The Common Agriculture Policy was originally implemented in the 1960s as a compromise among the six original member-states of the EU, each of which had their own protectionist policy for their farmers. The Republic joined a fait accompli in 1973, but we liked what we saw.
The CAP offered an escape from dependence on a low-priced and restrictive British market. Access to a high-priced European market of 300 million consumers was a dominant consideration in the arguments in favour of joining the EU. It promised a doubling of farm family income per family worker and - despite considerable economic turbulence in the 1970s - it had delivered on that promise at the end of the transition period to full membership in 1978.
However, even in those early years of EU membership, storm clouds were gathering. The Commission repeatedly warned of growing agricultural surpluses and even more rapidly growing budgetary costs for disposing of these surpluses. The agriculture ministers understandably were reluctant to take unpalatable action, but were prevailed upon to do so by l977. In that year a "prudent" price policy was agreed which involved cutting real prices paid for farm produce by 3 per cent per annum. That policy continued to 1993.
In the 1970s, most authorities, including most agricultural economists, believed that such a price cut would discourage production and stimulate consumption, sufficiently to contain surpluses within tolerable limits. The record now shows clearly how wrong they were: the 3 per cent annual price reduction had little noticeable impact, yet ministers found it impossible to agree a more severe price policy. The Commission had no option but to reach for another instrument to curtail surpluses, namely, direct supply control.
This was already in operation for sugar beet from the beginning of the CAP in the form of quotas at farm level. In 1983 the Commission proposed that a similar restriction be put on milk, then the most costly commodity for the budget. The Republic opposed this on the grounds that it would stifle our underdeveloped dairy industry, but as the message sunk home that the only alternative was a swingeing cut in prices, the lesser of the two evils was accepted.
Since then those farmers who have a decent-sized quota have become strong supporters of the approach because it delivers a high price, though for a limited quantity. On the other hand, farmers with few or no quotas have been frozen out.
Quotas solved the growing milk problem by providing an effective method of control. Other commodities remained free to expand and did so with the result that the budget cost of the CAP continued to soar. The Commission had to move again and, in 1988, persuaded ministers to accept a "stabiliser" approach in addition to the prudent price policy and quotas. Under the stabiliser policy, a maximum guarantee quantity was set for the major commodities, such as grain, and if farmers exceeded that ceiling an automatic cut in prices was triggered.
This price approach failed because ministers could not face up to the cuts that were involved. Production continued to grow with new technologies being adopted in the various forms of biological, agro-chemical and mechanical innovation. In addition, the management ability of farmers was improving all the time to boost production further.
Up to this time, CAP reforms were driven mainly by internal pressures expressed in the size of the CAP budget. Despite all the reforms and repeated efforts by finance ministers to control it, the budget continued to grow. Finally, in 1988 they moved to put in place binding controls; in particular they put a definite ceiling on the cost of price supports. That ceiling had a growth factor built into it, but it still was an effective constraint on the CAP. In the current negotiations it looks as if the growth element in the budget is to be reduced, thus further tightening the budgetary noose on the CAP.
1985 brought a turning point for the CAP. The main trading nations of the world entered into negotiations under the GATT (the General Agreement on Tariffs and Trade, now replaced by the World Trade Organisation), having agreed that there should be "substantial progressive reductions in agricultural support and protection".
Since virtually all countries (except New Zealand and Australia) protected their domestic markets against outside competition by policies such as the CAP, the GATT talks were a brave initiative. Progress was painful, but finally, after eight years of argument, the Uruguay Round Trade Agreement was signed. It covers the period 1995 to 2001, and for the first time, brings global agricultural policy under global rules.
These rules initially are lenient, but they provide a foundation which will be built upon in future trade rounds, the next one beginning by the end of this year.
These trade agreements now add external pressures on the CAP on top of the internal budgetary pressure. The controversial MacSharry reforms, which were implemented between 1993 and 1995, were a radical response to these new pressures, and Agenda 2000 is in effect a phase 2 of MacSharry. The MacSharry reforms consisted essentially of two elements, a sharp cut in price supports for arable crops and beef which was offset by compensatory payments, and an extension of supply control to these commodities.
Price-cutting and supply control have long been with us, so the novel part of the MacSharry package is the compensatory payments, popularly known as the "cheques in the post". These are changing the entire image of farmers and the course of their activities. They are to be greatly extended under Agenda 2000 to such an extent that by 2003, these direct payments will equal the entire family farm income of farmers collectively. Receipts from the marketplace will only cover non-family costs. A strange new world - for agricultural economists as well as for farmers.
Seamus Sheehy is a professor of applied agricultural economics at University College Dublin