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Butter Mountains: The EU’s Common Agricultural Policy

December 12, 2011

When asked what words they associate most with Europe or the European Union, it is doubtful that most people would choose agriculture or farming. Indeed, in today’s urbanized and industrialized European Union, farming makes up less than 3% of total GDP. However, agriculture was far more important when European integration began after the Second World War, and agriculture is today one of the most heavily integrated policy areas in the European Union. Even though agriculture as a share of the EU budget has declined dramatically over the past three decades, at over 40% it remains the largest area of budget expenditures. To see trends in agriculture expenditures as a share of EU GDP over time, click here (opens pdf). The pie chart below shows the breakdown in expenditures in the 2005 budget.

So what do these agricultural expenditures look like? Traditionally they have come in the form of subsidies to farmers. Until recently, the emphasis was on price supports. Farmers were guaranteed a minimum price at which the European Union would buy their products. One of the byproducts of this incentive structure was overproduction of some products, leading to the phenomenon in the 1970’s of the so-called “butter mountains” and “milk lakes.” The Common Agricultural Policy, or CAP, also featured high tariffs on outside products, which many of its economic partners criticized as a barrier to free trade.

Supporters of CAP have argued that price intervention and trade barriers are necessary because of the inherently risky nature of agriculture (dependence on weather and commodity prices) and because of the importance of the sector to rural communities. Nevertheless, the EU has responded to some of the early criticisms with a number of reforms. Direct payments to farmers have often replaced price support in an effort to remove the incentives to overproduce. In addition, these payments have become more dependent on factors such as meeting sound environmental standards. Also, the EU has reduced tariffs on some agricultural products as a result of the Doha Round trade talks, although there is still much criticism that it could do more.

The CAP obviously has important implications for Indiana farmers, given the Hoosier state’s status as an agricultural powerhouse. According to the USDA, Indiana ranked 9th among all states in 2008 in total foreign agricultural exports. It ranked 4th in soybean exports, 5th in seed exports, 6th in feed grain exports, and 7th in poultry exports. (You can view these rankings here.) According to WiserTrade.org, in 2010 Indiana agricultural exports to the EU totaled $106 million, making the EU the 3rd leading destination for Indiana agricultural exports, after Canada and Mexico. As we discuss in another One State, One World segment, one of the chief impediments to further agricultural exports to the EU is the latter’s tight restrictions on genetically modified crops, which comprise the vast majority of corn and soybeans planted in Indiana and other states.

As the EU faces decisions on how to reform the CAP, the central question seems to be, is the CAP still essential in a post-industrial, urbanized Europe? Does it meets is ostensible goal of preserving rural communities, and if so, is that goal worth the cost of higher food prices and disruptions to free trade? These are some of the issues which continue to divide European citizens and policymakers.

Below are some useful links on various aspects of the CAP:

For more information on the One State, One World series, please visit http://indianapublicmedia.org/onestateoneworld/.  This episode of One State One World is produced in partnership of WFIU Public Radio and the EU Center at Indiana University through a grant from the European Union.

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