Common Agricultural Policy

The European Union system of common agricultural policy (CAP) was introduced in 1962 following the creation of the European Economic Community (EEC, the “Common Market”) in 1957 by Belgium, France, the German Federal Republic, Italy, Luxembourg, and the Netherlands. The CAP has remained through the development of the EEC into the European Union (EU) of 12 countries in 1992 and its expansion to 27 countries as of 2008. The initial objectives of the CAP were to increase agricultural production, ensure a fair standard of living for farmers and the agricultural community, guarantee availability of food supplies, provide food at reasonable prices, and stabilize food markets. These objectives were to be achieved primarily by subsidizing agricultural production and maintaining agricultural commodity price levels within the EEC. The CAP has developed in response to a range of factors including overproduction of a range of agricultural products, market pressures, environmental concerns, and expansion of the EEC into the EU.

The CAP is the oldest and most costly common policy of the EU, utilizing approximately 60 percent of the total EU budget in 1992, 40 percent in 2007, and a projected 32 percent in 2013. Initially, the CAP subsidized agricultural production and maintained agricultural commodity prices within the EU by providing a direct subsidy payment for cultivated land, guaranteeing a minimum price to producers and imposing tariffs and quotas on certain goods from outside the EU. These measurements resulted in increased, and subsequently surplus, production of the major farm products in the 1980s. In some cases, goods were stored or disposed of within the EU but, generally, surplus goods were exported to the world market with subsidies given to traders who sold agricultural products to foreign buyers for less than the price paid to EU farmers. Disposal of surpluses had a high budgeting cost. In 1984, the surplus of milk was contained by the introduction of production quotas and in 1988, a limit was set on EU expenditure to farmers.

In 1992, reforms of CAP were established to limit agricultural production of specific products (e.g., wheat and milk) that attracted subsidies in excess of market prices. The prices farmers received for their products were reduced but they were given direct payment compensation for these reductions. Also, “set aside” payments were introduced in which farmers were paid to withdraw land from production and limit stocking rates, the number of animals per unit area. These measures were linked to environment-and rural development-related objectives. For example, reduced production required reduced inputs of agrochemicals such as nitrogen fertilizer that had been shown to have adverse effects on the environment such as the eutrophication of nutrient-poor land habitats and waterways, a decrease in biodiversity inside and outside the agricultural systems, and emissions of greenhouse gases into the atmosphere.

In 1995, in response to the World Trade Organization agricultural agreement, use of export subsidies to exporters was reduced. Also in 1995, rural development aid was introduced with the objective of diversifying the rural economy and making farmers more competitive. In 1999 the “Agenda 2000” reforms set in place reductions in market support prices for several products including wheat and milk. These measures were partially offset by an increase in direct aid payments to farmers. The Agenda 2000 reforms also introduced several rural development/regeneration measures including support for younger farmers and [Page 297]further aid toward the diversification of farms and the implementation of more “environmentally friendly” farming systems.

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