Common Agricultural Policy

What is the Common Agricultural Policy?

The Common Agricultural Policy^[1] (CAP) is the EU policy to provide financial support to farmers in member states. It is one of the founding policies of the original Common Market, and brings together national intervention programmes into one scheme to allow farmers to compete on a level playing field while protecting against volatility in agricultural prices (and hence incomes) and to provide food security.

Article 39 of the European Union Treaty sets out the specific objectives of the CAP:

• To increase agricultural productivity by promoting technical progress and ensuring the optimum use of the factors of production, in particular labour.
• To ensure a fair standard of living for farmers.
• To stabilise markets.
• To ensure the availability of supplies.
• To ensure reasonable prices for consumers.

In the early days of the Common Market, agricultural spending absorbed 80% of the budget. It is now a significantly lower share, as the EU has developed other budget lines, but still accounts for 38% of the EU budget of just over €140 billion.

What does the CAP do?

For most of its existence, the CAP provided income support to farmers by supporting the prices they were paid for produce. But this system was widely criticised for encouraging overproduction, leading to notorious wine lakes and butter mountains – produce that was then often dumped in third markets with adverse impacts on local agriculture.   

Following a major CAP reform in 2005, there are two big strands to CAP payments: one for direct income support (pillar 1) and the second for rural development (pillar 2). Direct income support is much a much bigger programme than rural development.  

CAP payments are an important part of farm incomes in the UK: the Department for Environment, Food and Rural Affairs (Defra) estimated that payments represented 55% of farm incomes in 2014. Those payments could also be regarded as subsidies to food prices. Because EU payments are denominated in euros, farmers get more when sterling depreciates and vice versa.

What is the difference between the two pillars?

Pillar 1 payments are direct income support payments to farmers. To remove any incentive to overproduce, payment (now known in England as the Basic Payment Scheme) is based on the amount of land a farmer owns, not how much they produce. This money comes direct from the EU and is administered by national governments (Defra for farmers in England, the devolved administrations for Scotland, Wales and Northern Ireland).

In order to qualify for payment, farmers have to meet certain standards on environmental management, animal welfare standards and traceability – these conditions are known as ‘cross-compliance’. Member states can also apply market support measures in certain conditions – the UK has used this to support dairy farmers when prices have been particularly low.

Pillar 2 requires co-financing from member state governments. The EU describes the purposes of this as:

• fostering the competitiveness of agriculture
• ensuring the sustainable management of natural resources
• combating climate change
• achieving a balanced territorial development of rural economies and communities including the creation and maintenance of employment.

How much does the CAP cost?

The CAP is one of the big EU programmes, with a total budget of just under €60 billion. France topped the list in 2014^[2], with payments worth €8.5 billion. Next came Spain, Germany and Italy.

Most of the money paid to farmers comes from the EU budget, paid for by contributions from member states, including the UK. The UK then tops up from domestic expenditure to pay for “co-financing of pillar 2 schemes”. In 2015 those top ups cost €250 million for the whole of the UK. The breakdown of payments for the whole UK^[3] is set down below for EU budget year 2015, in € millions.

Is CAP the only way the EU supports farming?

Those are not the only costs of the CAP. Defra has also had to pay fines for mismanaging farm payments. This is called “disallowance” and is quite big money. In his comment on Defra’s 2015–16 accounts^[4] the Comptroller and Auditor General, Sir Amyas Morse, noted that: “The total value of cumulative disallowance penalties incurred under CAP 2007–13 is £661 million” – or over £90 million a year. 

The other leg of EU agricultural support is through trade policy. Many producers from outside the EU pay tariffs on goods they import. The Common External Tariff is low on most manufactured goods but remains high on agricultural goods. This protection is another form of income support to EU farmers – but at the expense of consumers rather than taxpayers.

Why is EU agriculture policy controversial in the UK? 

The UK gets much less from the CAP than it contributes. 

But the CAP has also been criticised for encouraging farming practices that damage the environment. One indicator of the degree of environmental damage is the dramatic decline in farmland birds in recent decades. What is impossible to judge is what would have happened under potential alternative policies.

The CAP benefits large landowners just for owning more land. EU protectionism on agriculture has been criticised^[5] for the costs it imposes on consumers through higher food prices and the costs it imposes on developing countries by making it difficult for them to compete with EU farmers.

How will the UK’s agriculture policy change after Brexit?

The government has introduced a new Agriculture Bill to set up a domestic framework based on a payment system of ‘public money for public goods’ in England. The government has proposed^[6] establishing an Environmental Land Management Scheme which will require farmland management to be linked to the 25 Year Environment Plan goals. The transition to the new system will take place over seven years, with a national pilot starting in 2021. 

Both agriculture and environment policies are fully devolved, but the freedom of individual nations to diverge from existing rules is constrained by the policy frameworks being set by the EU. This will change after Brexit. The UK government and devolved administrations are currently working to establish common frameworks in some of these areas.

The Agriculture Bill also includes provisions for Northern Ireland to prepare for its own replacement scheme. But unlike the bill introduced under Theresa May, there are no longer similar provisions for; the Welsh government plans to bring forward its own Agriculture Bill. The Scottish government will do the same.

The UK government and devolved administrations will still need to agree how agriculture spending fits into any future fiscal framework. At the moment, CAP money flows from the EU and passes onto the devolved nations, all of whom receive significantly more CAP funding per capita than England.