Examining the European Unions Common Agricultural Policy - Assignment Example

Examining the European Union’s Common Agricultural Policy (CAP) College Table of Contents 0 Minimum Price Supply and Demand Curve………………………………..……………3 2.0European Union CAP Policy……………………………………………………..………5 3.0Problems Facing Global Agriculture…………………………………………….………10 4.0Demographic Changes…………………………………………………………..……….10 5.0Biofuels………………………………………………………………………..…………11 6.0Production Inhibitors………………………………………………………….…………12 7.0Price Volatility……………………………………………………………….…………..12 8.0Reference List…………………………………………………….……………………...15 1.0 Minimum Price Supply and Demand Curve Price floors refers to minimum commodity prices that are set by governments for specific commodities which it feels are attracting too low a price compared to what the producers invest in hence needing some sort of assistance to attract the correct prices. These kinds of set prices can only bring problems to the economy if they are set at above the equilibrium price of the commodity. When priced at over the equilibrium or market price, this will lead to a surplus in the market leading to stocks of agricultural goods that have nobody to buy them (Ackrill, 2000). Source (www.economicsonline.co.uk) Source (www.economicsonline.co.uk) In the EU farmers are guaranteed a certain price by their government. This is achieved mainly through the use of buffer stocks. These refer to the previous season’s stocks that were not absorbed by the market hence stored by the governments for future eventualities in the market prices. The government buys excess stock in the market to maintain a certain price if there is over supply and releases extra produce to the market to keep the prices at the agreed rate in case of shortage pushing the prices up (Swinbank, & Tranter, 2004). Agricultural Produce Supply Quota Source (author ) Whenever there is an overwhelming supply of farm products on the market, the excess supply tends to push down the average prices of the produce leading to reduced profits for the farmers or even end up making losses. The E.U sets quotas for such products so as to protect farmers from these problems. The dairy sector is one such agricultural sector that has set quotas imposed on it by the E.U. A quota is represented on the graph by a vertical supply curve at the time the quota is binding. The response of the producers to changes in prices is asymmetrical. Supply will reduce in response to fall in prices and this is represented by the left side of the quota. On the other side ,the right side, when the price rises the farmers are prevented from raising production making the supply curve to become inelastic in nature. (www.economicsonline.co.uk) The quota system can be explained using the following equations;- - (a+c) =refers to a consumer surplus change + (a+b+e)-(b+d+e) =refers to producer surplus 0= refers to a variation in taxpayer expenditure -c-d= refers to a change in general welfare. The elasticity of the demand curve will determine if the farmers will benefit from the production quota. The farmers will be at a benefitting position after the quota if the curve is inelastic around the initial set price. When a market economy is restricted, the quota that is set on production always leads to quota rents. This can be depicted as the a+b in the graphic representation. They are referred to as rents because the farmers get an extra return of Pd. If the farmers manage to sell or lease their quota rights, it gives a capital value to the quota which is equal to the discounted net present value of the stream of revenue a + b. (Lipsy, 1992) Set Aside Policy This is an agricultural policy in which land is set aside and farmers are not permitted to utilize it for any agricultural purpose during that time period. This program was introduced in 1992 as part of reforms in the CAP. This is only applicable to crop growing farmers in the EU. In the year 2006 there was roughly half a million hectares of land that had been set aside during the planning season. The farmers are compensated for the lost income due to leaving their land idle by the government. This is a policy used by most governments to help in regulating supply and hence prices of the commodities in the market (Lipsy, 1992). When there is a larger percentage of land that has been set aside, the production levels will drop in the coming season leading to steeper prices from P2 to P1 and vice versa with more land under production. European Union CAP Policy .The Common Agricultural Policy (CAP) is a policy, set forth by the European Union (EU).This policy comprises of rules that seek to control and regulate the manufacture, processing and trade of agricultural produce.  The funding of this policy is currently almost 50% of the European Union budget. This policy is very significant due to the fact that it symbolizes the Union’s collective move from national level sovereignty onto European level sovereignty. This policy is funded by the European Agricultural Guidance and guarantee Fund (EAGGF). The allocation of funds is done into two different areas: the Guarantee section and the Guidance section. The guidance part deals mostly with the structural funds. These funds are used in making improvements and development of the structure of agriculture in the rural areas of the continent (Great Britain, 2008). The guarantee part of the fund bankrolls expenditures that are involved in the organization of the agricultural produce market. The CAP is also financed by manufacture taxes, storage taxes and also portions of each state member’s Gross National Product (GNP) (Swinbank, & Tranter, 2004). The foundation of the unified Europe was made via the Rome Treaty of 1958. The CAP was launched as a way of correcting the food production deficit that was common in Europe through implementing a system that controlled internal incomes and prices. (Blair 123-124).  It recorded successes in achieving its key goal of improved production, secured supplies, farmer protection and a more stable market. This system, however, was not devoid of problems. The farming communities began recording surpluses in production of a majority of their agricultural products. This was caused mainly by the guaranteeing of set prices through the policy hence farmers tended to over-produce particular products since the risks of losses and wastage on their part was practically minimal (Petit, 1989). The subsided products affected the export markets leading to tension within trading partners and also increased intensive food production brought about damages to the environment in certain areas where it was practiced. This policy has a long history concerning reform as it is not a perfect system. There was an attempt at making significant changes to how it should be helping the agricultural sector after just a decade since its inception. Examples of attempts at reforming the system are: The Mansholt Plan was aimed at implementing a system that provided the farmers with adequate income and also reducing the cost of subsidies on the economy by coming up with much more efficient methods of agricultural production.  Another attempt was in the year 1972 whereby there was an attempt to modernize agriculture in Europe through the creation of structural measures. This too was seen as a failure since many of the issues it set out to fix were still not reformed at the end of it all.  In the early 1980s, the green paper was published which aimed at balancing differences between demand and supply through improved methods of production. The European Council (EC) agreed on several reforms in the agricultural expenditure guideline that sought to limit the percentage of the budget that was spent on CAP. The MacSharry reforms aimed at cutting back of agricultural prices so as to increase the competitiveness of the products, compensating farmers that incurred losses of income and also the sensitive issue of protection of the environment in 1992.These reforms were seen to be generally successful due to their positive impacts on agriculture (Shucksmith, Thomson, & Roberts, 2005). Further adaptation of the CAP was necessitated by increased competitiveness of products coming from non-member states, a new round of World Trade Organization negotiations and the preparation of a single European wide currency. (europa.eu.int).Agenda 2000 was created in 1997 so as to address many significant issues that the EU and CAP faced. This new agenda had the key focus of reinforcing the competitiveness of agricultural commodities in world as well as domestic market. Other issues it hoped to tackle were: The promotion of fair living standards. The development of new income source for the EU farmers. Coming up with a new rural development policy for the rural areas. Improved and better environmental considerations. The simplification of the CAP legislations The CAP accords the European agricultural sector too much protection and subsidies hence leading to serious social losses in the economic union.  This policy also leads to serious inadequacies in other sectors such as textiles, service and manufacturing industries. This high level of protection also tends to burden taxpayers, consumers, the environment and also harms vital international trading relations with other countries and economic unions.  Another negative effect in E.U countries is that the C.A.P has managed to keep agricultural prices higher that the world average. This policy has also encouraged overproduction of certain agricultural produce leading to a situation whereby net importers of the same have turned into net exporters of the same produce. This has also encouraged large scale agricultural stock-building by Europe. These events have hindered the growth of EU countries’ economies. Expensive food prices that come about due to this policy affects the least well – off the most and also tends to affect negatively EU products competitiveness in the international arena. Consumers of these products are the ultimate losers since they have to pay higher prices for the produce somas to pay taxes and raise subsidies that will be spent on the farmers in the agricultural sector (Blandford, & Hill, 2006). The EU’s total expenditure on agriculture rakes up roughly 45% of its budget. (Rosenblatt 36) These expenditures mainly go towards paying of farmers to prevent them from letting their pieces of Land staying idle. These payments shave no conditions attached as to what kind of crops are to be grown on the pieces of land. This policy has led to farmers harvesting much more profitable crops in land that is not suitable for these kinds of crops. This can be seen by the sudden switching of wheat farmers to start planting butter mainly because the EU accords butter farmers’ higher price supports. This eventually leads to a sudden shift from excess supply to excess demand. The producers of the crop suddenly become net exporters of the same over a very short period of time (Pugel, 2011). Implementation of the CAP has also led to concerns for the environment by various environmental groups. This policy has given farmers extra incentive to engage in intensive farming to increase yields .This kind of farming lead to overuse of pesticides, nitrates and antibiotics which are not naturally occurring chemicals as they are comparable to industrial chemicals. These chemicals eventually poison the soils and the underground water sources hence having a negative effect on the economy. When formulating this policy, the authors did not foresee this indirect cost on the economy hence it has caught them by surprise. European citizens are also greatly concerned on the safety of their agricultural products due to the over usage of chemicals in growing them. There is very limited regulation making farmers easily get away with this assault on the environment. Policymakers had thought that these price supports will eventually lead to better food quality and safety which is not necessarily the case. (Consumers in Europe group). The CAP policy has seen a shift in EU countries from being net importers to net exporters of agricultural products.  This heavy subsidizing of the agricultural sector has milked labor and resources from other sources of the economy. There has been negative change attributed to CAP in industries such as construction and utilities which are down 1%, the service industry by 2%, manufacturing by about 5%, and other sectors by a combined 6%.These statistics tell the bigger story of how CAP is negatively affecting almost all other sectors of the economy. All these negative movements in the critical numbers come at a cost to taxpayers and the whole European society (Shucksmith, Thomson, & Roberts, 2005).  These effects of the CAP are not just confined to the European borders. The effects are being felt in various other non- European nations. The excess products are dumped in other non EU countries. These countries are then forced to shift their economies and concentrate in other sectors such as manufacturing, service industries, construction and other primary goods.  The CAP has led to Canada and the United States to experience a decline of just over eight percent across agricultural produce.(Borrell 23).  Output in the cropping sector is also down by about 35%.The CAP effects can also be felt in far off countries like New Zealand and Australia as their resources have shifted from Agricultures to other critical sectors such as mining. Mining industry in these two nations has expanded by about eight percent.  Average CAP payments per hectare CAP Spending By Major EU economies in 2006 Problems Facing Global Agriculture Nearly half a century ago, farmers in Europe were being urged to produce more since there was a scarcity and food was being rationed. Right now, it is almost the complete opposite scenario from what was being dealt with back then. Food is being over produced from milk to grains and other foods. Limits are even thought of being imposed on production. There are several fast developing countries that have led to steep increases in demand for agricultural produce to feed their fast expanding economies and populations. This is being compounded by the diversification of huge chunks of land for the purposes of producing bio-fuels, some land is being preserved specifically for environmental purposes and also the drastic changes in global climate can take us back to the situation we were half a century ago. Demographic Changes The population of the world as it stands is about 6.3 Billion. This will eventually increase to about 10billion by mid – century. These increases will mainly be experienced in developing countries more than the developed nations. The main drivers will be China and India, two of the world’s most populous nations at the moment. Over the past decade, economic growth in these two countries has been tremendous and has coincided with increased demand for much more high quality food. The average incomes have more than doubled in these countries also further increasing the purchasing power of these populations. This is more or less a similar story across the developing world nowadays (Takatoshi, 2010). These rising and increasingly well off populations will tend to settle in and around urban areas and transform from being producers of food to exclusive consumers of the same commodity. The problem will be compounded also by the fact that they will take up previously arable land and construct flats and high rise buildings to house them and also provide offices for large corporations. According to the World Bank estimates, demand for food will almost double by 2050 mainly due to increases in populations and individual incomes. Looking at such a statistic and the fact that currently , only 12% of the total land left has yet to be cultivated (arable land) this means that food production needs to more than increase threefold in order to satisfy future populations (Díaz-Bonilla, Frandsen, & Robinson, 2006). The rising population is not a particularly bad thing in terms of its effects on farmers and agriculture. This increase in population will also translate to a bigger market for their produce if handled well. This can be achieved if there is improvements in technology that will enable the farmers to achieve greater yields per hectare so as to maximize on the declining land resource. This will lead to increased income for the producers who will not need state protection to achieve their desired prices. Biofuels In many countries currently, many farming products are being used in the production of Bio-fuels in response to depleting stocks of fossil fuels as well as the high prices that come with this. An example is the diversion of over 70 million tons of maize in the U.S.A for exactly this purpose has further compounded this problem creating a shortage in grain and cereals (Shucksmith, Thomson, & Roberts, 2005). This led to a steep rise in grain prices e.g. over a period of one year, the price of grain has almost double in Britain (Great Britain, 2012). This has created a problem for livestock farmers who mainly rely on bought grains to feed their animals. This new demand for grains for this purpose however comes as good news for grain farmers who view it as an added market for their produce added onto the previous traditional market that relied basically on human and animal consumption to thrive. This, however is not sustainable in the long run since for these bio fuel projects to be sustainable, they will need heavy government subsidies .That is why they have enjoyed successes only in countries that have a huge culture of subsidizing farmers like Germany and the U.S.A. Countries like the U.K have not experienced this kind of adoption due to the government’s reluctance to subsidize the project (Harvey, & Ritson, 1998). The issue of biofuels can also have a positive impact on agriculture. This is because it can go a long way in helping to reduce the greenhouse gases that are produced due to the burning of fossil fuel. If handled properly, the stability of the climate and environment will be a plus for crop farmers who will record better yields due to predictable climates which will make it easier for them to plan their planting and harvesting in a way to coincide with optimum atmospheric conditions that favor their crops. Production Inhibitors It is estimated that close to two thirds of the world’s fresh water is used in agriculture. This demand for water will definitely continue growing with increased population growth. The water resources will not increase at the same rate and this will lead to a reduction in availability of water per person by about 33 %. Agriculture will most definitely loose in this battle for priorities. Global warming and its effects is not particularly good news at the moment also. Over the past two decades or so, there have been severe changes in global weather (Artis, & Nixson, 2007). Australia has experienced harsh drought conditions that has led to total wipe out of grains in the fields and due to shortage in fodder for animals, many have died or get shot by farmers since they were starving to death. Parts of Eastern Europe specifically Russia and the Ukraine have experienced extremely cold winters that have negatively affected sown wheat. Farming systems that have been tried and tested over time will have to be altered if this trend continues and in the meantime, we will have to do with declining yields until we find a way around this problem. Research has to be done worldwide to come up with solutions and crops that can give us good yields in these unpredictable climatic times (Shucksmith, Thomson, & Roberts, 2005). These inhibitors cab be exploited by farmers by applying technology that will shield the crops from negative effects of the weather. This extra cost can be a discouraging fact at first but the profit margins will tend to be much higher than the naturally cultivated crop which has less initial input but end up flooding the market reducing the profit markup of the same. Farmers can take advantage of this to have their crop mature when there is extreme shortage in the market making good profits. Price Volatility Agricultural products seem to experience a lot of volatility in their prices due to various factors: The extreme variations in their supply mainly due to weather conditions which tend to affect their yield when harvested. This tends to vary extremely the supply of the products The prices will inevitably increase when there is a sharp drop in supply of the commodity that fails to match the pre –planned output and market needs On the other side of the spectrum, when there is an unexpected bumper harvest that tends to surpass the market’s needs, the prices will eventually decline to correct this situation These effects of variations in supply can be exaggerated by a price-inelastic demand for the components that the buyer views as being absolutely essential to their production processes hence they are forced by circumstances at whatever price the market is able to set. This volatility can also be exaggerated by speculators who are eying the expected future changes in the prices. The below supply demand curves can attempt to explain these phenomena Source (author) Source (author) These two graphs are based on the cobweb model. This model is basically drawn based on a perceived delay between demand and supply decisions. This is of great applicability to agricultural markets since they have the same characteristics. There is always a lag between the planting seasons and harvesting seasons. This can be explained in a situation like due to unpredictably poor weather, farmers end up having a very low yield of bananas that they proceed to ferry to the markets. This unforeseen shortage will result in the supply curve shifting towards the left. This will affect the mindset of farmers deep into the next season and expecting such high prices to prevail once more; will tend to raise their production levels for the next season. This will make the next season’s supply to be higher than expected leading to lower prices .This cycle will continue e.t.c (FitzGerald, 1991) This process is shown in the two graphs above. The price at the intersection of the supply and demand curve is known as the equilibrium price. Supply will fall to Q1 when there is low harvest in period 1. This will push the prices to the level of P1. After such an event, crop producers will want to reap more hence plant much more in their fields. This period two supply will be at the level of Q2. This excess supply will tend to push the new season’s prices to the level of P2. The price and quantity tend to trace out a spiral with all these oscillations (Shucksmith, Thomson, & Roberts, 2005). Price volatility can be used by a farmer to his advantage by studying the general planting trends in his country so as to always go against the grain so as to reap maximum benefit from the fluctuating prices and also minimize his losses when the crop is not doing very well. This will be possible since he will have a bumper harvest on his part when the prices are at an all-time high due to the fact that the previous season’s low prices discouraged many farmers to cultivate the crop leading to a shortage in the market. Reference List ACKRILL, R. W. (2000). The common agricultural policy. Sheffield, Sheffield Academic Press. EUROPEAN COMMISSION. (1998). The common agricultural policy: promoting Europes agriculture and rural areas--continuity and change. Luxembourg, Office for Official Publications of the European Communities. GREER, A. (2005). Agricultural policy in Europe.Manchester [u.a.], Manchester Univ. Pr. SWINBANK, A., & TRANTER, R. (2004). A bond scheme for common agricultural policy reform. Wallingford [u.a.], CABI. SWINBANK, A., JORDAN, K., & BEARD, N. (1999). Implications for developing countries of likely reforms of the common agricultural policy of the European Union. London, Commonwealth Secretariat. GREAT BRITAIN. (2008). The future of the Common Agricultural Policy. London, TSO. PETIT, M. (1989). Pressures on Europes common agricultural policy. Washington, D.C., International Food Policy Research Institute. GREAT BRITAIN. (2012). Greening the Common Agricultural Policy: first report of session 2012-13: report, together with formal minutes, oral and written evidence. London, Stationery Office. SHUCKSMITH, M., THOMSON, K. J., & ROBERTS, D. (2005). The CAP and the regions: the territorial impact of the common agricultural policy. Wallingford, UK, CABI Pub. DÍAZ-BONILLA, E., FRANDSEN, S. E., & ROBINSON, S. (2006). WTO negotiations and agricultural trade liberalization the effect of developed countries policies on developing countries. Wallingford, UK, CABI Pub. http://site.ebrary.com/id/10157974. GREAT BRITAIN. (2005). The future of the common agricultural policy: volume 2 - evidence. London, Stationery Office. ARTIS, M. J., & NIXSON, F. I. (2007). The economics of the European Union: policy and analysis. New York, Oxford University Press. BLANDFORD, D., & HILL, B. (2006).Policy reform and adjustment in the agricultural sectors of developed countries. Oxfordshire, UK, CABI Pub. http://site.ebrary.com/id/10255040. HARVEY, D. R., & RITSON, C. (1998). The common agricultural policy. Wallingford [u.a.], CAB International. Read More