Economics Q&A: Should the CAP be scrapped?

The Common Agricultural Policy is a system of farm support that was set up by the EU to assist the agricultural sectors of its member states. The CAP accounts for nearly half of the EU’s budget, at approximately £48bn, and combines direct subsidy payments and price support schemes. Economic welfare is concerned with levels of human well-being, and can be achieved through an efficient allocation of resources, thereby maximising consumer and producer surplus.

For much of its existence, the CAP has been criticised as being ineffective and a waste of EU funds. One area that the CAP has been criticised is its use of intervention prices. These are target prices that are set for certain foodstuffs, such as grain, that are designed to ensure that farmers receive a guaranteed minimum price for their produce. Target prices may be maintained through a buffer stock scheme, which will buy the good in question from the market when the price is low and sell the good when the price is high.

In many cases intervention schemes have been damaging to the markets concerned. The main reason for this has been that the intervention prices have been set too high. This resulted in excess production, often in an inefficient way, and the development of huge surpluses in certain products. The perishable nature of the goods being produced meant that many of these surpluses, for example “butter mountains”, have in many cases gone to waste. Furthermore, the surpluses meant that without the intervention price the goods themselves had little value and so the EU had no choice but to keep purchasing these goods, at enormous cost to EU funds.

Many argue that these funds could have been better used elsewhere, for example on healthcare or the development of green technologies. Instead, this was a clear misallocation of resources that was damaging to consumer welfare for EU citizens, who had to pay prices significantly above world prices. A further criticism of the CAP’s intervention schemes is that they are inequitable, as they give a skewed distribution of benefits. These schemes favour large scale farmers that have exploited economies of scale and brought down their marginal and average costs of supplying food.

Another criticism of the CAP has been the impact it has had on developing countries. Many argue that the CAP has resulted in severe damage to the food export industries of developing countries, as a result of the dumping of EU food surpluses. Dumping is the action of flooding a foreign market by selling goods abroad for a price below the market price in that country, which is often also below the cost of production. This dumping has been a result of EU export subsidies. These are financial incentives given to exporters, such as low-cost loans or tax relief, which are aimed to encourage the export of goods and discourage the sale of goods on the domestic market (as can be seen in the diagram below).

Dumping results in the forcing of local farmers out of the market and can leave countries unable to export produce. Import tariffs imposed by the EU on foods such as sugar further worsen this problem. Many argue that without the presence of the CAP Africa would account for a far higher level of world trade and as such many countries within Africa would be better placed to develop economically.

One the other hand, it might be the CAP does in fact benefit the EU, and that allowing the price of food in EU markets to be determined by free market forces would be damaging to economic welfare. One basis for this argument is that the CAP supports the welfare of EU farmers, whose livelihoods are dependent on the support they receive. This is because the agricultural sector is a highly competitive industry, in which farmers are price takers. The prices are determined to a large extent by supermarkets, who offer farmers a minimal rate of return on their produce. Without guaranteed prices, single farm payments and various other forms of financial support many farms would not be able to survive.

This issue would be compounded by the fact that imports would increase, as the removal of tariffs would open food markets to non-EU farmers, many of whom can produce foods at far lower cost. The farms that would be most vulnerable would be small scale, which are often inefficient in comparison to larger farms, which have been able to exploit economies of scale. As such, while the CAP has been accused of favouring larger farms, if free market forces were to operate a small number of large farms would almost certainly take over the whole sector. While some may argue that this would be the most productively efficient outcome, it may be seen as undesirable from a welfare perspective due to its impact on small-scale farming.

The creation of vast industrial farms creates further economic welfare issues, as it would change the nature countryside which may deter tourists and visitors, damaging those in the rural tourism industry, including farms that have diversified. This is an example of the law of unintended consequences. One might argue that if the CAP were to be reformed and free market forces we to operate, the EU would simply have to establish another support scheme, in order to support the people that have become unemployed and help them find new jobs.

While the CAP undoubtedly has its drawbacks, its complete removal and the allowing of free market forces to operate would be even more damaging for agriculture. Although the CAP may not maximise agricultural efficiency, it maintains the welfare of millions of small-scale farmers. Through this it also maintains our countryside. This is crucial from an environmental perspective and in the long term is arguably more important that maintaining economic welfare. As such, what is necessary is the reforming of aspects of the CAP which hinder economic welfare, such as export subsidies, rather than its complete removal.

Felix Tracey