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The famous reform of the European Common Agricultural Policy system and Buffer Stock Schemes

Updated on June 19, 2013

CAP or Crap?

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The Common Agricultural Policy (CAP) is the European Union's biggest system. It represents a collaboration of agricultural subsidies and programmes. It came into being in the late 1950s and early 1960s, and was reformed last in 2007. It was first initiated at the Treaty of Rome, when all nations of the EU

had been free for over 10 years of the food shortages connected with World War II

The initial CAP came into force during 1962. From 1968 to 1992 was a period of successful reforms, starting with the Mansholt plan and ending with the Macsharry reforms. The period to 2007, when the last reform was instigated, are known as the modern reform period. A buffer stock scheme, also known as the intervention storage, is a one time attempt to use commodity storage to try to stabilize prices in an entire economy, but used more often in an individual market. In summary, buffer stock schemes work on the basis that commodities are bought, which are in surplus in the market or economy, and then stored for a indefinite period of time, and then sold when there are economic shortages. There are two types of buffer stock schemes: Two-price and single price.

Graph 1 depicts a two-price buffer stock scheme. Two prices are decided upon – Maximum (ceiling) and Minimum (floor) . If the price of the commodity

drops close to the floor price the scheme operator, in most cases the government, begins to buy up stock in order to prevent a further decrease in price. Similarly to this,

if the price rises, the operator depresses the price by selling its holding. During this time the commodity must be stored or kept out of the market; one way of doing this is by destroying it. In the case of storage stabilization, the overall price of the product may also be stabilized to prevent inflation. Taking the market for maize, for example, if the market is stable and the harvest for maize is normal (S1) the operator (the government) does not need to act due to the fact that the price is within the pre-allowed range, again decided by the operator. In a year when the price rises (S2) the government must sell its stock to keep the price within its normal range. Likewise if the price falls (S3), the government must buy up wheat in order to stop the price from collapsing. The end result is nearly no fluctuation in price, and thus a stable market or in bigger cases, the economy.

In graph 2 a single scheme is presented, where the floor and ceiling price are the same, also known as a single fixed price. In order for this to work the normal supply has to be regulated and changed to keep up with any trends. Taking the example of wheat in graph 2. S3 and S2 show the supply of wheat at high and low respectively, S1 shows the normal supply. Again in high years the government buys grain, and in low years sells grain. Thus the price is stabilized at P3 and does not fluctuate between P2 and P1. An example of the use of buffer stocks or ever-normal granary was the use of such supplies during the wheat and grain crisis in the United States of America in the 1920s and 1930s.

Because of CAP, not only people gain, but also many institutions, the main one being the whole European Union. The best example of gains that people receive, are the direct subsidies for farmers, to encourage them to grow crops which are eligible to receive subsidies and funding. But after a 2005 reform, they are now allotted based on the area of cultivated lands, and also for environmentally friendly farming techniques. The change was implemented to give farmers more freedom and also combat climate change and environmental disasters. A good example of how the EU gains from the CAP is that there are import levies on specific products that are imported into the European Union. The EU has set these levies in order to try and raise the World Market price for these specific goods to a target EU price. Another example how member nations of the EU gain is that a number of countries are allowed to trade specific goods between each other without tariffs. Such policies increase trade and encourages multinational economic development with the European Union.

The CAP is funded from the budget of the European Union and every year is composed of a different percentage of the whole. In 1984 the CAP budget was a massive 71% of the whole EU budget, in contrast the projected budget for 2013 is only 39%. All nations contribute to the EU budget, and thus to the CAP funding. Although Germany is the biggest contributor to the total EU budget, France is the biggest contributor to the CAP covering around 20%, while Germany and Spain cover 13% each. Other countries that comply together 20% are Britain and Italy, covering 9% and 11% respectively.

However many critics argue that the opportunity costs of these, nearly 40% of the Europe’s budget are huge and can be tremendously valuable. One of the biggest criticisms is that the CAP has been labeled as “anti-development” due to the fact that it prevents or discourages developing nations that are mainly agricultural to export to developed countries within the European Union and CAP affected nations, halting their exports of agricultural produce and stalling their development. Another big criticism is that the amount of people that benefit directly from the Common Agricultural Policy are very few, compared to the massive amount of funds. Only between 5% and 7% of Europe’s population are employed on farms, with that number ever decreasing. Another negative factor is that agriculture covered only 1.6% of the GDP of the EU, a very small amount for the funding that is invested in agriculture. These funds that comply the CAP’s budget may be used in many other problematic areas, within the European Union, especially with regards to the less developed nations such as Bulgaria and Romania, and issues such as healthcare and environmental problems.

The quote “The CAP represents the best use of the EU’s scarce resource” has both negative and positive sides to it. It is true, and also a great issue that one of the scarcest resources within the European Union is agriculture considering the small area that Europe actually covers, and also the percentage of that area which is agricultural (20.5%) and arable (12.1%) land. Although the CAP represents the best use of the EU’s scarce resource, it is not effective in a globally politically positive way. It does not allow the import of agricultural produce from developing countries, which would aid the countries in their development and economic growth, and its budget consumes a huge proportion of the European Union’s complete budget, leaving great space for many and vast opportunity costs.

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