AEF811: 2.6: EU and US Agricultural Policies
Introduction:
The notes on this page are only brief highlights of EU Policy
and US Policy - further details of these policies can
be found on the linked pages and should be read.
There are two major issues or features highlighted by the Economic and
economical consideration of the CAP:
-
the evolutionary progress of agricultural support policies in Europe
-
the meaning of the economic representation of the transfers and effects
generated by these policies.
1. Evolution of European Policy (inevitable - with
benefit of 20/20 hindsight?)
-
Antecedents of the CAP:
-
Common urge to protect and support the agricultural sector against "unjust"
world prices - the consequence of recent histories of food insecurity (because
of war) and the predmominance of agriculturally dependent polpulations
(and associated sympathy amongst the rest of the population for assisting
farmers).
-
Differences between UK and Contintental (especially German) support policies
(deficiency payments versus import tariffs, plus the levels of each) -
stemming from the political weight of small farms in Bavaria, especially,
and the differences in commonwealth ties to the "New World".
-
The generation of the CAP as a bargain between Germany and France (primarily),
with France accepting free trade with Germany for industrial goods in return
for the opportunity to supply German agricultural and food needs at CAP
supported prices.
-
The almost inevitable development of the original CAP from a revenue generating
device for the early Community to a fiscal drain, associated with mounting
surpluses - you should understand and be able to explain why (economically!).
-
The atttraction of UK accession (as a net importer) at the time when the
Original 6 Common Market countries had begun to enter the surplus stage
-
The nature of the debate surrounding UK entry - concentrating on uncertain
general economic benefits and the certain costs of the CAP to the UK
-
The coincidence of dramatic change in world market conditions with UK entry,
and the consequences for the economic structure of the UK industry
-
The inevitable complication of the policy as compromise was sought between
the expense of the policy (to the taxpayer, and limited EU budget) and
the political need to continue support to farmers (with inevitable conflict
between countries where the farming vote was more politcally powerful -
both in number and in political position [reflecting political landscape
and structure of the industry] (Germany, Ireland and France), and those
where it is less important (especially the UK) - leading to:
-
Prudent support price increases (and weakening of intervention prices -
how?)
-
Maximum Guranteed Quantities (limits on exposure of EU budget)
-
Co-responsibility levies (taxing farmers for over-production against MGQs)
-
leading eventually to Dairy Quotas (1984) - why, and why not in other commodities?
-
The build up of opposing pressures:
-
budgetary costs and expanding EU budget requirements
-
Increasing aggrevation of trading partners (especially the US) (because??)
- culminating in the GATT Uruguay Round - putting agriculture at the top
of the Multilateral Trade Negotiation (MTN) agenda for the first time (see
next week)
-
Increasingly obvious failure of policy to either preserve farm structures
or farm incomes
-
Increasingly divergent demands of countryside (as opposed to farming) interests
in policy and market outcomes (environment, animal welfare, food safety
etc).
-
Finally, the seismic shock of the collapse of the USSR and the unification
of Germany fundamentally altered German interests in farm policy - away
from prtection of Bavaria towards efficient and effective assistance to
the Eastern Lander.
-
Generating the first real reform: the MacSharry reform - shifting
the burden of support from users/consumers to taxpayers, albeit at the
risk of some increase in the latter, though now capped by the 'quota' limits
on cropland areas and livestock numbers.
-
This progression continued under A2K, which, despite its rhetoric, pays
scant attention to the real difficulties of CEC enlargement.
-
Which leaves considerable problems for the EU in the future, since the
political pressures for farm support in Central Europe are difficult to
reconcile with a now very different set of pressures applying in Western
Europe (leaving on one side the very substantial differences within
each of these country blocks.
2. Meaning and Implication of Economic Analysis - the
illustrative case of elimination of EU Dairy Quotas
Question 1. If quotas are a 'bad thing', (as
outlined last week, and further explored below) why were they introduced
in the first place?
Quotas
were introduced (April 1st. 1984) in response to the growing surpluses
and increasing taxpayer costs of the previous policy - unlimited support
(in effect - aside from some co-repsonsibility levies, which were largely
ineffective - see full notes) at price Pm. The quota involved
a small reduction from previous production levels, which were then fixed.
Hence, the EU taxpayer gained, both by the initial reduction, as shown
here, and also by the fact that committment to support was now limited,
and no longer open ended. Consumers were not affected at all by the
change, while producers only suffered relatively minor losses as shown
- clearly quotas were economically a good thing compared with the previous
open-ended support - a step in the right direction?
Incidentally, as shown in the full notes,
the alternative to quotas - an equivalent reduction in the support price
(to generate the new excess supply of EUx) - would have generated a slight
increase in net gain (because of the consumers' gain), but a major reduction
in producers surplus - hence was dismissed by the Council of Agricultural
Ministers as being impractical politically, at that time.
Question 2: Just how bad a thing are quotas?
First,
there are very considerable practical problems in calibrating the principles
illustrated in this diagram with realistic representations of the real
world - especially the supply and demand responses both within the EU and
in the rest of the world, and equilibrium quota rents. Even, in the
case of milk, identifying Pm and Pwa causes problems, since
both are only known with certainty for butter and SMP, not for raw milk.
However, we can leave these issues on one side, and hope that accidentally
unrealistic estimates of these nearly unknowable points (footnote)
will either be unimportant or cancel out. Nevertheless, last week's
material, on the mechanics of the world market, is important in making
sensible judgements about the slope of the RoWxd curve (as it passes
through 'known' point X, and, subsequently, what it might look like if
and when the EU adopts a free trade policy.
Whatever judgements we might make about these practical analytical issues,
the diagram suggests a clear social gain - the Tax gain is clearly
larger than the net loss in surplus (the difference between the consunmer
gain and the producer loss). This will always be true so long
as demand curves slope downwards and supply curves slope upwards.
That is the way the world is - this diagram is simply the partial analogue
of the gains from trade logic outlined last week. Any set
of economic models representing this industry will necessarily come to
this conclusion that free trade is a good thing, so long as they obey the
principles of economics.
The conventional explanations of what consumers and producers surplus
measures mean and how they are to be explained is contained in Harvey,
Chapter 6 The CAP and the World Economy, 2nd. edn. (ed Ritson & Harvey),
CABI, Wallingford, 1997. However, recalling the general equilibrium
gains from trade of last week - the long run gains all accrue as consumer
gains (or, alternatively, as additional producer incomes earned through
additional trade). How are these related to the apparent partial
gains shown above? A sensible question, and not one addressed in
the text books (or any of the literature that I am presently aware of).
A practical and provisional answer is as follows.
The annual consumer surplus gain from the policy reform is a measure
of the potential for a perpetual stream of annual gains forever into the
future. The producer surplus loss, however, is a measure of the (negative)
incentive for the production adjustment - the shift round the production
possibility frontier. Once this adjustment is achieved, there is
no further loss. The producers surplus measure is, in effect, the
annual equivalent of the extent to which the present policy has increased
the capital value of the fixed and specialised assets employed in the dairy
sector, which would otherwise be employed elsewhere. This capital
value is a finite sum, not an infinite stream - it is part of the present
fixed costs of the industry, which would be reduced if the policy were
to be reformed (eliminated). The producers' loss is temporary, the potential
gain is permanent. The partial welfare arithmetic (the conventional measure
of the costs/benefits of policy change) seriously confuse these by treating
them as exactly comensurate.
The key, therefore, to policy reform is to design (and then market and
sell to the interested parties) a sensible transition policy which, at
least partially, compensates the present owners of these assets for their
capital loss. Convincing people of the sense of policy elimination
becomes the most critical part of policy analysis - the specific
estimates are largely beside the point - though the relative sizes of gains
and (temporary) losses are clearly important in illustrating the case for
reform. Here, there are several additional considerations which are
important - as illustrated in the analysis of eliminating quota:
This
Table, in bn. euros, shows the conventional measures of producers' and
consumers' surplus changes, and changes in taxpayer costs. Producers'
lose 8.6bn. per year (about 65bn. in total, capitalised over ten years
at a real interst rate of 5%). Consumers and taxpayers combined stand
to gain 10.8bn. per year without the policy in place (enough to completely
compensate producers' loss over 7 years, if the latter is converted to
an annual annuity payment at 2% real interest rate (reflecting the lower
risk associated with public funds compared with private commerical risks).
However, there is also a significant cost associated with implementing
and policing the present policy (and raising the necessary tax revenues
to finance it). This would also be saved if the policy were to be
eliminated - shown here at 10% of the transfer to producers - a conservative
estimate.
This estimate is partial - it takes no account of the general equilibrium
effects of the reform - which would effectively inject the static gain
(2.8bn.) into the circular flow of income - generating second round additional
gains according to the value of the multiplier - another 2.1bn as estimated
here (on the basis of the average of upper and lower bound estimates of
the partial static gain.)
There are also dynamic gains, resulting from the increased market incentives
for continual productivity improvements and matching productive potentials
to emerging market demands, adding a further 1.4bn, to the potential
gains from policy reform.
Overall, the EU stands to gain 6.2bn. (net of the produecers' loss)
from the policy reform. Once producers' had been fully compensated
for their loss, the gain would be an estimated 14.8bn. per year, indefinitely.
Question 3. So why doesn't this change happen?
The short, and perhaps glib, answer is that the time is not yet right
- the context and circumstance of the policy has not yet reached its breaking
point, at least not relative to the alternatives being talked of (e.g.
the Curry Commission made no mention at all of reforming the dairy sector
- only of making adjustments to area and headage payments!)
Consider the history of the CAP - policy was introduced, and then changed,
in repsonse to changing circumstances and contexts, opportunities and threats,
as represented in the political market place (where both votes and political
support are traded). It is a mistake to think that political decisions
are all made on the basis of 'one person, one vote'. The votes (and
associated political pressure and political party support) of the producers
for support (although smaller in number) will be more strongly expressed
because of their gains per head than the opposition of consumers.
It has also been argued that political support for farm subsidies (however
implemented) can also be expected from the consumers and taxpayers, so
long as these groupd believe that farmers would be unjustly treated without
such support - i.e. that altruism counts in political decisions.
Indeed, we had better hope this to be true - otherwise, the political system
is merely a system for producers to exert their power over the market,
since it is in their apparent interests to control the market, if at all
possible. Monopoly is the natural ambition of business. Competition
is its only countervail. Businesses seek to eliminate or subdue competition
whenever they can get away with it. If government can be persuaded
to assist in this, then so much the better.
So, Question 4. when might the time be right?
Several pressures can be identified against the present policy, which are
building all the time:
-
producers only win from the policy if they were the original owners of
the assets (especially quota rights themselves) - increasingly, present
producers have had to buy their way into the supported industry, and are
no better off than they otherwise would be without it (although would clearly
suffer a capital loss if it were to be abandoned with no compensation)
- so producers might begin to think themselves better off without it -
a major pressure for reform - providing they are compensated.
-
Competing claims on a small EU budget, especially as the euro area develops
and as enlargement comes closer, puts additional pressure on the budget
costs of the present policy
-
However, offsetting this, is the potential budgetary cost of compensating
farmers for policy change (since the budget would have to become responsible
for the consumer share of the present support, at least for a while)
-
The business of CEC enlargment presently involves allocating them a share
of the total EU dairy market, and hence allocating them quota - how much,
and how should it be re-allocated to allow growth and development of presently
underdeveloped industries in the CECs?? This could become a substantial
pressure for reform, simply because the present system becomes unmanageable
in the enlarged community. Unless quota rights are allowed to become
freely tradeable between countries, that is. But this might prove
even more unacceptable than elimination
-
Pressure from trading partners - disadvantaged by the present policy -
and expressed in the Millenium round of the WTO?
-
Pressure from the dairy processing sector, trying to adapt and adjust to
the ever changing market place within the constraints of quotas on throughput.
-
Examples (particularly from Australia) of policy reform elsewhere - added
to by the increasing weight of analysis and estimates of the costs of the
present policy?
-
The Australians have recently (as of 2000) embarked on a transition poliucy
to eliminate their own dairy quotas (introduced to restrict supplies and
thus increase market prices) by levying a temporary (8 yr.) tax on all
dairy consumption, the proceeds of which are paid in unconditional fixed
amounts to existing dairy producers. Quotas and associated trade restrictions
are all eliminated, After 8 years, both the tax and the fixed producer
payments will cease. The fact that the payments are funded through
an explicit consumer tax lends weight to the belief that the transition
policy will not become permanent.
Notwithstanding all these rather pragmatic arguements - there is no
solid analytical framework available for assessing the 'right' conditions
(contexts and circumstances) for poluicy change. We could easily
spend the rest of this course talking about why this is the case, and what
sorts of frameworks we might think of developing.
Footnote:
Unknowable? It is worth remembering a fundamental principle of physics:
the Heisenburg Uncertainty Principle: which roughly says: The more
accurate is the determination of the position of a particle (an event or
observation), the less accurate will be the associated information on the
speed and direction of travel of the particle. There is an irreducable
zone of uncertainty surrounding all events and observations. If we
know their place (circumstance), we cannot know their status in time (context),
and vice versa.
Resume:
-
US a natural exporting, commercial (if originally traditional family)
farm system, in a country committed to individual liberty and (+/-) free
trade, [c.f. Europe]
-
Year 2000 PSE around 22 - 25% for the US ($50bn. total), c.f. EU
of 38 - 42% ($100bn. total) [Canada 17 - 19% ($4.3bn total); Japan,
62 - 64% ($56bn. total)] (differences between natural exporter, with
no substantial peasant sector, and a natural importers with substantial
small farm sectors).
-
Hence, policy designed to work with the market
-
Present policy stems from the 1930s Great Depression - lack of market demand
and collapse of prices.
-
Support provided largely through exchequer payments (though not in
dairy!).
-
Extensive R&D and extension - land grant colleges - + credit support,
crop insurance, and infrastructure provision.
-
Loan rates - to support and assist market price recovery and recovery
of producer confidence in the 30s (CCC as implementation authority)
-
Needed set-aside, to control production levels as loan rates set
above market prices (+ some export assistance and subsidy)
-
Food Problem confined to the poor - less well supported by social security
than in Europe, and provided with food stamp programme - conditional (and
thus paternalistic) support - spend the government support on food, or
loose it.
-
1970s -> food shortage scares: deficiency payments to secure
future supplies, both against domestic food shortages and also to capitalise
on strong world markets.
-
Environmental Pressures (limited c.f.Europe, and more focused on
Natural Resources than on landscape etc.) dealt with via paid Conservation
Reserve programmes and sod buster/swamp buster provisions outlawing reclaimation
of sensitive areas in response to market or policy incentives.
-
Falling world prices in 80s ->
-
Loan rates reduced (to 85% of Olympic moving average) - otherwise simply
supporting world market prices (FSA, 85 and FACT, 90)
-
increasing DP costs; limited by freezing payment base (then
reducing this base to 85% of eligible) (FSA, 85 and FACT, 90)
-
Budget pressure (1995) (+ pressure from URAA on amber/blue box measures)
-> freezing the payment per farm, and setting time-limit on payments
(FAIR) - Production Flexibility Contracts
-
Now, no budget pressure - because of sustained boom over late 90s, and
now the apparent need to prevent a major depression - and depressed
world prices, + strong vested interests with considerable and differentiated
political clout -> strong pressure to continue support.
-
What might stop this??
-
External pressure - Millenium round of the WTO - limits on Blue Box, and
further constraints on Green Box??
-
Internal Pressures:
-
Taxpayers demands for other spending (only really effective if the Federal
Budget is under pressure, which seems unlikely for a while)
-
Taxpayers concerns over equity, justice, fairness of these payments?
-
Constituency (farmer) pressures arising from the realisation that these
payments simply increase costs for expanders and new entrants?
-
The 20/80 rule - 20% receiving 80% of support approximately, may cause
increasing friction over time.
-
While US appeared to be leading the way to sensible policy reform in 1995
FAIR, its true colours are now re-appearing - if we are rich enough (no
serious budget constraint) then we will continue to support existing vested
interests.
The Current Farm Bill debate:
At least a part of the future course of US farm policy already seems well
established. Congress has already set aside an additional $73.5bn.
over 10 years for the agricultural budget - the US seems determined to
spend more than before on farming, or at least to provide itself with the
budgetary headroom to do so if needs be.
As of March, 2002, the current state of the Farm Bill debate can be
summarised under the headings of the three main proposals, each of which
is designed to spend this additional budget. The House of Representatives
has passed its own bill in October, 2001, and the Senate passed its version
in late Feb. 2002. The Administration has indicated its support for
a third proposal - under the sponsorship of Senators Cochrane and Roberts
(though the Senate has already rejected this proposed bill). Congress
now moves the farm bill debate into joint session - Conference Committee
- to produce a compromise bill for submission to the administration.
The House Bill: (for period 2002 - 2011):
-
continued PFC payments (at a slightly higher rate) - fixed rate payments
(based on 85% of the eligible areas, as now) adding $1.2bn in fixed payments
to the current PFC bill of $4bn.
-
Loan rate programme continued, at essentially the same rates as currently
rule.
-
Countercyclical programme of payments when market prices fall below a target
price, with the payment rate depending on current market prices, but the
payment base fixed - in essence a return of the Deficiency payment programme.
The Senate Bill: (2002 - 2006) is essentially similar in structure,
but the PFC payment rate substantially higher, and the payment base is
raised to 100%, and the base is adjustable - producers can update their
base to their 1998/01 average. However, the fixed payment rates are
to be reduced by 50% in 2004, and further cut by 50% in 2006 (the final
year of the Senate's Bill). Thus, in 2003, the fixed payments would
amount to more than double current payments (at $8.4bn. total), but this
is set to fall to $4.2bn. in 2004, and to $2.1bn. in 2006. The Senate's
loan rates are set signficantly higher than those in the House Bill.
It's countercyclical programme follows a similar scheme to the House Bill,
but given the settings of the loan rates, could not make any payout until
2004.
Cochrane-Roberts Bill: (2002 - 2006) Allows updates to
the payment base for the PFC payments, and sets payment rates (fixed) significantly
higher than the 2002 rates - though on only 85% of the base. It proposes
to spend $8.1bn. per year on fixed payments as a result of the re-basing
and higher payment rates. It includes the House proposals for marketing
loan programmes. The C-R countercyclical proposal is for a farm savings
account, co-funded between producers and government, which would make payouts
as and when farm gross revenues fall below a five year average. All
three bills reinstate the dairy programmes, which are currently scheduled
for effective de-regulation by the end of this year.
This
chart shows the US Aggregate Measure of Support (AMS) spending under the
Amber Box in billion $, both for the history of the FAIR Act (to 2002)
and for the current proposed bills (House of Representives, Senate, and
Administration (Cochrane/Roberts).
This spending excludes Green Box programmes, - with some $17bn.
per year being spent of the Food Stamp programme, another $15bn. on other
forms of domestic food assistance, and $7bn. per year on research, extension,
information, inspection, and adminstration services, and on natural disaster
relief and conservation reserve programmes. Production Flexibility
Contract PFC payments under FAIR are shown here, though count as green
box, since they are fixed payments, since each of the three Farm Bills
include extension of these payments.
The history clearly shows the effects of the ad hoc assistance payments
made since 1998 - to offset poor market prices, and called Market Loss
Assistance (MLA) payments, which have been made on the same basis as the
PFC payments, but which are triggered by low market prices and hence registered
as amber and not green box.
The New Farm Bill proposals all result in an increase in spending -
and thus support - on US farmers, to match levels reached during the late
90s. Each tries to build in the apparent spirit of the MLA payments
into countercylical packages, but both the House and Senate versions result
in considerably greater expenditure than the C-R bill being counted as
Amber. There is, apparently, some considerable risk that the US will
exceed present URAA limits on Amber spending under the future farm bill.
It is also pretty apparent that the US is not yet able to give up supporting
farmers, whatever its rhetoric in the Multilateral Trade Negotiations may
say. However, a decline in the Federal budget balance coupled with
a recovery of world markets could change all that.
Source: US Farm Policy and the
WTO: How do they match up?, Hart & Babcock, CARD, Iowa
State, Feb., 2002.
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