This is a major reform (at least for cereals, which is the cornerstone of farm policy, since cereals are an input into livestock farming and thus support of cereal prices has to be reflected in support for livestock prices. The major reform is to shift the burden of support from the consumer (purchaser of the commodity) to the taxpayer (who pays the compensation payments - the area and headage payments). This will alter the pressures for support payment fixing and continuation of the policy of support.
How can we represent this change?
Figure 5 illustrates the basic principles of the reforms:
Notice, for
ease of exposition, I have omitted the World Market part of this diagram
(analysis), and left it implict - the world market generates the actual
world price (WPa), which would rise to Wpe in the absence of any policy
- and simplified the lablelling of the various areas (amounts of money)
as a consequence.
If, in fact, the reforms had simply exactly substituted a compensation payment (in £s per tonne) for the previous gap between the EU support price and the world price, then there would only be a change in the gainers and losers, (with an important but probably small overall gain of area a above, small because demand is typically inelastic) but not in the market situation. There would have been a major increase in EU budgetary spending on the CAP to replace the gains in lower user prices.
However, the reform was not quite like this. In fact:
Furthermore, and most importantly, the MacSharry reforms put a limit on total spending - limited by the limits set of total areas (and livestock head) eligible for support payments.
However, after 1992, world prices actually increased from their previous levels (Wpa), and were increased even more in the UK by the weakness of sterling relative to the ecu. As a result, the actual rulling prices in the UK (especially, but not only) were above Wpe - the price used in calculating the compensation payments. So farmers were over-compensated for the change - a difficulty for the taxpayers and the EU budget.
As a result, Agenda 2000 deliberately sets the compensation payments at rather less than the difference between the pre 2000 support price and the post 2000 price - to avoid future overcompensation.
Notice - these payments are still a problem for the rest of the world - they still result in over-production in the EU and hence depress world prices (see later in these main notes). Farmers still need to grow their base areas of crops (including set-aside), or keep their base levels of livestock. Thus production is still encouraged above and beyond the levels which would rule under free trade. In the jargon of the WTO, these payments are not de-coupled from production (though they are from the final products).
Why did this step take so long to happen?
There seem to be two major reasons.
First and most obviously, the additional cost to the EU budget was bound to cause difficulties with a budget which (in spite of popular myth) is actually very small compared with national government budgets. The reform package was obliged to remain within a tight budgetary guideline - the total EU spend must be within 1.4% of EU GDP (c.f. national budgets which are more like 30% - 40%), while agricultural spending is supposed to remain within a specified fraction of this total (about 65% and falling over time). Hence, the ability of the EU to change from a policy of high consumer prices to one of simple (and more efficient) direct subsidy to farmers is considerably restricted without limiting the compensation payments (from full compensation for price reductions) or limiting the extent of price reductions themselves.
Second, there is clearly a strong inertia in policy - there is resistance to change in the basic mechanisms - which tends to lead to greater complexity in the policy as it is modified to cope with market and policy pressures - as the MacSharry reforms did. Instead of completely replacing market intervention with direct subsidy payments, we now have both systems operating together.
Why did it happen at all?
The reforms happened at all because the pressures on the old CAP were finally too strong to resist. There are three major pressures which can account for the change.
Why did it happen when it did?
It could be argued that no one of these major pressures would have been sufficient on its own to trigger the change in policy, and that the change required the conjunction of all three - which culminated at the end of the 80s. Given the time necessary for the pressures to actually result in a policy proposal and eventual agreement within the European Council of Ministers, the timing of the change (with the considerable benefit of hindsight) seems near inevitable.