Ase study: The Common Agricultural Policy of the European Union

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The Common Agricultural Policy of the European Unionbr /
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The Common Agricultural Policy (CAP) of the European Union (EU) demonstrates well the working of price controls in the market place. In order to support the agricultural sector in the EU and to ensure an adequate supply of food, a variety of policies have been used. The guaranteed minimum price was one such control.br /
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One characteristic of agricultural goods is that price fluctuates a great deal from year to year depending upon weather conditions and the size of harvests. This means that the incomes of farmers cannot be predicted from one year to the next. By guaranteeing a minimum price for agricultural goods, this problem can be avoided and a supply of agricultural goods can be assured.br /
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If a minimum guaranteed price is set at or below the market price, there is no impact on the market and the good will be sold at the market price. If, however, the guaranteed minimum price is set above equilibrium as was the case in the CAP, a situation of excess supply will exist at that price (see Fig.1). Over-production occurs and this excess supply was the wine lakes and the food mountains of the 1980s. At times during the 1980s there was large-scale destruction of the excess supplies of agricultural goods a politically unacceptable solution.br /
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The CAP has long been a subject for heated debate within the EU. It accounts for over 50 per cent of the EU budget and supports a sector which accounts for only a small percentage of the EU electorate. It is also the source of arguments about equity as some countries are net contributors to the CAP budget while others are net recipients.br /
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There has been an acceptance within the EU that the policies used by the CAP have not worked in the way they were designed they have created inefficiencies by encouraging over-production rather than cost cutting and in the process have produced a dependency culture among farmers. The OECD estimates that the EU paid out on average $17,000 to every farmer in the EU compared with an average of $11,000 in countries belonging to the OECD. It also estimates that families in the EU pay an extra $1,200 a year on food as a direct result of EU policies.br /
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Figure 1: The operation of guaranteed minimum pricesbr /
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Reforms to the CAP were introduced in 1999 under the heading of Agenda 2000. They were designed to cap CAP until 2006 and to change the direction of agricultural policy. First, guaranteed prices were to be brought down towards world levels, which at the time would have entailed a 20 per cent cut in the price of cereals, 30 per cent cut in the price of beef and 15 per cent cut in the price of milk. Second, there was to be a movement to a system of direct payments to farmers which are unrelated to production this should have the effect of reducing the incentive to over-produce. More recently, there has been a movement to shift subsidies to environmental conservation, and the use of subsidies to encourage greener agriculture.br /
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Despite these policies, the nature of the CAP means that anomalies still occur. The production of olives in the EU is subject to the Agenda 2000 reforms. They are still subsidised according to production, so the more olives that are produced the higher is the payment from the CAP. In 2001, the subsidies paid to olive farmers accounted for 2.5 per cent of the EU budget and it is estimated that Spanish farmers receive half of their income from the EU. A massive programme of olive tree planting has resulted in parts of Spain olive trees are even planted on traffic islands. In an attempt to prevent this, the EU ruled in 1998 that only trees planted before that year would qualify for subsidies, but the controls on this have been almost non-existent and so planting has continued to occur. Production on such a level has implications for the environment, given the amount of water needed to sustain it, and it encourages desertification and soil erosion.br /
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The main reason that olives have not been subject to the same controls as other agricultural goods is that the olive farmers have a powerful lobbying presence within the EU. The main beneficiaries have not been the small-scale olive growers but the large-scale intensive agricultural producers, many of which are owned by banks and insurance companies.br /
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The problems of the CAP have worsened with the enlargement of the EU, as most of the new entrants have much larger agricultural sectors. To reduce the extent of these problem, the EU announced in 2002 that new members would only be entitled to 25 per cent of the level of subsidy received by existing EU farmers, although that will rise to 100 per cent within ten years. This was intended to keep the cost of accession down while at the same time producing a policy which is not too unfair to the newcomers.br /
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The guaranteed minimum price of the CAP is an example of the use of minimum price controls which worked against the market rather than with the market. Although the motivation for this policy was sound, the effect was not. Many of the policies introduced since by the EU have been attempts to alleviate the problems caused by guaranteed minimum prices.br /
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Assignment One questionsbr /
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1. Using a demand and supply diagram, illustrate the effect of a a?minimum price policya? on the market for agricultural products (5 marks). Other policies used by the CAP have been the use of quotas on production and set aside, where the farmer is paid not to cultivate land. Illustrate these policies by using demand and supply diagrams. (5 marks)br /
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2. Provide a critical account of the current EU Common Agricultural Policy (15 marks) supported by relevant statistics (15 marks).br /
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3. Provide a critical assessment of the main factors affecting global agricultural markets (60 marks). Make selective use of PESTLE model and demand and supply diagrams to illustrate your arguments where appropriate