The Common Agricultural Policy of the European Union - Case Study Example

The Common Agricultural Policy of the European Union Contents Case Analysis 3 Minimum Price Policy 3 Other Policies of CAP 4 Current EU CAP 7 Global Agricultural Markets 10 Works Cited 17 Name of the Student Name of the Professor Course Number Date The Common Agricultural Policy of the European Union Case Analysis This case study sheds light on agricultural sector of the European economy. The study here elaborates the economics or rationality behind the primary rules of Common Agricultural Policy (CAP) of European Union (EU). EU claimed that after implementation of the CAP, agricultural sector in the former has experienced over production and generated a dependency culture among farmers, instead of achieving cost efficiencies. In the latter context, this study will thoroughly examine the global agricultural market through PESTEL and demand-supply analysis. Minimum Price Policy The CAP was signed long back in 1957 and had formed the European Economic Committee. The primary tasks that the rules of CAP intend to execute are provided in Article 38. These are: To enhance the overall agricultural productivity in the community. Stabilizing the agricultural market. Assuring adequate supply of agricultural produce at reasonable prices. The ‘minimum price policy’ was a prominent policy introduced by the CAP. This policy assured that even though the actual market clearing competitive prices of agricultural products in a nation is low, farmers of the community will still experience the benefit of higher minimum prices (way above the market clearing price level). Figure 1: Demand and Supply Analysis for ‘minimum price policy’ D S Minimum Price Excess Supply Equilibrium Price Q1 Q0 Q2 (Source: Author’s Creation) After implementation of the ‘minimum price policy’, as shown in the above graph, the European Community is experiencing over-production or excess supply of agricultural output. The above graph reflects the demand and supply analysis of the minimum price program. As the minimum price is way above the equilibrium price, quantity of agricultural supply has increased from Q0 to Q2. On the other hand, supply of agricultural products at a higher price (compared to the equilibrium price) has lowered the market demand for products from Q0 to Q1. So, according to the law of demand and supply (given ceteris paribus assumption), the agricultural output’s supply has increased and demand has fallen with response to the change in price. Other Policies of CAP Apart from the ‘minimum price policy’, the CAP authorities in EU had also undertaken other policies in order to stabilize the agricultural sector as well as sustain negative externalities in the market like, bad weather and high price competition (especially in developing nations). Along with the price support program (minimum pricing), the CAP was seen to introduce the strategy of import substitution and export promotion in the agricultural sector. Figure 2: Demand and Supply Analysis for Quota D1 S1 Minimum Price P0 Pw Pw Q0 Q2 Qt Qw (Source: Author’s Creation) In order to protect domestic farmers within the community, the CAP have also introduced the policy of Quota in the EU agricultural market. This is a type of quantitative restriction imposed on agricultural imports of the nations. The above graph explains the demand and supply analysis for the Quota policy. The world market price (Pw) is much below the equilibrium price (P0) of the agricultural market of the European Community. The supply of agricultural products that could be imported in the European community is Qw. However, given the quantitative restriction, CAP has reduced the quantity of imports to Qt. This has helped to protect interests of the domestic farmers in the EU, who are selling their agricultural output at the minimum price. Due to the Quota, domestic buyers of EU are demanding for less imported agricultural products. Under the regime of the ‘set aside policy’, farmers of the EU are not allowed to cultivate land through forceful enactment of the law, where they are paid for not cultivating. This policy was undertaken by the CAP in order to prevent overproduction of agricultural output in the EU. Thus, it can be claimed that this was basically a back-up policy introduced to overcome the problems associated with minimum price policy. Figure 3: Demand and Supply Analysis for the ‘Set Aside Policy’ D S Minimum Price Excess Supply Equilibrium Price Q1 Q0 Q3 Q2 (Source: Author’s Creation) The above graph explains the demand and supply analysis of Set Aside Policy of the CAP. As denoted in the above graph, the policy would lower domestic agricultural production of the EU from Q2 to Q3 and hence, reduce the problem of overproduction. Therefore, from the above analysis, it can be claimed that agricultural output in EU had significantly increased due to support programs of the CAP. Nonetheless, the authorities have also tried to establish certain other counter policies to lower overproduction of the sector and attain higher stability in its growth. Current EU CAP The CAP is a set of agricultural rules introduced for all the nations in the EU. The policy was introduced long back in 1962 and over time, it has undergone several changes. This policy is a public one, which was introduced to ensure higher utilities and benefits for entities in the agricultural sector of the Union. Nonetheless, the policy proved to be less ambitious than was expected and is criticized in the market for several types of cost inefficiencies, negative humanitarian and environmental impacts. The above context has explained several loopholes in the support and subsidy programs of the CAP. At this juncture, efficient allocation of resources has turned out to be the primary economic problem. Thus, as stated in the demand and supply analysis, such large scale wastage of food in the EU was an unacceptable solution. It clearly indicated loss in valuable productive resources of the EU. Furthermore, it was also true that approximately 50% of the total budget of the EU was allotted for implementing the CAP rules in the economy. There were also several debates, which rose due to inequitable financial contribution made by different nations of the EU for implementing the CAP policies. Hence, economic and welfare support facilities provided to the farmers had substantially taken away chunks of social welfare and surplus of consumers in the EU. Such faulty policies in EU agricultural sector demanded for a strong reform in 1999 and finally, introduced the Agenda 2000 policies of the CAP. Even so, EU still suffered from overproduction of olives. The subsidies provided to the olive farmers were 2.5% of the total budget of EU (“ Agriculture and Rural Development”). The public regulatory authorities of the EU stated that by increasing plantation of olive trees, quality of environment in the regions would significantly improve. However, in reality, this created soil erosion and loss of much required water resources in the nations. After 2002, when the EU had expanded, problems associated with the CAP were found to increase notably. The regulations of CAP and their underlying rationalities are matters of debate on the public forum of EU, at present. Over time, the policy has experienced several changes and reforms according to suitable conditions in the external world. The Commissioner of the EU authority, Dacian Ciolos, has introduced the latest reform in 2013 (“The reform CAP”). The new set of revised policies in the sector would be implemented from 2014, continuing till 2020, in the EU (Baumol and Blinder 132). These newly made reforms would not allow farmers to produce fruits, vegetables and potatoes on their lands, owing to the facility of Single Payment Scheme. The farmers under this reform would be severely penalized, if they fail to abide by the norms of food safety and animal welfare standards. The EU allocated 71% of its budget for implementation of the CAP policies in the European Community nations in 1984. It is estimated that in 2013, the EU budget allocated only 39% in application programs of the CAP (Chapman, “Common Agricultural Policy reform”). Currently, The EU authorities only intervene in pricing and production activities of skimmed milk powder, wheat and butter, under the regime of revised CAP. It is also anticipated that by 2015, the extent of subsidies provided in form of Quotas in the diary production sector of the EU will also be significantly lowered. The excess fund that would be accumulated by EU, after financing the CAP programs, is declared to be used for the purpose of rural development in nations of EU. In reality, since 2000, Rural Development Policy has turned out to be the ‘second pillar’ of the CAP in EU. This policy aims to enhance the social, cultural, political and economic status of all nations in the Union. It is estimated that in 2013, approximately 11% of the gross budget of the EU was spent under the regime of this particular policy. Along with the ‘second pillar’, there are also three new aspects that have been addressed by the CAP, at present (Trostle, “Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices”). Restructuring and developing the sectors of forestry and farm in nations for enhancing global competitiveness. Protecting and preserving quality of external environment. Eradicate the existence of rural poverty in nations and encourage economic diversification. Nevertheless, it should be noted that the new set of reforms that would be implemented as CAP in EU are still not known, given that they would be declared by the authority in latter half of 2014. From the above context, it can be critically analyzed that price and output determination in the competitive market equilibrium is the best pareto optimal state of resource allocation. In the presence of such a pareto optimal state, the economy can manipulate the allocated resources so as to benefit certain entities, only after rendering few others worse off. Initially, the CAP in EU was policies, which facilitated stabilization of agricultural sector of the nations in EU by allocating higher resources in the concerned sector. However, following this motto, authorities had reduced the welfare of commoners in the community. The problem of excessive agricultural production faced in EU signifies that minimum price policies work against market. Encouraging such policies seems to be sound, but its real effect is highly irrational. Global Agricultural Markets The different agricultural markets across the world are subjected to several changes, according to the political, economical, social and technological scenarios of various economies. PEST Political (high influence) The political authorities in various nations significantly influence the level of agricultural sectors of different nations. The production, regulation, distribution and consumption pattern to be utilized in the agro sector of a nation is completely manipulated by the political authorities. The food supply in the domestic market as well as the international market of a nation significantly depends on the level of agricultural policies introduced by the political authorities. For instance in EU, the CAP has significantly influenced the agricultural productivity of all the nations in the Union. Since 2006, the agricultural policies included under CAP were revised and implemented in EU. The lists of changes that were incorporated in the CAP since 2006 under the program of Agenda 2000 are: Lowering the high minimum price level of agricultural outputs. From context of the above analysis, it is clear that the minimum support price of agricultural products settled by CAP was much higher than the world market price levels. This was a substantial cause for the high agricultural output in the EU. The current CAP has brought the agricultural product prices down to the world market competitive levels. The selling prices of cereals were reduced by 20% from its initial level. The prices of animal husbandry segment were also lowered. For example, the price of beef was reduced by 30% and selling value of milk was lowered by 15%. The direct payment system was abolished. It was analyzed that the system of direct payment is not related with the production of agricultural output. So, the Set Aside policy that was introduced for providing incentives to farmers in order to lower overproduction levels of agricultural output. At present, the revised CAP policies aim to provide special subsidies for matters relating to protection and preservation of environment of the EU. Moreover, from the above context, it is also found that production pattern of the agricultural sector of EU nations have changed under guidance of the political authorities. At present, these countries are only subjected to subsidies in wheat, butter and milk powder production (Parker, “CAP preserving the environment and promoting sustainable agriculture”). Similar trails of high political intervention can also be found in agricultural sectors of developing nations like, China, India and Brazil. The agricultural sector is the primary sector in such nations and is subjected to large number of support programs as well as governmental regulations (Fama 288-307). Most of the political factors affecting agriculture productivity of different nations are: • Introducing ‘green governance’ • Assuring food security • Introducing food labelling Figure 4: Political Impact on Agricultural Productivity S1 S2 Fixed Prices Q1 Q2 (Source: Author’s Creation) From the context of PEST analysis, it can be claimed that agricultural sectors of most of the nations experience regulated prices, which are way above the equilibrium prices. As a result of this, demand for the agricultural output (Q1) is much below its supply (Q2). Economical (high influence) The economic status of a nation in the global market has the ability to remarkably influence the agricultural market. The primitive Rostow Stage Theory model claims that in the process of economic growth, a nation transforms its base from agriculture to industry. As a nation progresses, its agricultural sector becomes more stable and its output serves the industrial segment of the nation, thereby facilitating industrial growth. Furthermore, the amount of public sector investment made in the agricultural sector of a nation substantially depends on financial reserves of the government. For instance, the EU authorities have realized that since global financial crisis, economic situations of certain specific EU nations like, Spain, Greece, Italy and Portugal, are worse off than other nations in the Union. The EU authorities through the CAP have decided to provide unequal benefits or support programs to different nations of the Union, as per the degree of misery and poverty in these economies. Moreover, as a nation heads towards economic growth, its agricultural sector becomes more commercialized in nature. For example, emergence of Green Revolution in India enforced through the planning process. As India was planning for greater economic growth, it decided to expand the production of commercial cash crops, which could be exported in external markets to obtain higher profits (Lawrence and Lwanga, “Impact of EU Common Agricultural Policy reform on Uganda’s food trade with EU”). The agricultural sectors in most of the nations are experiencing: Higher competition Greater volatility Higher supply chain pressures Increased export opportunities Higher costs of inputs that has increased budgetary pressures on consumers. Social (high influence) The social factors in a nation, like, literacy, health, corruption and cultural beliefs, can notably affect operational pattern of the agricultural sector of a nation. For instance, several developing nations still use labour-intensive, primitive mode of cultivation because illiterate farmers in such nations are not able to adopt new capital incentive techniques of production process. For example, farmers in India and Brazil are not able to efficiently use the newly invented fertilizers and pesticides in the correct quantities due to lack of proper education and training. On the other hand, in developed nations of EU, the policy undertaken by the government authorities in the agricultural sector is considerably shaped by the existence of internal market lobbies and corruptions. The strong lobbies of the farmers and agricultural development banks in these nations had forced the EU authorities to provide excess direct payments to these farmers. Estimates of the OECD stated that common households of the EU paid $ 1200 in excess for food necessities compared to that paid by commoners in other nations. Then again, estimates also claimed that EU paid approximately $ 17000 to each of its farmers through the price support programs, which was much more than that paid by the government authorities in other nations. There are a large number of rural and agricultural banks in the Union that used to provide funds to farmers on behalf of the government. These financial institutions upheld special objections to agricultural subsidy abolition policies in the nations (“Agriculture”). The main social factors influencing the agricultural sectors of various nations are: Changes in consumers’ diet and hence, demand pattern. Literacy levels of the farmers. Lobbying and corruption related problems. Technological Over time, technological improvement has also significantly helped in enhancing the level of agricultural productivity in a country. Invention of High Yield Variety seeds, fertilizers and pesticides have successfully facilitated enhancement of the agricultural output levels in both developed and developing nations. In nations like, India, food security and agricultural output was highly dependent on annual rainfall. Then again, with development of superior irrigation facilities, such problems are easily eradicated nowadays. At present, most developing nations are subjected to high food reliance. Though agricultural productivity in most of the nations has increased with the essence of technological progress, yet substantial investments in technological development must be incurred in order to assure greater productivity in agro sectors of nearly all nations in the long run (“World Fact Book”). The primary technological factor that affects agricultural sectors of most of the nations is: Inadequate research and development investments in technological progress related to agricultural sector Figure 5: Technological Impact on Agricultural Productivity D S1 S2 P0 P1 Q0 Q1 (Source: Author’s Creation) It can be claimed that in nearly all nations, agricultural productivity has increased with the essence of technological advancements. Hence, if all other factors are assumed to be given, then it can be stated that with the essence of technological development, markets in all nations can experience higher output (Q1) of agricultural products at relatively lower prices (P1). From the above PEST analysis, it can be suggested that both in developing and developed nations, scope and scale of operations in the agricultural sector has experienced significant changes subjected to the political, economical, social and technological activities in respective countries. Works Cited “Agriculture and Rural Development.” European Commission, 2014. Web. 27. February 2014. “Agriculture.” European Union, 2014. Web. 27. February 2014. Chapman, Dawn. “Common Agricultural Policy reform.” The Lawyer, 2013. Web. 27. February 2014. Fama, Eugene. “Agency Problems and the Theory of the Firm.” Journal of Political Economy, 88.2 (1980): 288 – 307. Web. 27. February 2014. Lawrence, Othieno and Musa Mayanja Lwanga. “Impact of EU Common Agricultural Policy reform on Uganda’s food trade with EU.” EPRC, 2012. PDF file. Web. 27. February 2014. Parker, Edward. “CAP preserving the environment and promoting sustainable agriculture.” WWF, 2012. Web. 27. February 2014. Trostle, Ronald. “Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices.” USDA, 2008. PDF file. Web. 27. February 2014. “The reform CAP.” Valentin Zahrn, 2010. Web. 27. February 2014. “World Fact Book.” CIA, 2014. Web. 27. February 2014. Read More