This article describes changes to the EU Common Agricultural Policy (CAP) and the different views to these changes. It deals with the economic principles of minimum prices, subsidies and buffer stocks.
The Common Agricultural Policy (CAP) is an example of a minimum price buffer stock scheme for agricultural products to prevent a “market crisis”. A minimum price is a guaranteed level of price for goods and services. The aim of a minimum price is to ensure that producers of goods and services with fluctuating prices have stable incomes. The high prices also encourage production. Subsidies are also given to farmers. These are “handouts to farmers” that increase supply by decreasing operating costs. This causes Supply to shift outwards. This creates a surplus (the quantity from Q1 to Q2). The EU eliminates this by buying up surplus. This shifts demand outward, creating a new equilibrium at the minimum price. An example diagram for wheat is shown on the right.
The EU stores the surplus as a buffer stock. When there is a supply shortage, they can release some of the surplus into the market. This allows the EU to stabilise prices in the event of an exogenous shock. Stability is created because prices and supply will always be constant through government manipulation of demand and supply. This allows for easier planning in relation to foodstuffs.
Despite the advantages brought from the CAP, there are many disadvantages.
Agricultural products are perishable, and need to be stored carefully. This is very expensive. If EU sold the surplus internationally to cover costs, it could distort market prices, seriously harming farmers in other countries. This might exacerbate “global food shortages” by forcing foreign farmers out of business.
In addition, the CAP is a form of government intervention. It distorts market forces, resulting in overproduction and inefficient allocation of resources. Moreover, the minimum price means that consumers have to pay more than they should for food, lowering standards of living. Because lower income groups are particularly affected, it has a regressive effect.
Without the CAP, resources supporting inefficient farming would be allocated to more important needs, based on market forces. This would prevent unnecessarily high food prices. Additionally, goods and service that people want can be made more available.
40% of the EU’s ï¿½100 billion-plus budget goes toward the CAP. Because the EU is a group of highly developed countries, most economic activity is unlikely to be in the Primary Sector. As such, the budget does not properly represent the economic needs of the EU. The significant volume of money could be spent in other ways. For example, the EU could promote tourism, improve healthcare, or assist developing countries with their food problems.
It is arguable, though, that because the priority is to “address global food shortages” the spending is reasonable. However, if the EU becomes the global provider of food, then other countries will never be self-sufficient. In addition, high levels of production are encouraged by continuous monetary payments. This could be achieved through other methods, such as improving technology. In the long term, the financial cost to the EU far outweighs the benefits. Furthermore, while minimum prices do guarantee supply and income to farmers, technological advancements mean we can now predict storms, drought or kill insects. Any possible supply shock can be reasonably predicted. This means buffer stocks are not as useful as they once were.
“Cutting red tape around aid payments” would also help deal with the “global food shortages”. By assisting foreign governments, the EU can also build strategic alliances.
Because of the above mentioned reasons, the CAP has an overall negative impact. The best solution would be to “plans aimed at slashing handouts to farmers”.
However, it is likely that because of the “decades-old system of EU farm subsidies” EU farmers are no longer competitive. If subsidies were cut, European farmers may find difficulty competing against foreign farmers. What the EU should do is slowly wean farmers off the CAP by reducing subsidies and the minimum price regularly. This would allow them to get used to a more competitive environment. Money saved could then be spent on research into improving efficiency to boost crop yields. This would fulfil the aim of reforms ensuring “European farmers will produce more and better products.”