The European Union's Common Agricultural Policy

The European Union's Common Agricultural Policy

Our Indiana Ag Leadership trip to northern Europe included a visit to the European Commission in Brussels, Belgium. The European Commission is the executive branch of the European Union (EU). One of the main topics of discussion was the Common Agricultural Policy, or "CAP," the EU's version of the US Farm Bill. The CAP has been an essential part of EU policy for decades and, like the Farm Bill, periodically undergoes reform. The post explains some of the differences and similarities between the CAP and most recent Farm Bill.

The 2014 Farm Bill phased out direct payments to corn, soybean, wheat and other commodity farmers in the US. The EU's CAP has chosen to retain direct payments as part of its farm subsidies. Why? According to EU officials, direct payments do not encourage over-production (which result in lower commodity prices). Direct payments subsidize farmers regardless of their actual production. This is referred to as "decoupling" subsidies from production. US crop insurance, in contrast, encourages farmers to maximize production by planting as much land as possible. If you don't plant the crop, you cannot collect crop insurance. Right or wrong, this is logic behind EU farm direct payments. Here is a slide that shows the evolution of farm subsidies in the EU over time.

EU member states are responsible for implementing the CAP. After a year is completed, those states then apply to the EU for reimbursement of the costs associated with implementing the CAP. The slide below shows how such payments are allocated among EU states.

Although the 2014 Farm Bill has a number of conservation measures, my impression is that EU's CAP is even more driven by conservation, or as was frequently sited to us, the need for "sustainability." For example, to be eligible for direct payments, an EU farmer must agree to plant at least three different crops. Corn/corn/corn rotation is not allowed (unless a farmer wants to forgo subsidies). Likewise, farmers are paid additional subsidies for undertaking certain "green" practices on their farms. Here is slide from LTO Nederland (a Dutch farmers' union) summarizing some differences between the CAP and Farm Bill.

One big shift in CAP policy is occurring in the dairy sector. For the first time in decades, the EU is lifting milk production quotas in 2015. The change reflects a simple fact: world demand for milk appears to be endless for then next 20+ years. In other words, there will be demand for all the milk and dairy products the EU can produce in the foreseeable future. Global demand has largely made EU dairy price supports irrelevant in recent years. The challenge is getting the products to emerging nations that are hungry for more dairy. In this regard, the EU is well positioned for growth, as it has already developed value-added exports and strong infrastructure geared towards exports. US production, in contrast, is more aimed at satisfying a domestic market. Here are some slides from Rabobank (a Dutch bank) and the European Commission explaining shift in world demands and the result on milk prices.

After spending time in Brussels, I left feeling impressed that the 27 countries that make up the EU were able to come together and pass a common agricultural policy. One of my ag leadership classmates commented more generally that the EU, as a government unit, is really "an evolution of civilization" much the same way that the founding of the United States was in 1776, when 13 somewhat autonomous states came together to form this country. US policymakers may not agree with farm policy decisions made by the EU, but we all must admire the means by which these diversely different countries have come together to eliminate intra-nation trade barriers. Sometimes the whole is greater than sum of its parts.

This is part 4 of a 6 part series on my travels to Northern Europe and West Africa as part of the Indiana Ag Leadership program.

Read more at Janzen Ag Law Blog by Todd Janzen, Partner, Plews Shadley Racher & Braun LLP.

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