Lecture 8.
Reform of the CAP: MacSharry, Agenda 2000 and the Mid-Term Review

What we want to learn about this topic

• to understand the strategies used by the EU in the past to contain the cost of the CAP
• to assess the importance of the 1992 MacSharry reforms and the Agenda 2000 proposals
• to appreciate the changes introduced by the Luxembourg Agreement Mid-Term Review in 2003

A consequence of the reforms in the 1990s is a much greater role for direct payments in farm transfers under the CAP. A separate lecture topic discusses the rationale and design of direct payments and issues about their future in EU agricultural policy.

Short introduction to the issues

The major reform landmarks

• 1968 the Mansholt Plan
• 1977 prudent pricing policy and abandonment of the 'objective method' of price setting
• 1984 milk quotas
• 1988 agricultural stabilisers
• 1992 MacSharry reform
• 1999 Agenda 2000
• 2002 Commission's proposals for the Mid-Term Review of Agenda 2000
• 2003 Luxembourg Agreement (ongoing reforms in sugar, Mediterranean products and fruit and vegetables)

The major reform strategies (in approximate order of implementation)

• tightening the circle of protectionism around EU agriculture (tried unsuccessfully for oilseeds through the demand for 'rebalancing' CAP protection in the Tokyo Round of GATT negotiations and implemented successfully through Voluntary Export Restraints against, e.g. New Zealand exports of butter and lamb, Thai exports of manioc, etc.)
• the subsidisation of consumer demand (esp. important for dairy products)
• persuading producers to contribute to the cost of surplus production through co-responsibility levies (although these levies were formally paid by producers, their actual incidence fell on consumers)
• supply management policies (quotas, restrictions on input use, buy-out schemes)
• support price reductions compensated by direct payments

The 1992 MacSharry reforms

The MacSharry reform introduced two main innovations: reductions in administered support prices for the first time, with farmers compensated for the expected income loss through the introduction of coupled direct payments, and a set of accompanying measures to the market reforms.

Support price reductions particularly affected cereals (30% reduction in intervention prices over three years) and beef (15% cut in intervention prices over three years). There were also small reductions in dairy intervention prices. Compensation for the cereals price cuts was on a per hectare basis. Compensation to larger producers was paid conditional on set-aside of land. In the case of beef, restrictions on the use of 'normal' intervention were introduced. Existing direct payments (male cattle premia, suckler cow premium) were increased, but subject to 'extensification criteria'. In the case of sheepmeat, where support was provided through premiums paid per ewe, the number of premiums was limited to those paid in 1991.

Accompanying measures

• Early retirement
• Agri-environment scheme
• Afforestation

Consequences of the MacSharry reforms

• greatly increased the significance of direct payments in farm incomes..
• . while also considerably extending the role of supply management policies (set-aside for arable farms, ceilings on premium numbers and eligible hectares for livestock and arable crops)
• helped to improve internal market balance by boosting demand (esp. for cereals) and cutting supply
• farmers over-compensated for support price reductions as market prices did not fall to the same extent
• permitted the Uruguay Round Agreement to be concluded

The Agenda 2000 reform

Background to Agenda 2000

Published May 1997 consisting of four inter-related proposals:

• proposal for the third medium-term financial perspective for the EU budget 2000-2006, including the financing of the eastward enlargement
• the EU strategy for enlargement, including opinions on each application for accession and the recommendation to open negotiations with just five of these countries in the first instance
• proposals on reform of the CAP in the 2000-2002 period (known as CAP 2000)
• proposals on the shape of the EU structural funds 2000-2006

Background to Agenda 2000 CAP reform proposals

• pessimistic forecasts on the EU's ability to remain within the WTO guidelines after 2000, as well as realisation that the EU would miss out on growing export markets unless further reform undertaken
• the next WTO negotiations must start before the end of 1999
• enlargement feared to cost too much without reform
• 1995 Commission's Agricultural Strategy Paper set out three options for continued reform: Status Quo (maintaining support levels and adjusting supply/demand imbalances through supply controls); Radical Free Market (abandoning price support) and Developing the 1992 Process (continuing the MacSharry process of gradual reductions in support compensated by direct payments) and opted for the last.

The CAP 2000 reforms (part of the Agenda 2000 package)

Agreed at the Berlin Council in March 1999, the main measures of the Agreement were:

• a reformulation of the aims of agricultural policy, to give greater emphasis to environmental policy objectives and the multifunctional role of the European model of farming.
• a reduction in the cereals intervention price by 15% in two equal steps of 7.5% in the marketing years 2000/2001 and 2001/2002. Area payments increased to compensate for 50% of this reduction in intervention prices. The possibility of a further reduction in the intervention price in 2002/2003 is held open depending on market developments. The base rate of compulsory set-aside is fixed at 10% for all the period 2000-2006. These cuts were expected to lead to support prices for wheat falling below world prices during the planning period, although not for barley.
• a reduction in the beef intervention price by 20% over three years. In addition, public intervention was replaced by private storage aid triggered when prices fall below a figure some 18% below the present trigger point for public intervention. 'Safety net' intervention for bulls and steers is retained after 2002, but only when prices drop below 60% of the intervention price. This is equivalent to a 44% drop in the point at which intervention is triggered. The clear message is that the Council does not want to get involved in beef storage again. Premium amounts in the beef sector were increased to compensate for these reductions. The changes may allow some beef to be exported without export refunds, but it is unlikely that they can be eliminated altogether
• A reduction in dairy support prices of 15% spread over three years, but implementation was postponed to the 2005/2006 marketing year because of the budgetary costs of compensation. Compensation in the form of a dairy premium per tonne of quota will be paid.
• an integrated rural development policy introduced as a second pillar of the CAP. This brings together the accompanying measures of the MacSharry reform plus compensatory allowances under the less favoured areas measure, as well as rural development measures previously financed by the FEOGA Guidance Fund, into a single Rural Development Regulation..
• Note that the lowering of support prices does not necessarily mean that EU producer prices will fall to the same level. The actual level of EU producer prices will be influenced by the degree of activism shown by the EU Commission in administering the export refund policy.
• The Agreement established tight budgetary limits on EU agricultural spending in the context of the current financial perspective. It limits Guarantee Fund agricultural spending to an average level of 40.5 billion euros (in 1999 prices, which can be adjusted upwards by an inflation factor of 2% per annum) but included in this amount spending on the accompanying measures and rural development measures outside of Objective 1 regions. A separate sub-heading was introduced for these rural development measures. The agricultural guideline (with growth indexed at 74% of the increase in the Union's GNP, is maintained, but its scope is broadened to include not only CAP expendoiture but also agriculture-related expenditure in connection with enlargement. The objective was to stabilise agricultural expenditure over the period. The Commission is to report in 2002 on the development of agricultural expenditure and, if necessary, to propose further changes which would ensure that the overall financial limits are not breached.
• Agenda 2000 also introduced the so-called 'horizontal' regulation which introduced two brand new instruments: modulation of direct aids (to reinforce the second pillar) on a voluntary basis, and stronger cross-compliance obligations for direct aids to meet minimum environmental standards.

Assessment of CAP 2000

• philosophical basis is not one of returning agriculture to market forces but rather adjusting the protectionist CAP to the minimum extent compatible with market and international realities
• further increased the significance of direct payments in farm income (from around an estimated 45% to 70% in Ireland, for example)
• less than full compensation being offered (though this will depend on the extent to which market prices follow the downward reduction in support prices)
• the budget cost of extending compensation to dairy producers threatened to break the overall agricultural guideline. The Commission proposed savings first through modulation and later degressivity, but ultimately both mechanisms of limiting the cost of direct payments were rejected in favour of postponing dairy reform until the end of the period (2005-2007).
• apart from general concerns about the adequacy of the compensation package, there was Irish concern that the package discriminated more heavily against Ireland than other member states. Examples include our greater reliance on beef intervention, the way in which the compensation payments are biased in favour of intensive producers and against extensive producers in the beef sector, and the proposed way of sharing out the suggested 2% increase in the overall EU milk quota which would allow a relatively marginal increase here
• final package met many of these concerns and Department of Agriculture and Food calculations suggest it result in increased income to producers as well as gains to consumers.
• the non-CAP elements in the Agenda 2000 package are also important, particularly the agreement to put a ceiling on agricultural spending up to 2006. This ceiling limits the possibility of increasing compensation payments to farmers if further reform of price support policy is necessary before that date.

2003 MID TERM REVIEW OF AGENDA 2000

Luxembourg Agreement June 2003

Can be summarised under the following headings
- Intervention price cuts (rice and dairy)
- Decoupling of direct payments
- Cross-compliance
- Modulation
- Financial discipline
- Changes to the Rural Development Regulation to provide wider options for expenditure

Mediterranean package April 2004

- affects tobacco, olive oil, hops and cotton.

Sugar reform November 2005

Decoupling of direct payments

Rationale for Commission's proposal
- Simplification of payment arrangements
- Encourages greater market orientation
- Will reduce pressure on environment
- Will improve efficiency of income transfer to farmers
- Will make it easier to extend CAP to the accession countries
- Will make it easier to defend payments in the WTO

The issues
Paid irrespective of production
- though subject to requirement that land is maintained in good agricultural condition
Is still linked to land
- But entitlements can be leased or bought and sold under certain conditions
Eligibility determined by payments received in a reference year
- Commission wishes to avoid the redistributional debate around introduction of a single uniform area payment
- Problems linked to establishing the reference year (some farmers will find they are not eligible for direct payments because they did not collect payments in that year; other farmers will have invested in quota or land expecting to receive premia payments in the future which now will remain the property of the person who sold them this quota or land)
- Other inequities created between farmers (neighbouring fields could have quite different payment entitlements for the forseeable future)

Decoupling : the effects
Output effects
- By how much will production fall?
- What will be knock-on effects on agro-industry and agri-services?
Environmental effects
- benefits arise through more extensive production…
- … but danger of land abandonment in marginal farming areas
Sustainability of payments
- Will decoupling undermine public support for transfers to farmers?

Cross-compliance

Already introduced in Agenda 2000, but suspicions remain about the commitment of Member States to enforcing this conditionality

Proposals cover:

• The scope of standards: to cover environmental, food safety, animal health and welfare, occupational safety
• The level of standards: meeting mandatory standards and applying good farming practice
• The monitoring of standards: Introduction of farm audits

  - Mandatory for producers receiving more than €5,000 in direct payments
  - Financial aid for audits to be available

Modulation : budget rebalancing

Key problem is how to increase the funding of the second pillar within the constraint of a fixed overall agricultural budget
Modulation already introduced as a voluntary option in Agenda 2000

Modulation proposals
- dynamic modulation (i.e. reduction) of 3% per year of an individual farm's decoupled direct payments up to a total reduction of 20%
- savings shifted to the second pillar (any measure) through the EU budget (adding €500-600 million per year). This money to be redistributed back to Member States using a distribution key based on agricultural area, farm employment and prosperity (compare to Agenda 2000 voluntary modulation where the unspent money remained in the Member State but had to be spent on the accompanying measures in the second pillar).
- a 'franchise' (threshold) of €5,000 for each farm to be exempted from this reduction. Member States may further exempt €3,000 for each labour unit above two (designed to take into account the larger farm structures in the former Eastern Germany, for example).
- direct payments to be capped at €300,000 per farm above the franchise, with savings kept in the Member State concerned.

Commission's modulation proposal opposed:
- Leads to redistribution within farming
- Leads to redistribution between member states
- Countries find it difficult to find the counterpart funds
- Second pillar schemes have high transactions costs
- Agricultural Ministers not necessarily keen on second pillar spending
- Problems in finding sufficient worthwhile rural development projects

Modulation - final agreement
Commission is proposing to distribute modulated monies between Member States on the basis of three criteria
- Area, employment, prosperity
Each member state guaranteed to receive back 80% of modulated funds.

Reading suggestions

Key texts

Senior Nello, S., 2005. 'The Common Agricultural Policy', Chpater 10 in The European Union: Economics, Policies and History, McGraw-Hill.
(a good short up-to-date overview of CAP developments)

*Ackrill, R., 2000, The Common Agricultural Policy, Sheffield University Press.

*Pezaros, P., 2000. 'The Common Agricultural Policy in the pliers (sic) of the Multilateral Trading System: Origins, Evolution and Future Challenges, in Bilal, S. and Pezaros, P., Negotiating the Future of Agricultural Policies, London, Kluwer Law International.
(nice short summary of the evolution of the CAP up to and including the Agenda 2000 decisions in Berlin March 1999)

Supplementary readings

MacSharry reform

Tangermann, S., 1998, 'An ExPost Review of the 1992 MacSharry reform', in Ingersent, K., Rayner, A. and Hine, R. eds., 1998, The Reform of the Common Agricultural Policy. London, Macmillan.

Swinbank, A., 1997, The New CAP, in in Ritson, C. and Harvey, D., eds., The Common Agricultural Policy, 2^nd edition, CAB International.
(detailed review of functioning of the CAP mechanisms after MacSharry, also taking into account the changes introduced by compliance with the Uruguay Round)

Agenda 2000 reform

Ackrill, R., 2000, 'New Century, Old CAP', Chapter 4 in The Common Agricultural Policy, Sheffield University Press.

Ingersent, K., Rayner, A. and Hine, B. eds., 1998. The Reform of the Common Agricultural Policy, Basingstoke, Macmillan. ARTS 338.1094 N8.

Reform of the CAP in the light of the EU's Uruguay Round commitments

This is discussed in the module on Implementation of the Uruguay Round Agreement on Agriculture where you will find additional references.

Mid-Term Review and Luxembourg Agreement

Baldwin, R., 2003. Update Essay 'The June 2003 CAP Reform', for Chapter 8 of Baldwin and Wyplosz, The Economics of European Integration (13pp).

Kelch, D. and Normile, M.A., 2004, 'European Union adopts significant farm reform', AmberWaves, September 2004, USDA Economic Research Service.

A succinct summary of the Luxembourg Agreement June 2003 changes is found in the Commission press release on the reform. The Commission has also prepared a summary of the legislation on the single farm payment.

Web resources

Check out the Comission DG AGRI's CAP reform website. In addition to the documents and press releases mentioned above, it also contains contains links to six impact studies commissioned to determine the effect of decoupling on EU farm production and incomes. Read the press release summarising the results of these studies.

DG Agri produces a handout setting out the implementation of direct payment schemes in the 27 member states.