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.
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
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
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,
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
- 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
Over the past few years, a number of different models of agricultural
production have developed, distinguished by the their structure, methods
- 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
- 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
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
- 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
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
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
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.
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.
- For preliminary estimates, see First Report on Economic and Social
- 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