The Changing Commodity Prices On The Cap Reform Commerce Essay

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The EU has through improvements in farm efficiency become a significant player in the world food production market and now produces food for the worlds population. It is the economical incentives offered by the Common Agricultural Policy (CAP) that have allowed the EU to gain and keep such a high market share. The policy has become well-known for its high cost, accuse of having trade distorting effects and its reluctance to change. (EU) This essay will discuss the impact of the changing commodity prices on CAP reform. It will look at how CAP reforms are impacted and based on the global food market prices. Food prices dropped in real terms from the 1960s until the early 2000s, making it more difficult for some farmers to make a living on their own. (Apendix 1) However, others have increased their productivity and since the early 00s food prices have kept going up, peaking in 2008, making these farmers do really well. Some saw this as a golden opportunity to dismantle the CAP altogether, whilst others still argued the policy to be a necessity for European agriculture to achieve its objectives. (euractive, 2009)

In order to discuss and draw conclusions about the impact of changing commodity prices, first the objectives of the CAP and what makes this industry unique needs to be understood.

The objectives of the CAP have changed over time. When it was created the main objectives of the policy was to provide food security for the citizens of Europe, to push prices of agricultural products down and to increase labor productivity. CAP's stated aim has also been to ensure fair living standards for farmers, but the costs proved themselves to be unbearable and constantly growing, and this fact has motivated several reforms. (europa.eu)

During the first 20 years of the CAP small farmers earned little from the policy. 20 % of farmers, often large producers who were already rich, received about 80% of the support. (Senior Nello 2005:226). But the price level allowed these farmers to stay in business (Baldwin & Wyplosz 2004:229). During these years, reform of the CAP was a taboo subject, because it was thought that undermining the policy would make European integration to tumble down. However if prices would have fallen and farmers would have risked to be forced out of business, the CAP would most likely have been reformed more quickly to take into account this inequality of distribution, since preventing abandonment of production was (and is) a key objective of the policy. (Senior Nello 2005: 227) This shows that there is a link between CAP reform and world prices. To emphasize this point further, the impact of recent price fluctuations on CAP reform will now be discussed.

The 2003 a reform took decisive steps towards market liberalization. In the past, the Cap has by guarantying product prices stimulated production and supported farmer incomes. However, by 1980s this policy had resulted in costly surpluses of major agricultural commodities which the EU had to pay for. The policy has gradually evolved - since the beginning of the 1990s - into a direct income payment system with an additional rural development component as part of the 2003 reform. (Parliament, 2008) The 2003 reform brought radical change to the CAP by proposing an elimination of production subsidies and introducing a system of Single Farm Payments (SFP) that is decoupled and green-box compatible (not viewed as market distorting) (Ackrill et.al. 2008:405). It allows farmers to produce what the market wants. In the future, the vast majority of subsidies will be paid independently from the volume of production. To avoid farmers from abandoning farming, individual states can maintain a restricted link between production and subsidy within certain limits. The SFP's are linked to the respect to cross-compliance of environmental, animal welfare standards and food safety. By decoupling production from subsidy the hope is to make EU farmers more competitive, whilst still giving them an incentive to continue farming. The reform also reduced some import control, such as tariffs and quotas on many products. (Europedia)

Thus, the objectives of the CAP have changed and the policy rests on two pillars: Pillar one inclydes the direct payments for farmers and managements of market measures are funded and Pillar II, supports environmental programs and rural development. Pillar I does take up a larger part of the budget, but that is set to change. (see appendix 1) (Parliament 2009)

These payments where based on an average of what farmers have received in recent years and the plan was to shift payments included in Pillar I into Pillar II by 3% a year over a certain period of time. (Poole 2003:107). The result was that most farmers incomes would be more impacted by changes in world prices of food stuffs, since they no longer receive a guaranteed minimum price. Since the EU does not want to cause abandonment and the objective with the reform was still to provide farmers with high enough incomes to continue production, the future prognosis of how world prices would change was therefore very important when passing the reform. (USDA, 2004)

When the 2003 reform was passed, prices were expected to remain relatively stable, at least the medium-term. However what really happened was that prices began to rise and continued to do so until 2008, hitting an all time high and causing a global food crisis. (see apendix 1) When EU's agriculture commissioner Mariann Fischer Boel said the following to promote the idea of the reform to the farmers she couldn't have been more right: "When farmers realise how much money they can make producing whatever they want, they are going to love the new reform." (Europa.eu, 2004)

When negotiating agricultural policies, decisions are generally based on historical net farm income figures, which are derived from the then current price and production data. Price fluctuations can often represent a new situation, even though they mostly are short-lived. This is because increased price leads to more actors producing the commodity, hence stabilising the price (European Commission, 2008). When the Single Payment Scheme was introduced back in 2003 commodity prices were low. This resulted in these payout being generous in the context of today high agricultural prices: "farmers are double-dipping". A research paper produced by Wiley InterScience provides an empirical analysis of the implications for these high payments for two crops: wheat and barley. What this study shows is that the policy payments should have taken into account future prices and therefore been more flexible. (Ingentaconnect, 2008)

Hence, some farmers are doing very well from subsidies they at times do not need. The long-term goal of the EU is to reform the CAP so that it only includes the second pillar and to provide a safety net by aiding farmers incomes when world prices diminish their profits, which are likely to be more frequent owing to global warming. This would change how famers do business and plan what crops to grow and it would fulfill the EUs objective of creating "a competitive agricultural sector which can operate in world markets".

The swedish agricultural minister made a proposal in 2007 to the EU for complete market liberalisation. As prices are expected to stay at a high level, (as some underlying factors are not expected to go away) at least in the medium-term, Sweden wants to keep subsidies for environmental protection but wants to phase out intervention subsidies, export subsidies and production subsidies completely. Erlandsson said that the reform would be made possible by high market prices. Those in favor of the reform argued that farmers cannot plead poverty when prices are expected are at record levels. (The local, 2007) Farmers are worried about what will happen with prices in the long-term and are afraid that if subsidies are taken away from them, they are will never to get them back when they need them. Therefore agricultural protectionist lobby have traditionally been known to seize upon any economic trend to justify its position. When world food prices are low, we are told that poor farmers need subsidies to guarantee their income. When prices are high, this is apparently a sign that subsidies are needed to expand production. This is one of the factors that have made reforming of the CAP such a slow and tedious process.(ibid)

Thurston believes we should be cautious of protection lobbyists who raise their voices when food prices raise to defend the CAP. He argues that the EU should be spending its money on research to develop sustainable farming solutions than letting it end up in the pockets of those who do not need it, referring to the fact that there is still a skewed distribution of the subsidies, where rich farmers, landowners and agribusinesses receive the majority of the funds (Thurston, 2010).

International trade organizations have pressured the EU to reduce its subsidies to agriculture has been high for a very long time. In 1986, the Uruguay Round began with the goal to reduce protectionist farm policies. This was the first time that agriculture was included in GATT negotiations in more than a marginal way (Senior Nello 2005:357). However, EU refused to liberalize, which led to a world trading system crisis (ibid.). As EU faced enormous pressure from their own industrialists and export-oriented sectors they eventually agreed on the MacSharry reform in 1992 (Baldwin & Wyplosz 2004:231). This was the first time international agricultural trade concerns entered CAP policy making (Ackrill et.al. 2008:394).

The latest WTO round, the Doha Development Round, began in 2000, but despite that EU instituted the Agenda 2000 reforms (adopted in 1999) to pave the way for the possibility of a successful conclusion, the round has yet not ended. As prices rose, resulting in the 2007-2008 food crisis the WTOs pressure and critique of the CAP mounted. The pressure for an agreement was large, since a failure could mean a new crisis similar to the one in 1992. (Baldwin & Wyplosz 2004:233).

The WTO fights for free trade and believes that it will bring economic growth on a global scale. There is a lot of evidence to support this claim and OECD works finds that a 50% decrease in subsidies paid to agriculture would lead to a net world output increase of USD 28 billion per annum. (Interscience, 2008)

The CAP is accused of causing a food crisis in Africa as subsidized European farmer can produce to lower price than in the developing country. European and American exports (which benefits from the farm bill, a similar system to the CAP) of subsidized agricultural products rob developing countries of their competitive advantage in agriculture. Because African agriculture has been forced to compete with subsidized and protected EU farmers it has failed to expand over the past half century. This lack of domestic production capacity is why the food crisis has hit Africa so hard. As prices rise the distorting affects that subsidizing agriculture in OECD countries has on other parts of the world become apparent, the pressure obviously increases on the commission to reform the CAP. (ibid)

However , CAP supporters such as French ex-agriculture minister Mr Michel Barnier support the maintaining of the subsidies to the farmers, not putting them responsible for the food crisis and even suggest the idea of the CAP should be exported to other parts of the world, promoted as a solution of the world food crisis. (RFI, 2008) Arguments are put forward about how agriculture displays some unique characteristics in terms of the demand for and the supply of its goods that justifies supporting it. However, others claim that these arguments are no longer valid in the 21st century and that food security can be achieved even under free trade terms. (Independent, 2008)

The recent changing commodity prices did trigger a responds form the EU in 2008. The so called "health check" of the CAP was launched and did lead to certain changes. The agricultural commissioner said that the health check was not to make any essential changes to the CAP (Cooper et al, 2007). However, the reform did continue the liberalisation process of the policy, shifting funds from the first to the second Pillar, abolishing milk quotas and removing the regulation of "set-aside" land. It soon has been converted from a market intervention policy into a genuine safety net.

As a conclusion it indeed seems that changing commodity prices have had a mayor impact on CAP reform and it has caused debate regarding food security in later years, in regards to what different opinions suggest that we shall ensure food security in the future. The underlying causes of the high food prices that world markets have experiences in recent years are likely not to change in the near future. The way that the commission reacted by launching the Health Check goes to show that commodity price changes can impact on CAP reform. Some critics argue that the EU has misunderstood crucial points of food security, hence as prices have risen the fundament of the CAP is being rocked.

The CAP may have been adjusted to correspond with global market evolution, but might another commodity evolution surrender the current reform useless? Might increased market liberalisation prove to be an unsustainable strategy as world prices fluctuate? These are questions where it has shown to be difficult to find one correct answer and future CAP reforms needs to be more flexible than those of the past in order to counterweigh the force of world markets.

Apendix

Apendix 1

Petergallagher, 2008. "Bartering for food 'security'"

Available [Online]:

http://www.petergallagher.com.au/index.php/site/tags/tag/food

Accessed: 12/02/10

Apendix 2

Source:

Parliament, 2009. "Introducing the Common Agricultural Policy "

Available [Online]:

http://www.parliament.the-stationery-office.co.uk/pa/ld200506/ldselect/ldeucom/007/706.htm

Accessed: 17/02/10

Apendix 3

Source: BBC News, 2008. "Common Agricultural Policy"

Available [Online]:

http://news.bbc.co.uk/1/hi/4407792.stm#mountain

Accessed: 16/02/10

Reference list & Bibliography

Internet

Europedia, 2009. "EU agricultural grants and product quality"

Available [online]:

http://www.europedia.moussis.eu/books/Book_2/6/21/04/02/index.tkl?all=1&pos=312

Accessed: 12/02/10

Euractiv, 2009. "Global food prices and CAP reform"

Available [online]:

http://www.euractiv.com/en/cap/global-food-prices-cap-reform/article-184329

Accessed: 21/02/10

Europa.eu, 2009. "The CAP explained"

Available [online]:

http://ec.europa.eu/agriculture/publi/capexplained/cap_en.pdf

Accessed: 14/02/10

Interscience, 2008 "LIBERALISING OECD AGRICULTURAL POLICIES IN THE URUGUAY ROUND: EFFECTS ON TRADE AND WELFARE"

Available [online]:

http://www3.interscience.wiley.com/journal/120104375/abstract?CRETRY=1&SRETRY=0

Accessed: 17/02/10

Europa.eu, 2004. "Press release RAPID 2004"

Available [online]:

http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/09/389&format=HTML&aged=0&language=EN&guiLanguage=en

Accessed: 16/02/10

European Commission, 2008. "Food facility - EU rapid response to soaring food prices in developing countries"

Available [online]:

http://ec.europa.eu/europeaid/how/finance/food-facility_en.htm

Accessed: 16/02/10

Independent.co.uk, 2008. "Soaring food prices should lead to the end of subsidies"

Available [online]:

http://www.independent.co.uk/opinion/leading-articles/leading-article-soaring-food-prices-should-lead-to-the-end-of-subsidies-831477.html

Accessed: 18/02/10

USDA, 2004. "CAP Reform of 2003-04" Authors David Kelch and Mary Anne Normile

Available [online]:

http://usda.mannlib.cornell.edu/usda/ers/WRS//2000s/2004/WRS-08-26-2004_Special_Report.pdf

Accessed: 17/02/10

Parliament, 2009. "The Review of the Less Favoured Areas Scheme"

Available [online]:

http://www.parliament.the-stationery-office.co.uk/pa/ld200809/ldselect/ldeucom/98/9804.htm

Accessed: 15/02/10

The local, 2007. "Abolish EU farm subsidies".

Available [online]:

http://www.thelocal.se/7443/20070529/ Sweden: 'Abolish EU farm subsidies' 2007

Accessed: 14/02/10

Thurston, J, 2010. "THURSTON COUNTY ENVIRONMENTAL HEALTH" Available [online]:

http://www.co.thurston.wa.us/health/ehoss/pdf/InstallerList.pdf

Books

Baldwin, R. and C. Wyplosz, 2004."The Economics of European Integration". Published by Mc Graw Hill

Poole, Nigel and Lynch, K. (2003) 'Agricultural market knowledge: systems for delivery of a private and public good.' Journal of Agricultural Extension. Berg Publisher. Page107

Senior Nello, 2008. "The European Union: Economics, Policies and History". Published by McGraw-Hill Higher Education; 2 edition

Journals

Ackrill et al, 2008:405. "European Review of Agricultural Economics"

Available [online]:

http://erae.oxfordjournals.org/cgi/pdf_extract/35/4/591 Ackrill et.al.

Accessed: 18/02/10

Ingentaconnect, 2008. "High Commodity Prices and the EU's Single Payment Scheme: Some Consequences of Double-Dipping". Authors: Schmitz, Andrew; Schmitz, Troy G.; Schure, Paul

Available [online]:

http://www.ingentaconnect.com/content/bsc/cjag/2008/00000056/00000004/art00011

Accessed: 12/02/10

Ingentaconnect, 2008. "High Commodity Prices and the EU's Single Payment Scheme: Some Consequences of Double-Dipping". Authors Schmitz, Andrew; Schmitz, Troy G.; Schure, Paul. Publisher: Blackwell Publishing

Journal Of Agricultural And Food Chemistry, 55 . pp. Cooper, K. Bell, JG et al. (2007)

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