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PART II - CONTRIBUTION OF COMMUNITY POLICIES TO COHESION

4 The common agricultural policy: price and market policies

Political and budgetary aspects

Developments, current situation and prospects

In expenditure terms the Common Agricultural Policy (CAP) is the most important policy of the EU. The CAP reform of 1992 and the Agenda 2000 reform initiated a shift from price support policies to direct payments for farmers based on historical yields.

In July 1997, the publication of Agenda 2000 presented a new reform of the CAP. A number of key priorities were defined, including securing the competitiveness of the agricultural sector, encouraging cultivation methods which contributed towards maintaining and improving rural areas and landscapes and protecting the sources of farmers' income, while at the same time encouraging the development of the rural economy as a whole. The reform included two important strands. First, official prices were reduced. Secondly, a new framework was established for rural development policy, which was regarded as the central element in the reform and, from then on, as the second pillar of the CAP.

Budgetary aspects

In 1998, the Guidance and Guarantee sections of the EAGGF, ie the source of the overall financing of the two pillars of the CAP, accounted for 54.6% of the European Union budget, or EUR 43.3 billion. Price and market support from the Guarantee section of EAGGF alone represented 48.9% of total Community expenditure, or EUR 38.7 billion (all the following references in this section to the EAGGF are to the Guarantee section). The prospects for the period 2000 to 2006 are for a broadly unchanged level of overall agricultural expenditure but for a reduction in relative terms, to EUR 44.8 billion in 2002, 46.8% of total appropriations, and EUR 42.5 billion in 2006, 46.0% (Graph 18).

Since the 1992 reform, direct payments for assistance and, to a lesser extent, the amount going to rural development, represent growing shares of total expenditure on agriculture at the expense of spending on market support and payments to exports. The latter two categories accounted for only 29% of total expenditure in 1998 as against 82% in 1992 (See Graph A.37, in annex).

The substitution of direct aid payments for market support has increased the share of subsidies in agricultural income. In 1998, subsidies represented, on average, 28.6% of agricultural income in the Union as against 15% in 1990 and 5% in 1980. Overall, they have contributed to stabilising income.

France (23.2%) and, to a lesser extent, Germany (14.3%) remain the main beneficiaries of the EAGGF. Since 1998, Spain (13.7%) has taken third place ahead of Italy. These three countries receive more than half of total EAGGF expenditure. For the rest, the share of Portugal, though low, has increased over the past 10 years, from 0.6% to 1.6% (See Table A.24, in annex).

The ranking of Member States, however, is changed considerably if expenditure is related to the numbers employed in agriculture. The cohesion countries, except for Ireland, are at the bottom of the list because of the large numbers employed. Where, as in the Mediterranean, a more labour-intensive type of production predominates (in Greece, Spain, Italy and Portugal), some 8½% of employment is in agriculture, due in part to smaller average farm size. EAGGF expenditure per person employed, however, has tended to increase over the past 10 years, as employment has declined, and the gap between countries receiving the least (Portugal in particular) and the most has narrowed (See Table A.25, in annex).

Contribution of agricultural price and market support to national cohesion

The impact of the CAP - or at least the first pillar - on cohesion is linked to the large redistribution of income among European citizens stemming from transfers between social groups, sectors, regions and Member States. The current shift from price support to direct payments implies a shift in transfer flows. This has distributional implications for consumers and taxpayers. With market price support, low income consumers pay a disproportionate share of transfers relative to their share of income and they are, therefore, expected to benefit from reduced domestic price levels.

The CAP also involves large transfers between Member States and regions. The amount of such transfers can be calculated from budgetary information together with estimates of the effect of international trade.1

The patterns of transfers between Member States in 1998 was very similar to that in 1993: net contributors and net beneficiaries were the same. (See Table A.26, in annex). In 1998, net transfers were positive for 5 Member States, three of which were cohesion countries (Spain, Ireland and Greece). The change in the scale of such transfers differs between Member States. The amount rose considerably for Spain and France between 1993 and 1998, largely because of increases in direct payments (especially to cereal producers). The rise was smaller for Ireland and was the result of positive trade transfers, high payments to beef and veal producers and a small contribution to the agricultural budget. The amount of net transfer declined for Greece and Denmark, though it remained positive - for Greece, largely because of direct payments and a low budgetary contribution, for Denmark, because of positive trade transfers.


The remaining 10 Member States are net contributors to the CAP. Portugal is the only cohesion country for which net transfers were negative in 1998 as well as in 1993, the result of a low level of direct payments received and of a high level of protection against imports. Except for the Netherlands, which receives a low level of direct payments, the net contribution of all these countries declined between 1993 and 1998.

Contribution of agricultural price and market support to regional cohesion

Regions play an increasingly important role in the operation of the CAP, even if this differs markedly between Member States. In general, regions are responsible, on the one hand, for measures relating to rural land use (environmental protection, agritourism and infrastructure, for example) and, on the other, for providing support for specific agricultural sub-sectors. In this regard, differences between Member States are large: While Italian regions manage around 70% of the agricultural budget in Italy, agricultural measures undertaken by French departments (which are much larger than those undertaken by regions) account for only around 2% of the budget in France.

The effect of the 1992 reform

Producers of cereals, oil seed and meat have benefited from the direct payments introduced under the 1992 reform. This system provided compensation for the loss resulting from the alignment of European to world prices and, ipso facto, prevented income from agriculture falling in a number of regions and even led to an increase in some cases. The regions affected most by the new system were the cereal-producing areas of France (Centre, Poitou-Charentes), Germany (Bayern), Spain (Castilla y León, Castilla-la Mancha) and Portugal (Alentejo) as well as the livestock areas of Ireland, the UK (Scotland, Wales, South West), France (Basse-Normandie) and Germany (Bayern). The result was an increased level of support in terms of the amount of aid in relation to agricultural employment (Map14).

Production aids are also used for other products, such as olive oil, so providing support to many producers in the Mediterranean regions, and cotton, produced mainly in Greece. There have, in addition, been improvements, this time due to market forces, in wine-growing regions as well as in those producing fruit and vegetables: La Rioja and Andalucia in Spain, Puglia in Italy, Aquitaine in France as well as many regions in the Netherlands and Baden-Württemberg in Germany. In general, Mediterranean products have proved to be relatively competitive on world markets and their share in total agricultural output has increased, due partly to the modernisation of distribution systems in a number of coastal regions.

Total transfers to agriculture, including indirect as well as direct payments, have increased in relation to the number employed in all regions of the Union, the largest rise occurring in French regions (especially those producing cereals) and those in the new Länder in Germany. In terms of assistance relative to agricultural land area, regions in Greece receive the highest level of support in the Union.

Overall, the reform did not radically alter the distribution of support between European regions. In 1996, as in 1991-92, the regions where the level of support per person employed in agriculture is relatively low in relation to the gross value-added per person employed are located in the Netherlands, Portugal, Spain, Italy and Greece (ie they are situated on the bottom right-hand side of Graph A.38, in annex).

At the same time, the reduction in market price support most affected the regions with a high level of value-added per person employed, which led to a more equitable distribution of aid between regions. Moreover, a number of regions continued to receive much the same level of support following the reform, direct payments compensating for the reduction in market price support, while others experienced a reduction. The result is a weakening of the relationship between the level of aid to regions and agricultural performance. Wine-growing regions, for example, like those producing fruit and vegetables, succeeded in maintaining, or increasing, their agricultural income, despite benefiting only to a very limited extent from direct and indirect aid.

Although the 1992 reform led to a more equitable distribution of support across regions, it also became more dispersed. The distribution of transfers in relation to GDP per head (Graph A.39, in annex , which shows the cumulative proportion of transfers in relation to the population of regions ordered by GDP per head) shows that:

  • the effect of the CAP is negative in the least prosperous regions, which account for around 20% of EU population (the graph showing that these receive less in transfers than their relative level of GDP per head);
  • the regions benefiting most are those between the 2nd and 6th deciles in terms of GDP per head.

Contribution of agricultural price and market support to social cohesion

Over the past few years, a number of different models of agricultural production have developed, distinguished by the their structure, methods and aims:

  • a 'productive' model, geared towards international markets and increasingly concentrated in a few areas in the Union. Taking gross value-added per annual work unit as a measure of productivity, the highest values are found in Denmark, Champagne-Ardenne and Picardie in France and Sachsen-Anhalt in Germany;

  • an 'adaptive' model, concentrated in particular regions and on particular products and targeted on local or national markets. This form of agriculture is based on traditional, local produce and is a response to an increasing demand for higher quality among consumers;

  • · a 'transition' model, which is subject to increasing constraints and permanent change, with farmers continuously changing their methods of production and what they produce in response to the development of large agricultural markets, increased competition and the ever greater pressure from agri-food chains;

  • a 'marginalisation' model, characterised by structures of production which are increasingly unstable and precarious and which, if they are not capable of adapting, are set sooner or later to disappear. Taking farms below 4 ESU 2 as an indicator of precariousness, the regions in question include Centro in Portugal, Valle d'Aosta, Abruzzi, Basilicata and Molise in Italy and Galicia in Spain.

This typology of models is confirmed by an analysis of the average economic size of agricultural holdings in 1997 and the change between 1993 and 1997 for the 20 regions with the lowest and the highest levels. (See Table A.27 ,in Annex). There is a marked distinction between the southern and the northern regions. The 20 regions with the smallest size of holding are all situated in Greece, Spain, Italy and Portugal, Moreover, the average economic size of agricultural holdings declined over the 4-year period by 2.2%, while it increased in the top 20 regions, all located in the north, by 24.6%. Furthermore, employment in agriculture tends to be higher in the regions with small holdings, such as in Crete, where almost 38% of employment was in agriculture in 1997, where the average size of holdings was only 4.7 ESU and where this declined by 10% over the period.

Although the 1992 reform reduced expenditure on market support in favour of direct payments, the distribution of support in relation to farm size remains inequitable, since support is still fixed on a 'per hectare' basis (which means that support increases with economic size). Before the reform, the system of support favoured farms with a certain level of production and, de facto, of a relatively large size (of 16 ESU and over). Although direct payments have become more important since the reform, the main beneficiaries remain the large holdings (over 40 ESU). The inequality of the distribution of support is seen even more acutely if account is taken of the fact that 10% of holdings in the EU account for two-thirds of the total standard gross margin and half account for 95%. The CAP, therefore, continues to support the development of large specialised units at the expense of small and medium-sized farms, which play a major social and economic role in a number of regions (See Graph 19).

The enlargement perspective

The inclusion of the 10 Central European candidate countries in the Union (ie leaving aside Cyprus and Malta) would lead to:

  • an increase of 2.4 times in the number employed in agriculture (from 6.9 million in 1998 to 16.6 million);

  • an increase of 12.7% in the gross value-added of the agricultural sector;

  • an increase of 5.4% in total agricultural imports (intra- plus extra-Community) and of 4.9% in exports.

With almost 10 million people employed, agriculture in the Central European countries is a considerably larger source of jobs than in the EU. Productivity, measured in terms of valued-added per person employed, is, however, only 9% of the level in the Union. Nevertheless, in relative terms, the contribution of agriculture to GDP as to employment is much larger in the CECs - particularly in Romania and Bulgaria - than in the EU (Table 7).

Although data from current Agricultural Economic Accounts in the CECs make accurate comparisons difficult, it is possible to identify broad differences between the candidate countries and the Union.

  • In Poland and Romania, very low labour productivity reflects the large proportion of micro and small farms in total production combined with a relatively high density of labour per hectare. These types of structure, inherited from the pre-transition period in Poland and to a lesser extent Romania, reflect the presence of considerable labour intensive and semi-subsistence agriculture. Bulgaria is perhaps more polarised between small-scale labour-intensive farming and large-scale extensive cereals production.

  • In Hungary, the Czech Republic and Slovakia, labour productivity is higher reflecting the importance of large structures and the development towards more market oriented farms. In Slovenia levels of value-added are significantly increased by market price support policies.

  • The Baltic states lies somewhere between the two groups. Here recent low levels of productivity reflect the significant recessions and restructuring undergone in recent years.

In all cases, low productivity per hectare and per labour unit correspond to a high labour/capital ratio in comparison with the European Union and a comparatively low level of input use (see Graph 20). This reflects relative factor costs in the CECs as well as barriers to investment. In the Czech Republic, Poland and Hungary, capital per employee is no more than a third of that in France, if commercial holdings alone are taken into account. This falls substantially, particularly in Poland, if smaller holdings are included. In these countries, national statistics suggest that there is perhaps one tractor for every 20 agricultural workers.

Structures and subsistence farming

A common feature of countries where, before 1989, agriculture was largely collective is the gradual closing of the gap between, on the one hand, large collective or state-owned holdings and, on the other, very small private units (like those in mountain areas in Romania). The average size of remaining state-run holdings, including private cooperatives, is declining considerably, while that of private holdings is gradually increasing.

In Poland and Slovenia, where the private sector was already important before the transition in 1989, structural change is less pronounced. In Poland, the size of private holdings is only increasing slightly as the land from state-owned farms is privatised, though, in general, their small size represents a handicap in the longer term (See Table A.28 ,in Annex).

Increasingly, this distinction between small private holdings and large collective farms is being replaced by a dualism between market oriented competitive farms and a semi-subsistence sector. This latter is a factor contributing to low levels of productivity, lack of market orientation and resistance to structural change in a number of candidate countries. Although no standard definition of subsistence farming exists, it is generally associated with small holding size, family agricultural work as a part-time or supporting activity, high levels of on-farm consumption as well as an important role in extended family structures.

Subsistence farming is not a new phenomenon in the CECs. Household plots played an important role in the pre-transition period. However, its scale has increased since transition, reflecting a response to economic and social adjustment. The importance of subsistence farming varies markedly between countries remaining significant in Romania, Bulgaria and Poland. In contrast, it plays only a small role in Hungary, the Czech Republic and Lithuania.

Subsistence farming defined in these terms reflects therefore both historical factors but equally rational responses to high levels of rural unemployment, low incomes and social security systems. For example, more than a million Polish's farmers receive an agricultural pension, absorbing the major part of the agricultural budget. Such social security transfers play an important part in agricultural household income and could easily account for more than half of total agricultural household income in some countries. Subsistence farming can therefore play an important role in overall family welfare and, equally, in absorbing labour where alternative sources of employment are scarce. However, rural poverty remains a considerable problem in the CECs (see Box in Part 1, Social cohesion).

Market Support Policies

In general, data from the OECD suggest that current market support policies in the CECs, with the exception of Slovenia, and to a lesser extent Poland, have had little effect on agricultural value-added and sectoral income. It should be emphasised that due to the acknowledged limitations of these data, conclusions should be seen as indicative of broad trends. On average, the CECs have moved from a position of negative market support over the past years to a situation close to neutrality. This, however, may hide implicit market support due to significant differences in quality between domestic production and world markets, particularly in the livestock sector. On the other hand, it also reflects price competitiveness and (in some cases) policy choices to maintain low prices, particularly in the cereals sector. In this respect, cereals and oilseed play an important role in final agricultural output, particularly for large producers such as Hungary and Romania. Macroeconomic restructuring and exchange rates trend play an equally important role, particularly in Bulgaria and Romania. The picture in most countries is, therefore, of low levels of support gradually increasing over time, with the exception of Slovenia which has levels of support similar to those in the Union.

When the structure of market price support is examined by hectare or livestock unit (see Graph A.40, in annex), levels of support for oilseed and cereals are generally low or negative in the candidate countriess with the notable exception of wheat in Poland. Despite of considerable policy intervention, price support in the livestock sector has not raised domestic prices significantly above world prices, although there is an implicit transfer due to quality differences particularly for beef and pork. The only areas of major ,support are for sugar and milk. Here, as in the EU, support for sugar is relatively concentrated. It is notable that the application of EU prices to the CECs would increase levels of market price support without raising them to EU levels. This reflects lower yields per hectare and per livestock unit.

The effect of current market support policy in the candidate countries on national cohesion and farm incomes in most countries is relatively small given the low level of transfers from consumers to producers, with the exception of milk and, perhaps, sugar. However, there are significant transfers in Slovenia and in some sectors in other countries such as Poland. As prices move towards EU levels and production increases, these transfers will also increase, with corresponding effects on income, although it is not unclear how this will affect the semi-subsistence sector.

Prospects

Enlargement towards to Central Europe gives rise to a number of challenges as regards national and regional disparities in the Union. The overall impact on EU15 growth and employment is likely to be small. But achieving productivity gains in the CECs and dealing with the consequences of such gains in rural areas, particularly from labour adjustment, is very important. Agricultural and rural development policies are particularly significant here, given the important role of agriculture in many areas.

Enlargement will clearly widen disparities in the EU between rural areas and between these and urban areas. Price convergence between the CECs and the EU15 will increase transfers from consumers to producers in the CECs, but these positive effects on farming income may be offset by a range of factors undermining the competitiveness of CEC agriculture (eg real exchange rate appreciation). It should be noted, however, that these processes reflect broader economic adjustment and are already underway in the pre-accession period.

Many CECs are characterised by a dualistic structure of farms. For the more market oriented farms, the key challenge would appear to be the need for better functioning factor markets. On the other hand, the small size of holdings farm structures and high levels of employment in agriculture pose particular challenges for improving the efficiency of the sector, particularly since the social costs of so doing appear to be high.

In a number of countries, and particularly in Romania and Bulgaria, where employment in agriculture has increased in both absolute and relative terms, there has been migration from urban to rural areas as economic conditions have worsened. Agriculture has, therefore, been important in absorbing the shock and has enabled essential needs to be met. The small size of farms, low labour productivity and incomes, lack of alternative employment and reliance on subsistence farming can be contributory causes of rural poverty. Nevertheless, subsistence farming can also play an important role in maintaining agricultural and rural household income and may, in some cases, complement social security or, indeed, substitute for labour market measures. At the same time, however, subsistence farming has created a problem of under-employment, which remains to be tackled in the future by attempting to achieve a more balanced and diversified development of the areas in question. In this respect, the creation of alternative sources of employment and functioning labour markets would appear as important as improved general skill levels.



BACK
  1. For preliminary estimates, see First Report on Economic and Social Cohesion.
  2. Economic size is conventionally expressed in terms of the European Size Unit (ESU), corresponding to a standard gross margin (SGM) - the difference between gross agricultural output and the costs associated with that output - of EUR 1200. The Farm Accountancy Data Network considers "very small" holdings to be those below 4 ESU.

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