Why Intervene in the Agriculture Markets?
the past most of the population were employed by agriculture.
Labour has been very slow to leave agriculture which has resulted for
most of the sector incomes which are below those of other occupations.
This was deemed to be inequitable, so the government used social policies to try and raise them.
economic reason for intervention is that prices are inherently unstable in a
free market. Price elasticities
of demand for food products are low because they are a need.
This means that a very small change in quantity will lead to a large
change in price. Supply is
perfectly inelastic in the shortrun as farmers are unable to increase supply
of foodstuffs until the following year.
Unstable prices fail to signal to producers what consumers really
want, therefore stabilising prices will lead it improve economic efficiency.
This can also have a detrimental effect on the disposable incomes of
farmers and consumers.
is also a strategic argument for intervention, as a secure food supply is
essential to any nation.
The objectives of CAP
following aims were highlighted in the Treaty of Rome:
the availability of supplies.
reasonable prices for the consumer.
formal title for the executive body of CAP is the European Agriculture
Guarantee and Guidance Fund (EAGGF).
different agricultural goods are treated in different ways, the basis of the
system is in the setting of a target
price for each product. Different
target prices are set for each area of the EU.
This is not set with reference to world prices, but is based upon the
price which is needed to cover costs, including a profit.
The EU then sets an intervention or guaranteed price for the product
in that area - this is usually about 7-10% below the target price.
If the price is in
danger of falling below the guaranteed price then the commission will
intervene to keep the price above that level.
This is done for all areas in the union.
The guaranteed price acts as a floor below which the price cannot
this system of guaranteed prices is to work then EU farmers must be protected
from low priced imports from overseas. This
is done by the use of tariffs. This
will not need to cover exactly the difference between the world price and the
target price as the importer incurs transport costs. The tariff must therefore be large enough to raise the import
price at the border to the target price minus transport costs - this is known
as the threshold price.
This calculation takes place in the highest cost area of the EU, this
means that the import tariff will more than protect the producers in areas
with lower target prices.
should the EC producer wish to export an agricultural product, then an export
subsidy will be paid to bring the receipts up to the intervention price.
of the CAP
downgrading of the guidance section has meant the continuance of many small
high cost farmers with correspondingly high target prices.
High target prices have in turn encouraged excess supply in a number
of products. This has required
substantial purchases by EAGGF to keep the prices at the target level. These
purchases create a number of problems of storage, which can only be reduced
by selling at prices well below the intervention price.
This puts a further strain on the budget. Many agricultural countries therefore suffer the effects of
the world price for their good being depressed in addition to the lack of
access to the European market. A
study by the Australian Bureau of Agricultural Economics in 1985 suggested
that CAP surpluses reduce the price of wheat, meat and sugar by between 9%
30 years of the policy has seen the EU transformed in markets such as wheat,
where it used to be a net importer to a situation now where it is the second
largest exporter after the USA. This
situation came about from the mid 1970s and has led to an increasingly costly
policy as the USA has tried to recover sales lost to EU farmers.
Their export enhancement programme has had the aim of winning back
sales to selected markets by offering extra subsidies.
The effect of this subsidy war has been to lower the world price in
many different agricultural goods. This
problem has been amplified by the fact that production has been rising at a
faster rate than consumption. Many
farmers are also paid large sums of money to not grow anything, obviously
this demonstrates there is a large amount of excess capacity (see following
we have seen a series of measures taken to try and reform the CAP, involving
both price and output measures they have had relatively little impact.
This has meant that within the union there have been many budget
we have seen it is not only the EU which has a costly system of protecting
domestic agriculture. An OECD
report estimated that the cost of this protectionism ran at $53 billion for
the EU, $33 billion for Japan and $32 billion for the USA.
the Uruguay round of GATT talks there was a willingness to discuss a
withdrawal of agricultural subsidies and to negotiate reductions of tariffs
hoped the following points would be implemented, however to date, they have
yet to be achieved:
allow market signals to influence agricultural production through a
progressive and concerted reduction of agricultural support.
immediate need to prevent yet greater market imbalances by reducing the
guaranteed prices and other production incentives.
production restrictions or other interventions in markets should be
implemented in ways that allow markets to work better.
income farmers would be
best helped through direct income support rather than by price
guarantees or output related assistance.
under pressure after the Uruguay round of the GATT talks the MacSharry
reforms were agreed to lower the level of support provided by the EU.