A (very) short history of the Common Agricultural Policy at 60

The Common Agricultural Policy is 60 years old! So, this month, we look back on its evolution over those six decades, and ask: does it still have the means for its ever-changing and increasing ambitions?

Food security and fair farmers’ incomes post WWII

The Common Agricultural Policy is remarkable in that it was the first and for a long time the only common policy with a common budget in the European Community.

Immediately after World War II, agriculture was a significant part of the European economy, but its productivity was poor, farm incomes were much lower than other sectors’, and availability of food for citizens was inadequate. The CAP was introduced in 1962 with a number of clear interlinked objectives: increasing agricultural productivity, including by improving the living standard of farmers, guaranteeing the availability of food supplies at reasonable prices for consumers, stabilising volatile agricultural markets, securing the supply chain and levelling the competition playing field across the countries.

The first iterations of the CAP were very focused on economics, establishing a system of price and market supports. The main aim was to guarantee product prices for farmers, by protecting them from external competition through import tariffs and by engaging in market interventions to support falling market prices.

By the 70’s however, it became clear that while the CAP was good at improving food availability, it failed at lifting farm incomes. A move towards increasing cultivated areas and restructuring farms into larger units was the next stage – it was known as the Mansholt Reform, in 1970.

Mountains and lakes in the 70’s/80’s

The CAP became tremendously successful at increasing production because it gave farmers every reason to respond to incentives rather than market demand. This led to the accumulation of surpluses into intervention stores (the infamous butter/beef mountains and wine lakes), but also to a policy of subsidising exports to “dump” surpluses onto world markets.

It was in response to those huge milk powder and butter stocks as well as low dairy farm incomes that milk quotas were introduced in 1984.

From market interventions to direct farmer payments and rural development supports

In the early 90’s, with Ray McSharry as EU Commissioner for Agriculture, the first major reform of the CAP sought to redirect supports from markets and produce prices towards producers. Also, to address the lack of economic and employment opportunities and deteriorating social fabric of rural areas, around 1994, the concept of compulsory rural development support was introduced, which in the next reform in 2000 resulted in the creation of a second pillar to the CAP. The new rural development focus allowed for some greater targeting of supports towards those farming in more disadvantaged areas or with particular challenges.

The thing is, supporting markets and product prices through intervention purchases, processing subsidies and export refunds allowed to support farmers’ incomes with relatively low budgets. Shifting from market supports to direct payments required a significant increase in budget to provide comparable levels of income support. The enlargement of the EU to the East also required higher budgets from the early 2000’s. CAP dominated the EU global budget for many years, peaking at around 66% in the early 80’s. It is predicted to only represent 31% for the 2022-27 period, and as a cost relative to EU member states total GDPs, it will have fallen over the same period from 0.54% to 0.32%. It is not so much that the EU financial commitment to CAP reduced – it first increased, then stabilised – but more funding was directed towards other policy priorities, including Single Market, innovation and digital, cohesion, migration, security and defence, international relations and European public administration.

Source: EU Commission

WTO and decoupled payments

The Doha Round of WTO negotiations in the early 2000’s focused on member countries’ agricultural policies and supports in an effort to level the global competitive trading field. The principle was that some supports to agriculture should be reduced, some (e.g. export refunds) eliminated, while direct supports to farmers, to be exempt from reduction commitments, should not encourage production increases. This is why EU payments to farmers became largely decoupled from any requirement to produce and paid per hectare.

Those decoupled direct payments were first calculated based on historical payments including cattle premiums (headage and slaughter) or tillage premiums, received by farmers in the period 2000 to 2002. Those were then applied to the farm area as a per hectare payment different for each farmer, but representative of their farm activity in those reference years. Various cuts, tweaks and the application of convergence – partial or total – have weakened that historical link considerably.

The Lisbon Treaty added a number of legislative areas for co-decision by the EU Parliament. This included agriculture, so that the 2013 CAP was negotiated utilising the full co-legislator process. Tripartite negotiations between the EU Commission, Council of Agriculture Ministers and the Parliament slowed down the decision-making process and made it much more complex.

From the point of view of EU democracy, the inclusion of the EU Parliament arguably contributed to widening the debate on CAP and adding more societal considerations beyond economics and technical agricultural requirements. It was also important to make the CAP policy more defensible with taxpayers and voters in Europe.

In more recent iterations of the CAP, social and environmental considerations have been added to, some might say even taken over from, the economic objectives of the policy.

The 2013 reform created ‘entitlements’ – the direct payment on each hectare that an eligible farmer is entitled to. In an effort to redistribute payments more equitably towards smaller and medium size farms, the concept of convergence was introduced by Dacian Ciolos’s Commission back in 2010 and introduced in 2013. It means that entitlements below the national per hectare average are to be increased, and those above average reduced, to narrow the differences between them. In some member states this was taken to the full equalisation of per hectare entitlements, achieving full “flattening” between 2015 and 2019 (UK, Germany, Denmark among others). Others, like Ireland, went only part of the way.

The fact that the EU average distribution of Direct Payments was imbalanced (80% of payments going to 20% largest beneficiaries, see graph below), while not representative of all countries (Ireland, at 56%, is among the most equitable), was seen as symptomatic of the inequity of the system. This provided much of the impetus to continue with convergence and other forms of redistribution in the 2023-27 CAP.

Source: EU Commission

The new policy also sets out to limit maximum per farmer payments with a degressive maximum cap of €66,000 to €100,000 to further redistribute some of the payments towards smaller farmers.

Favouring succession and young farmers has been another social aim of recent CAPs. The early retirement and new entrants’ installation schemes of earlier years have been replaced by schemes favouring “generational renewal”. These include top ups to single payments for young farmers (another form of redistribution) and higher grant rates for on-farm investments, among other elements.

With the deterioration of the environment, the climate and the loss of biodiversity becoming urgent global priorities, the CAP measures expanded to include environmental aspects and conditions, starting from the early 2000s.

The environmental focus strengthened rapidly, not least to ensure the defensibility and sustainability of the CAP budget as societal expectations from the public (voters, taxpayers, consumers) evolved. Payments were restructured from 2013 to include a 30% greening element, which made crop rotations and maintenance of permanent grassland compulsory, while requiring the creation of ecological focus areas of least 5% of the arable area. CAP since 2013 has required farmers to respect Statutory Management Requirements or SMRs (typically around animal and plant health, animal identification and welfare) and to keep land in good agricultural and environmental conditions (GAECs), including providing buffer strips near water courses, soil cover and retaining landscape features and habitats.

To receive 100% of their Direct Payments, farmers have had to meet the “cross-compliance” requirements for both types of measures. Compliance is verified through inspections, some unannounced, and farmers who fail to meet requirements stand to lose up to 100% of their basic payment.

The new 2023 CAP sets an even higher bar on compliance for farmers to secure their basic direct payment, and for the first time, through the Eco-Scheme, makes an element of the Pillar I payment conditional on participation and results delivery.

Greater autonomy for member states or ‘subsidiarity’… but within limits

One of the innovations of the 2023-27 CAP is the introduction of National Strategic Plans covering both Pillar I and Pillar II payments and measures. In the past, only the Rural Development measures (Pillar II) involved the development of a National Plan. In theory at least, this approach is meant to allow member states to better adapt implementation to national realities.

However, the ground rules were agreed in quite a bit of detail between the EU Commission, Parliament and Council of Ministers, and National Plans are liable to vetting by the EU Commission, to ensure those European environmental ambitions are not watered down by local politics. Hence, earlier this year, the EU Commission sent the Irish Plan back to the Department of Agriculture to make a number of changes to better meet its expectations.

Dependence of farmers on direct payments

While increasingly conditional on the delivery of public goods, including environmental benefits, we cannot forget that Direct Payments to farmers continue to fulfil a crucial role of income support which the marketplace does not play. Many farmers produce food at a loss, as processors and retailers compete in a global marketplace, and the Direct Payments is vital to offset some of the difference.

As we pile more and more expectations on farmers, it is easy to forget just how dependent farmers’ incomes are on EU direct payments. In 2021, a notably good year for Irish family farm incomes (FFI) which saw increases in all sectors’ incomes of between 11% (cattle other) and 74% (tillage), direct payments were nonetheless 90% of sheep and 139% of cattle rearing farmers’ incomes. In previous years, those figures have mostly exceeded 100% for sheep, and 150% for cattle rearing systems.

More to do with less money?

The table below, from the July 2019 Basic Payment Scheme Payment Entitlements Overview published by the Department of Agriculture, Food and the Marine, shows that the number of entitlements in Ireland have come down from 4.53 million in 2005 to 4.44 million by 2019. The slight increase between 2015 and 2019 reflect the allocation of new entitlements created for the National Reserve, funded from a reallocation of existing funds. It should also be noted that in the period between those two years, the amount includes a greening payment which comes with additional environmental requirements.

The projection for 2027 – the end of the next CAP period – is for an average Irish entitlement value of €158.68, before the inclusion of a redistributive payment (CRISS) which the DAFM Strategic Plan predicts would add an extra €43.14/ha for the first 30 ha. So potentially an average entitlement value of around €201.82 for smaller farms. Farmers who engage with the measures of the Pillar I Eco-Scheme will pick up a few 10’s of Euros per hectare. But it is unclear whether the Eco-Scheme payments will cover the additional costs involved. So, in just over 20 years, the value of farmers’ entitlements – and therefore payments – could be down by as much as a quarter, but their obligations to receive 100% of those payments will have increased significantly.

Source: DAFM

Greater environmental delivery from European farming is undoubtedly necessary in light of the climate and biodiversity emergencies. But the EU is expecting farmers to act with lower CAP payments, which are already committed to supporting their often-vulnerable incomes. This runs counter to the concept of just transition. EU talks of developing a carbon farming framework allowing for the remuneration of farmers, or payments for ecological services have yet to deliver anything tangible. In the face of a climate emergency, failing to provide additional supports could prevent farmers from delivering fully on their climate mitigation and GHG reduction targets.

Rural development payments in Pillar II make an important additional contribution to the income of those farmers who can and do participate. Rural development funding is the one area where member states can co-finance measures, which allows to leverage greater support for desirable, locally relevant environmental measures in particular. And these measures are very important to the economic sustainability of farmers, especially in more disadvantaged regions, never mind their environmental performance.

But agri-environmental schemes are not cost neutral, and in the new CAP payments will be far more conditional on results obtained, not just actions undertaken – this is a good thing, as it helps farmers focus on impactful actions, but it leaves farmers taking a greater risk.

Can the one budget really do it all?

The Russian invasion of Ukraine has brought the issues of food security and food affordability front and centre in the western world. If some did not realise it before, they should now understand that food production capacity cannot be taken for granted.

If farmers are to ensure plentiful food supplies for growing global demographics while adopting, at speed and at scale, the necessary farm practices and/or technologies to reduce emissions and improve their environmental impact, they will need to be supported financially, and technically.

The CAP budget, needed to compensate farmers for selling their products often below production costs, will only go some of the way to achieve this.

Before we go… a cautionary tale from New Zealand

In the last week, I came across a sad tale which illustrates the risks inherent in farmers adopting new, desirable farm practices with the best of intentions, but without the right kinds of supports and research.

Linzi and Jeff Keen are a couple of award-winning Kiwi sheep farmers with strong environmental credentials and a track record of commitment to sustainable farming practices. They decided to go further in their green farming journey and adopt regenerative practices to further improve the environmental condition of their farm. Without appropriate support and advice specific to local soil conditions, they ended up exhausting nutrients from their soil, with dire consequences for the health and welfare of their flock. They ultimately pulled the plug on the experiment, but not before having lost their shirt.

A tough, incredibly stressful story for this young couple, but one which should make us all reflect on how we expect farmers to deliver on food production and the environment.

Read Linzi and Jeff’s story here: https://www.newsroom.co.nz/green-dream-pushes-farmers-into-red

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