Farm subsidies: welfare or market distortion?

A risky business that involves 20% of EU citizens

Agriculture has always been fundamental for human life. It gives us much of the food we eat every day. Even in developed countries, it’s still a very important sector of the economy, even if its size, relatively to GDP, has shrunk in the past century.

In the EU, it creates approximately only 3% of the total GDP, even though it uses 48% of the Union’s territory and the income of 20% of its citizens depends, directly or indirectly, on it.

However, it’s a risky businessprices are very volatile and adverse events, such as disease outbreaks, droughts or floods are common, with climate change contributing to this uncertainty.

My name is Federico and I am a student of Economic and Social Sciences at Bocconi University in Milan.

The EU intervention in the agrobiz

To offset such risks, that pose a threat to the incomes of a lot of citizens (and thus voters), European institutions, as well as in other countries, have taken a very interventionist approach.

It’s interesting to note that agricultural policy is probably where EU countries are most integrated, together with trade policy.

The Common Agricultural Policy (CAP) was set up in the Treaty of Rome of 1957 and came into force in 1962. Lawmakers decided that, in order to increase productivity, stabilise market prices and guarantee a reliable source of income for farmers, Common Markets Organisations (CMOs) would be set up, one for each group of products.

There are currently 21 CMOs. Through these organisations, the two “pillars” of the CAP are implemented:

  1. direct payments to farmers and market measures, which account for 75.6% of the total allocated resources
  2. rural development policies, 24.4% of the total allocated resources

The CAP accounts for 38% of the whole EU 2014-2020 budget, for a total of 408.31 billion Euros (approximately 68 billion Euros a year).

The system is still not perfect

The mechanism has been reformed in the past:

  • Payments have become less market-distorting: under the new Single Payment Scheme subsidies would no longer be given on the basis of production, but depending on the size of cultivable land
  • Production limits: also called “milk quotas”, were abolished
  • The overall percentage of the EU budget allocated to the CAP was reduced, from 71% in 1984 to the current 38%.

However, many other reform attempts, such as a proposed increase in farm size to achieve economies of scale, known as Mansholt plan, were taken down by the strong opposition of farm lobbies.

Furthermore, the extent to which the EU intervene in the agricultural market is still much higher than in other countries. In the US, for example, only 25 billion Dollars (21 billion Euros) are spent each year on agricultural subsidies, 69% less than in the EU, even though its total agricultural surface is just 24% smaller.

Pros

The supporters of the CAP argue that it fully delivers on the promises it was conceived on:

  • it guarantees stable income for farmers
  • creates a secure food supply chain for EU consumers
  • allows to plan an harmonious development of rural areas.

And cons

Howeverdetractors criticize it: the most severe accusation is that, by heavily subsidizing European agriculture, the CAP greatly damages developing countries, hitting their farmers with unfair competition. In these countries, the share of population whose income depends on agriculture is much bigger than in the EU.

Furthermore, they argue that subsidies encourage overproduction, which has several negative effects: many health issues, such as obesity and diabetes, seem to be linked to excessively high food supplies, and the overuse of land pose a threat to environmental safety.

It’s also argued that risk management could be provided by the private sector, through insurance policies and other financials instruments, or by product diversification and economies of scale such as smaller farms merging together, without the need for widespread government intervention. According to some, the CAP actually worsens the problems it was designed to solve: it distorts farmers’ risk perception, encouraging them to pursue less safe business practices.

Under the Single Payments Scheme, it’s obvious that bigger farms get bigger subsidies. Many argue that this hurts smaller farms. In the UK, for example, among the 100 recipients of the biggest subsidies under the CAP there were 20 millionaires and billionaires, including the Queen, many nobles and even Saudi princes.

What can Vox do?

Instead of just pumping money in subsidies that lead to overproduction, the EU should invest in re-skilling the workers that might suffer from a less loose agricultural policy.

In addition, our Union should start developing the necessary R&D to counter the threat of climate change, which only last summer led to disastrous food loss of 2 billion Euros in Italy only.

Agricultural policy is one of the main areas of intervention of the EU, and is currently supervised by the European Parliament. If Vox manages to obtain seats in the legislative body, it could shape future decisions on this matter, which affect the lives of many Europeans. If you think this is an important issue to you, join Vox and be part of the change!

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Federico Bindi

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Sources

  • http://www.oecd.org/agriculture/agricultural-policies/49003833.pdf
  • https://ec.europa.eu/agriculture/statistics/facts-and-figures_en
  • https://ec.europa.eu/agriculture/statistics/factsheets_en
  • http://www.europedia.moussis.eu/books/Book_2/6/21/?all=1
  • https://en.wikipedia.org/wiki/Common_Agricultural_Policy
  • https://www.linkedin.com/pulse/two-pillars-eu-common-agricultural-policy-gianluca-sgueo
  • https://www.downsizinggovernment.org/agriculture/subsidies
  • https://data.worldbank.org/indicator/AG.LND.AGRI.ZS
  • http://www.independent.co.uk/news/uk/home-news/eu-farming-subsidies-billionaires-high-uk-rich-list-recipients-brexit-james-dyson-earl-rosebery-cap-a7815871.html
  • https://phys.org/news/2017-07-nationwide-drought-rome-ways-rationing.html