. , . EUROPEAN OOMMUNJH'S COMMON AGRICULTURAL POLICY: IMPLICATIQNS FORU., S. TRADE. USPV FAER -55 CForeig I') , A,gr.1Qu._l t;.\Jr c;ll Economic Re pO,rt). / B•.L. Bernt,son (al)d, -other 5). Wa stlin~ t9 n , DC: EC,Q,no,mic Research Service. O?t. 1969. "CNAL Cal'). NQ.' A;2~1.~)Ag81n '" 2 5 1.0 ::t Illp·B 11111 . , . I~ II~~ \ 2.2 11111 I" a;. ~~~ lilll~ Lu.g 2.0 111111.25 \\\\\1.4 111111.6 I ! ! • I THE EUROPEAN COMMUNITY'S COMMON AGRICULTURAL POLIC'? . Implications for U. S. Trade ,;>, /~.J/ ,// It" .Foreign Agricultural Economic Report No. 55 0 Economic Research Service 0 6: S. Department of Agricult;ure .------.- FOREWORD This report gives a general explanation of the European Community's Common Agricultural Policy (CAP) and it describes the impact of the CAP on u.s. agricultural exports. The CAP for each major commodity group is explained in economic terms and is placed in perspective with a discussion of farm production and patterns of use in the Common Market. This report should be helpful to U.S. Government officials and others concerned with international trade and with the U.S. balance of payments. Also it should help private exporters and farmers appraise the effect of the CAP on their business. In addition it should interest economists, educators, and all who have a need to understand current events in Europe. For several years economists in USDA felt the need for a straightforward explanation of the Common Market's CAP. Until now it was difficult to prepare such a publication because many important issues were unsettled and existing regulations were transitional. By mid-1968, however, a single Community market had been created for most agricultural products. Impetus was given to the preparation of this report by a request to the Economic Research Service from the Office of the Special Representative for Trade Negotiations (STR). In 1968 the STR requested a staff report for distribution to the President's Public Advisory Committee on Trade Policy. The report was prepared and submitted, and with subsequent revisions and refinements it became the basis for this publication. The authors, with the help of many specialists in the Foreign Agricultural Service and the Economic Research Service, USDA, have made a notable contribution to economic information of vital importance to American agriculture. Special credit goes to Raymond P. Christensen, Director of the Foreign Development and Trade Division, ERS, for his strong support throughout the project; to Bettv Case for her highly efficient management of the computer processing of the trade data, and to Hans Hirsch for his competent professional contributions to the entire publication. Economic Research Service For .ale by the Superintendent of Doc~menes, U.S. Government Printing Office, Washingfon, D.C., 20402 CO~J:'ENTS Page SUMMARY AND CONCLUSIONS ......... ., . ~ . iv INTRODUCTION '" ................ .. .­ .............. DEVELOPMENTS AFFECTING COMMUNITY AGRICULTURE SINCE THE ROME TREATY '" 2 Development of the Common Agricultural Policy .............. "........... 2 Changes in Factors Affecting Consumption of Agricultural Products .............. 3 Population ............................................. 3 Income ................................................ 3 Conditions for Agricultural Production i.n the EC ........................... 4 The EC Market for U.S. Agricultural Pmducts ............................. 5 Community Agriculture and World Trade ................ 5 U.S. Agricultural Exports to the EC . 6 COMMODITY ANALYSES ........................... 7 Wheat and Coarse Grains . 7 CAP for Grains . ........................ " 7 Production and Consumption ................................... 12 Foreign Trade ............................................ 19 Role of the European Agricultural Guidance and Guarantee Fund .........•. 33 Special Policy Features Influencing Trade ...................... 35 Implications for U.S. Trade. .. 39 Rice . · .................. 40 CAP for Rice ............... · ................. 40 Production and Consumption ..... · ........................ 41 Foreign Trade ......... 44 FEOGA Expenditures ..... ............................ ... " 45 Implications for U.S. Trade .. · ............... 46 Oil bearing Materials and Products · ............... 46 CAP for Fats and Oils ...... · ............... 46 Production and Consumption " · ..................... 47 Foreign Trade ........... .... · . ........ 51 FEOGA Expenditures .......... · .................... 54 Implications for U.S. Trade ............ · ....................... 54 Poultry and Eggs ..................... · ..................... 56 CAP for Poultry and Eggs ............. .. 56 Production and Consumption .......... · .................... 57 Foreign Trade ......... · .................... 60 FEOGA Expenditures ..•... ·................. 65 Implications for U.S. Trade ... ............ · . .. 65 ii ". o 0 Page Livestock and Meat . 66 CAP for Beef and Veal ...................................... 66 Ii Production and Consumption ................ 67 CAP for Pork . 71 Production and Consumption ..... 71 Foreign Trade .............. 74 FEOGA Expenditures . • . 76 Implications for U.S. Trade .................................... 76 Dairy Products .............................................. 77 CAP for Dairy Products ...................................... 77 Production and Consumption .................................. 79 Foreign Trade ................. ....................... 83 FEOGA Expenditures. ........... 87 Implications for U.S. Trade. ..................•....... 88 Fruits and Vegetables .............. .... 89 CAP for Fruits and Vegetables . .... 89 Production and Consumption . 91 Foreign Trade ......... 93 FEOGA Expenditures ..... 99 Implications for U.S. Trade .. 99 FEOGA· THE EUROPEAN AGRICULTURAL GUIDANCE AND GUARANTEE FUND 101 FEOGA Financial Operations .... 101 Expenditures .......... 101 Contributions ......... 101 Balance of Member State Contributions and Receipts .. 103 Renegotiation of FEOGA .................... 103 Washington, D.C. October 1969 iii I ! SUIIARY AND CONCLUSIONS Implementation of the European Community's Common Agricultural Policy has had an impact on international trade in many agricultural commodities. The hallmark of the CAP is a sycrtem of minimum import prices and variable levies, with modifications and exceptions where dictated by production, marketing, and institutional conditions. For many agricultural products the European Community (EC) has become insulated from world market price ievels. This has significant bearing on international production and consumption incentives and, in turn, on the level and flow of trade. The CAP has brought about these general changes which affect U.S. exports: 1) Higher prices for farm produce in most member states under a price support system intended to assure "adequate income" to farmers. There are no provisions for production controls except the rather generous quotas on sugar. 2) Protection of Community farmers from import competition via a variable levy system which generally increases prices of imported commodities above those for domestically produced goods. 3) Removal of nearly all trade barriers among member nations, making all markets equally accessible to all farmers within the Community. 4) Establishment of a Community·financed export subsidy system, providing subsidies at levels required to sell products in world markets. Although there are exceptions to these points, they apply to the bulk of the Community's agricultural production. High internal prices tend to encourage increases in production while dampening growth in consumption, although significant responses to farm price increases are not generally demonstrable. For example, higher yields have lifted production despite a modest reduction in land under cultivation. The responsible yield-raising techniques may have been adopted more rapidly than usual under the stimulus of high prices. Grain yields in 1967 and 1968 were much above previous levels. Favorable weather is given major credit, but price-induced changes in production practices may have reinforced the effects of good weather. Although the impact of higher prices on consumption is even more difficult to isolate, some restraining effect appears to have emerged, particularly in the last year or two. EC policymakers are finding it impossible to assure "adequate" income to the many small producers by a S\/stem relying primarily on high prices. Budgetary costs are mounting rapidly without realization of producers' income aspirations. Further strains are being placed on the system because the distribution of expenditures among countries differs from the pattern of contributions. Therefore, internal pressures against higher prices are increasing, resulting in discussions of alternative methods of raising farmers' income, such as structural reform in agriculture. Freeing of the Community's internal trade and applying variable levies to imports relegate the United States and other supplying nations to the role of residual suppliers because they are not permitted to compete in price with EC produced commodities. And recent price movements tend to reduce the size of the residual or .at least to slow its growth. These movements not only limit U.S. export prospects to the Community, but Community exports also stiffen competition faced by U.S. exports in Japan, the United Kingdom, and other major agricultural importers. Moreover, exporters such as Canada, Argentina, and Denmark encounter greater difficulties in