Select Committee on Environment, Food and Rural Affairs Ninth Report



45. Despite the importance of domestic agricultural and food markets to the fortunes of United Kingdom agriculture, international, European and national policies in a wide range of areas also have a crucial role to play in shaping the future of the United Kingdom's agricultural industry. The most important factor is the Common Agricultural Policy. The first section of this Chapter reviews the development of the CAP and examines its likely future development. However, the CAP itself is not immune to pressures from within and outside the European Union. The following section looks at some of the pressures on the CAP, including the proposals for the enlargement of the European Union and the negotiations on the World Trade Organisation's Agreement on Agriculture, which will have implications for the development of policy. Climate change and the Kyoto Protocol may also have implications for agricultural policy but they are even more likely to have practical implications for farming.

46. Pressures and influences on farming do not just come from domestic, European and global agreements, but can also arise from policy developments in other countries. On 13 May 2002 the Farm Security and Rural Investment Act (formerly commonly referred to as the 'US Farm Bill') became law in the United States.[64] The new Act could increase farm subsidies in that country by up to 80 per cent.[65] The response from within Europe has been critical. In a letter to the Financial Times, Commissioner Fischler described it as "more a flunk bill than a farm bill",[66] and Margaret Beckett told the Committee that she had told US Agriculture Secretary, Ann Veneman, that the Bill was "extremely disappointing".[67] We comment below on the Farm Act in the context of our discussion on prospects for change.

47. Within the framework of the CAP and European Union law, the United Kingdom Government has some leeway to intervene itself in agricultural markets, and the freedom to decide some elements of domestic agricultural policy. The Government also has objectives of its own for the future development of the CAP. Therefore, in the final section of this Chapter we consider domestic agricultural policy.

The Common Agricultural Policy

Origins and Development

48. The development of the CAP can be traced back to the periods of food shortages on the continent in the immediate aftermath of the Second World War.[68] The original objectives of the CAP were enshrined in the Treaty of Rome, signed in 1957. Its principal objective was to "assure the availability of supplies" by "increasing agricultural productivity".[69] Increasing production would, it was argued, benefit the farmer and the consumer. These aims are economic, but it is worth noting that there is a social dimension to the policy. This has been consistently financed at the expense of taxpayers and consumers.

Extract from the Treaty of Rome: the Common Agricultural Policy

The objectives of the common agricultural policy shall be:

(a)  to increase agricultural productivity by promoting technical progress and by ensuring the rational development of agricultural production and the optimum utilisation of the factors of production, in particular labour;

(b)  thus to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture;

(c)  to stabilise markets;

(d)  to assure the availability of supplies;

(e)  to ensure that supplies reach consumers at reasonable prices.[70]

49. The detailed working of the CAP system was determined by negotiation and by 1962 the first commodity regimes were in place. The CAP relied upon the creation and maintenance of a system of European market prices set higher than those of the world market in order to stimulate increased levels of production. Higher domestic prices were maintained through the operation of common market organisations which, although they varied from product to product, followed a similar basic model. A target price was set for each product, and, in order to prevent imports undercutting that price, variable import levies (or in later years tariffs) were imposed to bring the price of imports up to European Community levels. Within the European market a system of market intervention operated, under which the European Commission ensured that the target price was achieved by buying and storing products. Finally, in order to enable European agricultural produce to be sold outside the Community, a system of export subsidies was also instituted.

Early pressures for reform

50. As early as 1968, it became apparent to the then Agriculture Commissioner, Sicco Mansholt, that the CAP was unsustainable in the long-run. He was concerned that price was the only policy instrument and that without structural reform too many farms would remain unviably small.[71] At one time some 90 per cent of the Community's budget was spent on agriculture. Demand for reform was stilled by the world economic crisis of the 1970s, as high European Community prices were exceeded by world prices. But even in this period, the problems did not completely disappear. In 1977 the CAP budget came under pressure, with dairy spending accounting for 40 per cent of the CAP Guarantee Fund budget, and for 35 per cent of the total Community budget. The response was the introduction of a co-responsibility levy on dairy farmers, which was intended to pass some of the costs of the over-production of milk to farmers.[72] The levy is generally considered to have been ineffective.

51. By 1982 the cost of the CAP was again causing "extreme concern".[73] Attempts were made to limit spending on a number of commodity sectors through the introduction of guarantee thresholds. Exceeding the thresholds would trigger price cuts in the following year. But the system did not halt continuing increases in prices, and so the remedy was regarded as ineffective. In 1984, in response to new problems in the dairy sector, production quotas for milk were introduced. Rather than facing price cuts if production limits were exceeded, fines (superlevies) were imposed on producers who exceeded set ceilings. In 1985 a Commission green paper "sought to bring supply and demand into balance to introduce new ways of reducing production in problem sectors and generally, to analyse alternative solutions for the future of the CAP". A package of measures was agreed by the European Council in 1988, which limited the percentage of CAP expenditure in the overall Community budget.[74] That percentage has fallen but the total amount spent has steadily risen.

Figure 6: Sectoral spending in absolute terms and as a proportion of the CAP budget[75]

The MacSharry reforms

52. Until the end of the 1980s, efforts to reform the CAP had been stimulated by budgetary pressures. Little attempt was made to address the fundamental problems of the price support system and the structure of the European agricultural industry. In the 1990s more far-reaching reform was sought. In 1991, the then Agriculture Commissioner Ray MacSharry instigated a major reform process with the publication of a 'reflections' paper entitled The Development and Future of the CAP. In that reflections paper Commissioner MacSharry outlined very succinctly a number of "deficiencies" in the CAP:

  • linking support to production "stimulates production growth and this encourages intensification of production techniques";

  • income support which depended on price guarantees "concentrates the greater part of support on the largest and most intensive farmers";

  • "the per capita purchasing power of those engaged in agriculture has improved very little over the period 1975-89", at a time when the active agricultural population fell by 35 per cent;

The Development and Future of the CAP sought to set European agriculture in a wider economic context, looking at the effectiveness of reforms already undertaken and the situation in various commodity markets. It concluded that:

    "It appears in these conditions that the Community's agricultural policy cannot avoid a succession of increasingly serious crises unless its mechanisms are fundamentally reviewed so as to adapt them to a situation different from that of the sixties.

    "The Commission considers there that the time has come to stimulate a reflection on the objectives of the Community's Agricultural Policy and on the principles that should guide the future development of the CAP".[77]

Unmentioned in the Commission's analysis, but providing the backdrop to the review, were the negotiations between 1986 and 1994 in the Uruguay Round of the General Agreement on Tariff and Trade (GATT). For the first time in the history of the GATT these talks included negotiations on reducing trade-distorting support for agriculture.[78] We discuss the influence of GATT and the World Trade Organisation below.

53. After presenting its analysis, the Commission set out a number of objectives and then guidelines, rather than detailed proposals, for reform. The Commission allowed a period of time for Member States to reflect and comment on these guidelines before publishing, later in 1991, a Commission communication to the Council and European Parliament on the development and future of the Common Agricultural Policy.[79] The proposals it contained were far-reaching, including price cuts in the cereals, dairy and beef sectors, changes to the support systems for oilseed rape and the introduction of set-aside. It was proposed that the amount of compensation individual farmers could receive for set-aside and price cuts should be limited: in other words that compensation payments should be 'modulated',[80] a policy which the Commission acknowledged was controversial.[81]

54. In addition to seeking to tackle production-related problems, the European Commission also proposed a series of accompanying proposals that it described as "three key measures complementary to the changes proposed in the market organisations and which offer special opportunities for rural development". The proposed measures were:

  • "A system of aids to encourage farmers to use production methods with low risks of pollution and damage to the environment". This included constraining production, promoting environmentally friendly farming and ensuring the environmental upkeep of abandoned agricultural land;

  • The afforestation of agricultural land; and

  • Structural improvement through early retirement.[82]

55. The final agreement reached over the MacSharry proposals was less far-reaching than the original proposals - for example, the modulation of compensation payments was not agreed. Nevertheless it can be said that "a fundamental change in the role of prices in the CAP came in 1992. ... support prices were cut by nearly a third [for cereals] and replaced by direct payments to farmers. ... Thus prices began to be constrained in 1992 and their role in support curtailed, but only after rising self-sufficiency, stocks and expenditure had done enormous damage to the policy".[83] Nevertheless overall spending on the CAP continued to rise and declined only as a proportion of Community spending.

56. The impact of high prices fixed by the CAP for European Union farmers is particularly damaging to countries that are net importers of food, principally Germany and the United Kingdom. They bear a cost equivalent to the difference between the lower price they would have had to pay to acquire food from the world market and the price they actually have to pay within the European Union. This comprises increased payments to their own farmers which in the main remain in the domestic economy, payments to farmers in other European countries whose countries retain the whole benefit, and taxes on imports from third countries which become part of the revenue of the Community budget. Thus as a net food importer the United Kingdom benefits less from the CAP than its neighbours.

64   The US Department of Agriculture has a Farm Bill 2002 website: Back

65   Outrage as US farm handout agreed; see Back

66   Taken from a letter from Commissioner Fischler published in the Financial Times; published on the Europa website at Back

67   Evidence taken on 15 May 2002, Ev 310, Q.1039. Back

68   Memorandum from the Farmers' Union of Wales Ev 418, para 3. Back

69   Article 39 of the Treaty of Rome. Back

70   Article 39 of the Treaty of Rome, now Article33 of the Consolidated Version of the Treaty Establishing the European Community, see­lex/en/treaties/dat/ec_cons_treaty_en.pdf. Back

71   Ackrill, R (2000) The Common Agricultural Policy, Sheffield Academic Press: Sheffield, p. 50. Back

72   Ackrill described the levy as "supposed to discourage the production of surpluses and generate revenues to promote measures to dispose of surpluses and increase milk consumption" (p. 54). Back

73   Ackrill, op cit, p. 58. Back

74   European Commission, Agriculture - Introduction, see: Back

75   Derived from Court of Auditors and European Commission data, cited in Ackrill, op cit, p. 110. Back

76   European Commission, The Development and Future of the CAP - Reflections Paper of the Commission (COM (91) 100), pp. 1-3. Back

77   The Development and Future of the CAP, p. 9. Back

78   World Trade Organisation, see: Back

79   Commission communication to the Council and European Parliament on the development and future of the Common Agricultural Policy, (COM (91) 258). Back

80   Commission communication to the Council and European Parliament on the development and future of the Common Agricultural Policy, pp. 9-29. Back

81   The Development and Future of the CAP, pp. 16-17 Back

82   Commission communication to the Council and European Parliament on the development and future of the Common Agricultural Policy, pp. 32-37. Back

83   Ackrill (2000), op cit, pp. 69-70. Back

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