EU Common Agricultural Policy – a primer

Author: Paul Vine Publication | December 2014


The common agricultural policy (CAP) is a combination of agricultural subsidies and related agricultural development policy which had the original goal of ensuring food security in Europe after the Second World War. The CAP is funded through the EU’s annual budget, in contrast to areas like healthcare and education which are funded mainly by national EU governments. At its peak in 1984, CAP spending accounted for 72 per cent of the EU budget and, whilst it has fallen in percentage terms (to currently around 40 per cent of the EU budget), it is still the first or second item of EU expenditure.

This article outlines a brief history of the CAP and summarises the latest policy developments for 2014 to 2020.

Brief history of the CAP

1957 created the European Economic Community (EEC), the forerunner of today’s EU. That Treaty already foresaw CAP as a means to provide affordable food for EU citizens and a fair standard of living for farmers. A less charitable interpretation of the origins of CAP are that, in the negotiations to create the EEC, a system of agricultural subsidies as its price for agreement on the free movement of industrial goods throughout the EEC.

Either way, the essence of the early policy was price support which was successful in increasing the availability of affordable food but eventually led to significant oversupply in the 1970s and 80s.

As a policy response, the EU introduced product quotas to try to align production to market demand and then, in the 1990s, reduced price support and increased direct payments to farmers. The direct payments were still made in connection with the production of certain products (so-called ‘coupled support’) but, in return for the subsidy, farmers had to meet food quality and sustainability requirements.

In 2000, the idea of Rural Development Support (RDS) was introduced – policies and related payments to support the more general economic, social and cultural development of rural Europe. This was the first modern-era CAP, each of which runs for a number of years (the current CAP covers the period 2014 to 2020) and all of which are based on these two pillars:

Pillar 1 – direct payments from the EU budget to farmers to subsidise food production and encourage good agricultural practices.

Pillar 2 – Rural Development Support where each Member State implements a rural development strategy where further subsidies are available to farmers who implement the programme.

Historical development of the CAP

The modern CAP reduces income volatility by guaranteeing minimum income for farmers and rural communities. What it does not do particularly well is protect against market failure or against price volatility, except for a few emergency measures.

The future of CAP: 2014 to 2020

We are at the beginning of the latest CAP cycle which runs 2014 to 2020. This was hard-negotiated over a number of years, against a background of weak budgets in the EU and a philosophical question over CAP’s priorities in the present day.

Whilst most of the current CAP rules were effective from January 1, 2014, many of the rules on direct payments will not apply until January 1, 2015, so the policy is currently operating under transitional arrangements. However, the expected final position is set out below.

Direct payments

The previous CAP (2007 to 2013) gave farmers one direct payment called the Single Payment Scheme (SPS) which allocated a subsidy depending on the type of land owned by the claiming farmer. For 2014 to 2020, this has been replaced with three payments.

Basic Payment Scheme

The Basic Payment Scheme (BPS) is similar to the SPS with one important difference. In previous CAP systems, Member States had some flexibility to choose the basis on which the subsidy would be calculated. However, in 2014 to 2020, all BPS payments will now be based on the area of land farmed, which means that CAP payments are now de-coupled from production. Whilst it is hoped that this criteria for eligibility will reduce production distortions, experience in the previous CAP exposed other uncertainties. For example, should agricultural investors, who own large areas of agricultural land but do not farm it, receive CAP subsidies? What if some farmland is used for renewable energy or rented for holiday accommodation?

The current CAP now directly addresses some of these potential loopholes by including an ‘active farmer’ requirement and excluding from subsidies agricultural land used for certain other uses (for example solar panels). Overall, commentary on the formalisation of area-based payments has been positive including that from third parties such as the World Trade Organisation.

Greening payment

Whilst the SPS and RDS both included incentives for sustainable farming practices, the 2014 to 2020 CAP introduces a specific subsidy to incentivise farmers to follow greening practices for the first time. Such practices include maintaining permanent grassland; crop diversification; and provision of ‘ecological focus areas’. The greening payment and related policies were one of the most hotly debated aspects of the current CAP and the final compromise is certainly less ambitious than the original. However, taking the positives, the green and environmental lobby achieved for the first time a concrete requirement to pursue sustainable agricultural practices and a penalty (up to 30 per cent of the direct payment) for failure to comply. Farmers have retained some flexibility for themselves for example by exempting smaller farms from some of the greening requirements.

Younger farmer payment

The ageing of the farming community in the EU is a problem. Two thirds of farmers are now older than 55, meaning that the future of the rural community is in question, with not enough young people entering the sector. To combat this, the current CAP has introduced a young farmer payment which is a top-up allocated to young farmers (under 40) to stimulate entry into the sector.

Rural development

The second pillar of CAP should be less prescriptive in the 2014 to 2020 period. Member States will have flexibility to develop their own programmes from a menu of options set at EU level but within six broad goals – enhancing agricultural competitiveness; promoting food chain organisation; preserving and restoring ecosystems; promoting resource efficiency and the transition to a low carbon economy; and promoting social inclusion and poverty reduction in rural areas.

Rural development programmes are cofunded by Member States and the EU – with the EU providing around 50 per cent to advanced EU states and up to 85 per cent in less developed regions. One of the key debates here was around the flexibility that Member States have to move up to 15 per cent of the funds available for Pillar 1 to Pillar 2.

Put in simplistic - and somewhat polarising – terms EU states have a choice between supporting agriculture and protecting the rural environment. England has chosen to transfer 12 per cent (subject to review) from Pillar 1 which has been supported by the farmers’ union as a reasonable compromise. It is hard to tell what this means for the future, especially with the new Commission under Jean Claude Juncker only recently installed after more than a decade of Jose Barroso’s presidency. However, a weak economic recovery in Europe and a shrinking CAP budget in real terms mean that the Member States will need to refine their vision of CAP for the next cycle. Is food security still really an issue in 21st century Europe? How big does the safety net need to be and how much discretion should Member States have? And is the CAP the best tool to pursue environmental policy?

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