The third period of the CAP (the 1992 Reform) Mac Sharry Reform

Agri-food economics Prof. Andrea Marescotti Part 3 The new model for agriculture The third period of the CAP (the 1992 Reform) Mac Sharry Reform 1 2 Problems are not solved. MacSharry Reform (1991/92) Pressure for a radical CAP change came from: The EEC, because of unsustainable financial burden and distortions created by price policies; Most imoprtant CMOs were changed (cereals, oilseed, bovine-sheep-goat meat) BASIC PRINCIPLES OF THE MAC SHARRY REFORM The society, more and more oriented to food quality and safety, to environmental effects (pollution, landscape, biodiversity, animal welfare), to services (multifunctionality of agriculture). Besides the CAP was conceived as opposite to Robin Hood philosophy as it stole to poorer consumers to support richer farmers (80% of support went to 20% of farmers) The international context which exerted pressure to liberalize agricultural markets and to access to EEC market. Besides the CAP induced a drop in world prices and consierable price volatility on international market. Agriculture was coming to the forefront of the international discussions on trade liberalization for the first time (within GATT agreement) Reduction of minimum guaranteed price as to get it closer to international market prices; the loss of income farmers undergo was compensated by direct aids (compensatory payments) Decoupling: the direct aid was calculated per hectar / head and differentiated across products (wheat, rye, sunflower, bovine, sheep, etc.). Compensatory payments linked to average yield of the geographical area and a reference period. Maximum guaranteed quantities remains in the form of Maximum Guaranteed Surfaces or heads Therefore the EEC had to re-structure the typology of support as to reduce farmers incentives to increase quantities produced, and to get farmers close to market mechanism 3 Accompaning measures: first regulations on quality and environment 4

MacSharry reform: an assessment MacSharry reform: accompaning measures From a support coupled to the quantity produced to a partially decoupled support (linked to the use of some fixed input: land, heads): reduction of incentive to increase productivity Support moves from how much each farmer produces to a standard production at territorial level Reg.2092/91: it regulates organic production Reg.2078/92: agro-environmental measures: financial support (direct aids) to farmers engaging in organic or integrated production, biodiversity, landscape, reduction of fertilizers, extensive farming, management of abandoned land Farmers are sure to receive at least a minimum level of support Price partly regains its function of signal which direct farm decisions: the paradox: the reform aimed at getting the farmer closer to market, while in this way some producers even do not care to harvest Reduced incentive to produce for intervention: Greater transparency of support burden is transferred, albeit partially, from consumers to taxpayers Visible support, therefore more vulnerable to competing demand in budget spending, requires justification, potentially subject to specific conditions; besides, it can benefit the landowners as it makes more visible the part of Reg.2079/92: pre-pensioning (regime for early retirement): incentives for elderly farmers to cease farming, opening up new job opportunities in agriculture for young people Reg.2080/92: forestation: of forestry activities on agricultural land Reg.2081/92: PDO PGI (protection of Geographical Indications typical products) 5 6 the support linked to the land (Still) The third period of the CAP (the 1992 Reform) Agenda 2000 7

Agenda 2000: a new situation In 1997 "Agenda 2000: For a stronger and wider Union", which comprises a single complete framework offering a coherent vision of the Union's future in front of the accession of new members (East Europe). NEW OBJECTIVES Increase competition in European agricultural markets, through the gradual alignment of domestic prices with world ones Guarantee food safety and food quality, for better consumer protection Ensure an equitable standard of living for agricultural and rural population and to contribute to the stability of agricultural incomes Create employment opportunities for farmers and their families in activites complementary to farming or in alternative occupations Agenda 2000: both pillars affected THE FIRST PILLAR: price and market policy Strong price policy no more necessary as food security achieved. More and more difficult to justify financial aids to farmers as the MGP caused distortions (anti Robin Hood) and society needs other functions to be accomplished by agriculture) Deepening of Mac Sharry Reform: Further reduction of minimum guaranteed prices and increase of direct decoupled payments, but.. The name has been changed: from compensatory aids to direct payment (change of philosophy: no need to compensate farmers for each CAP change) Cross-compliance : compliance with minimum environmental criteria in farming to access the direct payments (new instrument) Integrate environmental objectives in the CAP policy for agriculture policy for society through agriculture Simplify the CAP and its management 9 (agriculture declines: less political strenght) 10 Agenda 2000: both pillars affected THE SECOND PILLAR: structural (rural ) policy Agenda 2000 reforms the structural policy (now Rural Development Policy), although the term «rural» still stands for «agricultural»). The new rural policy contains and modifies all previous structural policy tools, grouping them into a more coherent framework. Besides, it introduces the need to draw national plans for rural (in Italy each Region) with the aim of highlighting territorial specificities and needs. MEASURES Agro-environmental measures (previous reg.2078/92) Pre-pensioning (early retirement) Forestation Disadvantaged and mountain areas Support to farmers and processing firms investments Young Training and technical assistance to farmers Diversification and improvements in the quality of life in rural ares 11 The fourth period of the CAP (2003) Mid-Term Review 12

The Mid-Term Review (2003) On 26 June 2003 the Fischler Reform was approved; this opened the way for an unprecedented revision of the First Pillar of the CAP. Indeed, the 2003 reform was conceived as a Mid Term Review of Agenda 2000, to assess ex-post the effectiveness of the 1999 Reform. In reality, the Mid Term Review contains new policy elements that go far beyond a simple review, transforming it into a much more incisive reform than Agenda 2000 itself, going in depth nto the process of re-orientating policy tools and the very goals of the support policy The Mid-Term Review (2003) The MacSharry and Agenda 2000 direct payments are substituted by a direct aid to each farm fully decoupled by quantities (potential or really) produced The direct aid (single farm payment) is calculated on the basis of what each farmer received on average in the period 2000-2002 OBJECTIVES Make EU agriculture more market-oriented through the further alignment of domestic prices to world ones Shift the support from production to producer (full decoupling) Promote sustainable and socially-acceptable agriculture (crosscompliance) Make the CAP more responsive to the obligations assumed, or to be assumed, in the international arena (WTO) Reinforce rural policy Simplify the procedures and administration 13 The aid is no more linked to the kind of crops or other activity each farmer decides to do. The farmer is free to cultivate whatever he/she likes on the basis of market signals. He/she can even decide to produce nothing, provided he/she complies with some minimum agro-environmental obligations (Good Agronomic and Environmental Conditions) The payment is made more «visible» to citizens, and it has to be «justified» to citizens 14 What next: why another reform? According to EU Commission, agriculture will have to front new challenges: The fifth period of the CAP (2013 --) NOW 15 FAIRNESS OF SUPPORT ECONOMIC challenges Food security Price variability Economic crisis ENVIRONMENTAL challenges CO2 Soil erosion Water/air quality Habitat and biodiversity TERRITORIAL challenges Social erosion in rural areas diversity of EU agriculture Sustainable production of food Support farmers income and reduction of its variability Improve compeitiveness and value added along the supply-chain Compensate areas with natural constraints Sustainable management of natural resources and climate Guarantee public goods provision Support green growth and innovation Front climate change Balanced territorial Support disadvantaged rural areas Promote diversification 16

1 pillar a) Direct payments 2 pillar Rural 8% 40% Misure di mercato Pagamenti disaccoppiati Sviluppo rurale 52% 1 pillar b) Market measures Now 1 Pillar Direct payments Now: new design of direct payments Direct payment has been «fragmented» into seven components as to take into account the multiple functions of agriculture. Each EU Member State decides which component to activate (some are compulsory). 19 20

Italy: 5 out of 7 Italy: 5 out of 7 Exemple: young farmer producing cereals on 150 hectares 70.000 Euro 5 Small farmers 4 Coupled payments 3 Young farmers 2 greening 11% 1% 30% 60.000 50.000 40.000 30.000 Accoppiato Giovani agricoltori Greening Pagamento di base 1 Basic payment 58% 20.000 10.000 No natural constraints and redistributive payments 0 2014 2015 2016 2017 2018 2019 2020 Direct payments 2014: 58.669 euro Direct payments 2019: 48.406 euro (-17%) 22 Now: new design of direct payments Now: new design of direct payments FLAT RATE: in each «region» all farmers will have to receive the same direct payment per hectare (the payment is no more linked to the amount received by each farmer, as in the Mid-Term Review). 600 Italy chose to adopt only one region (the entire territory of the country) Italy: Direct payments before the reform euro/ha 500 400 300 200 100 - Piemonte Valle d'aosta Lombardia Trentino Alto Adige Veneto Friuli Venezia Giulia Liguria Emilia Romagna Toscana Umbria Marche Lazio Abruzzo Molise Campania Puglia Basilicata Calabria Sicilia Sardegna Italia Redistribution between farms: territories (plains vs mountains), products (penalized farms producing highly supported crops such as tobacco, tomato, oranges, milk, beef, XV olive oil, rice, hard wheat, sugarbeets, mais) Italy chose to adopt only one region (the entire territory of the country) 23 24

Now: new design of direct payments Basic payment scheme Basic payment Scheme The aim of direct payments are: To contribute to keep agriculture a rentable activity, granting a minimum income to farmers (insurance vs higher price instability and market risk) To compensate farmers for the provision of other services that cannot be easily remunerated by the market (public goods: envirnoment, lanscape, animal welfare) Basic payments can be perceived only if the farmer complies with cross-compliance (minimum environmental and animal welfare criteria) Green payments can be perceived only if the farmer adopts farming practices that have positive impacts on the climate and the environment A basic payment is introduced that replace the payment of the Mid Term Review Basic payment Opposite to what happened in the previous period, the basic payment will be progressively brought to the same level in all UE. Each eligible hectare will benefit from the same amount of money, and it will no more linked (as in the past) to output, to yields, to standard yields, nor to the historical amount of money each farmer was used to receive in a given period All the same!!! 25 26 Basic payment scheme Basic payment Scheme Basic payment scheme Basic payment Scheme 27 28

Green Payment Green payment scheme Green Payment Green payment scheme The green payment: additional payment (maximum of 30% of the national cap) for farmers who adopt farming practices that have positive impacts on the climate and the environment, such as crop diversification, maintenance of permanent pasture and areas to specific environmental value. Organic farming system automatically enters this system Crop diversification maintenance of permanent pastures 29 areas to specific environmental value 30 Green Payment Green payment scheme Young farmers Young farmer scheme Agri-environmental benefits 2 pillar (rural ) Greening Cross-compliance Agricultural surface (eligible for direct payments) Agri-environmental scheme Decoupled «green» payment per hectare Basic payment Payment for young farmers (<40): another component (up to 2% of national endowement) for young farmers (it may integrate that granted by rural policy) who take the leads of the farm for the first time (payment for five years) Natural constraints area Member States may introduce an additional payment for farmers located in areas subject to specific natural constraints. 31 32

Coupled aid Coupled aid Now Member States can give coupled aid for some products (such as cereals, oilseeds, rice, milk, seeds, sheep meat, beef, olive-oil, sugarbeets, fruit and vegetables) with the aim of supporting those products in difficulty and/or have a particular importance for economic, social or environmental reasons. Aid must be paid according to number of hectares or heads. 1 Pillar Market measures 33 34 Market measures Now Market measures are targeted to help farmers: 1. To increase their bargaining power as compared to other enterprises 2. To front the increased price volatility due to both global market dynamics and CAP evolution 3. To be more inserted into market dynamics Support to producers organisations and interprofessional agreements Protectionism in some cases Safety net with low MGP in case of crisis for cereals, sugar, bovine meat, butter and powder milk, pigs Quotas (milk, sugar, vineyards) are abolished Fruit and milk in schools 2 Pillar Rural 35 36

Rural Rural Member States and regions draw up their rural programmes based on the needs of their territories and addressing at least four of the following six common EU priorities: fostering knowledge transfer and innovation in agriculture, forestry and rural areas; enhancing the viability and competitiveness of all types of agriculture, and promoting innovative farm technologies and sustainable forest management; promoting food chain organisation, animal welfare and risk management in agriculture; restoring, preserving and enhancing ecosystems related to agriculture and forestry; promoting resource efficiency and supporting the shift toward a low-carbon and climate-resilient economy in the agriculture, food and forestry sectors; promoting social inclusion, poverty reduction and economic in rural areas. 37 38 Time for questions The evolution of the CAP 39 TRUE or FALSE? The McSharry reform of 1991/92 increased the minimum guaranteed price The Mid-Term review introduced the full decoupled payments: farmers could even not produce anything and get the money from the EU The structural policy (rural policy) has significantly increased its importance in the course of CAP history Today direct payments vary according to the kind of product each farmers produce Today direct payments are composed by a basic payment that is more or less the same in each region of the EU, plus other payments (greening, young farmers, etc.) FALSE TRUE TRUE FALSE TRUE 40

Time for questions The evolution of the CAP QUESTIONS Describe the aims and tools of the McSharry Reform (1991/92) What are the main changes brought by the Mid-Term Review of the CAP in 2003? Can you shortly describe the contents of the five periods of the CAP? OVERVIEWS What are direct payments and how are they composed in the CAP today? What is cross-compliance? 42 : THE PERIODS Years Name 1 PILLAR (price and market) 2 PILLAR Rural First period -1985 Unlimited guarantee Minimum guaranteed price (MGP) Coupled payments weak What next? Second period 1985-1991/92 Limited guarantee Minimum guaranteed price (MGP) with corrections (i.e. quotas, set-aside) Coupled payments with Co-responsibility weak Third period 1992-2003 MacSharry Reform + Agenda 2000 Minimum guaranteed price (MGP) lower than before. Compensatory payment / direct payments (partial Decoupling) Accompanying measures (quality, environment) Growing: Birth of Rural policy Fourth period 2003-2013 Fifth period 2013- Mid Term Review Now MGP as safety net and for some products only. Full decoupling but for single farmer Cross-compliance Same Direct payment / hectar for all composed by basic payments, greening, young farmers, coupled aids, etc. MPG as safety net Strong Rural policy Strong Rural policy 43 44

45 Key concepts 47 48

Key-concepts Key concepts In the 80s the phase of the unlimited support and coupled to the production evidences critical issues related to the financial sustainability (increase in costs borne by the Community budget), the international sustainability (high protectionism and pressure from major countries outside the EC), social sustainability (anti Robin Hood). Therefore a new phase of the CAP begins, during which, through various instruments (MGQ, quotas, set-aside, etc..) an attempt to contain the excesses of production is made In 1991 the MacSharry reform is approved (third period), which aims to bring agriculture closer to the market by lowering the MGP and compensating for the losses suffered by farmers with partially decoupled payments calculated in proportion to the use of factors of production (hectares, livestock units) corrected by average yields 49 The fourth period begins in 2003 with the Mid Term Review, which introduces the (almost entirely) decoupled payment. The payment is in fact calculated on the basis of historical aid received by each farmer. The farmer can then freely decide what and how much to produce, or not produce at all, provided it complies with good agronomic practices (conditionality) Starting from 1999, the structural policy is strenghtened (rural policy): it includes investment aid to farms and processing firms, subsidies for the adoption of environmentally friendly practices, and many other aid in part inherited from the past structural policy (aid to young people, early retirement, aid to farms located in mountain and disadvantaged areas, etc.). 50 Key concepts The fifth period starts in 2014. The environmental function of the CAP is increased, and the decoupling strengthened (full decoupling). The aid will be disbursed according to the number of hectares (equal amount to all the territories, and not calculated to historical aid of each farmer), and increased in function of their participation to agri-environmental measures, the age of the farmer, the location of farms Rural policy is further developed and funded 51