultural Policy (CAP) designed for a sector of the economy that is changing rapidly as a result of forces beyond the policy makers’ control. As a result the policy sometimes has unintended, undesired and damaging consequences. However, although the policy has adjusted, the process has always been too little and too late. As a result for thirty years there has been a continued debate about the ‘reform’ of the policy.

This would matter little if the social and economic dimensions of the policy were small. Unfortunately the impacts of the CAP are large. Within EU25, millions of people are still involved in agricultural production, the impact of farming is the dominant influence on a very large proportion of the landscape and everyone is involved as a food consumer. As the EU is one of the world’s largest traders in agricultural products, the ramifications of the CAP affect agricultural prices and production throughout the world.

This report looks at the current stage of the development of the CAP primarily from the perspective of consumers. However, to understand what is happening it is also necessary to recognise the changes taking place in the industry, in the political framework to which the CAP applies and in the wider world in which it has to compete. Traditionally, and with common sense, studies of the impact of the CAP on consumers have focused on issues such as the extent to which food prices are artificially increased by the policy and its role in ensuring a secure supply of wholesome food. However, policy developments since 1992 have shifted an increasing share of the financing of the policy from the consumer to the taxpayer. Whilst this has some important social benefits, since higher food prices matter especially to the poorer consumers who may proportionately pay less tax, it is true that most consumers are taxpayers. Policies that require substantial sums to be transferred from private spending to public expenditure via taxation mean that consumers have less choice about what they can buy. If the benefits derived from the public expenditure are less than the contribution they make to taxation, they are made poorer.

Three forces, in particular, press upon the CAP at this stage: the need to reach an acceptable outcome to the current world trade negotiations, the requirement to adapt the policy in the light of the enlargement of the Union to 25 member states, and the underlying and incomplete process of structural adjustment in the EU’s agricultural industry.

First, the European Union is committed to a round of trade negotiations within the World Trade Organisation (WTO). The outcome of this Doha Development Round is a matter for continued negotiations and at this stage much remains to be decided. However, two important characteristics of the WTO debate are inescapable and apply to this paper: (i) agriculture has to be included in any settlement and (ii) the thrust of WTO negotiations is towards greater liberalisation of trade and therefore more exposure to international competition.

Second, the EU has committed itself to an enlargement process that is planned to take place in 2004. The countries that are joining have a very different economic profile than do existing members. Their agriculture has been very differently configured and includes a considerable diversity of performance and structure. These countries will have to adopt the common policies of the Community (acquis communautaire), including the CAP. For them it is a bad fit with serious implications for both production and consumers.

Third, the structure of agriculture within the EU needs radical adjustment if its businesses are to be able to compete in global markets. Agriculture faces inescapable competition for its inputs from other sectors of the economy. Their incomes are continuing to rise, although painfully slowly. This means that for all those inputs where farming has to compete with other sectors it must pay more – if it cannot generate competitive incomes, its labour will move away, if it cannot compete for capital, it will become obsolescent, where other sectors make demand for land, it will find it uneconomical to retain it in farming.

The impact of rising real incomes is not just on the price farmers pay for inputs, it also changes demand for the mix of outputs that the resources they use are capable of producing. Some of these shifts are simple matters of market adjustment. Farmers diversify into the leisure sector, providing services, for example, in the growing tourist industry. Farmers may provide facilities for sports such as moto-cross, they may establish nature walks, and they can offer ‘fresh from the farm’ food products designed to bring the flavour of the countryside to the tables of the affluent. However, there are important areas where private provision does not meet growing demand. Farmers individually cannot provide landscape or manage watersheds. The demand for attractive landscapes and for clean water has grown and become increasingly articulate.

Most of the product of farms now reaches the consumer via complicated chains of food processing, distribution and retailing. Many of the companies involved are by farm standards very large; some are global businesses. The remoteness of the farm from the consumer changes relationships. There is an increased wish for assurance that food is safe, that it is produced in ways that meet some moral or aesthetic concerns, that its production is not damaging to wildlife or the rich biodiversity characteristic of traditional farming methods. In effect, farming faces a level of regulation and detailed contractual obligations never before attempted. Much of this was said to be ‘in the interests’ of consumers.

New technology affects farming not just because of developments within agriculture but as a result of discoveries in quite a few other sectors. Historically new, cheap and increasingly rapid forms of transport have hugely enlarged the area of competition within which European farmers compete. More recently, developments in communications have made possible a degree of co-ordination between consumer demand and production decisions never before feasible. By using this effectively, products meet consumer demand better than ever before – but the price, from a farming point of view, is ever increasing dependence on external agencies to determine what happens on the farm. Currently discoveries in the world of biotechnology are transforming our understanding of the working of living organisms and the potential for designing farm products to match better the needs of the market - whatever they may be. In Europe there is marked reluctance to apply this technology in farming and to food products but globally it is taking place and will determine the long-term market for European food producers.

This long but abbreviated list of external forces bearing on agriculture makes it clear that the CAP does not operate in a vacuum. Even if present arrangements were entirely satisfactory they would need to be changed to cope with future challenges. Failure to change is borne as a cost to the Community as a whole. This paper sets out some of these costs based on the most recent information available. It also attempts to explore, in a preliminary way, the implication of the current trend to shift payments to farmers from rewards for production to rewards for ‘environmental or rural development’ achievements. This arrangement has all the hall marks of political convenience but if it does not really represent the preferences of European people, what will result is a surplus of ‘environmental services’ which may be less visible but is just as costly and damaging as the butter mountains and wine lakes of the past.

The report considers first the impact of the WTO debate. It then provides a brief account of the CAP and the proposals currently being considered and next examines the likely effect of the CAP on the economies, consumers and agriculture of the new Members. Finally it explores the implications in terms of consumer welfare of the tendency to shift support from product related (Pillar I) expenditure to rural development (Pillar II). Although this remains a modest part of current CAP expenditure, current trends suggest that, by the time enlargement is complete, it may become much more significant.

3. The WTO and Consumer Interests

3.1. Why trade matters to consumers.

The consumer interest in trade is based on its ability to make the same set of resources and the same technology deliver a higher value bundle of outputs, including goods and services, than would be attainable if we were unable to specialise, exchanging the things we produce most efficiently for the vast range of things we need or would like to consume.

This logic applies at the individual level. Most of us could not, by ourselves, make a single electric light bulb, let alone generators and transmission systems. However, we obtain bulbs at very low real costs because we exchange the things we produce, or to the production of which we contribute by our labour, for bulbs, food, fuel and all the other goods and services we consume. In modern advanced societies this process is facilitated by money but money itself is not wealth; that is made up of the goods and services we enjoy.

What is true for individuals is true, too, for society. In modern developed countries many of us (singers, lecturers, civil servants and politicians for example) create exchange value through activities that may have little or no material content. Despite this we live much more comfortably than our forebears, enjoying not only more services but also more and better material goods. This is only possible because we trade and a major function of governments has been to facilitate trade.

The characteristics of trade between the citizens that make countries rich apply equally to trade between countries. The more diverse our resources of mind and material the greater the potential benefits from this process of exchange. However, trade between countries has often been obstructed by governments, sometimes for political purposes and more often to raise revenue. This makes the countries concerned and the world poorer, although some interest groups receive real benefits. Such groups seek to manipulate the political process to secure protection from international competition. Their reaction is understandable and may be tolerated by the rest of the community because the gains from trade arise only when non-competitive resources move from existing uses to new activities. Until that happens exposure to international competition will tend to be seen as ‘exporting jobs’ rather than ‘creating wealth’. Several features contribute to this preference for protection.

First, the immediate impact is that some businesses become unprofitable. Essentially the resources they use will have to find new uses if they are to be rewarded at the ‘going rate’. Similarly people working in these enterprises find that their jobs have disappeared and have to seek new employment. This process of change is painful. The business of finding new, profitable uses for resources or of discovering new jobs can be long drawn out and some never do. Although ultimately the economy will generate more jobs and higher incomes, those displaced may not qualify because of lack of skills or age. Farming in Europe has been in this state during most of the 20^th Century. It has been very successful in persuading governments to adopt policies that effectively frustrate or limit the extent to which international trade has competed with domestic production.

Second, as productivity raising technology is applied, farming tends to produce more than the domestic market can absorb. The farm lobby has then succeeded in persuading governments not only to prevent imports but also to subsidise exports. Internally, consumers may be forced to fund this via higher prices or through paying higher taxes. Externally, lower cost producers in other countries may be forced to leave the industry whilst consumers in markets open to world trade enjoy prices below the true cost of production. In effect this is what has been achieved by the agricultural policies of the USA and the EU during the second half of the twentieth century. The cost of the failure of these rich countries to adjust to world trade has been felt by farmers in New Zealand, Australia and South America as lost markets and lower real incomes. Even more seriously it has been endured in many developing countries by depression of their domestic agriculture, generally the largest part of their economy, and growing urban dependence upon imported food. The costs of agricultural protection are borne not just by the countries that impose trade barriers but by many other countries throughout the world.

Third, farming and food production generate costs and benefits that do not appear in the accounts of the enterprises involved in production. These so called ‘externalities’ may be negative, as for example when water is polluted, so that others have to pay to make it fit to drink, or positive where, for example the industry provides a rich and diverse habitat and landscape. From this others may benefit at no cost to themselves either as individuals or in terms of gains to their businesses such as tourism. These costs and benefits are real and to neglect them is to countenance a misallocation of resource. Consumers in total would benefit from appropriate adjustments in resource use to ensure that the ‘non-market’ components of value were properly taken into account. However, these costs and benefits are difficult to measure especially in so far as they comprise public services rather than material goods. In rich societies, especially those that are densely populated, many of these public services are associated with land use, and therefore the importance of farming practice as distinct from farm production tends to increase.

Finally, consumers secure the full benefits of trade only if non-competitive resources actually move to new productive activity. If structural rigidities prevent this movement, then society remains poorer than needs to be the case. In practice many agricultural resources can prove difficult to adjust. Historic rules about land ownership and inheritance can prevent an operational market existing in farmland. Much farm machinery and many buildings are specific to certain patterns of production. They have little value in other uses. Many farm people lack skills needed in newly developing industries, they live in isolation from the places where development is happening and find it almost impossible to discover new work. Especially where the farming population consists of a disproportionately high share of older people, the impact of trade may not be so much to liberate resources for new forms of production as to impose high levels of unemployment on declining regions. As taxpayers, consumers may then find that they carry, at least for a while, an increased burden of social security payments.

3.2. GATT and WTO

In the 1930s global depression added weight to the negative aspects of international trade. Governments sought to prevent access to their own markets and to ‘dump’ exports in other countries (to sell them at less than the cost of production plus transport). Such behaviour spread and intensified the slump as producers in importing countries were forced out of business. In the years following the Second World War the destructive consequences of protection were recognised and a major effort was made to dismantle the protective armoury and open up the world to free trade.

The vehicle for doing this was the General Agreement on Tariffs and Trade (GATT). Intended initially as part of a much grander design for an International Trade Organisation, which floundered in face of opposition in the US Congress, the GATT became the mechanism through which countries could negotiate mutual reductions in tariffs and the removal of quantitative restrictions on trade. They did so in a series of ‘rounds’ at which countries offered ‘ concessions’ in the form of lowering their own import barriers by specified amounts in return for reciprocal offers from other countries. GATT membership required that concessions offered to any one country had to be extended to all other members, the ‘Most Favoured Nation’ (MFN), trading rule.

Substantial progress was made in the remaining years of the twentieth century. Tariffs and quotas on manufactured goods were removed or reduced. World trade grew dramatically, world real income rose to unprecedented levels and more and more countries sought to belong to GATT and to apply its rules of trade. By the mid 1980s membership had grown from the initial 23 to over 100 countries. With the end of the cold war more of the formerly centrally planned countries sought membership so that today some 145 countries, including the two Chinas, have signed up to the basic rules agreed at the first negotiating conference held in Geneva in 1947

GATT was a great success but there remained some important limitations. Agriculture, although formally included in GATT, had almost wholly escaped its liberalising influence as countries including the US and later the EU sought to protect their farmers. Services, which grew rapidly in importance as real incomes across the world rose, were largely excluded. The non-market values associated with productive activity were largely neglected, except where, as with food safety, they impinged directly on the acceptability of goods in foreign markets. The gains from trade accrued most obviously to those who trade most – the richer countries of the world. Despite arrangements that gave them longer to implement agreements and more freedom in relation to internal policies, the developing countries felt they gained little, whilst exposing their vulnerable infant industries to competition from abroad. Still more, they faced subsidised competition in agriculture – the largest sector of their economies – and were denied access to the markets of rich countries where imports competed with home production. The problem was intensified because there was discrimination among developing countries: some, such as some former dependencies of EU member countries, having preferential terms of access to developed country markets.

These problems ensured that there developed a significant body of opinion hostile to the trade liberalising agenda of the GATT. Despite this the benefits of freer trade provided compelling arguments for its extension. Some of the most dynamic economies in the world, which in a short period had raised living standards in some previously poor countries to the standards of the developed world, depended greatly on global trade and access to global capital markets. For countries whose centrally planned economies had tended to stagnate, the end of the cold war in 1989 opened up the possibility of access to this dynamic world market. Some of these countries, including Hungary and Poland, were already GATT members but looked to expand their trade with the rest of the world in the wake of the break up of the ‘communist bloc’. The solution to the admitted deficiencies of the GATT was seen to be not to abandon it but to build a much more comprehensive World Trade Organisation which would subsume its achievements and extend into new areas of international exchange.

The most recent ‘Uruguay Round’ of negotiations, started in 1986 but was not completed until 1994. It negotiated this wider agenda and enabled the new World Trade Organisation to be set up. This is the context within which the current international negotiations about trade take place. It is through this mechanism that the liberalisation agenda has to be taken forward and at the same time the issues relating to non-market values, developing countries and economic adjustment have to be resolved. This has sustained the liberalisation process. The more recent accession of China to the WTO, although it remains a communist economy, recognises the importance of this for all trading countries.

For the purpose of this paper the key feature of the Uruguay Round settlement was an ‘Agreement on Agriculture’ (AoA). Without a device which would ensure that agriculture would be effectively brought within the disciplines of GATT, many agricultural exporting countries would have been unprepared to sign up to the much broader WTO agenda. The AoA brings agriculture firmly into the arena for future trade negotiations. It commits signatories to take the liberalisation agenda further and has to be the starting point for contemporary negotiations about the future of agricultural trade. It matters both because of the changes it has already brought about in agricultural trade and because it implies a commitment to the removal of trade distorting agricultural policies.

3.3. The Agreement on Agriculture

This agreement covers not only matters relating to trade between countries but the ways in which within countries governments provide support for their farmers. For the Community it required a significant change in the CAP itself - a shift that was possible only because in 1992, following the failure of what had been intended to be the final session of the Uruguay Round, the Community undertook major reform of the CAP, discussed in the next chapter.

The agreement required all forms of price support to be converted into equivalent tariffs - a process known as ‘tariffication’. The agreed tariffs, which were based on the level of protection operating in 1986-88, were to be reduced by a minimum of 15% and an average of 36% over a six-year transitional period. This effectively outlawed the variable import levy that the CAP had used to isolate internal prices from the ups and downs of the world market[2]. The level of protection remained high so that the initial impact on the internal market of the EU was small. However, the GATT, and later the WTO, agenda seeks to remove protection that stimulates production and distorts trade. Thus the use of fixed tariff rates, which could be negotiated downwards, meant that the level of world market prices would play an increasing role in determining prices within the EU.

The AoA did not require the removal of all support for agriculture. However, support payments were to be classified in ‘boxes’. Support, which does not directly relate to production, such as environmental payments, has been placed in a ‘Green Box’. This is said to be decoupled and fully acceptable within the AoA. In addition a number of direct payments to farmers were allowed to continue provided they included production limitation arrangements such as ‘set aside’, these were known as Blue Box payments. Payments that directly supported production, such as subsidies related to output, were classified as ‘Amber Box’. An Aggregate Measure of Support, (AMS) was constructed for these payments and the agreement required that this should be reduced by agreed amounts over a six-year period.

The opening up of markets was taken further by a minimum access clause which required members to make arrangements to allow at least 3% of home markets to be accessible to imports, rising to 5% by year six. However, it also allowed countries to apply additional duties if the landed price of an import fell below a trigger price based on 1986-88 import prices. This safeguard clause effectively dilutes the commitment to tariffication.

For agricultural exporting members of GATT a major cause of concern had been the export subsidies that enabled the EU to clear its domestic market and the US to penetrate the markets of third countries. Export subsidies drove world market prices below the costs of production in the exporting countries and resulted in a loss of markets for countries that were genuinely low cost producers. It was a critical element of the AoA for these countries that this situation should be brought to an end. They achieved a partial success. Annual expenditure on export subsidies had to be reduced by 36% compared with 1986-90 base and the volume to be cut by 21%.

Frame 3‑1 Producer Support[3] in OECD Countries in year 2001 [4]

The AoA included a so called ‘Peace Clause’ – in effect, countries agreed not to engage in disputes through the WTO mechanisms so far as agricultural policy and trade practices were concerned, even if they were incompatible with GATT principles, provided the country concerned was fully observing its commitments under the agreement. This Peace Clause was to apply for nine years, starting in 1995. However, the AoA included an agreement that a review of the achievements of the Uruguay Round should be undertaken in 2000 and should take further the liberalisation agenda for agriculture.

Developed country governments, under pressure from their farm lobbies, have applied the agreement in ways that minimise its impact on vulnerable farmers. This was done partly by the choice of a base year to ensure that tariffs were fixed at very high levels, and partly by concentrating tariff reductions on those items of least importance to domestic agriculture and on products where the set tariff level amounted to a virtual prohibition of trade. Despite this ‘dirty tariffication’, tariff levels have been reduced and the total amount of protection accorded to producers significantly cut.

Frame 3‑2 Asistance to agriculture in OECD countries in 2001 (NA% and €mn)[5]

Frame 3‑3 Value of production and support to agriculture in the European Union

Frame 3‑1 and Frame 3‑2 indicate the levels of assistance to agriculture in developed countries in year 2001, computed by the Organisation for Economic Co-operation and Development (OECD). The amount of support granted to agriculture in the EU accounts for over 40% of the total support granted in developed countries, followed by United States (21%) and Japan. Such support is estimated at 54% of the value of agricultural production without support (at border prices) in the EU, it is much higher (144%) in Japan mainly due to self sufficiency problems, and rather lower in the US (27%)

Notwithstanding the various reforms of the CAP, on the whole agricultural support remained rather unchanged in the nineties, as indicated in Frame 3‑3. After the 1992 reform, part of the support granted via market price support, the difference between the value of production at farm gate (VPfg) and at border prices (VPbp) , was substituted by payments to producers. In the EU the protection offered to farmers is made up partly of higher prices paid by consumers and partly by subsidies from the budgets of the EU and member countries. For EU consumers the shift from price support to direct payments, initiated in the MacSharry reforms, has meant that the implicit tax on food (the amount by which the price of food to consumers is raised by the CAP) has fallen from one third to one quarter of the price between 1986-88 and 2001. However, a growing volume of direct payments now have to be funded out of tax revenues.

At the global level OECD countries dominate international trade in agricultural commodities in both value and volume. Thus the efforts made in reducing protection must be welcomed. However, it is disturbing to note the continuing high PSEs for Japan and Korea, although partly justified by low self sufficiency levels in food, and the resistance to lowering protection in the non-EU European countries, Norway and Switzerland. Not all moves have been in the ‘right’ direction. For example the prospect of access to the EU has encouraged Poland and other Central and Eastern European Countries to increase their support for farmers, whilst Mexico as a member of the North American Free Trade Area has moved from negative to a very substantial level of protection. Negative PSEs, although rare, are also undesirable. In effect they depress agricultural production, and in a market which was not distorted by subsidised production in other places, would lead to higher prices for consumers than would otherwise be necessary.

3.4. The new negotiations

The AoA required member countries to resume WTO negotiations on agriculture in 2000. These would explore what further steps were needed to reduce trade distorting support and protection. The negotiations have to examine the impact of the agreement to date on agriculture, on non-trade concerns and on developing countries, and to see how much progress has been made in creating a fair and market oriented agricultural trading system.

A ministerial meeting convened in Seattle to set the framework for this discussion proved to be tumultuous as demonstrators took to the streets in opposition, indicating concern, among other things, about what they described as ‘globalisation’. Little visible progress was made at this meeting but discussions between officials continued and in November 2001 a Ministerial Conference of the WTO, held at Doha, Qatar, was able to set out a programme for negotiation. This programme not only takes on board the ongoing discussions on agriculture but extends into a number of longstanding issues such as services, intellectual property, investment, dispute settlement, environment, the transfer of technology and special treatment for developing countries. Many of these will impinge on agricultural trade but their significance is far wider.

At Doha the WTO members agreed to negotiate for further liberalisation in agriculture on the basis that the long-term aim was a fair and market oriented trading system, that the negotiations would deal with market access, the phasing out of export subsidies and further substantial cuts in domestic support. Allowances are to be made for non-trade concerns and the difficulties of developing countries. They also set a timetable for taking the agricultural negotiations forward. By March 31^st 2003 countries have to submit their formulae and modalities for commitments. Draft commitments have to be offered by a Ministerial Conference to take place in Cancun Mexico in September 2003. The intention is to complete negotiations by January 2005 as part of a single undertaking covering all the remit agreed in Doha.

At this stage member countries are submitting their proposals. A great deal of negotiation will take place before any final package emerges but papers on a wide range of issues have already been submitted. They include:

¨ Tariffs- the level of tariffs and the rate of reduction, tariff quotas and their application.

¨ The future of the Amber, Blue and Green Boxes. In principle, all Amber box support should disappear, but several countries argue that payments currently included in the Blue Box should also be phased out. There is also considerable debate about the future of the Green Box, ranging from countries that wish to see it extended to those who question whether it is being used to conceal continued trade distortion.

¨ Export subsidies and export credits – there is a commitment to their reduction and ultimate elimination. However, this is qualified by a statement that this does not prejudge the outcome of the negotiations.

¨ Developing countries and the provision of special treatment in their favour, including better market access to rich economies. There is agreement that food aid for humanitarian purposes is essential. But mechanisms are needed to ensure aid goes to those really in need and does not harm domestic production in recipient countries. Furthermore aid must not distort trade, displacing exports from competing suppliers nor be used as a mechanism for disposing of surplus by those who provide it or a as concealed form of export subsidy.

¨ A wide range of non-trade issues such as animal welfare, environmental protection, rural development, consumer information and labelling.

It is too early to predict the outcome of these complex negotiations for consumers and misleading to look at the entire WTO process in terms of agricultural and food trade alone. Indeed there are disagreements among members about what exactly they did agree to at Doha. However, several indicators can be identified of issues of special relevance for consumers.

¨ The reduction of tariffs, and the removal of quotas on products allowed in at reduced rates, makes it possible for consumers to enjoy both more variety and lower prices. How effectively this operates depends, among other things, on the existence of genuine competition within each country.

¨ Lower protection for farming implies less income transfers from the rest of society to the agricultural industry. Consumers benefit from lower prices and lower taxes.

¨ Export subsidies and export credits support internal prices by removing products from the domestic market. Their phasing out means that, whilst internal prices are likely to fall and consumers and taxpayers in exporting countries will benefit, in some importing countries consumers may face higher prices.

¨ Developing countries include some whose exports are frustrated by trade barriers. Exclusion from developed country markets means that some investments in agriculture and food will not be justified. For them, opening up these markets can assist economic growth, although the short run impact may be to raise the price of food for domestic consumers. In contrast farmers benefit and there is a reduced incentive for those who work on farms to move to cities in search of paid work.

¨ At the other extreme are developing countries that depend upon imports to meet the nutritional needs of their citizens. For these the end of export subsidies and the reduction of protection in rich countries could mean even greater immediate problems in supplying food for their people. If this leads to greater investment in their domestic agriculture it may strengthen their long-term ability to feed their own people. However, this process cannot cope with an immediate and pressing crisis.

It is clear that consumers are affected by a range of non-trade issues.

Food safety is an issue wherever the food is produced. There is no reason to assume that because goods are produced in foreign countries they are more or less safe than domestic goods. However in an era of enhanced consumer anxiety, consumers need assurance that all food is subject to processes of production and monitoring that minimise the risks of disease. Different monitoring systems and standards may be seen as justifying restrictions on imports.

Perceptions of animal welfare vary among differing cultures. Consumers need to be able to choose food products that take account of their concerns, but this is not easily accomplished for imported products. Traceability at present carried out mainly in some rich countries provides evidence about production methods as well as the geographical origin of food products. It is clearly unsatisfactory if WTO trade rules prevent such information reaching consumers. At the same time the use of this information to set discriminatory standards by the state clearly provides a basis for protection, the real justification for which may well be the high cost of domestic production.

Environmental concerns raise a complex range of issues for consumers, some of which are discussed at greater length in a later section of this report. Consumer demand is not just for food but also for a range of values associated with what may be called ‘quality of life’. Within this framework co-exist a wish to ensure short and long term food security, the enjoyment of landscapes, habitats and wild animals, the special place given to rural communities within some societies and the benefits of clean air and water. A good economic system enables consumers to make choices that enable them to give effect to those preferences that represent, among all these competing demands, the best possible value. A WTO system that ignored everything but market values would clearly imperil this. However a WTO that allowed such values to become the vehicle for concealed protection would become ineffective, threatening a return to general and overt protection. Consumer interests lie in finding the right balance and recognising that this may differ among communities and change over time.

4. The CAP and Consumer Interests

4.1. A brief background

The Common Agricultural Policy (CAP) was an essential component of the European Economic Community. Without arrangements that included agriculture the Community itself would not have been born. In practice the CAP rapidly became both the most visible and most expensive evidence of Community activity. It dominated its budget and created a trade barrier around member countries that, for some products, virtually excluded external competition.

The policy was framed in the aftermath of serious post war food shortages and among countries, many of which had a tradition of protecting domestic agriculture. Its main thrust was to maintain the prices of key commodities by regulating trade, limiting imports and subsidising exports, and limiting the quantity reaching the home market by intervention purchase. Price levels were fixed by the Council of Ministers under pressure from powerful farming lobbies. They thus tended to be above the average of the prices previously paid to farmers in member countries before the Community came into existence.

The CAP rapidly ran into difficulties. Production increased more rapidly than demand. More productive varieties of plant and animal were introduced and investment in farming was encouraged by new technology and the sustained high level of price. An inescapable evidence of difficulty was the accumulation of stocks of unsold produce in intervention stores (the so called wine lakes and butter mountains). Financially the costs of intervention and the costs for export subsidies grew remorselessly and dominated the budget of the Community.

As early as 1968 the then Commissioner for Agriculture, Sicco Mansholt, pointed to the need for a radical change in policy. He sought a switch from relying almost wholly on price support to policies that facilitated structural change and assisted the industry to adapt.[6] Dependence on price policy led to increasing problems as member country currencies became more volatile.[7] The Commission’s solution in effect created a separate currency for agriculture within the Community. It involved substantial budget costs. It involved considerable administrative costs, especially if fraud were to be avoided. It shielded agriculture from pressures to adapt in response to changes in the overall economic situation of member countries. As a result greater adjustments were required of the rest of their economies. The Commission understandably wanted to reduce these distortions. It did so by the politically convenient route of raising common prices towards those prevailing in the countries with appreciating currencies. In effect dragging up agricultural prices throughout the Community. This exacerbated the problem of controlling surplus production.

In the mid 1970s pressure on the policy was relieved by a world food crisis that at least for two years resulted in high world prices. However by the end of the decade surpluses were growing again and the Commission faced an ever growing demand on the EEC budget to fund farm policy. Ministers in the face of lobbying from farming interests refused to lower prices and so other means had to be sought to limit the cost of production. A number of schemes, including imposing co-responsibility levies, were tried but failed to contain the level of production. The product causing the greatest difficulty was milk, and in 1984 the Community adopted a system of individual quotas for milk, which imposed high penalties on producers who exceeded the amount they were entitled to sell. This approach enabled prices to EU consumers to be held well above world levels but at the same time greatly reduced the cost of milk support to the budget. From an economic perspective it replaced a visible surplus of output by a concealed surplus of excess resources retained in milk production. For consumers it meant that they continued to pay prices for milk much higher than those needed to ensure an adequate supply.

The application of quotas varied among countries. In the UK, for example, quota rights were tradable. In France they were tied to the individual farm. Either approach gives rise to some anomalies. Non-tradable quotas freeze the pattern of production. Technical and economic pressures mean that to secure low cost production, capable of competing in world markets, much larger sized dairy herds are needed than currently prevail in most of the EU. Saleable quotas allow this to take place whilst keeping aggregate production within limits the policy has set. Because the benefits of scale are so large, the value of the quota may at times exceed the value of the cows themselves. In contrast, non-saleable quotas make it possible for small-scale producers to continue, so long as policy is prepared to buy up and dispose of any surplus. This dialogue is essentially between those concerned with economic efficiency, low prices to consumers and low costs for taxpayers and those whose primary goal is social, to protect and preserve the traditional small scale dairy farming which has characterised much of EU milk production.

As quotas removed milk from the centre stage of budgetary concern, the grain market soon developed a similar surplus problem. The solution adopted, was to use ‘set aside’. If farmers were to receive support for their grain sales they were required to take a proportion of land out of grain production. Again instead of benefiting from improved productivity via lower prices, consumers were forced to see land idled.

These systems of support greatly distorted international trade. Access to the EU market was regulated by tariffs and variable levies that ensured imports could not undercut domestic production. Surpluses were sold to third countries with the aid of costly subsidies that forced down world prices for all exporters, resulting in lost markets for producers with far lower costs than the EU. Some low cost producers were forced to contract production. As a result the world was made poorer because, as a result of subsidised trade, more resources were used to supply the market than would have been used in their absence This produced a collision between EU internal policy, the CAP, and its relationships with trading partners elsewhere in the world. Reform of agricultural policies and trade thus became, for many countries, a sticking point in the Uruguay Round trade negotiations. For the Community the benefits of trade reached far beyond concerns about farming. By the mid-nineties agriculture accounted for around 2% of GDP, compared with around 10% when the CAP was initiated and for some 5% of employment compared with 20% in the early 1960s. Thus a failure to reach a settlement in the GATT generated a clash of interest between agriculture and the rest of the economy.

The final session of the Uruguay Round GATT negotiations was supposed to take place in 1990. The EU failed to offer a deal which went anywhere near the requirements of the agricultural exporting countries and the negotiations broke down. In fact the Community could not make an acceptable offer unless it made some significant changes in the CAP. It did so in 1992 as part of what became known as the MacSharry Package, after the name of the Agricultural Commissioner who introduced it. This package brought new life to the Uruguay Round and allowed the AoA ultimately to be negotiated.

The reform involved three sorts of change. First support prices for some key commodities within the EU would be significantly reduced. Cereals prices were to be cut by 30%, making EU cereals competitive in the animal feed market. As a result the pig and poultry sectors would enjoy lower costs and the institutional support prices for beef and butter could be reduced. Second, to offset lower prices cereals farmers would be offered compensation payments, funded by the Budget. The restrictions on production embodied in the set aside regime were continued, so that farmers who failed to observe these rules would lose their entitlement to compensation. For beef and sheep, payments were related to a fixed number of animals per farm. Third, a number of accompanying measures were introduced to facilitate change and promote policies favourable to rural development, early retirement, afforestation and environmentally sensitive forms of farming.

The lower prices and the control of production provided the basis for a negotiated settlement of the Uruguay Round. The reform package made internal price levels lower. This also reduced the cost of export subsidies. Support provided by compensation payments was regarded as Blue Box, which meant that they were excluded from the calculation of the amount by which internal support had to be reduced. Tariffs were fixed at levels based on the prices of 1986-88 and gave a great deal of protection from cheaper imports. As a result the Community could sign up to an agreement that brings agriculture within the disciplines of the GATT framework. From a farmer’s perspective, the immediate impacts of this settlement were very small. However, they have a much more significant implications for farmers in the long term. Over a five-year period both the newly fixed tariffs and export subsidies were to be reduced. Domestic support that fell within the AMS, i.e. was not linked to supply control, would be reduced. The commitment to further negotiations in 2000 implied more moves in the direction of liberalisation. Ultimately these would require more substantive changes in the CAP but the issues could be addressed later. By that stage they would have to take account of the new situation created by the prospective enlargement of the Community.

Many countries in Central and Eastern Europe wished to become members of the Community. Agriculture, as we shall see in the next chapter, represented a proportionately much larger section of their economies than in the existing EU. Within the Community they would be required to adopt the same policies as other members, the acquis communautaire. The medium to long-term impact of imposing CAP prices would be to stimulate production and discourage internal consumption. Not only would this damage exporters in the rest of the world but it seemed likely to place an unsupportable burden on the EU budget. In practice the accession negotiations have proved protracted. Questions about agriculture remain central to the debate. These are looked at more closely in the following chapter that describes more fully the situation of the acceding countries and the proposals made by the EU.

These questions greatly influenced the discussions that took place around the most recent reforms of the CAP. These formed part of Agenda 2000, a blueprint for the development of the Community presented to the Council in 1997, part of which dealt with the further reform of the CAP. The Commission’s preferred route was to replace production related price support by direct payments linked to accompanying measures to make the CAP part of a consistent rural policy. The Commission hoped by these measures to enable EU farmers to compete in the market place, to contribute to rural development and the maintenance of landscapes and to sustain farm incomes. Central to its thinking is the wish to preserve the small scale ‘family’ farms which it regards as characteristic of the ‘European Model of Agriculture’. Such a goal is undermined in any affluent society in which market forces ensure that real incomes grow more rapidly in other sectors than agriculture. As a result young people seek better prospects off the farm, leading to a situation in which the farming population ages and farm sizes increase to levels capable of generating incomes that are acceptable to those who remain. Thus employment in agriculture, hunting and fishing which, for the Community of Six in 1960 was 15 million, was by 1999 just over 3.4 million. Among the same six countries, the number of holdings fell from 4.5 to 3.7 million between 1975 and 1997.[8]

The reform process introduced new language and a re-emphasis on the goals of policy. ‘Pillar I’ consisted of traditional, production related policies that enhanced prices and benefited most the largest producers. A ‘Pillar II’ was made up of environmental and rural development policies. The thrust of the reform was to shift the emphasis of public support for agriculture from production to these Pillar II objectives, from assisting production to supporting producers. Member states were required to introduce their own programmes for rural development, which would be subject to approval by the Commission.

To help fund this, member states are allowed to reduce direct payment to their farmers by up to 20% and divert this money, together with a contribution from national funds, to Pillar II type policy. This activity, known as ‘modulation’ represented an attempt to retain support for farming, whilst diminishing the trade distorting impact of direct payments, which inescapably are added to the farmer’s perception of the reward for production.

In addition to this innovative approach, Agenda 2000 resulted in a reduction in the cereals intervention price and the amalgamation of increased direct payments for arable crops into a single, non crop-specific area payment. Beef market support prices were lowered and direct payments increased under a complicated set of premium payments. For the dairy market, the milk target price was cut by 17% but the fundamental issue was dodged by extending the quota regime for eight years. The financial ceilings for the CAP were fixed to 2006 and an undertaken was given to review the working of the reformed policy in 2002.

The Agenda 2000 agreement took further the MacSharry reforms of 1992. It was ‘described as deepening and widening’ the CAP. It also reflected the position the Community was to adopt in international debate, stressing the unique character of what it described as the European Model of Agriculture – basically a device to justify defending small family farms that could not achieve a satisfactory level of income by selling their output at internationally competitive market prices. The Berlin settlement, which marked the completion of the Agenda 2000 package, did not tackle the underlying problems of the CAP relating to the place of EU agriculture in world trade or to enlargement. It was agreed at the time that the 2002 Mid Term Review (MTR) should consider what further measures would be needed. That is the current state of the debate and forms the backdrop to the analysis presented in this paper.

In July 2002 the Commissioner for Agriculture, Mr Fischler put forward some important radical ideas for further reform. The Commission described the CAP, in its July MTR paper[9], as an evolving policy. It saw the task of the Mid Term Review to be to support agriculture and rural areas. It rejected the idea of an unsupported agriculture; nor was it prepared to see agricultural support made a responsibility of individual member states – the so-called ‘renationalising’ of agricultural policy. Instead it sought to promote what it described as a European Model of Agriculture which responds to objectives set at the Berlin and Gothenburg Summits. In October 2002 the European Council set financial ceilings on the CAP. This limited the amount which could be spent from the Common Budget for the EU of 25 to € 42.9 billion in 2004 rising to € 48.5 billion in 2013. In effect this implied that any additional expenditure by the CAP would have to be funded by reductions in the amount spent on some existing activities. In December 2002 the negotiations for the entry of 10 new member countries were brought to a successful conclusion. These countries will now join the EU in 2004 on the basis of these agreements.

These developments paved the way for the Commission to make further proposals for CAP reform to deliver a long term perspective for sustainable agriculture based on its ideas in the July 2002 paper. This paper was put to the Council of Ministers[10] in January 2003. During the course of this year decisions will have to be made concerning its implementation.

According to OECD estimates, the total support to EU15 agriculture in 2001 accounted for € 110 billion, i.e. 45% of the value of production at farm gate prices, almost of the same size of the net value added of agriculture (€ 113 billion). Such support was not substantially reduced in the nineties, notwithstanding the MacSharry reform of the CAP and the GATT-WTO Agreement on Agriculture.

A correct knowledge of the effects of economic policies is necessary in order to assess their consistency and the attainment of stated policy objectives. Present CAP is still non transparent. Notwithstanding numerous requests by consumer organizations and representatives, the EU Commission does not yet mention the in its official documents the cost borne by consumers as a consequence of agricultural market price support. According to OECD estimates, such cost in the EU-15 accounts for about 50% of the total support,[11] it is just incredible that such huge cost for citizens and its relative impact on income distribution are not even mentioned in documents dealing with the reform of the CAP and its enlargement to new Member States.

4.2. Present debate on the reform of the CAP

The Commission argues that a further reform of existing measures is needed to:-

• Enhance the competitiveness of EU agriculture
• Promote a more market oriented, sustainable agriculture
• Provide a better balance of support and strengthen rural development.

Its proposals embody four major elements.

First, the most innovative element in the recent Commission proposals is to consolidate direct payments into a single payment per farm. This will be based on historic receipts but paid as a single income payment per farm. Entitlements to payments will be linked to the land, and if the farm, or part of it, is sold, the single payment on a per hectare basis will move to the new owner. Farmers will no longer have to produce particular commodities in order to receive direct payments but they will have to comply with statutory environmental, food safety and animal health and welfare standards.

Second, the Commission describes this as decoupled[12] but it will only be paid to farmers who continue to meet stringent land management standards, a form of what is called ‘cross compliance’. An audit of farm practices will be required to ensure that this is the case. This potentially expensive activity is needed to justify the continued support of farmers in respect of their role as producers of ‘public goods’. It will also provide incomes for farmers greater than they could earn in a competitive market. Despite the requirement for ‘stringent land management standards’, it seems unlikely that the environmental, safety and welfare requirements can be much more demanding than those one might expect to be enforced by regulation in modern European societies. If this is the case what these payment will achieve is to keep in business farmers who would otherwise be forced out. This may preserve what the Commission calls ‘The European Model of Agriculture’ but other members of GATT may see it as continued trade distortion, even if it is less obvious than under previous arrangements.

The third device takes further the idea of modulation agreed in Agenda 2000. It is to be made compulsory, although small farms will be exempt. The Commission system of ‘modulation’ will apply to all direct payments, now to be a single income payment. These payments are to be reduced over time, a process known as ‘degression’. The Commission sets out its proposals in a table (Frame 4‑1).

It is clear from the table that the reduction in direct payments, needed to finance other aspects of the policy, will affect mainly the large commercial farms. In the Community, most farms are small and will be unaffected. The funds released are to be used to support a larger Rural Development Programme, the Pillar II activities of the CAP, and to fund direct payments that it is proposed to provide as some other commodity regimes, notably milk, are reformed and have to adjust to lower prices. The funds used to support the rural development programme will be distributed to member states on the basis of agricultural area, agricultural employment and a GDP per capita.

Frame 4‑1 The Commission’s proposals for degression and modulation[13]

Legend: Percentage reduction of direct payments A: Degression; B to D By tranche of direct payment; E Modulation – Destined for the Rural Development Budget; F Destined for financing future market needs

The effect of these proposals is to redistribute funds from larger intensive cereal and livestock areas to poorer and more mountainous regions and countries. Member states will be able to use funds released by modulation in support of existing rural development programmes they were required to establish under Agenda 2000. However the proposal envisages extending the scope of ‘accompanying measures’ to be funded under this programme in three new directions.

• Food quality. Farmers are to be encouraged to participate in quality assurance and certification schemes. Support is to be given to producer groups to promote products designated under these schemes.
• Meeting standards. Aid would be given for up to five years to help farmers implement the standards on food safety, environment, animal welfare and occupational safety demanded by Community legislation. A flat rate payment will be given to help farmers meet the costs of farm audits, required in order to verify they meet the standards for the receipt of direct payments.
• Animal welfare. The Commission proposes to introduce payments for farmers who commit themselves to animal welfare practices which exceed the mandatory level set in relation to agricultural environment schemes. Support will be paid annually up to a maximum of €500 per livestock unit.

Fourth, The Commission proposes to bring the cereal intervention price down by a further 5%, to the level proposed in Agenda 2000 and to discontinue monthly increments in the support price. Direct payments will be increased by €3 per tonne to take account of the price cut. The Commission believes that this will keep internal prices in line with world market prices and yet provide a safety net in the event of a market price collapse. It proposes to abandon intervention for rye and to abolish special aid for durum wheat, except in traditional areas where it will be reduced to 250Eur/ha. The rice intervention price is to be reduced by 50% bringing it into line with world prices. An intervention safety net will be put in place and rice producers will receive direct, compensatory payments equivalent to € 177/tonne. Part of this, €102, will become an income payment the remainder will be paid in response to continued rice production on a maximum guaranteed area.

The quota system which underpins the dairy regime is to continue until 2014/15. In 2007 and 2008, the quotas are to be increased by 1% to offset a cut in the support price. Over five years the intervention price for butter is to be cut by 35% and for skimmed milk powder by 17.5%. The effect of these changes on farm revenues will be offset, at least in part, by direct payments that will become part of the single income payment per farm.

The radical ideas presented in the July paper generated a storm of controversy within the EU, particularly from those countries who received the largest net transfers under existing arrangements. However, before the merits of the case could be carefully examined the French government, aided and abetted by the German Chancellor, placed a bomb under the entire CAP reform process by freezing the budget at the level fixed for 2006 until 2013, increased by 1% per year to take account of inflation. It seemed difficult to see how the commitments of the Union towards the countries that the same Summit agreed to allow to enter in 2004 can be met within this financial ceiling.

Speaking in Ireland on 11^th November 2002[14], Mr Fischler insisted that his proposals were still necessary to enable the Community to meet commitments made in the Doha Round and at the Johannesburg Summit for Sustainable Development. He argued that, in the absence of decoupling, the only way to meet WTO obligations to cut trade distorting support would be to give up some of the direct payments. He pointed out that by fixing the ceiling for CAP expenditure and agreeing to enlarge the Union, the Summit meant that funding the reform process and including new members would imply smaller shares for all. Progress in rural development would depend considerably on financial input by member governments. The January proposals provide a framework for the continued development of the CAP along the lines the Commission has outlined.

For consumers the one certainty is that a substantial amount of money will still be spent in support of agriculture. Just how that will be raised, who will benefit and how it will impact on the countries due to join the EU in 2004, remains far from clear.

4.3. Do the CAP costs to consumers matter?

In section 5.3 we include a calculation setting out in a numerical form the costs imposed on consumers by the CAP and how these will impact on consumers in the joining countries. Here we set out some of the characteristics of food supply and demand that are important in assessing the significance of these costs, which consist of two elements. First the difference between the cost to them of the food they would buy if they had unrestricted access to world markets and the higher price the policy compels them to pay within the EU. Second, the amounts they pay in taxes to support activities such as export subsidies, direct payments to farmers and environmental grants.

Against these costs must be set some benefits. Consumers may feel more secure because a large share of their food supply is produced locally. Consumers may feel they benefit from the impact on their environment of the type of farming the CAP protects. Consumers may derive pleasure from the continued existence of some farming communities that, in a competitive environment, could not be viable. These benefits are hard to measure but this does not mean they are unreal. Some of them we discuss in the final chapter of this report.

Food consumption represents a declining component of consumer expenditure in rich societies. However, especially for poor people it remains a large and critical element in personal expenditure. In the EU, the share of food and beverages in total consumption has fallen since the EEC was created and its people have become wealthier.

Frame 4‑2 Falling share of Food and Drink in Consumer Expenditure[15]

Only a proportion of the money spent on food represents its value as it leaves the farm gate. This proportion varies greatly between commodities. Thus, in the United Kingdom in 2001 it was estimated that more than 70% of consumer expenditure on food and beverages relates to values added after the farm gate. These include processing, distribution, catering and retailing. They are areas in which competition has enforced considerable structural change since the Community came into existence.

Since food as produced by farmers represents a diminishing proportion of consumer food expenditure, it may well be argued that the increased farm product prices resulting from the CAP are not very important. Even if these were reduced dramatically, the impact for most consumers would be modest. This misses some important issues that grow in relevance as the EU is enlarged.

First, although the proportion of total expenditure may diminish, the total resource involved remains substantial. If this is not used efficiently then the economy of Europe is made poorer and this will impact especially on poorer people.

Frame 4‑3 Share of food and beverages in consumer expenditure by country

Second, other countries, including some developing countries are denied access to EU markets and face subsidised competition in third markets. This impedes their growth and in the long term the contribution they can make to the world economy as a whole. Consumers are the ultimate beneficiaries of economic growth and the CAP, in common with the agricultural policies of many developed countries, including the USA and Japan, tends to diminish this on a world scale. It is a form of ‘shooting ourselves in the foot’. Third, whilst raw material food accounts for a small share of the budget of most EU consumers, it is much more important for those who are poor.

Frame 4‑4 The greater weight of food expenditure in budgets of poorer households[16]

Frames 4‑3 and 4-4 shows how this applies Europe. Everywhere poorer people spends proportionately more on food and in the countries with the lowest per-capita incomes, (all candidate countries except Slovenia), more than a quarter of expenditure goes to feed the family. For these people the price of food is much more significant than among the richer, and probably more politically articulate, members of the society.

The impact of the CAP on consumers has been reduced as a result of the MacSharry reforms and the Uruguay trade round (Frame 3‑3). OECD data indicate this has applied too for the countries as a group and confirms the effectiveness of the AoA. These countries account for the majority of world trade, so it can reasonably be claimed that the overall position so far as consumers are concerned has improved since the early 1990s. However, it remains clear that consumers are still paying significantly more than is needed to supply their food requirements. There is a pressing need for further reform.

Within the Community the level of support to producers varies greatly among commodities. For some, such as durum wheat and beef, it dominates their receipts (NAC greater than 200%). For eggs, in contrast, it is negligible (NAC about 100%). Frame 4‑5 illustrates the range involved.

Frame 4‑5 EU, Development of Producer Assistance Coefficients (100% = border price)

This differential support for products is itself a powerful source of economic distortion and loss to the world economy[17]. Implicitly it frustrates consumer preference directing the use of resources and results in a bundle of outputs that remain significantly different from that which would be of greatest value. To some degree recent movements, which show falls in support for most cereals, sugar and milk and increases for beef, pig and poultry, represent an improvement, but the underlying problem remains. This is of special importance for consumers in the EU because, despite shifts from market price to direct support, the burden of producer support remains firmly on EU citizens shoulders.

5. The CAP and the New Members of the Union

The current process of enlargement envisages some 104 million people in Central and Eastern Europe becoming members of the European Union and applying its policies. In addition Malta and Cyprus are expected to join in 2004 whilst Bulgaria and Romania, both countries with substantial agricultural populations, are also expected to become full members of the EU at a later date.

5.1. Basic features

This study, whilst it records some information for a wider group of countries, focuses on the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia. These countries are collectively referred to as the CEEC8.These are countries which formerly had centrally planned economies but in 1989, with the end of the cold war, began the transition to market economies. The prospective membership includes countries with very different social and economic sizes. Four have populations below five million. In contrast Poland alone accounts for almost 40 million people (Frame 5‑1). All of them experienced severe reductions in real income in the early 1990’s. Since then, although there have been fluctuations from year to year, incomes have tended to grow.

Compared with the existing members, the CEEC countries remain relatively poor. As Frame 5‑3 demonstrates,[18] only Slovenia approaches the income level per head of the poorest member countries in EU15. For consumers in the CEECs, the early 1990s were a period of turbulence and declining GDP (Frame 5‑2). Inflation rates were so high that assets valued in money terms became virtually worthless (Frame 5‑4). There was a marked improvement by the end of the decade, but inflation rates remained considerably higher than among existing EU member countries.

Food expenditure accounts for a much larger share of household income than in the existing member countries (Frame 4‑3). As a result, increases in food prices are of considerably greater significance, especially for the poorest households. For Latvia and Romania food accounts for almost 40% of all household expenditure. However, the significance of this has to be set in the context of societies in which a very much larger share of the population derive their income from farming. Agriculture is also a much larger part of the total economy than in most countries of the existing EU. In terms of its share of GDP it remains largest in Bulgaria and Romania, but everywhere it is declining as other parts of the economy become established and grow. Nevertheless there is a considerable difference between the position in the existing EU, where it accounts on average for only 1.7% GDP, and any of the Candidate Countries (Frame 5‑6).

Frame 5‑1 Population in candidate countries (mn inhabitants)

Frame 5‑2 Rates of change in Gross Domestic Product of CEEC8[19]

Frame 5‑3 Gross National Income ($) and Gross domestic Product (PPS) in year 2001[20]

Frame 5‑4 Gross National Income ($) and Gross Domestic Product (PPS) in 2001

Frame 5‑5 Rates of inflation in CEEC8 (weighted average of national rates)

Frame 5‑6 Agriculture’s share of Gross Domestic Product[21]

Data for 2001 except for countries * for which the figures refer to 2000

Frame 5‑7 Percentage of agriculture in total employment[22]

Agriculture is also important for the trade balance of these countries. International trade in agricultural commodities accounts for a considerable share of total trade

Frame 5‑8 Importance of agriculture in trade[23]

The expectation of higher income in agriculture after EU accession probably contributed to the increase of the share of agricultural employment in total employment in some large candidate countries (Frame 5‑7) such as Poland, Romania and Bulgaria

The high proportion of people in agriculture means that farm price shifts have a major impact on the real income of many people who are relatively poor. Thus whilst consumers in the towns benefit from lower prices, many people in the countryside fear them. For countries joining the EU and applying the CAP this is an important issue. In the long run their agriculture, if it is to be competitive, will have to shed a high proportion of those currently employed. In effect the present situation is one of concealed unemployment, conveniently coped with in rural communities. If real incomes are to rise and approximate to those in the rest of the Community, then most of these people will have to find higher productivity jobs. In so far as the CAP underpins existing agricultural activities it may shield a significant number of rural consumers in the short term, at the expense of denying them and their children the full possibility of earning incomes equivalent to those elsewhere in the EU in the longer term.

Frame 5‑9 Transfers associated to agricultural policy in EU15 and CEEC8 in 2001[24]

The levels of support for farming vary considerably among the applicant countries. Frame 5‑9 shows estimates of the components of total support to agriculture in the EU15 and in the new members CEEC8 as a percentage of the value of production at border prices. Positive transfers benefit agricultural producers by means of market price support (22% in EU15, 13% in CEEC8) and direct payments (18% in EU15 and 6% in CEEC8), while another component of support flows to general services for agriculture (4% in EU15 and 3% in CEEC8). Such transfers flow from consumers (20% in EU15 and 10% in CEEC8), and taxpayers (24 in EU15 and 11% in CEEC8). Minor flows between taxpayers and consumers are not indicated.

Estimating the cost of adopting the CAP for consumers in the new member countries involves making assumptions about the extent to which the Commission’s July 2002 MTR proposals are accepted by the Council of Ministers. If they are adopted then a further move will have been made from market price support towards tax-funded payments. However, a substantial part of the cost will still be borne by consumers. For new member countries, where incomes are relatively low, food continues to account for a large share of household expenditure and a higher proportion of people continue to work in farming. In these countries the impact of the CAP will be felt in personal real incomes to a much greater degree than is characteristic of the existing Community. Whilst farmers will gain, at least in the short term, consumers will experience both higher food prices and higher taxation levels needed to fund the policy.

5.2. Current negotiations

The process of negotiation with the new members has been protracted. Each applicant has its own list of priorities and problems. For the Commission, the ultimate goal has to be the successful application of the ‘acquis’ to all members of the enlarged Community. Existing structures vary from very large units, the legacy of collective farms under central planning to tiny family holdings that are primarily subsistence farms.

In a paper delivered in the spring of 2002 the Commission set out its position. The Commission starts with a clear statement that the acquis has to be applied combined with recognition of the need for restructuring the agriculture of the applicant countries. As things stand, applying the existing CAP would lead to an increase in production and a decrease in consumption within these countries because of price increases. It recognises the need for radical structural reform and recognises that simply adopting current EU arrangements in full could obstruct that process. It also states that the enlargement process has to be completed within the financial guidelines already determined for the Community by the Berlin Summit. Its proposals are designed to enable the accession to go ahead whilst recognising these restrictions and promoting structural reform to enable the new members to compete.

A major issue concerns the level of ‘direct payments’. These have become a dominant feature of support among existing member countries but the Commission believes that if they were offered on the same terms to countries which had not experienced the high prices prevailing among the Community of fifteen, they would make the process of structural adjustment more difficult. Therefore the terms of accession include a phasing in process starting with payments at 25% of the rate paid elsewhere in the Community in 2004, building to 35% by 2006 and then, following the negotiation of a new financial package, gradual approximation up to 100% in 2013. In some applicant countries national governments already made payments to farmers in excess of the level proposed for 2004. Although these payments are not consistent with the rules of the Community, the proposal was that they should continue until the incremental payment of EU direct payments reached the prevailing level. Paying direct payments, on the same basis as exists within the EU, presents severe administrative problems where there are very large numbers of small farms. At the heart of that system is the Integrated Administration and Control Scheme (IACS). To meet this issue the Commission proposes for up to five years, a simplified system of payment based on a decoupled payment based on the whole agricultural area. This would be paid regardless of whether the farmer continued to produce or not. If a country chose not to adopt this simplified scheme, and in any case, when the transitional period during which it was to operate was over, they would have to apply the normal EU scheme, including IACS.

The CAP policies rely extensively on supply control and this process is to be extended to the new member countries. For the allocation of quotas and other supply control measures, the base is to be related to production in 1995 – 2000. A key component in this process is the existence of a reliable statistical base providing the same information as is used already in the Community. A harmonized agricultural census has been carried out in the Czech Republic, Estonia, Hungary, Latvia, Slovakia, and Slovenia. The results are already available for some countries. Cyprus, Lithuania, Malta, and Poland planned to carry out the survey in 2002 and 2003 so that results could be expected for 2003 and 2004. On the basis of this information the Commission will allocate quotas and headage limits so that CAP policies can be applied in the new member countries.

The Community in its pre-accession programme has already been involved in rural development through the Special Accession Programme for Agriculture and Rural Development (SAPARD). The Commission notes that most of the new members will fall into the Objective 1 category for Community support and will therefore qualify for many of the schemes already tried out under the limited time scale of SAPARD. These will be funded partly by the guidance section of the CAP and partly from Community structural funds.

In addition the new members will qualify for the ‘accompanying measures’ that exist as part of the CAP and will be extended if the Commission’s reform proposals are accepted. These measures to assist early retirement, ‘Less Favoured Areas and Areas with Environmental Restrictions’, agri-environment and afforestation of agricultural land will be co-financed from the EAGGF Guarantee section. The agri-environment has already been applied on a pilot scale under SAPARD, but the other accompanying measures will be new to the new Member States.

In the next section we report the outcome of an analysis of the economic impact of the CAP on these countries.

5.3. The impact of the CAP on the CEEC8[25]

The Common Agricultural Policy is itself in a process of change. Some of the pressures for this change have already been indicated, the commitment to enlargement, the ceiling set on the total level of payments to producers at European Summits and the need for the EU to engage in a further round of WTO negotiations. More immediately, in the Mid-term review (MTR) of the CAP the Commission has set out some radical new ideas for the future of the policy. These were later presented as draft new regulations, to the Council of Ministers in January 2003.[26]

The analysis, which follows in this chapter, requires a clear-cut basis for comparison. It therefore explores the implications of applying the CAP as it was in 2001 to the Central and Eastern European 8 (CEEC8). This enables use to be made of the important work by OECD on monitoring agricultural policies in the EU. Clearly, if at the point of entry the CAP has changed so that the prices and direct payments granted to EU farmers are different than those in 2001, their impact on income levels and distribution, resource allocation and the environment will be different. Some discussion of the implications of trends in policy implicit in the MTR proposals figures in Chapter 6 of this report

Frame 5‑10 Share of 8 Central European Countries on total 10 new EU members

The 10 new member countries joining the EU by July 2004 include two small Mediterranean countries and a much larger group of CEEC8. The two Mediterranean countries account for a very small share in the agricultural economy of the new members: less than 1% in terms of agricultural employment and of utilised agricultural area, less than 4% in terms of agricultural value added. From the consumer side, their population accounts for less than 2 per cent of the total population New Members (Frame 5‑10).

As the agricultural economy in Mediterranean countries is rather different from the Central and Eastern European Countries, our analysis of the impact of implementing the Common Agricultural Policy in the New Member Countries will be limited to the eight Central and Eastern European Countries. We will gain in terms of a more homogeneous approach in the identification and possible solution of existing problems, without losing too much in the total assessment of the impact of enlargement both in New Members and in the EU15.

Among the eight CEECs, Poland is by far the largest country, accounting for about half of the total CEEC8 aggregate (e.g. 52% of population, 54% of agricultural production). Hungary is the second largest country (14% in population and 15% in agricultural production), immediately followed by the Czech Republic (14%) and then by Slovakia, Lithuania, Latvia, Slovenia, and Estonia.

Information on agricultural support is mainly collected and estimated by the OECD, and will be further analysed in the following paragraphs. It deals with 11 major commodities, accounting for two thirds of the total agricultural production of the CEEC8 aggregate (Frame 5‑12). However such share differs among each single country, being highest in Hungary (89%) and lowest in Poland (57%).

Frame 5‑11 Commodity shares of the CEEC8 aggregate

The most important commodities analysed in the CEEC8 aggregate (Frame 5‑11) are pigmeat (18% of the total value of production), milk (13%) wheat (8%) and sugar (7%).

Frame 5‑12 Share of analysed commodities on the total production of new member states

5.4. Changes in agricultural support

In Frame 5‑13 the support granted in the CEEC8 to the 11 major commodities analysed is presented in the most compact way, as one country and one commodity aggregate.

Frame 5‑13 Average support before and after CAP implementation

According to our estimates for the 11 commodities, based mainly on OECD database, in the CEEC8 the market price support (MPS, i.e. protection granted to farmers mainly by means of import levies, export subsidies and surplus disposal) increases domestic market prices on average by 14% of the border price, while in the EU15 such increase is estimated at 35%. Direct payments granted to producers (PP) provide a further 10% increase of the farmer receipts, while in the EU15 they account for 36%.

Altogether the commodity-specific public support to agricultural producers for our 11 commodities accounts for 24% of the international market value of production in the CEEC8 and for 71% in the EU15. Non commodity specific expenditure for general services (GS) accounts for another 4% in the CEEC8 and for 4.4% in the EU15.

At a first glance, without taking into consideration the adjustment in quantities demanded and supplied as a consequence of the changes in domestic prices, the impact of extending the 2001 acquis communautaire of the European Union in agricultural policy to the CEEC8 is likely to increase the revenue of CEEC8 farmers by 38%. Transfers from consumers through market price support (MPS) and transfers from taxpayers via producer payments (PP) would triple. We will analyse more in detail such aggregate figures in the following paragraphs.

Developments in support in the CEEC8 and the EU15

The past development of public support in the nineties is indicated both for EU15 and CEEC8 in Frame 5‑14 as an aggregate figure for the 11 commodities analysed. In the last decade, the difference between public support granted in the Union and in CEEC8 has been rather stable. Two scenarios are clearly detectable:

a) Traditional scenario: New member countries will adopt the present acquis communautaire of the CAP, as was the case for previous accessions to the Union.

Frame 5‑14 Trends in producer assistance to agriculture and policy options

Public support in the new Member Countries would substantially increase. Assuming a ten-year transition period for fully adopting the CAP, as envisaged by the EU Council of Ministers, the increase in support would follow a pattern indicated by the black line and triangle markers from the present situation (year 2001 and 2003) to the full CAP adoption 10 years later in 2013.

The graphic trends presented in Frame 5‑14 clearly indicate how much the policy implemented by the CEEC8 differs from the past policies. Market price support will be implemented immediately in year 2004, while payments to producers will increase gradually from 2004 to 20013.

b) Free trade scenario: Instead of increasing protection and direct payments in CEEC8, both EU15 and CEEC8 will phase out the present amber-box price distorting policies and substitute them with green-box policies well targeted to any environmental, social or territorial objective including them in the second Pillar of the CAP, the Rural Development Policy. The CAP market policy will perform mainly as a safety net, stabilising domestic prices without supporting them in the long run.

A free trade approach would attain better the goals of greater transparency, efficiency, equity and sustainability, it was already implemented in the early nineties by most CEEC8 and is recommended in WTO declarations. The changes in market support implicit in such free trade scenario are indicated by the black lines (bullet markers for the EU15 and square markers for CEEC8).

Implementing the EU-15 acquis communautaire

Frame 5‑15 illustrates more in detail the differences in price support granted at present in the CEEC8 (upper panel) and in the EU15 (lower panel) for each analysed commodity. The international (border) price is taken as a base (bP=100), and for each commodity the market price support (MPS) and commodity-specific payments to producers (PP), increasing his revenue, are indicated as percent increases of the border price.

According to OECD surveys and estimates, in the CEEC8 market price support is granted mainly to sugar, eggs, and poultry production. These commodities also benefit from direct payments to producers, payments granted in moderate amount to all commodities.[27] For cereals, oilseed and sheepmeat, in year 2001 domestic prices have been slightly lower than prevailing international prices, generating a negative support, which could be considered as equivalent to a tax on producers.

In the European Union the 1992 CAP reform dismantled domestic price support for cereals and oilseed. Producer revenues were maintained by granting compensatory payments per hectare in order to smooth the adjustment process to the new relative prices. To such purpose, they should have been degressive and limited in time. On the contrary such payments were maintained and called production aids. As a consequence the revenue of producers was not substantially affected by the reform, and the foreseen structural change in production did not take place. At present a substantial support to sugar, milk, beef and poultry, is still granted via market price, while public aid to other commodities is mainly granted via direct payments. The average support is much higher in the EU15 than in the CEEC8 especially for cereals, oilseeds, sugar, milk and beef, while for eggs the average support in the CEEC8 is higher than in the EU15.

The CEEC8 levels of public support to our 11 agricultural commodities was computed as a weighted average among the eight countries, whose agricultural commodity-specific policy is however still rather different, as shown in Frame 5‑15. Market price support is higher in Poland and in the Czech Republic. In Slovenia average market price support and total support, including payments to producers are almost as high as in the EU15, probably due to the net-importing status and to higher costs of production in mountain regions.

Adopting the CAP will substantially increase and level off the average agricultural support in all countries (Frame 5‑16, central panel), according to the commodity mix of each of them. Among commodities the largest increase in producer revenues (price support and payments to producers) would be for beef, cereals and milk. Among countries, the largest increase would be for Baltic countries, where at present agriculture is relatively less supported, while the smallest increase in average farm revenues will take place in Slovenia, where at present some commodities are even more supported than in the EU15.

Frame 5‑15 Assistance coefficients (border price =100) before and after CAP implementation

Frame 5‑16 Assistance coefficients (border price =100) by country

5.5. Impact on consumers and producers

Shifting from the present CEEC8 pattern of commodity support to the CAP support is likely to generate profound changes in the structure of consumption and production, originating a large income redistribution between consumers, taxpayers and agricultural producers.

While direct payments to producers have been phased in by the EU Council of Ministers in a 9-year transition period, from 2004 to 2013, the impact of market price support will be immediately perceived by farmers and by consumers in the new member countries. As milk and eggs, for example, are supported mainly by border protection both in the EU15 and in the CEEC8, the adjustment to CAP prices will take place immediately, raising milk prices and lowering egg prices.

This is likely to create a shock in the first months after accession especially for CEEC8 commodity markets where border protection will change the most (Frame 5‑15). Short-term export flows for beef, milk and sugar are likely to be generated, together with imports of eggs, while structural adjustment in supply will take place.

Impact on demand and consumer expenditure of agricultural products

On households’ side, the increase in agricultural prices will be transmitted to consumers by an increase of food prices. The impact will have a larger or smaller incidence in relative food prices also according to the share of the raw agricultural good on the price of the final food product. Only the market price support affects consumption, direct payments do not have a commodity specific impact on market prices and on consumers.

Frame 5‑17 Impact of the CAP on CEEC8 consumption (1000 t)

Food demand will be reduced as a consequence of a substitution effect, shifting consumer expenditure towards items whose prices have not increased. Higher food prices will also mean a lower real income for consumers, while part of the budgetary cost of producer payments will be paid by the CEEC8 households as taxpayers, lowering further their disposable income. Such a reduction in consumers’ real income will further contribute to a reduction in food demand.[28]

Frame 5‑18 Change in consumer expenditure (at farm gate) (€mn and % )

In the CEEC8 market prices at farm gate level will increase for most agricultural commodities, especially beef 122%, milk 51%, sugar 33%, (Frame 5‑15) generating a reduction in the quantity consumed, as indicated in the Frame 5‑17 in thousand tonnes. This reduction is also proportional to the importance of each commodity in the family budget of CEEC8 consumers, the largest reductions would be in milk, cereals, sugar and beef.

Such reduction in consumption does not necessarily mean a parallel reduction in consumer expenditure at farm gate, as the increase in price may be proportionally higher, resulting in a higher expenditure, as indicated in Frame 5‑18. Notwithstanding the reduction in consumption consumer expenditure is likely to increase by about 75% for beef, 34% for milk, and 15% for sugar. The per cent increase in expenditure of sheep meat is not very important given the very low consumption of such commodity. For eggs the CAP price support is lower than in CEEC8, consequently the market price paid by consumer will be reduced together with expenditure at farm level.

Frame 5‑19 shows the impact of the CAP on consumer expenditure in individual countries. In the CEEC8 on the whole, the amount of consumption is likely to be reduced by 3% and consumer expenditure increased by 12%, equivalent to € 2353 million, i.e. € 127 per a 4 member household. Differences among countries are large, ranging from €19 in Slovenia to €230 in Estonia.

Changes (in per cent terms) at farm level, will be reduced in percentage terms at retail level will be reduced according to the incidence of the value added of processors, wholesalers and retailers in the final consumer price, changes in expenditure expressed in absolute terms, in Euro, are likely to be transferred as such to consumers, at least in the medium term. In the short term the impact on consumer expenditure could be higher or lower according to the competitive structure of intermediate markets at wholesale and retail level.

Consumers will be adversely affected not only as a consequence of a higher expenditure, but also as a consequence of the reduction of commodities consumed. Lower consumption and higher cost for food paid by consumers still is only part of burden on households, the part deriving from higher market prices. The whole burden includes also the cost borne by households as taxpayers, financing farm support via producer payments and higher taxes. This will be discussed in later paragraphs on income distribution.

Impact on supply

On the producer side, an increase in producer per unit revenue (market prices + per unit payment) will attract extra resources in farming (Frame 5‑20). Farmers will invest more in the production of commodities whose price has increased, devoting a larger share of farm resources, land, capital and labour, to such commodities, while adopting more costly and usually more productive farming techniques.

Frame 5‑19 Change in consumer expenditure by country and € per household (4 member)

Frame 5‑20 Changes in per unit revenues (change market price + payments per unit)

Consequently supply will expand as a response to price increases, the ratio between the per cent increase of supply and the per cent increase in producer prices (price-elasticity of supply) varies according to the time period considered. In a very short time lag after the price changes, the extra resources diverted to the commodities whose production became more profitable are necessarily low, also due to the time-related biological nature[29] of agricultural production. As a consequence the price-elasticity of supply is low. In a few years time, structural adjustments will be possible, the reallocation of available resources will take place in full and the elasticity of supply in the longer run is consequently higher.

In our computations, reference is made to a ten-year time period of transition from the existing CEEC8 agricultural policy to the full implementation of the CAP. A moderate elasticity of supply is assumed in order to take account of the likely expansion of production.[30]

These estimates are only indicative, they do not take into consideration constraints on production (production quotas, land set-aside), and do not take into account cross-elasticities among commodities. Such estimates are however conservative because they do not fully take into account the expansion of supply as a consequence of improved technology. In the recent decades the supply of agricultural commodities in the EU15 increased at an average rate of 2% a year, while demand increased only at a rate of 0.5%. This difference in expansion rates, together with the CAP price support policy is the major cause of agricultural surpluses and of constraints put on the use of available resources such as land set-aside.[31]

Frame 5‑21 Components of the Value of agricultural production by commodity

The most important components of CEEC8 agricultural production are pigmeat, milk, wheat and sugar. If quantitative constraints on production are not imposed, the largest expansion in supply is likely to take place in commodities where the producer revenue per unit (market price + payments per unit) will increase the most, as indicated in Frame 5‑26

Frame 5‑22 Components of value of agricultural production by country (€ mn)

Frames (Frame 5‑21 and Frame 5‑22) show the composition of agricultural production in the CEEC8 before and after the adoption of the CAP market policy, both by commodity and by member country. On top of the value of each commodity computed at border prices, the charts indicate the market price support and producer payments in million Euro.

The change in the total revenue of CEEC8 producer as a consequence of the CAP market policy is shown in Frame 5‑23 by commodity and by member country. In order to distinguish the increase in farm revenue as a mere consequence of increased price support and direct payments to producers from the increase due to the expansion of supply, the impact of agricultural policy is presented in three scenarios:

Frame 5‑23 Change in producer revenue from public support (0% = free trade, no subsidies)

a) the increase in farm revenue due to present commodity specific price support and direct payments (scenario 2001);

b) the increase due to the adoption of the CAP acquis communautaire in market policy as applied in the EU in year 2001, assuming unchanged supply;

c) the likely increase of farm revenue as a consequence of price and an assumed moderate expansion of supply, as mentioned in the previous paragraphs.

Only CEEC8 egg and poultry producers will face a reduction in revenue, while all other agricultural producers will face a substantial increase in their revenues, often over 70% of the value of production at border prices, if we include the increase due to higher prices and to larger quantity produced.

Among countries only in Slovenia the increase in producer revenue is limited. On the other hand policy measures included in the second pillar, the Rural development policy, being concentrated on hilly, mountain and disadvantaged areas, will contribute further to increase farm revenues especially in this country.

5.6. Impact on international trade

The immediate result of higher domestic prices, expanding supply and reducing domestic demand, will be an increase of exports or a reduction of imports. This would not be a problem without domestic support, but will be a big problem in the EU25 where extra exports are generated by prices above the world market levels. Exports surpluses are supposed to be sold by filling the gap between domestic and border prices with export subsidies paid by taxpayers

According to our assumptions on demand and supply elasticities, and without production constraints especially on sugar and milk, as already present in the EU15, the CEEC8 exportable surpluses would triple, as indicated in Frame 5‑24 by commodity and by country. Obviously such exportable surpluses could be reduced at any level by enforcing production quotas or/and land set-aside.

The impact of extending to the CEEC8 the CAP market policy is particularly important for at least two reasons: (a) the creation of unsold surpluses, or the sterilization of resources as setting aside arable land, and (b) the intra EU25 invisible income transfers generated by market price support.

a) Unsold surpluses

As a result of the market support granted to agriculture, the agricultural supply in the EU15 already exceeds domestic demand in various commodities. In order to avoid unsold surpluses, which are very costly both in terms of storage costs and/or of disposal costs (by means of destruction, denaturation etc.), the Union used to heavily subsidise exports.[32] Such subsidies were strongly distorted world market prices downwards damaging lower cost exporting countries. Consequently quantitative constraints to export subsidies have been set in GATT negotiations and are likely to be strengthened in the current WTO negotiations.

Instead of reducing producer incentives, (market prices + direct subsidies) as a market-oriented approach would suggest, the European Union chose to reduce domestic supply by enforcing production quotas and setting aside arable land (i.e. sterilising part of land, a basic factor of agricultural production).

Frame 5‑24 Impact of CAP extension to CEEC8 on net trade, by country

At present the CEEC8 are already net exporters of most of the analysed commodities. The implementation of the CAP market support will necessarily increase their exportable surplus. At CAP high domestic prices it would be very costly to subsidize exports and, however, such subsidies are and will be constrained by international WTO agreements. Quantitative constraints to production have been already agreed (Frame 5‑25), worsening further the allocation of available resources and increasing the economic waste generated by the agricultural policy. However quantitative constraints will probably not totally offset the impact of the CAP on CEEC8 exports.

Frame 5‑25 Present production and quota agreed with CEEC8 for sugar and milk

Frame 5‑24 indicates the likely flows of net trade by commodity and by country under the present approach: (2001) flows, flows due to higher price support and unchanged supply and flows according to our assumed moderate elasticity of supply.

b) Intra EU25 “invisible” income transfers

At present, trade flows between the CEEC8 and the EU15 are subject to border tariffs and export subsidies. As a general rule[33], for EU imports the difference between world market price and the EU domestic price is roughly equivalent to the border tariff which is a proceed for the EU budget. When the CEEC8 new members become part of the European Union such trade flows will take place in a common market, consequently the EU budget will not be involved any more, neither tariffs nor export subsidies will be needed.

Frame 5‑26 Invisible trade balance transfers between the EU-15 and the CEEC8 in EU25

EU agricultural imports from CEEC8 will probably increase, however, as a consequence of extending the CAP market price support to the CEEC8, EU imports will be paid by EU15 citizens at a higher price, the extra cost being roughly equivalent to the EU border proceeds if the CEEC8 were not EU member countries. Imports which would have generated revenue for the EU15 budget without a common market, become “invisible” income transfers from EU15 consumers to CEEC8 producers. Actually, as the CEEC8 will be a larger net exporter, the higher price received by CEEC8 farmers will be paid partly by CEEC8 consumers through their food purchases, and partly by EU15 consumers through higher prices of CEEC8 exports in the EU25 common market where border trade barriers will be dismantled.

The size of invisible transfers between the EU15 and the CEEC8 in the enlarged EU25 common market is very difficult to predict, as it depends not only on the actual demand and supply elasticities, but especially on the supply management measures constraining CEEC8 production.

Frame 5‑26 indicates the present budgetary proceeds of CEEC8 and two estimates of invisible transfers in a unified market EU25. These two estimates range from a first assumption that CAP implementation in the CEEC8 would not modify present CEEC8 trade flows (no CAP effect), to a second assumption that no quantitative constraints would be enforced, so that demand and supply would react as assumed in the previous paragraphs (full CAP effect).

On the whole invisible transfers mainly from EU15 consumers to CEEC8 producers would range between € 400 million and € 1465 million (Frame 5‑31). Milk, beef and sugar are and would be the main responsible for invisible transfers between EU consumers and CEEC8 producers, while the countries benefiting most from such transfers are the largest in terms of agricultural production: Czech Republic, Hungary and Poland.

5.7. Impact on income distribution

Extending the EU15 agricultural market policy to the CEEC8 will generate a remarkable income redistribution between households (as consumers, paying higher food prices, as taxpayers paying higher taxes) and agricultural producers.

Our estimates refer only to the 11 commodities analysed, accounting for two thirds of the value of CEEC8 agricultural production. Consequently the amount for the whole agricultural sector would be 50% higher than our estimates if the average level of market supports (price support + payments) for commodities not included in the OECD surveys were similar to the support estimated for the 11 analysed commodities.

However, market support for the remaining commodities is likely to be lower,[34] a reasonable guess could be about half the estimated support for our 11 commodities. Under this assumption our estimates on income transfers related to the whole agricultural sector should be increased by 25 per cent.

Burden on taxpayers

The likely impact of the CAP market policy on households includes the impact on consumers, already discussed in section 5.5 and the impact on taxpayers. The 1992 CAP reform shifted to taxpayers a large part of the burden previously borne by consumers. Compensatory payments granted as a short term incentive for easing structural adjustment after the reduction of market price support for cereals and oilseeds, have become permanent “production aids” and will be granted also to CEEC8 farmers.

Frame 5‑27 indicates the amount of payments to producers granted in CEEC8 up to now and the budgetary expenditure projected by the EU Commission as such payments are gradually phased in during the next decade, up to the full equalisation with EU15 farmers in 2013. Our estimates of payments with (PPfs) and without (PP) the assumption of fixed supply are added after year 2013.

Frame 5‑27 Producer aids granted by CEEC8 and foreseen by the EU Commission[35]

Frame 5‑28 indicates the increase of producer payments for CEEC8 farmers both by commodity and by country. The usual three scenarios are described: payments granted at present (2001) to CEEC8 farmers, payments granted under the assumption that production is constrained in all products to the present levels, maintaining a fixed supply (the increase in total payments is only due to the change in payments per tonne), payments granted under our current assumption of a moderate elasticity of supply. The difference between scenario (b) and (c) is a consequence of the impact of our assumption on supply elasticity.

For the whole CEEC8, present payments to producers are € 1826 million. They would be € 5961 million under the assumption of no expansion on supply, increasing by 326%, and € 7215 million under our assumption of elasticity of supply, increasing by 395%. According to the financial projections of the EU Commission such payments would increase by 319%.

Such huge budgetary expenditure will not only be paid by CEEC8 taxpayers. As a charge on the future budget of the EU25, it will be paid by all EU25 taxpayers. As the Gross Domestic Product of CEEC8 is less than 9% of the GDP25, its contribution to the EU25 budget is not likely to be higher. On the other hand CEEC8 receive over 15% of the payments to agricultural producers, consequently over 40% of this burden will be born by present EU15 citizens (Frame 5‑31).

It will be interesting to know how the EU policymakers will justify to EU15 citizens such expenditure which does not seem to have many positive effect, except a windfall gain for CEEC8 farmers and landowners, but does have numerous negative effects.

Frame 5‑28 Producer payments before and after adoption of the CAP (€mn)

Burden on Households

Households altogether are now spending for the agricultural sector about € 5.1 billion (€ 2,5 billion as consumers and € 1.9 billion transferred as taxpayers, € 0.7 billion spent for general services) as a consequence of the present agricultural policy which was already oriented to the CAP in view of the EU enlargement to CEECs (Frame 5‑29). Implementing present CAP market policy, such burden would increase to € 12.9 billion (€ 6.1 billion as consumers and € 6.7 billion as taxpayers) on the assumption that CEEC8 supply would not react to price increases as production constraints would fully offset the incentive to expand agricultural production. In case of a moderate supply response to CAP prices as assumed in this study, the burden for households would increase to €bn 14.1.

Frame 5‑29 Income redistribution between consumers, taxpayers and producers

Frame 5‑30 Income transfers per household[36]

If all costs were paid by CEEC8 households, the cost of the CAP per household which is estimated now at € 332 would be in the order of € 838 under the assumption of fixed supply and of € 967 under our supply response assumption.[37] Transfers paid by consumers will be equivalent to a tax on food and will be regressive. Poorer households will pay a larger share of their income than better off households, as the share of food expenditure is much higher in their family budgets.

In fact these estimates do not take into account the administrative costs both in raising taxes and in distributing subsidies to producers. To estimate such costs is very difficult as administrative frameworks are different between countries and the administrative cost is also related to the farm structure. In countries where the public administration is less efficient and farm sizes are very small, administrative costs are likely to be higher. In other studies[38] such costs have been indicated in 15% of income transfers for tax raising and 13% for subsidy administration.[39] Under an even more moderate assumption, say 20% altogether, the present cost for taxpayers (€ 6 billion) would raise to € 15.5 billion or € 17.9 billion in the two scenarios with and without supply constraints.

Burden on EU citizens

As already mentioned, part of the transfers from consumers will be paid by EU15 households as invisible transfers via higher price in net CEEC8 exports, while a larger part of the taxpayer burden will be paid by EU15 households via the EU25 budget. Such costs for EU15 citizens are indicated in Frame 5‑31

Frame 5‑31 Cost for EU15 citizens as consumers and as taxpayers

The cost born by the EU25 budget for direct payments will be borne by EU25 taxpayers. However New Members account only for 8% of the GDP of EU25 and their contribution to the budget is likely to be of the same order. On the other hand the share of direct aids to producers spent in New Members in 2013 will be 14%.[40] Consequently approximately 40% of the direct aids to CEEC8 producers will be paid by EU15 taxpayers, € 2647 million if supply will not change and almost 4.2 billion Euro if the response of supply will be of the dimension assumed in this study.

Benefit to producers

Not all transfers from CEEC8 households and from EU15 countries will benefit CEEC8 agricultural producers, part of such transfers are wasted in deadweight losses as a consequence of the worse allocation of available resources generated by distorted prices. Such a cost for society as a whole is difficult to estimate empirically, and is likely to be much higher in the long rather than in the short run.

As a consequence of increased costs of production, CEEC8 producers will benefit less than the transfers paid by household which are estimated in € 4.3 billion at present and would increase to about € 12 billion assuming no supply response to price increases or to € 14 billion under our assumptions of supply response. The average transfer per ha of utilised agricultural area (UAA) attributable to agricultural market policy is likely to increase from € 170 to € 470 or € 548, while the average transfer per employed in agriculture is likely to increase from € 1675 to € 4623 or to € 5381 (Frame 5‑32)

Frame 5‑32 Income transfers per hectare of land, and per agricultural worker[41]

Present producer revenues are likely to increase between 34% and 51% as a consequence of the implementation of the CAP market policy.

In order to assess the likely increase in the income of CEEC8 producers we should estimate changes in farm costs through a detailed farm analysis. Fortunately the likely changes in farm incomes have been estimated in a research by the European Commission, General Directorate Agriculture,[42] whose results are presented in Frame 5‑33.

According to such results the sectoral income in agriculture would increase by 88.6% on average in the CEEC8, with wide variations from a high of 165% in Latvia and a low of 33% in Slovenia. On average in the CEEC8 the increase in income would be 30% as a consequence of market price support and almost twice as a consequence of direct payments to producers.

Such windfall gains by agricultural producers must have been considered modest by CEEC8 negotiators in agricultural policy since they requested, on average, an extra 30% increase. CEEC8 agricultural policy negotiators appear to be much more concerned with the interests of agricultural producers than those of the consumers and taxpayers of their countries, let alone the interests of EU citizens as a whole.

Frame 5‑33 Estimated impact of CAP on agricultural income

6. The costs of the CAP for consumers – the longer term perspective.

The CAP is not stationary. Under pressure from commitments within WTO and a changed valuation of agricultural resources and outputs within the EU significant new directions are being undertaken. Traditionally the CAP was a ‘production’ policy. Most of its money was spent supporting commodity markets and relatively little was spent on ‘guidance’ or ‘structural adjustment’. This remains true but is changing. The thrust of the Fischler proposals for the MTR is to reduce price support to a safety net level, at which export subsidies would not be needed and to shift support towards Pillar II, broadly public good objectives associated with the environment and social change. The process is incomplete. Many important products are not covered. There is a risk that the safety net will be fixed too high. Consumers still lose as long as production is limited by quota, set-aside or headage limitations designed to force prices to higher levels. However, the direction of change implied in the Fischler paper should eventually challenge all these elements of continued price protection.

The analysis presented in earlier chapters suggests that for consumers in the new member countries the CAP will represent an additional burden. In effect they will pay more for their food than is necessary – either as taxpayers or as shoppers. This cost will fall disproportionately on the poorest, urban members of their communities. Whilst some countries may receive a net inflow of resources as a result of CAP policies, others will not. Assuming the present policy adjusts in the direction foreseen by the Commission, and prices are brought into line with world price levels the immediate impact on consumer prices will be reduced and the net effect on EU citizens welfare will depend increasingly upon the extent, distribution and funding of direct payments. If they are used to offset the impact of lower prices for existing EU farmers, the prospects for citizens are poor, in effect they are being made to pay as taxpayers to preserve an uncompetitive and obsolete agriculture. If they are distributed to help low income communities develop, then new member countries might be expected to gain. In so far as they are made conditional on contributions by member governments, (co-financing) the relatively poorer new countries will be at a disadvantage.

6.1. Structural adjustment

The planned increases in CEEC8 producer prices (market prices + direct payments), besides almost doubling farm incomes (Frame 5‑33) have no justification from the point of view of society as a whole, increase price distortion, result in unsold surpluses, and/or waste resources in the short term. They are likely to generate even larger problems in the long term. as they impede the adjustment of production structures.

Private investments in the CEEC8 will be driven by a system of relative producer prices inconsistent with the needs of domestic and foreign consumers in a market economy. Instead, investments will be driven by arbitrary producer prices which (a) do not possess a rational basis for supporting one commodity more than another, (b) have generated a huge waste of resources in the EU15 and would do so to an even greater degree if applied additionally to agriculture of the CEEC8, (c) which, once implemented will create rents, especially for landowners, which will be extremely difficult to dismantle, as is the now case in the EU15, (d) which, will reduce the international competitiveness of CEEC8 agriculture, in contradiction to the direction advocated by recurrent official statements including the Mid-Term Review, that assert that CAP reform will increase the competitiveness of European agriculture.

Frame 6‑1 EU15, year 1999/00, Gross Productivity of labour and distribution of farms per size class[43]

Frame 6‑2 Czech Republic, 2000/01, Gross productivity of labour and farm distribution by size

In the upper panel, Frame 6‑1 indicates the relationship existing in the EU15, between the average economic size of farms classified by size classes in terms of European Size Units (ESU) and the gross productivity of farm labour in terms of Gross Value added per Annual Work Unit (AWU), i.e. full time equivalent farm worker. Scale economies in agricultural production are manifest, especially in the small and medium farm size. In small farms (less than 8 ESU) on average a full time farm worker produces € 5500 per year, while in the same annual labour unit is producing a value added of € 26280, almost five time larger, if working in a larger farm, between 40 and 100 ESU. The result of a better mix of land and capital. On average farm workers employed on larger farms (over 100 ESU) are even more productive (€ 36570) but the scale economies for large farms in terms of productivity of labour increase much less rapidly.

On average farms included in the farm class size 40-100 ESU in the agricultural year 1999-2000 produced a € 51000 Gross Value Added, this size is not at all incompatible with a family farm, although, if compared with farm sizes in other continents it would still be considered a relatively “small farm”. The European Model of farming should promote the restructuring of farms toward this sort of dimension, rather than seek to maintain small farm sizes where productivity is too low and farmers will always be in need of external aid.

The lower panel of Frame 6‑1 indicates how present farms in the EU15, after 40 years of CAP are distributed by farm size classes. The large majority (41%) are included in the farm size class of smaller farms (less than 8 ESU, on average € 6100 farm GVA). In the first two smallest farm size classes (less than 16 ESU) are included 60% of farms.

Instead of favouring intersectoral labour mobility and restructuring of farms towards more economically viable sizes, as proposed by Sicco Mansholt in the late Sixties, the present proposals of the Commission favour small farms and are likely to maintain an inefficient non competitive agricultural sector, in contrast with the first objective stated in the Mid-Term Review Document.

The same result will have the adoption of the CAP by the New Member Countries. In Frame 6‑2 are indicated the same figures for the Czech Republic.[44]

Frame 6‑3 Utilised Agricultural Area per holding (ha)

Scale economies are equally manifest, moving from small to medium size farms. The Czech situation provides us with an indication of how scale economies could develop between medium and large farms, as very large farms are available (the average size of the farms larger than 100 ESU is 433 ESU, while it was only 150 ESU in the EU15). The empirical evidence confirms that scale economies are much less important in very large farms. The average value added produced by an annual work unit increases only by € 0.83 between the farm size classes 40-100 ESU and over 100 ESU.

Frame 6‑4 Output per employed in agriculture in 2001 (Euro per year)

The distribution of farm per size class in the Czech Republic is indicated in the lower panel of Frame 6‑2. Also in this country small farms inducing a very small productivity of farm labour are the majority (32%), but the distribution is bimodal, presenting an increase in the share of farms included in the largest size class.

The urgent need of promoting intersectoral labour mobility and improving agricultural structural policies is very apparent in CEECs, especially if we consider that in countries such as Poland and Romania the farm structure is much worse than in the Czech Republic.

Such analysis on the farm structure is confirmed by more aggregate data on the average farm size in EU27 countries presented in Frame 6‑3 and on the average output per employed in farming presented in Frame 6‑4 .

Especially in countries where farm structure is inefficient, and the size of farm is a major cause of high production costs as in Poland, the long term effect of implementing present CAP market policy will be to slow down a very positive process of structural adjustment towards relatively larger and more economically viable farms. Instead of favouring a rapid structural adjustment in agriculture and in the economy as a whole, moving towards eliminating subsidies not justified by ecological, land use or other plausible reasons, the present approach will maintain, and in some instances increase, the need for permanent aid to agriculture not justified in the interest of society as a whole.

6.2. Public goods and the future of the CAP

In considering the long-term impact of the CAP for consumers it is the ‘new model’ proposed by the Commission which gives priority to rural development and environmental issues, rather than production, that is likely to be significant, rather than the residue of the 1960’s policies that continue to inflate product price levels within the EU. Consumers must welcome the switch towards prices determined competitively in a global market. This brings the agriculture of the EU into line with its other industries. In economic terms this should lead to an additional gain to consumers stemming from a better allocation of resources between farming and other sectors in the long term.

However, what is proposed is not simply a price reduction but continuing payments, and potentially growing expenditure under Pillar II combined with a series of regulatory interventions concerned with the way farms are managed. In effect, instead of paying for surplus food the consumer/taxpayer is being asked to buy another package of outputs which will cost as much – or probably more than the existing CAP. This raises questions about whether this represents ‘best value’ for consumers or taxpayers. In this chapter these issues are discussed. It is inevitable that more questions will be raised than answers provided but the issue concerns a very substantial net transfer of resource to the agricultural sector via tax from the rest of the community, which normally expresses its preferences through the market in the form of purchases by consumers. This needs to be justified.

Policy intervention is justified where there is evidence of market failure and where the cost of remedying this is less than the demonstrable benefit for society. In broad terms we can identify two classes of market failure both of which apply to agriculture and the food sector, first, the inability of the market to deliver a satisfactory mix and amount of ‘public goods’ and second, imperfections within the market which prevent consumer preference influencing the use of resource.

Public goods consist of those benefits that result from economic activity but for which the ‘producer’ cannot charge a fee. They are essentially non-rival goods, the enjoyment of which by one person does not limit its enjoyment by others. Because the ‘producer’ cannot limit access to the goods, he cannot charge for them and as a result they register as of zero benefit in his profit and loss account. However, if they ceased to exist the community as a whole would be poorer. Agriculture is associated with a variety of such public goods, landscape, habitat, biodiversity, water management and access are all areas where farming activity may add, or reduce, the supply of such public goods.

Although the private citizen cannot ‘buy’ public goods, the state can do so if it judges a greater supply would benefit the consumer as a citizen. It does so by making payments to producers to undertake activities which would not be profitable but which sustain the supply of these non-marketable outputs. The criteria which should apply to such expenditure is that the value of the public goods exceeds the cost of the payment to farmers by a value greater than that which could have been secured by using such funds for other, public or private, purposes.

The justification for those accompanying measures that involve the environment is that this spending meets these criteria. If it does not, what we achieve is a switch from a surplus of production, either visible in the existence of goods which need subsidy to sell or invisible where production is limited by supply control measures, to a surplus of environmental goods – a supply greater than that which consumers would willingly buy if they had the means and the ability to choose to do so. In so far as the policy falls into this pattern it represents just another way of making the EU poorer.

In practice, there are intransigent problems in assessing the extent of public good benefits, or how much of them would be willingly chosen by consumers, if they had a choice between these outputs and other public or private goods. Their distribution also presents problems. Many public goods, although they may in principle be available to all are in practice enjoyed by only part of the community, for example those who have access to landscapes or those who derive pleasure from seeing farmland birds. Public funding in this area as in others leads to an effective real income transfer from those who do not benefit (enjoy or use these goods) to those who do.

To assess the public interest in the reformed CAP we need to understand better what public goods it buys and to understand how they are funded. Some policies are financed by cross compliance, in effect making existing businesses deliver them by adopting systems of production which have higher costs measured in market values. Some are paid for by EU or national taxpayers and reach land users as grants or subsidies for specific actions. This means that it is relatively easy to provide an estimate of the funding going into the purchase of public goods but there is not an equally objective method of valuing the output this expenditure generates.

This matters because this expenditure effectively pre-empts other possibilities. Consumers when they buy private goods allocate money according to their own preferences. When public goods are bought from taxation or by making private goods more costly, shoppers can afford less of the goods and services they individually want. Consumers also demand public expenditures which would not normally be described as ‘public goods’, such as hospitals, schools and universities which are rival goods, individually consumed but paid for from taxation. Within the public goods category, there are many competing demands, such as urban roads, parks and police forces. In essence although public goods are non-competitive at the point of consumption or enjoyment, they do have to compete with all others at the point of supply. It is in the consumers’ interest that this competition should be as fully informed and effective as possible.

Site-specific public goods

An important characteristic of environmental evaluation is the site-specific nature of public goods. Landscapes and habitats belong to particular places and are valued by differing cultural groups. This makes it difficult to discuss the issue in terms of an area as large and diverse as the enlarged Community. The paragraphs that follow draw on experience within the UK to provide an example of the sorts of question that have to be addressed. Many of the same concerns will apply in other member countries, too, but their perception will owe much to their history and to local circumstance. The central message is nevertheless clear – if we are to know that this substantial expenditure from EU funds in support of agricultural practices is justified, we need to ensure that the decision processes do allow other preferences to be fully expressed and properly weighted in the debate.

Concern about changes in the rural environment is not new. In eighteenth century England writers and poets viewed the enclosure movement with dismay. The ‘drift from the land’ has been a subject of study and concern by academics and parliamentary committees for more than a century. More recently UK governments have legislated to protect specific features of the landscape, (SSSI’s and AONB’s for example in the UK) In addition we have legislation to protect wild animals and plants wherever they are found. More recently an increasing array of environmentally oriented legislation has been built into agricultural policy. In 1987 we introduced funding for ESA’s (Environmentally Sensitive Areas), the Countryside Commission started Countryside Stewardship Scheme (CSS) in 1991 and this was taken over, and expanded by MAFF in 1996. In response to Agenda 2000 the England Rural Development Plan was created, embracing both ESA’s and CSS. Similar changes have taken place in other member countries although reflecting the diversity of their circumstance and including more emphasis on social change and retirement policies.

Attitudes in the UK and in much of Europe differ from those in some other developed countries. Here the countryside is relatively densely populated and mainly made up of productive farmland. Farming has created habitats, landscapes and managed water supplies as well as producing much of the nation’s food supply. In contrast, in the United States, farmland is often less populated, more overtly ‘industrial’ in its aspect and outdoor recreational areas are distinct, often wilderness regions where very little farming takes place. In this sense attitudes in the UK are not very different from those that have led the European Commission to talk about and seek to defend the European Model of Farming. It is clear that European policies reflect these values.

The case for directing policy towards environmental rather than food production goals, has been articulated by a number of professionally led pressure groups asserting that the public want a less intensive system of farming. They have succeeded in generating a sustained media campaign to portray modern agriculture as destructive, indifferent to animal welfare and a source of dangerous pollution. Some have gone further claiming that modern food production methods make the food produced unsafe. Many commentators disagree with this critique, but it has informed policy. The negative aspects of modern farming have become part of the conventional wisdom. Unsurprisingly survey evidence reflects such views, suggesting that there is a widespread willingness to fund support for environmental policies. However such attitudes are generalities where no actual bills are presented. Assessing whether the public wants a particular public good and if so how much of it they are willing to pay for remains obscure.

6.3. What do people want?

Technical and economic changes in European agriculture remorselessly change the pattern of farming and with it the flow of public goods that have previously been taken for granted. Clearly there needs to be a policy debate about these values, just as there should be about the support of production. This may well conclude that the economically optimum use of agricultural resources is other than that which might result from unrestricted international competition. Policies that use public money to secure a better pattern of resource use on these grounds are not subsidies distorting markets but devices to correct market failure. Many diverse elements are involved in the current debate, including the following.

A ‘clean’ environment This may require a change in production practices, whether on or off the farm that cause damage or reduce public good benefits. These changes are not needed to produce an adequate and safe supply of food. They are needed to take account of values that do not figure in the accounts of producers. The sorts of issue involved include for example:

- flood prevention;

- retention of water for use in other industries or as a means of supporting wild plants or animals;

- avoidance of pollution by fertilisers or pesticides ranging from substances which damage human health to substances that change the ecology of the river systems in ways some people deplore;

- eliminating noxious plants or dangerous animals, e.g. flies spreading disease such as malarial mosquitoes.

A sustainable use of resources. This requires farmers to go beyond measures needed to keep the food or farm business in existence, matters that are clearly of private interest, to require action and expenditure in areas of no immediate commercial importance. For example:

- soil erosion taking place on areas outside those controlled by the farm business itself. Farmers and landowners have every reason to ensure that soil losses on their own land do not reduce its productive capacity;

- maintaining a diverse genetic base as a tool for further developments of social value;

- efficiency in the use of non-renewable resources, research related to substitutes and alternative productive strategies;

- impacts of farm production on water and air systems, including climate;

- the harvesting of natural outputs, timber, fish etc at a sustainable rate;

- the capacity of farming to dispose of waste materials.

An additional supply of certain public goods Reflecting the diminished anxiety of consumers about food supplies and their appreciation of some public goods, for example:

- landscape, including the appearance of the countryside and traditional villages and farm buildings; sometimes protected by designation for example as Areas of Outstanding Natural Beauty (ANOB) or inclusion within National Parks;

- habitat, including areas within which wild life can flourish often protected by special designations such as Sites of Special Scientific Interest (SSSI);

- access, the maintenance of traditional rights of way, and, at least in some areas the ‘right to roam’ over privately owned farm land;

- heritage, preserving both the built inheritance, including some ‘ruins’ and areas of particular importance because of their ecological history.

6.4. How environmental preferences can be assessed

In seeking to establish priorities for policy, economists have made considerable efforts to detect and measure consumer demand for many of these environmental goods. These include contingent valuation, where members of the public are invited to say how much they would be willing to pay to maintain or achieve a particular public good, estimates based on the travel cost of visitors to natural attractions, estimates of the difference in valuation of similar sites with specific environmental differences (more or less trees for example). Such studies generally indicate a positive approach by the public to the particular environmental benefit explored. However, the methodology cannot replicate a real market in which a decision to have more of one type of product is seen to apply acceptance that the consumer will be able to have less of others. It is, for example, commonly the case that consumers respond to enquiries by indicating that they want more rural rail services or more country markets. However, where these facilities exist they often remain under used.

Another approach explores what it would cost to undo what are seen as the damaging effects of agriculture. These include water and air pollution, loss of soil and biodiversity and damage to human health. There are real difficulties in defining how much such events matter, what to one man may seem to be damage, could to another be perceived as an environmental gain, e.g. he is no longer likely to be flooded. This method of approach allows very large numbers to be reached relating to the ‘environmental cost’ of UK agriculture. Quite apart from the difficulty of identifying and putting numbers on damage, there are clear difficulties in estimating the counter factual. For example, what would be the external cost of replacing agricultural output lost if these costs were not incurred – presumably if people continued to eat meat or consume bread, some extra external costs would occur where this took place and in the business of moving the produce into consumption in the UK. We do not know whether these would be greater or less than continued production in the UK.

A further problem arises because we do not know how much cost the public is willing to bear in terms of pollution. For example, we can calculate the cost of restoring polluted water to drinking quality. However, since most water is used for purposes other than drinking, it might be that the public would wish to incur such costs only on that element of the water supply they drink or use in food. If such a view were taken it would give a very different estimate of cost than that implied for removing all pollutants.

Whilst overall estimates of cost and benefit may be impractical, there are circumstances where such an approach can be valuable in determining policy. For example, if a target were defined such as increasing the population of skylarks by a given percentage, a cost benefit analysis could explore whether this would be achieved at least social cost by regulating the behaviour of all farmers, with consequential administrative costs and production losses on farms, or by paying a premium to a limited number of farms to secure a given density of population of skylarks on their farm. Many practical policy decisions may have this characteristic.

This suggests that in making decisions about how much to spend buying public goods from agriculture, it is the political process rather than economic measurement upon which we have to rely. Considerable success has already been achieved in placing environmental concerns on the political agenda. At the European level environmental assessment has become a requirement of policy. The initial accompanying measures, which were primarily concerned to compensate farmers for price cuts have been captured by policies which to a growing degree make payments conditional on reaching environmental standards.

In the UK concern about the environment is not new. Policies have explored a variety of ‘environmental’ schemes, evaluating them against a series of targets. This approach was initiated in MAFF and taken up by the then Countryside Commission. This provides an indication of what has been achieved and a basis for anticipating the likely effect of Pillar II policies. A report produced in 2002 commissioned by DEFRA provides an Economic Evaluation of Agri-Environment Schemes.

The report covers thirteen schemes introduced in the UK in the past two decades. Some have been discontinued or absorbed in others confirming that this has been a period of experiment and development. In this report it would not be helpful to review the assessment these schemes one by one but there are some important general lessons that emerge for those who are seeking to establish what sorts of costs and benefits arise for consumers.

The report considers the important work done to attempt to construct surrogate money measures by which to evaluate the schemes. They point out some of the difficulties:

- the absence of a clearly defined indication of what would happen in the absence of the scheme;

- the separation of the impact of particular schemes from the many other influences affecting farm businesses at the same time. – for example the influence of changes in commodity prices or the impact of external changes in the local economy;

- the difficulty of defining the outputs the policy measures are supposed to deliver. For example, how do we define ‘a more sustainable, diversified enterprising rural economy and community’ a goal common to many of these schemes.

There are other difficulties with survey type measures. How to devise questions that do not generate answers which are influenced by the anxiety of people to please the questionnaire, by local or immediate circumstances rather than a considered longer term view, or that can ensure a genuinely representative group etc. Can we be sure that questions describe inputs and outputs in language that the respondent fully understands? How do surveys take into account implicit costs in the form of other goods or services foregone etc? Considerable efforts have been made to avoid such difficulties but doubts continue about the robustness of the data reported.

Another approach does not aim at any single aggregate number as an outcome but develops a framework for putting together relevant but dissimilar data so that the overall effect of a scheme can be looked at simultaneously, what the policy achieves, where it fails, where it generates unexpected conflicts etc. This is not a measurement tool but one that helps to inform subsequent political assessment.

Frame 6‑5 Assessment of Public Good Schemes

	Economic Assessment	Achieve Goals	Use by Visitors	Participation by farmers	Transaction Costs.
Agri environment	Formal CV[45] (Doubts about methods) Public Approval	Biodiversity Landscape Ecosystems Climate Change	Numbers visiting (how different) Membership of charities	Cross Compliance Score system to secure grant competitively	Large but falling
Organic Farming	Competitiveness	Benefits to soil, biodiversity, animal welfare, employment (some contested)	na	Expanding Oversubscribe available funds
Hill Farm Allowances		Difficult to assess because HFAs are small in relation to other variables		Paid to hill livestock farmers. Issue about whether rightly targeted within group.	Success depends on continuation of other support coming to the Hills
Woodland Grant Scheme Farm Woodland Premium Scheme	Some CV analyses. These do not explore the value of marginal adjustments. Tend to show value>cost	Biodiversity and woodland habitat for birds	Value primarily recreational and amenity Greatest near to urban centres	Farmers more interested in recreation and landscape than timber production.	Allocation by scoring scheme avoids wasted applications. Tendering used.
Processing and Marketing Grant Scheme	Job creation More production Better quality		Consumer demand for local products	New scheme for 370 businesses by 2007. 80 recruited by 2000	External review says ‘value for money’
Vocational Training Schemes		Industry needs more trained people		Provides for 48K days training by 2007. So far 3.4K days approved
Rural Enterprise Scheme		Diversify and develop rural economy	No evidence of public response	2001 – 2007 £152 m expect to help 6k – 7k schemes end 2001 123 applications	Objective 5b predecessor delivered – new scheme more regional

Rather than attempt to evaluate environmental schemes in terms of a single number this Review focuses on the material that is available or can be readily constructed. Thus it looks at the participation rate for each scheme. It examines the costs of administration – noting that very little information is often available, not least information about the costs the scheme involves for farmer applicants. It reports on past examinations of particular schemes that have probed the extent to which they meet with the approval of participants. It looks at alternative approaches in Wales and Scotland as well as in some other EU member countries.

This is helpful not least because it demonstrates the complexity of the issues involved. Assessment requires clarity evaluating the targets of each scheme, who benefits, when, where and in what form? It needs an objective analysis of the costs involved, not just the exchequer cost but those embodied in alternatives in the economy as a whole which, as a result, cannot be pursued, it has to take account of disruption and extra cost and stress to the farm business etc. It then has to see what actually emerges from the operation of the scheme and retrospectively look at what has happened to see where greater efficiencies can be achieved and how far the total benefits exceed, or fall short of, the total costs.

Frame 6‑5 based on information extracted from the DEFRA Evaluation Study gives some idea of the sort of information available by which the advantages of a group of schemes which are justified in terms of their public good benefits have to be assessed. The criteria are of interest because they suggest what we ought to be looking for. In practice many of the cells are blank, most that are filled have entries that are either evidence of administrative activity or of the intentions of the programmes. Economic assessment has been attempted for some schemes but the results are less than straightforward to interpret.

6.5. Consumers and the application of Pillar II

Choosing the right policy

Pillar II, reflects the view that governments have a continuing responsibility to support agriculture, on the basis of its public good values. However, there are differing means of securing these benefits each of which has some sort of impact on the amount consumer incomes will buy of other goods.

Regulatory approaches

Regulatory approaches essentially require resource users to adopt methods that are not necessary to produce the goods they sell. These practices raise production costs for the businesses concerned. If the approved method were lower cost, then competition alone would be sufficient to ensure they were applied. A number of situations can be recognised.

‘case 1’ – the rules apply with equal impact on all producers to whom consumers have access. In this case the cost will be passed on to consumers.

‘case 2’ – the rules apply to all producers but affect some more than others e.g. those close to water courses as distinct from those situated away from streams and rivers. In this case the impact will be partly to shift production towards the producers least affected and partly to raise prices to consumers. Costs for producers who go out of business will be measured by the difference in profitability between products that have now become non-competitive and the next most profitable activity for which these resources might still be used.

‘case 3’ – the rules apply only to some of the producers to whom consumers have access (e.g. to domestic but not foreign suppliers). Consumers will experience cost only to the extent that imports are dearer than home supplies. Producer costs will be represented by the lost profit as they are forced to find alternative uses for their resources or simply accept lower returns on continued production of the products concerned.

Estimation of the impacts for case 3 will depend upon the supply elasticities of domestic and foreign supplies. Under the small country assumption imported supplies would be regarded as infinitely elastic so consumers would continue to enjoy products at initial prices and the total cost of the regulation would be borne by producers. If the regulation were applied worldwide a ‘case 1’ situation would emerge and the cost would fall wholly on consumers. Case 2 impacts can only be explored by individual examination of the situation of each farm affected.

Compensatory approaches

The state would calculate the cost to producers of applying its preferred set of practices and make a financial transfer to farmers to leave their profit position unchanged. Again a number of situations need consideration.

‘case 4’ – the state makes its calculation for the industry as a whole and pays farmers the same amount per unit of input as compensation. The impact here would be to over compensate farmers who could accommodate the changed production systems at least cost and to under compensate those for whom the change raised cost more than average. Looked at in terms of profitability, this would tend to encourage the expansion of the ‘most efficient’ users of the input – in the sense that a rise in its cost made smallest impact on their profits – and lead to price levels at which the ‘least efficient’ would be forced to seek alternative uses for their resource.

‘case 5’ – the state seeks to identify the impact separately for each farm of the approved production system and compensates farmers accordingly. This would be a gigantic bureaucratic exercise with much scope for fraud and needing to be revised each year as techniques and prices of substitute inputs changed. Provided the calculations were accurate, the impact on farmers would be neutral. However, the tax cost and the implied reduced ability of consumers to buy other goods would be substantial both in administrative time and as a result of continued inefficiency in the production of the ‘public good’. Against this cost has to be set the benefits people gain as ‘public consumers’ – of which more later in this chapter.

Incentive approaches

Here the state provides funds to pay farmers to deliver a different bundle of goods than the market demands. These can include genuine public goods of which the consumption by one person does not lessen the availability for others – for example landscape – but they also include outputs which benefit specific groups of people – ramblers, organic food consumers etc. In effect these are income transfers within the community. Again a number of distinct approaches need exploration:

‘case 6’ – a competitive bidding approach. The state decides how much of a public good it wants (can afford) and then invites potential suppliers to bid to deliver. There are clear problems in defining the public good in ways that make it certain when delivery has taken place but if these are overcome, then, assuming competitive conditions are fulfilled in the rest of the economy, the bidding system ensures that the state receives its public goods at least cost.

‘case 7’ – the state establishes a tariff and invites people to deliver in return for fixed payments. Assuming that on day 1 a correct price is set which results in precisely the amount of public good that the community demands, this will provide a satisfactory solution so long as the surrounding conditions, economic and technical remain unchanged. In practice both the initial calculation and confidence in its continued accuracy as circumstances change present severe problems. For example enthusiasm for recent environmental schemes in the UK has been encouraged by the depressed state of the market for conventional farm products. When this changes, farmers will need more persuasion to stay within the ‘public good’ supply sector.

‘case 8’ – the state manipulates some other payment to make its receipt conditional upon performance of certain ‘public good’ tasks. Cross compliance has the ability to provide an incentive as long as the ‘carrier payment’ continues. Thus a commitment to phase out direct payments based on compensation for price cuts implicit in international obligations to reduce domestic protection may conflict with the delivery of the public good.

Cases 6 and 7 both overtly demand ‘new’ payments from the budget. Politically this may be concealed by making these payments coincide with reduced payments to recipients from some other source – described in the case of the CAP as switching funds from Pillar I to Pillar II. In practice the taxpayer still has to pay and the impact on consumers as citizens has to be a balance between perceived benefits and the reduced levels of personal consumption implicit in higher taxes. Case 8 is usually presented not as new money but as the redirection of existing payments. Whilst this is politically convenient it is untrue. Payments related to production are reduced because the state does not want the extra output. The rational approach is to remove or reduce these payments and then determine whether the money released is best spent in the public interest by lower taxes, spending on some other area of public funding or use to support farmers for higher cost systems of farming. It would be an astonishing co-incidence if the funds withdrawn from product support corresponded perfectly to the additional funds needed to meet the demand for public goods.

There is no doubt that consumers benefit from the availability of public goods. It is a basic function of the state to determine what these are and how they should be supplied. The Fischler proposals for CAP reform justify shifting funding from Pillar I to Pillar II, in terms of the delivery of a variety of ‘agricultural and environmental public goods’. So far Pillar II expenditures represent only a minority share in the total cost of the CAP. However, this seems likely to become very much more important in the future. At this stage it is important for all parties, including consumers, taxpayers and the owners of agricultural resources to assess their potential impact on their own situations.

National and regional schemes

Consumers need to examine the policies put in place under Pillar II to determine what benefits and what costs are involved. This presents some difficulties because each country has the responsibility under the Commission to develop its own set of arrangements. In England these are given effect through the ERDP. Elsewhere within the Community, larger sums are spent on a diversity of policies. However, much of the funding is from the common budget to which all have contributed. Here it is possible to look at this diversity of schemes only in terms of very generalised categories. In future research will have to monitor and assess the actual schemes operated in terms of what benefits arise to whom and who pays. Contemporary schemes include:

Policies to encourage organic farming. The gains for consumers will depend upon the degree to which they receive perceived benefits at lower costs than would otherwise be available. Some consumers do not regard organic produce as providing any benefit; indeed some may see it as inferior. In recent years the organic market has grown. It is difficult to predict how far this will go, what will happen if some serious breakdown in either supply or safety occurs and how rapidly the market will absorb incremental output. For consumers the market is clearly able to deliver more organic food if they wish to buy it. The public good benefits arise in terms of environmental impact. However, consumers and taxpayers are entitled to ask, if the environmental benefits can be achieved at less cost by marginal adjustments to conventional farming methods. The answers are not straightforward and may differ if they are posed at a global as distinct from a ‘field’ level.

Policies intended to facilitate early retirement and the training of new farmers. Consumers may benefit in the long run through greater efficiency as the numbers engaged in farming fall and new comers introduce more efficient methods. Such policies facilitate structural adjustment but their benefit to consumers is experienced by a continued fall in the real price of food leaving the farm.

Policies to encourage farming practices that seek to deliver specific environmental gains. These can include support for biodiversity, habitat, improved methods of weed and pest management etc. The type of ‘broad and shallow’ scheme advocated by the UK Curry Commission offers an example. For consumers it is difficult to know whether the policy has delivered, outcomes are vulnerable to a range of contingent uncertainties. It is also problematical to know when enough has been delivered. If we enjoy having 100 times as many species as before the policy began, would another increment of 100 be equally valuable?

Policies to support farmer’s marketing organisations. These represent a response to the asymmetrical situation in which farmers find themselves as processing and retailing become more concentrated. If such policies overcame a failure of competition in the market place, then consumers might be expected to benefit. If they do not the outcome is not public good but private benefit. Most analysts recognise that in reality, acute competition does exist in food distribution. The impact of these sorts of policies is primarily to support farm incomes.

Having established the benefits to be derived from Pillar II payments, it is necessary to examine whether these resources would generate greater or lesser benefit for consumers in other uses. This is a political decision but from an economic perspective it is critical that the decision taking process accurately interprets the preferences of the community. Pillar II payments benefit from vigorous, articulate support by a variety of influential pressure groups, including farmers, environmental lobbyists and EU member countries who see a means of protecting the net transfers they have hitherto received as a result of price support.

Within the EU the decision taking process is complex, highly centralised and subject to intense professional lobbying. Lobbies are a vital part of the political process, bringing information and insight to decision taking as well as representing their own interest group. However, there is a clear asymmetry between areas where strongly perceived self interest or passionately held ideology enable large funds to be spent on advocating particular causes and the detailed, fragmented and confusing reality of making effective Pillar II type policies which directly affect relatively small and sometimes very specific areas.

It is a paradox of the EU that as it is vigorously enlarging its geographic boundaries, its agricultural policies are demanding more and more local autonomy. To secure this whilst retaining a genuinely common policy will be a major challenge for the next generation of policy makers. What is clear is that if they do not succeed then consumers will be made poorer in terms both of the things they buy in the market place and in relation to public goods that are likely to assume more importance.

7. Concluding remarks

The EU Commission in its Mid-Term Review document reaffirms the basic objectives of promoting a competitive agricultural sector, of implementing a simpler agricultural policy and of “justifying farm support through the provision of services that the public expects farmers to provide”.[46] Such broad objectives are fully shared by consumers, and include the production of environmentally friendly quality products and a fair standard of living and income stability for the agricultural community. The difficulties arise in putting them into practice.

This report shows that they are far from being attained by the present CAP. The agricultural sector is clearly not competitive since producers are still largely protected from international competition by import tariffs and export restitutions, and farmers receive commodity-specific payments not directly related to “the provision of services that the public expects farmers to provide”. For example, the present market price support for sugar, milk and beef, together with direct payments to producers of cereals and oilseeds are not correlated with parallel services to EU citizens. Rather they result in higher cost for food paid by consumers, a large budgetary burden paid by taxpayers, a large amount of deadweight losses resulting from the misallocation of resources, such as payments for setting aside arable land and large bureaucratic costs paid not only by the EU budget, but by national and regional budgets as well.

The Doha Development Round of WTO negotiations and the enlargement of the EU15 to 10 Candidate Countries are very good opportunities for fully reforming the CAP in the interest of all citizens, and avoid the extension to the New Members of policy measures manifestly distort market prices, creating deadweight losses and worsening income distribution among EU15 citizens.

The present proposals of the Commission although going in the right direction to reform the CAP are too limited and too gradual to prevent a large reduction of the well-being of EU citizens in the next decade as a consequence of extending the CAP to the candidate countries.

Border protection, still very high for some commodities such as sugar, milk and beef, is not dismantled and will be extended to New Members. Although consolidated in a single payment per farm, payments to producers will still reflect historic commodity-specific support, and still discriminate between farmers producing different commodities.

There is no economic rationality for the CAP to triple the direct payment to producers on commodity-specific criteria or to almost double farm income in New Members. Excess resources clearly remain in agriculture since we are compelled to pay farmers not cultivate part of their land in order to maintain high domestic prices. Exportable surpluses should not be subsidized by taxpayers, such subsidies are already limited by WTO in order to prevent further distortions on world markets. Transferring further resources to farm producers when we should reduce the present excess transfers is manifestly against the interests of EU25 consumers and taxpayers.

The proposals of the Commission exempt small farms from the reduction in payments and positively discriminate against large farms in various ways. While this may look like being justified in the short term on social grounds, it will strongly hinder structural adjustment in agriculture, maintaining numerous non viable inefficient farms which will be in need of permanent support in the next decades. This will be especially the case in countries where many labour resources in agriculture are already redundant. Instead of favouring the mobility of economic resources and of labour in particular, the Commission proposals will maintain inefficient resources in farming, fully at odds with the stated objective of promoting a competitive agricultural sector. In the long term all EU citizens will be poorer as a consequence of such policy.

As was already proposed by EEC Commissioner Sicco Mansholt in the late Sixties, the interests of EU consumer-citizens would be much better served if in regions where farms are too small, public money were spent to ease intersectoral labour mobility and to help people who decide to remain in farming to enlarge and restructure their farms to achieve an economically viable size. The result would be a general reduction in the costs of agricultural production, thanks to scale economies, better incomes for farmers and a lower burden for consumers and taxpayers. The objectives of a competitive agriculture and of a fair standard of living and income stability for the agricultural community would be reached without the need of continuing transfers from consumers and taxpayers.

Environmental objectives should be reached by site-specific targeted policy measures, related to the site-specific environmental policy. The bulk of present producer payments originated in price support policies designed prior to the 1992 reform. They were called “compensatory payments” after the reform, then renamed “producer aids” in the late nineties. They will now be disguised as “environmental payments” under the fig leaf of cross-compliance regulations claimed to assure “good farming practices” but which will be very difficult to monitor. Such payments are not site-specific, consequently cannot be efficiently targeted to environmental objectives. They will continue to distort incentives to produce and worsen the allocation of economic resources, although at a reduced level. Unfortunately the benefits of less misallocation of economic resources will probably be offset by higher bureaucratic cost of administration and auditing, and unnecessary limits on the entrepreneurial activities of farmers. The proposed reform of the CAP will simplify some features of the present policy but complicate it through a more pervasive intervention of public administration. The overall result is likely to be a more complicated CAP.

None of the objective stated in the Mid-term Review will be reached efficiently by the proposed reform. After the implementation of the Commission proposals in EU25, the burden for EU15 citizens in terms of higher food prices, higher taxes, worse income distribution, and waste of economic resources will not be substantially reduced, while such negative effects of the CAP will be extended to the New Members of the Union.

The overall interests of European citizens would be attained by a genuinely simplified, transparent, efficient, equitable and sustainable agricultural policy, based on market policies (Pillar I) which ensure that market forces transmit to producers the preferences of consumers. Market failures should be offset by providing adequate direct payments to producers, targeted to the attainment of specific positive externalities and public goods (Pillar II), thus “justifying farm support through the provision of services that the public expects farmers to provide”, as stated in the objectives of the MTR.

The failures of the existing CAP should be reduced over not more than a decade, say by 2013. New Members, should be asked to apply an acquis communautaire which brings only the benefit of a market economy, rather than dirigiste policy measures, production quotas, land set-aside, over-regulated production and distorting market regimes. Such an approach, properly programmed over the next decade, is in the interest not only of EU consumers, but also, in the longer term, in the interests of agricultural producers in a sustainable and progressive global economy

About Consumers International

Founded in 1960, Consumers International (a non-profit organisation registered in The Netherlands as the International Organization of Consumer Unions, registration number S1 49999) is a federation of consumer organisations dedicated to the protection and promotion of consumers’ interests worldwide through institution-building, education, research and lobbying of international decision-making bodies. An independent, non-profit foundation, Consumers International has more than 250 members in almost 115 countries.

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[1] EU §Commission Mid-term Review of the CAP, COM(2002)394, Explanatory Memorandum.

[2] The variable levy was introduced as part of the commodity regimes that formed the main feature of the CAP from the 1960s to the 1990s. It operated by setting a price at the frontier of the Community for each product for which there was a common policy, often known as the ‘Threshold Price’. This price was then compared with the lowest price offered on world markets. The difference between the two prices was charged as a levy on all imports of the product. Threshold prices were fixed to ensure that imports could not undermine the ‘target’ prices fixed by the Council of Ministers for goods produced within the Community. The levy varied in response to changing world market prices and where seasonal target prices were set by the Council of Ministers. By substituting a fixed level of import duty for this variable charge, prices within the EU would, in principle, be affected by changes in world price levels. However, if the fixed tariff is too high, imports will still be unable to compete with domestic production. The high level of tariffs initially fixed meant that reductions agreed in the Uruguay Round could take place with minimal immediate impact on internal price levels – this is sometimes talked about as ‘water in the tariff’.

[3] Two main indicators usually indicate producer support: the Producer Support Estimate (PSE) and the Nominal Assistance Coefficient (NAC). The PSE quantifies the annual monetary value of gross transfers from consumers and taxpayers to support agricultural producers. If presented in percent terms, the PSE indicates such transfers as a per cent of the value of total gross farm receipts (value of total production at farm gate prices, plus budgetary support). The NAC measures the ratio between the value of gross farm receipts including support and gross farm receipts valued at world market prices without support. In the following pages we will use more frequently the Nominal Assistance indicators of agricultural support (motivations are listed in Tarditi, S., 2003, Consumer Interests in the Common Agricultural Policy, EU Commission, SANCO, and University of Siena).

[4] % on VP (bp) indicates the transfers to farmers as a per cent of the value of production at border prices. Source: OECD (2002) Agricultural Policies in OECD Countries. Monitoring and Evaluation 2002 Table 2 Annex 2 pp 41- 42.

[5] The Nominal Assistance % (NA%) indicates the producer support as a per cent of the value of production at border prices. Nominal Assistance Coefficient (NAC) = 1+NA%

[6] Commission of the European Economic Communities 1968 Memorandum on the Reform of Agriculture in the European Economic Community COM (68) 1000, Part A Brussels.

[7] The Community fixed its prices in terms of a common unit of account; which had to be paid to farmers in their national currencies at the prevailing rate of exchange. If a member countries currency appreciated then an unchanged price in units of account would fall in terms of the domestic currency. Similarly, if a currency depreciated prices measured in domestic currencies would rise. Neither movement was welcome to governments of the countries concerned. However, if payments to farmers continued at the same prices in national currencies it became profitable to send goods from depreciating countries for sale or intervention purchase in countries whose currencies had appreciated. The price received could then be converted into the currency of the exporting country at higher levels than if the product had simply been sold on the home market. To avoid this the Community invented a complex system of monetary compensatory amounts (MCA). In effect this imposed taxes on goods moving from countries with weak currencies to those with strong currencies and provided subsidies for goods moving in the opposite direction.

[8] Holding numbers in Italy actually rose in this period. If this country is excluded the decline in numbers among the remaining five countries is more than 40%, from 2.4 million to 1.4 million.

[9] COM (2002) 394 final. Mid-Term Review of the Common Agricultural Policy. 10-7-2002

[10] COM (2003) 23 final. A long-term policy perspective for sustainable agriculture. Proposal for Council Regulations. 21-1-2003

[11] The average share of total support borne by consumers is in the last three years (1999-201) is estimated at 51%.

[12] Decoupled payments are those that have no impact on the level of production. Although the Commission’s proposals remove the incentive to produce particular products, they fall short of full decoupling since they require that the land continues to be farmed. Some output will emerge from this which might not otherwise have been produced.

[13] COM (2003) 83 Final page 12 Explanatory Memorandum

[14] European Commission Press Release – DN: SPEECH/02/577 – 12/11/2002

[15] Source: Agricultural Situation in the European Union, various annual reports.

[16] Data source:Consumers in Europe, Facts and Figures Data 1996 - 2000 page 25 Table 1.16

[17] A distortion not revealed by this type of analysis, and which applies to virtually all economic activity, is the exclusion of external costs and benefits which affect the real income of the economy as a whole, but do not figure in the accounts of individual businesses. Thus, for example, fertiliser that leaches into ground water or rivers can involve water companies in significant costs to fit the water for human consumption.

[18] The relative well-being in better indicated by the Purchasing Power Standards (PPS) indicator.

[19] Weighted average of national rates. Data source: OECD Agricultural Policies in Transitional Economies page 77 Annex Table I.2

[20] Sources: GNI in US $ = World Bank Database; GDP in PPS (Purchasing Parity Standards) = EU, DG Agriculture Database.

[21] Data source: OECD, Agricultural Policies in Transitional Economies Annex Page 88 Table II.1

[22] Data source: OECD, Agricultural Policies in Transitional Economies Annex Page 89 Table II.2

[23] Data source: OECD, Agricultural Policies in Transitional Economies Annex Pages 90 & 91 Tables II.3 & II.4

[24] Data source: OECD database

[25] This chapter is largely taken from a background paper: Tarditi S. (2003) Impact of the Common Agricultural Market Policy on Central and Eastern European Countries, CIPAS, Siena, where greater detail on individual commodities is available.

[26] COM (2003) 23 final. A long-term policy perspective for sustainable agriculture. Proposal for Council Regulations. 21-1-2003

[27] The high direct support per tonne granted to sheepmeat production is not very important given the low level of production of such commodity.

[28] The ratio between the percent reduction in food demand as a consequence of the percent increase in prices is indicated by the “price-elasticity of demand”, which is rather difficult to estimate in statistical terms for such large changes in food prices. In our computation we assume a moderate price-elasticity of demand[28] in order to envisage the likely changes on domestic market and on international trade flows.

[29] Plant and animal production are dependent on seasonal factors as well as on fixed biological lags in order to bring a plant or a new-born animal into the production stage.

[30] According to such an assumption (price-elasticity of supply 0.3) a 10% change in prices, for example, would generate a 3% increase in the quantity supplied. If empirical estimates will be available, this assumption will be changed accordingly

[31] In the background paper (Tarditi S. 2003) commodity markets are presented in the traditional Marshallian diagrams showing the demand and supply functions with reference to quantities (1000 tonnes) indicated in the horizontal axis and prices (€ per tonne) indicated in the vertical axis.

[32] Export subsidies granted by the European Union to agricultural commodities are over 80% of total export subsidies granted in the world.

[33] Without taking into consideration transport costs and bilateral trade agreements involving border tariffs.

[34] Estimates on CAP support for fruit, vegetables, wine and olive oil in the CAP are reported in Perugini C., Sarri D., Nucifora A. (2001) “Estimates of the Producer support and consumer support for the fruit and vegetable sector in the European Union”. CIPAS, University of Siena.

[35] Legend: years 1992-2001 producer aids paid by CEEC8; years 2005-2013 producer aids foreseen by the EU Commission (COM(2003)23; PPfe our estimates of aids to producers assuming 2001 fixed supply, PP our estimate assuming a moderate price-elasticity of supply (no increase in yields due to improved technology).

[36] Average costs per a 4-member household.

[37] These estimates assume that the remaining part of CEEC8 agricultural production would be granted a support of only 50% as compared to our 11 analysed commodities.

[38] More on this subject in Tarditi S. (2003) Consumer Interests in the Common Agricultural Policy. Report to EU Commission, DG 24, CIPAS, University of Siena. § 7.4

[39] At all levels of government: Community, national, regional, local.

[40] Direct aids for New Members will be € 5819 million, for EU25 € 41942 million (COM(2003)23, p. 157). Our estimates of Producer Payments include National payments (8.9%) not taken into account. Expenditure on General Services is not included, as in this item national expenditures account for a much higher share (54.4%)

[41] Average benefits per hectare (ha) of Utilised Agricultural Area and per Annual work Unit (AWU)

[42] EU Commission (2002) Analysis of the impact on agricultural markets and incomes of EU enlargement to CEECs, CAP Reports, Brussels. On the same subject Munch W. (2002) Effects of EU enlargement on Central and Eastern European Countries, Georg-August –Universitaet Gottingen, Peter Lang.

[43] Source: European Commission, DG Agriculture, Database. Farm size is defined in terms of European Size Units (ESU) = € 1000, Figures produced by the Farm Accountancy Data Network (FADN) of the EU.

[44] Unfortunately comparable figures are not available for all other Candidate Countries.

[45] CV = Contingent Valuation

[46] EU §Commission Mid-term Review of the CAP, COM(2002)394, Explanatory Memorandum.