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The EU’s CAP and the likely impact of a Doha Agreement
Lecture 24.
Economics of Food Markets
Alan Matthews
Why focus on Doha?Composition of operating surplus
in agriculture
Premia and arable aid
Market returns
Rural development payments
0
500
1000
1500
2000
2500
€ m
illi
on
Decoupling
WTO reduced protection
Rural development
Export Subsidies
• January 2003: EU initially offered to reduce aggregate expenditure limits by 45%– but in 2001/02 only used 35% of entitlement
• In July 2004 Framework Agreement, EU signed up conditionally to full elimination
• Importance of ‘credible date to be agreed’– Blair has called for end by 2010
• It may be that policy change will eliminate the commodity export surplus: but what about Non-Annex I goods, i.e. the food industry?
Domestic support – EU situation 2001 (before Mid-Term Review)
Amber Box US dollars
Bound AMS 65,383
Market Price Support 25,085
Direct Payments 12,117
less De Minimis 411
Current AMS 36,791
Degree of AMS Overhang 44%
Blue Box
$ Millions 21,262
% Value of Agricultural Production 7%
Green Box 19,452
Overall Distorting Support (ODS)
Bound ODS 87,056
Current ODS 58,464
Degree of ODS Overhang 33%
Market accessEffect on tariff cut on beef price
EU support price (basic intervention price)
€2,224
Estimated world market price €1,200
Current EU import tariff €1,922
Possible tariff cut which does not impact on EU market price (tariff overhang)
40%
Market accessEffect on tariff cut on beef price
EU market price €2,700
Estimated world market price €1,200
Current EU import tariff €1,922
Possible tariff cut which does not impact on EU market price (tariff overhang)
16%
Market accessEffect of tariff cuts on butter prices, €/tonne
Unfavourable world market
Favourable world
market
EU market price (2008) €2,247 €2,247
Estimated world market price
1,170 1,575
Current EU import tariff 1,896 1,896
Possible tariff cut which does not impact on EU market price (tariff overhang )
36% 54%
Market accessEffect of tariff cuts on SMP prices, €/tonne
Unfavourable world market
Favourable world market
EU market price (2008) 1,782 1,782
Estimated world market price
1,650 1,800
Current EU import tariff 1,118 1,118
Possible tariff cut which does not impact on EU market price (tariff overhang )
55% 64%
Effect of tariff cuts on white sugar price
EU support price (based on Commission July 2005 reform proposal)
€386
Estimated world market price €210
Current EU import tariff €419
Possible tariff cut which does not impact on EU market price (tariff overhang )
63%
Export Subsidies
• January 2003: EU initially offered to reduce aggregate expenditure limits by 45%– but in 2001/02 only used 35% of entitlement
• In July 2004 Framework Agreement, EU signed up conditionally to full elimination
• Hong Kong 2005 agreed to end date of 2013, with substantial progress in early years
• Only important now for dairy and sugar exports, but implications for Non-Annex I goods, i.e. the food industry?
The EU’s AVEs (ad valorem equivalents of specific rates), excluding sugar
Bands TariffLines
>100% 7480-99% 5160-79% 8240-59% 16620-39% 2800-19% 350Agra Europe, 22 July 2005
Note many of the highest tariffs are actually on processed foods (e.g. yogurt, whey) rather than bulk commodities
Comparison of EU banded offer with Swiss 60 formula
Market accessEffect on tariff cut on beef price
EU support price (basic intervention price)
€2,224
Estimated world market price €1,200
Current EU import tariff €1,922
Possible tariff cut which does not impact on EU market price (tariff overhang)
40%
Market accessEffect on tariff cut on beef price
EU market price €2,700
Estimated world market price €1,200
Current EU import tariff €1,922
Possible tariff cut which does not impact on EU market price (tariff overhang)
16%
Market accessEffect of tariff cuts on butter prices, €/tonne
Unfavourable world market
Favourable world
market
EU market price (2008) €2,247 €2,247
Estimated world market price
1,170 1,575
Current EU import tariff 1,896 1,896
Possible tariff cut which does not impact on EU market price (tariff overhang )
36% 54%
Market accessEffect of tariff cuts on SMP prices, €/tonne
Unfavourable world market
Favourable world market
EU market price (2008) 1,782 1,782
Estimated world market price
1,650 1,800
Current EU import tariff 1,118 1,118
Possible tariff cut which does not impact on EU market price (tariff overhang )
55% 64%
Effect of tariff cuts on white sugar price
EU support price (based on Commission July 2005 reform proposal)
€386
Estimated world market price €210
Current EU import tariff €419
Possible tariff cut which does not impact on EU market price (tariff overhang )
63%
Domestic support - EU situation 2001 (end Uruguay Round, before Mid-Term Review)
Amber Box US dollars
Bound AMS 65,383
Market Price Support 25,085
Direct Payments 12,117
less De Minimis 411
Current AMS 36,791
Degree of AMS Overhang 44%
Blue Box
$ Millions 21,262
% Value of Agricultural Production 7%
Green Box 19,452
Overall Distorting Support (ODS)
Bound ODS 87,056
Current ODS 58,464
Degree of ODS Overhang 33%
Fischler reforms (EU15):
• Switch 90%? of existing blue box expenditure into the green box
• Shift €4.2 billion (cotton, tobacco, etc.) from amber to blue/green
• Milk reforms strip €1.9 billion from amber box, and add (dairy premium) €0.4 billion to blue/green
• Sugar reforms strip €3.5 billion from amber box, and add €1.3 billion to blue/green (EU15 income support)
• Rice, fruit and vegetables…..
Commitments on blue and amber boxes:
• EU will make the biggest AMS cuts under the tiered formula – could afford up to 70%
• Blue box limited to 5% of value of agricultural production– achievable, provided most of the Single Payment is in
the green box
• Overall limit on all trade-distorting support (80% of base entitlement): achievable for EU15
• Product specific AMS limits
Source: Kutas, G. EU Negotiating Room in Domestic Support after the 2003 CAP Reform and Enlargement
Source: Kutas, G. EU Negotiating Room in Domestic Support after the 2003 CAP Reform and Enlargement
Source: Kutas, G. EU Negotiating Room in Domestic Support after the 2003 CAP Reform and Enlargement
Does the Single Payment fit in the green box?
• Restrictions on fruit and vegetables: see Upland Cotton
• Annex 2, 6(d): ‘The amount of such payments in any given year shall not be related to, or based on, the factors of production employed in any year after the base period’– But an annual claim on farmland in agricultural
production or kept in good environmental condition
Future challenges for Irish agriculture
Premia and arable aid
Market returns
Rural development payments
0
500
1000
1500
2000
2500
Premia and arable aid
€ m
illi
on
Decoupling
WTO reduced protection
Rural development