Q&A: Common Agricultural Policy

The Common Agricultural Policy is regarded by some as one of the EU's most successful policies, and by others as a scandalous waste of money.

A series of reforms has been carried out in recent years, the most significant being the Single Payment Scheme introduced in 2003, intended to break the link between farm aid and production.

In the latest reforms, announced in November 2008, farmers are to have more of their subsidies for food production diverted towards rural development. Milk quotas will be boosted before being scrapped in 2015.

Instead of paying farmers to produce more, the EU now makes payments conditional on farmers meeting environmental and animal welfare standards and keeping their land in good condition.

What is the CAP?

How much does it cost?

What will the latest reforms do?

Who gets the money?

How is the money spent?

What products are subsidised?

How many people benefit?

WHAT IS THE CAP?

Agriculture has been one of the flagship areas of European collaboration since the early days of the European Community.

In negotiations on the creation of a Common Market, France insisted on a system of agricultural subsidies as its price for agreeing to free trade in industrial goods.

CAP OBJECTIVES To increase productivity To ensure fair living standards for the agricultural community To stabilise markets To ensure availability of food To provide food at reasonable prices From Treaty of Rome, article 39

The Common Agricultural Policy began operating in 1962, with the Community intervening to buy farm output when the market price fell below an agreed target level.

This helped reduce Europe's reliance on imported food but led before long to over-production, and the creation of "mountains" and "lakes" of surplus food and drink.

Click here to see the beef and butter mountains

The Community also taxed imports and (from the 1970s onward) subsidised agricultural exports. These policies have been damaging for foreign farmers, and made Europe's food prices some of the highest in the world.

European leaders were alarmed at the high cost of the CAP as early as 1967, but radical reform began only in the 1990s.

The aim has been to break the link between subsidies and production, to diversify the rural economy and to respond to consumer demands for safe food, and high standards of animal welfare and environmental protection.

Critics say the subsidies still distort world markets and harm farmers in developing countries, by guaranteeing prices for farmers in the EU.

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HOW MUCH DOES IT COST?

The CAP was a battleground in the dispute over the EU's 2007-13 budget. The UK demanded guarantees of reduced farm spending before it would agree to cuts in its rebate.

The cost of the CAP can be measured in two ways: there is the money paid out of the EU budget, and the cost to the consumer of higher food prices. The latter cost is about 50bn euros (£39bn) annually, the Organisation for Economic Co-operation and Development (OECD) says.

The EU spends about 43bn euros (£34bn) annually on the CAP, about 88% of it direct aid. The rest is market price support - public purchases to protect farmers from a drop in prices. In addition, about 7.7bn euros is spent on rural development.

In 2006 the CAP accounted for 45.4% of the EU's budget.

The CAP budget has been falling as a proportion of the total EU budget for many years, as European collaboration has steadily extended into other areas. It has been falling as a proportion of EU GDP since 1985.

EU member states agreed in 2002 that expenditure on agriculture (though not rural development) should be held steady in real terms between 2006 and 2013, despite the admission of 10 new members in 2004.

This means that the money paid to farmers in older member states is beginning to decline. Overall, they will suffer a 5% cut in the 2007-13 period.

The addition of 10 new member states in 2004 plus Bulgaria and Romania in 2007 added seven million more farmers to the existing six million in the old 15-nation EU.

Under the European Commission's budget proposals for 2007-13, agricultural spending will peak in 2008/2009, in nominal terms, then decline until 2013. By that date, the commission says, the share of traditional CAP spending - excluding rural development - will have almost halved.

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WHAT WILL THE LATEST REFORMS DO?

More subsidies will be transferred to rural development and conservation, further reducing the traditional EU incentives for farmers to produce.

Milk quotas will be raised initially, but later scrapped, in the biggest overhaul of farm policy since 2003.

The reforms, covering the period 2009-2013, will make farmers spend 10% of their EU subsidies on projects to improve the countryside - double the current amount. The rules apply to farms that receive at least 5,000 euros (£4,208; $6,312) in annual EU subsidies.

In order to cushion the blow to dairy farms the milk quotas will rise by 1% a year from 2009, before they expire in 2015.

Italy, which has overshot its milk quotas, will be allowed to implement the full quota increase from next year.

The arable "set-aside" policy will be scrapped - but that decision is controversial. Farmers have been leaving some land fallow, to prevent surpluses accumulating, but that land will now be put back into production. Conservationists say set-aside has been very beneficial for wildlife.

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WHO GETS THE MONEY?

France is by far the biggest recipient of CAP funds. In 2006 total CAP spending (including rural development) was 50bn euros, of which France got 10bn (20%), followed by Spain - 6.6bn (13%), Germany - 6.5bn (13%), Italy - 5.5bn (11%), the UK - 4.3bn (9%), Greece - 3bn (6%) and Republic of Ireland - 1.7bn (3%).

The largest per capita beneficiaries from the CAP are Greece and Ireland. While they are big recipients of CAP funds, in 2006 agriculture accounted for just 3.1% of GDP in Greece and 0.9% in Ireland.

In 2006, France was the biggest agricultural producer in the EU, accounting for 18.6% of total farm production, ahead of Italy (13.2%), Germany (12.6%) and Spain (11.4%). The UK accounted for 6.4%.

The new member states began receiving CAP subsidies in 2004, but at only 25% of the rate they are paid to the older member states.

However, this rate is slowly rising and will reach equality in 2013. Poland, with 2.5m farmers, is likely then to be a significant recipient of funds.

Most of the CAP money goes to the biggest farmers - large agribusinesses and hereditary landowners.

It has been calculated that 74% of the funds go to just 20% of EU farmers, while at the other end of the scale, 70% of farmers share just 8% of the funds. The Commission says this is heavily influenced by the funding for farms in the new member states.

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HOW IS THE MONEY SPENT?

Until 1992, most of the CAP budget was spent on price support: farmers were guaranteed a minimum price for their crop - and the more they produced, the bigger the subsidy they received.

The rest was spent on export subsidies - compensation for traders who sold agricultural goods to foreign buyers for less than the price paid to European farmers.

CAP REFORMS 1992: Direct payments and set-aside introduced 1995: Rural development aid phased in 2002: Subsidy ceiling frozen until 2013 2003: Subsidies decoupled from production levels and made dependent on animal welfare and environmental protection 2006: Reform of sugar subsidies 2008: CAP "health check" - plan to scrap compulsory land "set aside" and milk quotas

But in 1992 the EU began to dismantle the price support system, reducing guaranteed prices and compensating farmers with a "direct payment" less closely related to levels of production.

Cereal farmers were obliged to take a proportion of their land out of cultivation in the set-aside programme.

In 1995, the EU also started paying rural development aid, designed to diversify the rural economy and make farms more competitive.

Additional reforms in 2003 and 2004 further "decoupled" subsidies from production levels and linked payments to food safety, animal welfare, and environmental standards.

A reform of the EU sugar regime was adopted in 2006. The guaranteed price of sugar was cut by 36%, following protests from developing countries seeking to export sugar to the EU. The European Commission wants EU sugar producers to cut their output by 6m tons by 2010.

In international trade negotiations, the EU has offered to cut all export subsidies from 2013, as long as other countries reciprocate by lowering tariffs on industrial goods. Big cuts in import tariffs were discussed in the latest trade round, but no breakthrough was achieved.

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WHAT PRODUCTS ARE SUBSIDISED?

The crops initially supported by the CAP reflected the climates of the six founding members (France, Germany, Italy and the Benelux countries).

Cereals, beef/veal and dairy products still account for much of the CAP funding, but the southern enlargements of the 1980s brought new crops into the system.

Producers of milk and sugar are subject to quotas, which they must not exceed.

Wine is a special case: the EU provides funds to convert surpluses into brandy or fuel - a process known as crisis distillation - and payments to replace poor quality with high quality vines.

In the 2006 CAP budget, EU subsidies in the form of market support totalled 8bn euros. Of that, 1.5bn was spent on sugar, 1.5bn on wine, 1.4bn on fruit and vegetables, 1bn on dairy produce and 935m on textile plants, such as cotton.

The EU area covered by cereal crops is set to increase by 5.7% in 2008, compared with 2007. This is linked to the current high prices for cereals and the reduction in "set aside" land.

In line with the EU sugar reform, the area under sugar beet is expected to decrease by 6.8% in 2008.

Doubts have been raised about the policy of encouraging biofuel production - and that means the area under rapeseed is set to decrease by 3.1%.

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HOW MANY PEOPLE BENEFIT?

Critics argue that the CAP costs too much and benefits relatively few people.

Only 5% of EU citizens work in agriculture, and the sector generates just 1.6% of EU GDP.

Supporters of the CAP say it guarantees the survival of rural communities - where more than half of EU citizens live - and preserves the traditional appearance of the countryside.

They add that most developed countries provide financial support to farmers, and that without a common policy some EU countries would provide more than others, leading to pressure for trade barriers to be reintroduced.

According to the European Commission, the CAP is the only policy funded totally from the EU budget. Other policies cost much more, but are funded out of national budgets, it argues.

The importance of farming to the national economy varies from one EU country to another. In Poland, 18% of the population works in agriculture, compared with less than 2% in the UK and Belgium.

The number of people working on farms roughly halved in the 15 older EU member states between 1980 and 2003.

About 2% of farmers leave the industry every year across the EU, though falls of more than 8% were registered between 2002 and 2003 in the Czech Republic, Hungary, Poland, Slovenia, Slovakia and the UK.

At the same time, the average age of farmers is rising. In 2000, more than half of individual farmers in the 15 countries that then made up the EU were aged 55 or over.

Farmers and their employees often work very long hours for little money. Many farms would be unprofitable if EU subsidies were withdrawn.

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