THE COMMON AGRICULTURAL POLICY OF THE EEC - A Review of Recent Developments

Occasional Paper No. 41

[IU)~ Bureau of Agricultural Economics, Canberra

(1~8O) Bureau of Agricultural Economics, Canberra

THE COMMON AGRICULTURAL POLICY OF THE EEC - A Review of Recent Developments

D.C. SPROTT and I.C. DlCKlE

Occasional Paper No. 41

Australian Government Publishing Service Canberra 1976

Introduction . ,

The Organisation and Regulation of the EEC's Major Agricultural Markets

Cerea 2s

Sugar

Beef and veal

Dairy Products

The Impact of Major Economic Problems on European Agriculture

Monetarg Adjustments and In tm-Comni ty Farm Trade

NationaZ Aid Measures i n IndividwzZ Member Countries

i Conswner Interests and Cost o f the CAP

structural Adjustment in EEC Agriculture

Proposals for Refoq

Implications of Recent EEC Developments for Australia

Conclusions

I TABLES

I Table No.

. . 1 Self-sufficiency Levels for Major Agricultural Products in the EEC

2 Economic, Indicators in Major EEC Countries

3 , , EEC Expenditure Patterns : . , . .

. .

. . .

TABLES (continued) u

Tcrbte No.

4 Labour Mobility in EEC Agriculture

5 Changes in the Number and Size of Community Farms: EEC-9

6 Australia: Gross Value of Exports of Rural Comodities to the United Kingdom: 1970-71 to 1974-75

7 Australia: Gross Value of Exports of Rural Commodities to the Enlarged Community: 1972-73 to 1974-75

Page

27

GRAPHS

I Prices of Certain Agricultural Products in the EEC in Relation to World Prices 6

I I Exchange Rate Adjustments of Selected EEC Currencies

I11 Adjustments in EEC Representative Exchange Rates and in Monetary Compensatory Amounts 19

THE COMMON AGRICULTURAL POLICY OF M E EEC A REVIEW OF RECENT DEVELOPMENTS

In t roduct ion

Since i t s introduction i n 1962 the Common Agricul tural Policy (CAP) has, through providing extensive ass is tance and protect ion t o the EECts agr icu l tura l sec tor , influenced the leve ls of ag r i cu l tu ra l output and resources u t i l i s e d i n agr icu l ture . A t present over 80% of the Community's agr icu l tura l production is covered by the system which involves the provision of i n t e rna l support f o r market pr ices , the abol i t ion of b a r r i e r s t o intra-Community t rade and the establishment of common border r e g u l a t i m s f o r both imports and exports.

The major elements of the CAP mechanism and the overal l objectives of the system were described i n some d e t a i l i n an e a r l i e r Bureau study(1) and a l so i n the recent OECD repor t on ag r i cu l tu ra l po l icy i n the EEC.C2) Essent ia l ly , however, the system ensures t h a t f o r most agr icul tural commodities, in tervent ion agencies support market p r ices f o r producers by buying a t predetermined l eve l s which, f o r most of t he period since 1962, have been well above world market pr ices . This has been made p s s i b l e by insu la t ing the domestic EEC market from the world market through the operation of var iab le import l ev ies and threshold pr ices . The existence of r e l a t i v e l y high support pr ices , of ten i n conjunction with c l imat ical ly induced increases i n output, has per iod ica l ly generated surpluses which have often been exported with t he a i d of export res t i tu t ions . Alternatively, however, when world pr ices a r e above EEC support levels , as they were i n 1973 and 1974 f o r grains and sugar, and there i s a t the same time the p o s s i b i l i t y of i n s u f f i c i e n t domestic supplies, export l ev ies and controls are sometimes used t o discourage Community exports and subsidies a r e used t o encourage imports.

During the past fourteen years the pr inc ip les and the bas ic mechanism of the CAP have remained e s s e n t i a l l y unchanged. However, within t h i s hroad framework there have been continuing adjustments i n the regulations of the CAP and some r e l a t i v e l y minor s h i f t s i n the emphasis given t o the various objectives of EEC agr ic l l l tural policy. The period 1962 t o 1968 can be viewed a s a t r a n s i t i o n a l phase during which the or iginal s i x member countries adapted t h e i r ag r i cu l tu ra l systems t o the major pr inciples of the CAP such as the harmonisation of farm pr ices , Community preference and cen t ra l i sed f inanc ia l management. By Ju ly 1968 the CAP'S provisions were f u l l y operative on the E E C t s production of cereals , dairy products, eggs, and beef and veal, accounting f o r over 50% of the gross value of EEC ag r i cu l tu ra l output. (3)

(1) A.C. Byme, 'The Common Agricultural Policy of the EECt , Quarterly Revim of Agricultural Economics, Vol. XXIV, No. 2, April 1971.

(2) OECD, Agricultural Policy o f the Europem Eco?zomic Comunity, Par i s , 1974.

(3) The major ho r t i cu l tu ra l i ndus t r i e s i n the Community and i t s mutton and lamb industry a r e protected through the Common External Ta r i f f (CET). Neither t he CAP nor the CET a re applicable on raw wool and oilseeds, imports of both commodities being admitted duty f ree .

The major emphasis o f EEC ag r i cu l tu ra l pol icy d u r i n ~ the 1960s and e a r l y i w n s was on the implementation of a system of common nr ices i n order t o sunnort market p r i ce s and farm income levels . '!'here was much less a t t en t ion given t o consumer i n t e r e s t s and t o measures t o imnrove the s t ruc tu re and t o nromote the product ivi ty of t he F F r ag r i cu l tu ra l sec tor . As a r e s u l t there were marked increases i n farm support ~ r i c e s , especial ly i n France, t he l a rges t ag r i cu l tu ra l producer, and i n l e v e l s of agr icu l tura l se l f -suf=iciency within the Community. There was a l so an increase i n the aropensi ty of the EEC t o generate surplus supplies, p a r t i c u l a r l y of so f t wheat and h u t t e r , and i n t o t a l Community expenditure on agr icu l tura l support. 'hx~ino, t h i s nerioA t h e CAP played a r e l a t i v e l y minor r o l e i n the i ~ l e m e n t a t i o n of programs desipned t o improve the product ivi ty and s t ruc ture of E E c agr icu l ture . Thus, although there was an especial ly large outflow of lahour from the r u r a l sec tor between 1962 and 1071 and consequently an impressive growth i n lahour productivity, these developments were largely autonomous and were not a r e s u l t of t he implementation of Community ag r i cu l tu ra l policy. I n f a c t the high leve ls of support under t he T.4P have tended t o constra in the movement of labour from agricul ture .

Since 1971 the re have been several important developments which have influenced the evolution of t he CAP. In t h i s respect t he enlargement of t h e Community from six t o nine members a t t h e beginning of 1973 was of fundamental importance. This had t h e e f f e c t of a l t e r i n g t h e export/import balance and self -suff ic iency leve ls f o r some of t he main ag r i cu l tu ra l products i n t h e EEC. In pa r t i cu l a r t he accession of t he United Kingdom, a major ag r i cu l tu ra l importing country, t o t h e EEC has had important implications f o r t h e d i rec t ion of in te rna t iona l commodity tradeC4) and f o r t h e exports of countr ies such as Austral ia t h a t were major suppl iers t o t h i s market i n t he past. In te rna l ly t h e enlargement of t h e EEC, i n conjunction with o ther f a c t o r s , e.g. i n f l a t i o n and t h e spread of consumerism, helped t o focus g rea t e r a t t en t ion on i s s u e s such as consumer food pr ices , t he cost of ag r i cu l tu ra l support and s t r u c t u r a l reform. However, c r i s e s i n various agr icu l tura l markets and t h e continuing dominance of producer i n t e r e s t s have subsequently diminished t h e importance of these i s sues t o a considerable extent.

Another major f a c t o r which has a f fec ted Community agr icu l ture over recent years has been an increase i n economic and monetary i n s t a b i l i t y . I n pa r t i cu l a r t h e r e was a se r ious de t e r io ra t ion i n t h e economic environment i n al l member countr ies i n 1974 and 1975, espec ia l ly i n I t a l y and the U.K. This de te r iora t ion was manifest i n high r a t e s of i n f l a t i o n , depressed l eve l s of economic a c t i v i t y and, i n some countries, severe balance of payments problems. Also, t h e economic cos t s associated with the CAP became much more burdensome i n t h i s period of economic depression.

One of t h e e f f e c t s of t h i s economic malaise has been an increasing incidence of u n i l a t e r a l ag r i cu l tu ra l act ion by member countr ies . This has taken var ious forms, including t h e imposition of import cont ro ls by I t a l y and of domestic l ives tock producer subsidies by France and Belgium. I n some cases t h e measures have apparently been i n

14) N-D. Honan, 'Impact on Aus t ra l ia ' s Agricul tural Trade of the United Kingdom's Accession t o an Enlarged European Economic Community', &uarterzy Review of AgricuZturaZ Economics, Vol. XXV, No. 3, Ju ly 1972.

contravention of CAP regulations. Another important aspect of recent economic developments has been t h e l a rge number of exchange r a t e var ia t ions amongst member countr ies . This has created problems i n maintaining common pr ice leve ls and has made t h e operation of t he CAP more complex, The system of compensatory measures introduced t o o f f s e t t h e effects of these exchange r a t e va r i a t i ons has, t o some extent , fragmented Community agr icu l tura l markets.

Since 1973 EEC ag r i cu l tu ra l pol icy has a l so had t o respond t o rapid and s ign i f ican t changes i n t h e world supply/demand s i t u a t i o n f o r important agr icu l tura l comodi t ies . h 1973 and 1974, world pr ices f o r cereals and sugar rosc t o extremely high leve ls and were a t times well above EEC support levels . This necessi ta ted t h e introduction by t h e Community of unprecedented measures such as l ev i e s on exports of ce rea l s and sugar and subsidies on sugar imports. After a long period of buoyant demand there was a l so a severe downturn i n world meat t rade and pr ices i n 1974,largely a s a r e s u l t of lower l eve l s of consumption and g rea t ly increased supplics i n major producing regions, including the EEC. In t h i s s i tuat ion the EEC in tens i f ied i t s e f f o r t s t o protect i t s domestic beef producers by several means including the c losure of the market t o non-member solirces of supply such a s Australia.

The period 1971 t o 1976 has thus been one i n which t h e foundations of EEC agr icu l tura l pol icy have been subject t o considerable and diverse pressures. Internal and external developments have encouraged a more c r i t i c a l assessment by the EEC Commission and by member countr ies of the d i rec t ion and operation of ag r i cu l tu ra l policy i n t h e Community. Several p r o ~ o s a l s f o r reform of t h e CAP have been produced s ince 1973, t h e most recent and probably t h e most important being the Commission's 'Stocktaking of the Common Apricul tural Policy' which was re leased i n March 1975.(5) However, i n s p i t e of these pressures, t he pace of change has been slow and there have not a s yet been any s ign i f i can t a l t e r a t i o n s brought about t o the basic pr inc ip les and framework of t h e CAP. I t has often been necessary instead t o concentrate on resolving short-term problems t h a t have ar isen, a t t he expense of working towards achieving longer-term objectives.

The purpose of t h i s r epo r t i s t o review major developments i n the organisation and regulation of agr icu l tura l markets and i n agr icu l tura l pol icy i n the EEC over t he l a s t f i v e years and t o make some assessment of the e f f e c t s of these developments on EEC agr icu l ture and agr icu l tura l trade. The repor t a l s o describes the recent proposals t o reform the CAP and attempts t o i d e n t i f y possible longer-term changes i n Community agr icu l tura l policy and t h e i r implications f o r Australian farm trade.

The Organisation and Regulation of the EEC's Major Agricultural Markets

The enlargement of the EEC and the magnitude of the f luc tua t ions i n world commodity pr ices over recent years necessi ta ted important adjustments i n thc Community's regulat ions regarding the production and t rade of several agr icu l tura l commodities.

(5) Commission of the ~ u r o ~ e a n Communities, Stocktaking o f the C m o n AgricuZturaZ PoZicy, Brussels, March 1975.

For many major agr icu l tura l products the accession of the United Kingdom t o the EEC i n i t i a l l y reduced the Community's level of self-suff ic iency (see Table No. 1) . Community enlargement resul ted i n a sharp f a l l i n self-suff ic iency levels f o r wheat, da i ry products and sugar. In fac t , i n t h e case of sugar the EEC moved, a t l ea s t i n the shor t term, from being a s izable exporter t o being a s izable ne t importer. Enlargement had l i t t l e immediate impact on self-suff ic iency leve ls f o r the major meat products (although since 1974 the enlarged Community has experienced surplus beef supplies).

Table No. 1

SELF-SUFFICIENCY LEVELS FOR MAJOR AGRICULTURAL

PRODUCTS I N THE EEC

EEC - 6 EEC - 9 Product

1970-71 1971-72 1970-71 1971-72 1972-73 1973-74

Common wheat 102 115 86(a) 99 (a) 100 100

Oats 88 100 91 102 96 96

Barley 91 110 91 102 107 103

Beef and veal 88 86 94 90 86 100

Maize 66 68 56 58 54 59

Pigmeat 101 100 105 101 101 100

Poultry meat 101 100 102 102 101 103

Butter 105 116 83 98 103 93

Cheese 102 103 99 101 101 107

Sugar 106, 122 86 100 9 2 91

( a ) Including durum wheat.

Sources: 'European Agriculture i n F igures t , Newszetter o f the C o r n AgricuZturaZ Policy, January 1974; 'The Agricultural Si tuat ion i n t h e Community, 1974 Report, Synthes is t , Newstetter o f the C m o n Agricultural Policy, January 1975. The Agricultural Si tuat ion i n the C o m i t y , 1975 Report, Par t I , Synthesis.

The organisation of the EEC ag r i cu l tu ra l markets has not only been influenced by in te rna l s t ruc tu ra l changes such as enlargement but a l s o by external commodity p r i ce developments. World prices of many a g r i c u l t u r a l commodities reg is te red massive and i n most cases unprecedented increases between 1972 and the end of 1974, la rge ly a s a resu l t of production s h o r t f a l l s i n several major producing countries. During t h i s period world wheat and coarse grain pr ices more than doubled while t he re was p rac t i ca l ly a tenfold increase i n world sugar prices. The pr ice of these commodities has eased during 1975 and 1976. Nevertheless, the increase i n world cerea l and sugar p r i ces from 1972 t h o u g h 1974 was of such magnitude a s t o a l t e r the t r a d i t i o n a l relationsfiip for these commodities between world and Community p r i ce levels . For tKe first time

s i r ~ c e the inception of the CAP, world pr ices of these commodities a t mid-1973 were above EEC threshold l e v e l s (Graph I) .

World meat pr ices , which had been on a strong upward trend throughout most of the 1960s and u n t i l 1973, weakened sharply i n 1974 and have remained weak i n t o 1976 as a d i r e c t r e s u l t of lower world demand and a subs tan t ia l build-up i n world c a t t l e numbers. A subs tan t ia l supply/demand imbalance i n world da i ry product markets has a l s o recent ly developed i n 1975 and 1976, and has been pa r t i cu l a r ly marked i n t h e skim milk powder (SMP) sector . This has been re f lec ted i n t he EEC by the accumulation of l a rge surplus s tocks of SMP. These recent d i s rup t ions i n t he world dairy products and meat markets and the e a r l i e r market buoyancy and abnormally high pr ices f o r cerea ls and sugar have led t o the introduction of new agr icu l tura l market regulat ions and t e s t ed the f l e x i b i l i t y of t he CAP. The new regulat ions introduced f o r major agr icu l tura l s ec to r s i n response t o these changed circumstances and pressures a r e reviewed i n the following sect ions .

Until 1973 the usual ex te rna l t rade regulat ions appl icable t o the EEC grain market were import l ev i e s and export r e s t i t u t i o n s . However, a s a r e su l t of the upward movement of world cereal p r ices the EEC Commission, i n May 1973, cancelled export r e s t i t u t i o n s on a l l ce rea l s , f lour , f i n e meal and semolina. This was followed by a decis ion i n J u l y of t ha t year t o apply lev ies on grain exports i n the event of the c.i.f. p r ice exceeding threshold pr ices by more than 2%. After a sho r t period i n which the Commission suspended wheat exports a system of var iab le export l ev ies was introduced i n August 1973 t o cover not only wheat but a l s o bar ley and maize shipments. The purpose of these l ev i e s was t o safeguard Community supplies.(6) Their method of operation was similar t o t h a t of import l ev ies i n reverse, and they were made equal t o the difference between world market pr ices and t a r g e t p r ices i n order t o discourage cereal exports.

The above measures represented a s ign i f i can t depar ture i n E E C . regulations governing cereal t rade , and remained operative in the case of ' , :: wheat f o r ' the remain'der o f 1973 and f o r most of 1974. Export l ev i e s on. . : . barley and maize were applicable f o r sho r t e r periods because world pr icesz- : ' of these.commodities per iodical ly dipped below EEC threshold leve ls i n - : 1973 and 1974.(7) Signif icant weakening i n world cereal p r i c e s during the

'

first h a l f of 1975 resul ted i n the re-introduction of import' levies which ." have been i n bperation again over most of the ensuing period:. However, . . t he strong recovery i n world grain t rade i n the ' second ha l f of 1975, which . came about largely as a r e su l t of subs tan t ia l USSR imports, led t o the re-introduction . . of EEC export l ev ies i n August f o r a short period. . ,

:1

( 6 ) The E C attempted t o ensure t h a t exports t o t r a d i t i o n a l markets were , ' not disrupted, through the use of tendering procedures. Under t h i s system EEC exporters were i nv i t ed t o tender f o r the export levy on the supply of a given quant i ty o f grain t o specif ied markets.

, (7) In comparison t o l ev i e s on s o f t ,wheat, export l ev ies on maize and bar ley were 'not only of shor te r duration but were a l so not as great. For example, , a t the beginning of 1974 export levies ' on s o f t wheat - . w e r e t h e equivalent of '&out $A80 per t o n n e ' w h i l s t ~ ~ l e v i e s on barley and maize a t t h e i r highest , were, only about $A30 per tonne.

GRAPH I PRICES OF CERTAIN AGRICULTURAL PRODUCTS IN THE EEC IN RELATION TO WORLD PRICES

(EEC threshold prices as percentage of wolid prices)

0 I I I I I I 1968.69 1969-70 1970-71 1971-72 1972-73 1973-74 1974-75

Soume! Commission of the European Cornmunitis% Ths Agricu~ur~~lSitua~ion in the Community. 1974 and 1975 R ~ m , Pan I.

600- /.\ / * /. \

500

400

300

\ - +% \. a w .\.

\ 0 - - - - - ' - .\ \ . 0. \ /- \ 0- \

Beef ad Vwl

........ ..--- ........ .... ....... ................. ......................................... ...-om ..... Wheat ....

100 /

\'V - --+ Sugar --

I n addit ion t o t he EEC f r o n t i e r adjustments f o r cerea ls over the l a s t three years there have been other measures designed t o influence internal consumption and production. On the consumption s ide , the run-down i n the Community's wheat supplies resul ted i n the denaturing premium being discontinued i n e a r l y 1974. The main object ive of discontinuing t h i s premium was t o increase domestic food wheat supplies by allowing a considerable quant i ty of s o f t wheat, which had been used previously for animal food, t o be avai lable f o r human consumption.

Cereal production has not been pa r t i cu l a r ly encouraged by the annual increases i n support p r i ce levels,which have tended t o be about t h e same as the average increases accorded most other ag r i cu l tu ra l products covered by the CAP. A new device designed t o improve pr ice r e l a t i v i t i e s between the various cerea ls was adopted i n ea r ly 1976 t o encourage the use of poor qua l i ty wheat a s feed and t o avoid the need f o r denaturing premiums. To t h i s end, a lower intervent ion pr ice for non-baking qua l i t y wheat has been established f o r t he 1976-77 season onwards.

In many respects , developments i n the world sugar market over the l a s t four years have been s imi la r t o those i n the world cerea ls market and t o a large extent Community responses have a l so been s imilar . After r i s ing s t e a d i l y during 1972 and 1973, world sugar pr ices i n 1974 soared t o record leve ls mainly as a r e su l t of poor harvests i n some major producing countries.

The enlarged Community was affected by supply shortages caused by disappointing beet harvests , an unexpectedly la rge growth i n consumption leve ls i n 1973-74 and by de l ive r i e s from some developing Commonwealth countries being below supply commitments. A t the end of 1974 the price of white sugar on the world market was about t h r e e times the EEC threshold level .

I t i s against t h i s background t h a t the EEC Commission adopted a s e r i e s of t rade and production measures t o ensure adequate suppl ies t o t he domestic market. Consequently, f o r the f i r s t time s ince the introduct ion of the common organisation of t he EEC sugar market i n 1968, export l ev ies on unprocessed sugar were introduced a t the end of 1973 and import l ev ies were discontinued. (8) In addi t ion, i n February 1974 the Commission a l s o introduced a special export levy on syrups and other sugars t o avoid possible exports of Community sugar i n t h i s form, and i n December of t h a t year an export t ax was introduced on sugar contained i n processed products. (9) The system of export l ev ies was maintained throughout 1974 and for most of the f i r s t ha l f of 1975. Nevertheless, world sugar pr ices declined sharply during ear ly 1975 and i n June of t h a t year import l ev ies were re-introduced.

Broadly speaking, t he t r ade measures adopted by the Community with respect t o sugar were p a r a l l e l t o those introduced f o r cereals .

(8) This applied i n i t i a l l y only t o quota sugar production. However, it was extended during 1974 so t h a t sugar produced over and above the maximum quota was subject t o 80% of the export levy. Community exports of 'over quota' sugar (sometimes ca l led 'C ' quota) have a t times been subs tan t ia l , fo r example 665 000 tonnes i n 1973-74.

(9) In 1973-74 about 225 000 tonnes of sugar were exported by the EEC i n the form of manufactured goods.

However, an important dif ference was t h a t i n the case of sugar t he community undertook s p e c i f i c act ion t o encourage imports. For example, i n October 1974 the Community decided t o subs id i se ' sugar imports i n order t o compensate f o r supply def ic ienc ies , pa r t i cu l a r ly i n the U.K. and I t a l y . These were brought about mainly by s h o r t f a l j s i n de l ive r i e s by other Commonwealth countr ies . Under t h i s arrangenient some 500 000 tonnes of sugar were imported and the t o t a l cos t of t he import subsidies was about 140 mi l l ion un i t s of account (1 un i t of account is approximately equivalent t o $All. A fu r the r s ign i f i can t devetopment regarding EEC sugar imports occurred a t the beginning of 19.75 iwith t he negot ia t ion of p re fe ren t i a l sugar t r ade arrangements with .the EEC1s associated countr ies i n Asia, the Caribbean and the Pac i f ic ( the ACP countries) .(lo) Under these arrangements the ACP countr ies a r e guaranteed an annual market i n the EEC of 1.3 mil l ion tonnes of sugar, a t p r i ~ e s determined annually by negot ia t ion.

Sugar production over recent years i n the enlarged EEC has no t shown any s i g n i f i c a n t change and has generally been below se l f - suf f ic iency leve ls . Consequently, important s teps wereltaken t o encourage sugar production i n 1975-76. As with cerea ls , however, these s teps involved adjustments t o t he ex is t ing regulatory mechmisy and did not involve the adoption of new measures. Community sugar production i n 1975-76 was encouraged both through an expansion of pro$uction quotas and through a subs t an t i a l l i f t i n t he minimum pr ice f o r sugar beet . Production quotas were increased i n 1975-76 by 25% t o 13.2 mil l ion tonnes(l1) while the minimum (guaranteed) pr ice f o r quota sugar beet production was increased by 15% (compared with an increase of 7.5% i n 1974-75).

P r i o r t o the establishment of 1976-77 season pr ices , the Commission an t ic ipa ted a turnaround i n the supply posi t ion f o r the EEC leading t o a possible exportable surplus i n 1976. Therefore, no fu r the r measures were considered necessary t o encourage increased community sugar production,and the minimum beet p r ice f o r 1976-77 was increased by only 8% i n l i n e with the overa l l increase f o r other farm products. There was a l so a reduction again i n ' B ' quota sugar beet from 145% t o 135% of t h e bas ic , o r A quota which was no t increased. I n addi t ion, t he pr ice d i f f e r e n t i a l between 'A' and 'B' quota bee t was re-introduced.

(10) The ACP countr ies a r e a l l developing countr ies and have i n the past been colonies of the present EEC member countries. They include severa l countr ies of the B r i t i s h Commonwealth. To a l a rge degree the ACP p re fe ren t i a l sugar arrangements replace the Cornonwealth Sugar Agreement (C.S.A.) which expired a t the end of 1974. Austral ia was a member of the C.S.A. which involved the supply o f sugar t o the U.K. but is not included i n these new sugar arrangements.

(11) Sugar production i n t he EEC is largely regglated by production quotas which a re a l loca ted t o f ac to r i e s and hence t o sugar bee t producers. There a r e two c lasses of quota, namely ' A t and ' B 1 . P r ior t o 1975-76 'A' quota production received a pr ice premium &ove ' B ' quota. For 1975-76, however, the minimum pr ice f o r production under both quotas was made iden t i ca l . Nevertheless the system s t i l l d i f f e r en t i a t ed between the two quota types. For 1975-79, 'A1 quota was increased from 7.82 mil l ion tonnes t o 9.136 mil l ion tonnes and 'B' quota was increased from 35% t o 45% of 'At quota.

Beef ond Veal

Tight world supplies and r i s i n g demand i n conjunction with increases i n the volume of i n t e rna t iona l t rade resu l ted i n pr ices f o r beef and veal reaching h i s t o r i c a l l y high leve ls i n 1973. However, unl ike the s i tua t ion i n the cerea ls and sugar markets, these high world pr ices were not sustained i n 1974 and i n f a c t p r i c e s and t rade turned sharply downward t o extremely depressed levels . This was caused i n i t i a l l y by a slowing of world demand growth and s i g n i f i c a n t l y increased world supplies. Within the Community, c a t t l e slaughterings i n 1974 increased by about 21%, pa r t l y a s a r e s u l t of g rea t ly increased feed costs , while consumption rose only marginally. (12) There was a f u r t h e r increase i n slaughterings of about 3% in 1975 w i t h only a s l i g h t increase again i n per caput consmption. Declining beef m r k e t p r ices and increasing farm cos ts adversely affected producers' incomes while a t the same time there was a subs tan t ia l increase i n EEC intervention stocks which had previously been a t neg l ig ib le levels . In response t o t h i s s i t ua t ion the Community introduced a v a r i e t y of t rade and production measures designed t o maintain the domestic market and t o support market pr ices . However, apa r t from a few important exceptions most of these measures have been of an administrative nature taken within the framework of the ex is t ing beef and veal regime.(l3)

While several measures were adopted i n 1974, the two most important were the suspension of import l icences f o r beef from non-EEC countries and the introduction of s laughter premiums f o r beef producers. The suspension of EEC beef and vea l import quotas i n Ju ly 1974 has meant tha t ,apar t from small quan t i t i e s of beef and veal entering the EEC under the levy-free quotas of GA'IT(14), t h e Community beef market i s e f f ec t ive ly closed t o major beef exporters such a s Australia. This v i r t u a l embargo on beef imports by the EEC has continued i n t o 1976 although as a r e s u l t of steps approved during 1975 the re has been some s l i g h t re laxa t ion i n the r e s t r i c t i ons . A l imited and r e l a t i v e l y small number of s t o r e c a t t l e from Yugoslavia, Poland and Austria were allowed en t ry t o the EEC during the northern s m e r of 1975 and a small quant i ty of boned beef from four of the ACP countries i s a l so permitted en t ry on a continuing b a s i s in accordance with predetermined quotas. I n addit ion, a special export-import scheme was introduced a s from June 1975, allowing the importation of up t o SO 000 tonnes of beef i n t o t he Community by September.(15) The scheme was then relaxed s l i g h t l y t o allow t h e import

(12) For a de ta i led discussion of developments i n the French beef industry see A.C. Byrne, 'The Beef and Veal S i tua t ion i n France', &uarterZy Review o f Agricultural Economics, Vol. XXVII I , No. 2, April 1975.

(13) For a descr ipt ion of the measures taken i n 1974 see A.C. Byrne and T.H. Berenger, 'The Beef and Veal S i tua t ion i n the EEC', Meat : Situation and Outlook, BAE, Canberra, 1975 ..

(14) Within the framework of GATT the EEC has granted countries which a re exporters of frozen beef an annual export quota which. is not sub jec t t o the common customs t a r i f f . This quota, which is 38 500 tonnes i n 1976, f a l l s i n t o two par ts : a consolidated duty-free quota, and a quota which i s duty f r e e ye t l i a b l e t o compensatory taxes i f the \

offer ing pr ice i s inadequate.

(15) From June t o September 1975, import l i cences were issued f o r a t o t a l of 15 344 tonnes of meat under t h i s scheme.

of two t a n e s f o r each one tonne previously exported, u n t i l f i n a l l y , a t t h e end of December, the Commission decided t o abolish it. I t was replaced by a more usual l inking system h i c h had been used previously by the Community and which is s t i l l cur ren t ly operating. Under t h i s system t h e purchase of one tonne of intervent ion meat confers the r i g h t , i n pr inc ip le , t o import an equivalent quant i ty . Although these schemes have permitted the en t ry of ce r t a in q u a l i t i e s o f beef not r ead i ly avai lable i n t he EEC, they have nevertheless been e s s e n t i a l l y cosmetic and have had an in s ign i f i can t e f f e c t a Community beef t rade.

Overall, desp i te the p a r t i a l easing of import controls during 1975 and 1976, it i s apparent t h a t i n fu tu re t he EEC beef import regime i s l i k e l y t o be more protect ive than it was p r i o r t o the imposition of the import embargo i n 1974.(16) The Commission has proposed t h a t the import levy system should be more r e s t r i c t i v e when the embargo is eventually l i f t e d .

This w i l l be achieved by t igh ten ing up the import levy procedures. For example, when the in t e rna l market p r ice (reference pr ice) i s at a leve l between 98% and 100% of guide p r i c e (the pr ice t h a t t he au tho r i t i e s would l i k e t o be achieved) then the bas i c import levy i s charged, equal t o the f u l l amount between c . i . f . import p r ice and guide pr ice . However, only when reference pr ice reaches 112% of guide p r i ce is the import levy reduced t o zero. Under t he previous arrangements t h i s occurred when reference pr ice was 106% of guide pr ice . A t the other extreme the levy t o be charged under the new arrangements could r i s e t o a s high as 130% of the bas ic levy ( the previous maximum was 100%) when reference p r i ce f a l l s below 90% of guide pr ice .

The s laughter premium system which was introduced i n August 1974 represented an attempt by the EEC t o encourage c a t t l e producers t o temporarily withhold t h e i r c a t t l e from the market and t o encourage the order ly marketing of c a t t l e through the autumn and winter. The system involved a f l a t r a t e payment per head on f in i shed c a t t l e r i s i n g from the equivalent of about $A20 i n August 1974 t o about $A80 i n April 1975. This w a s i n addi t ion t o the re turn obtained through the supported market price. The provision of d i r e c t ass is tance of this type was a departure from the more t r a d i t i o n a l Community approach which has r e l i e d pr imari ly on high support p r ices t o maintain producer re turns . The above arrangements were replaced i n May 1975 by a system of var iab le s laughter premiums, The aim of t h i s system, which was introduced on the i n i t i a t i v e of t he U.K. and was optional t o member countr ies , was t o provide beef producers with a predetermined guaranteed re turn. Under t h i s system the difference between the market p r ice and the guaranteed u n i t r e t u r n was made up by a premium, the cos t of which was met p a r t l y from Community funds and p a r t l y by the member country concerned. The premiums paid t o producers varied according t o the s t a t e of the beef market. An e s s e n t i a l feature of the scheme was that the premium could not be paid on beef sold i n t o intervent ion. This scheme, which ran u n t i l April 1976, was s imi la r i n concept t o the U.K.

(16) For a de ta i led discussion of t he EEC beef and veal market p r io r t o 1974 see I .M. Roberts and G.L. Mi l le r , 'An Analysis of the EEC Market f o r Beef and Veal' , &uarterZy Review of AgricuZturaZ Economics, Vol. MIIV, No. 3 , July 1971.

deficiency payments scheme which was i n e f f e c t p r ior t o t h a t country's accession t o the EEC.(17) A s a concession t o the U.K., t h a t country has been permitted t o continue operating the premium system i n the 1976-77 marketing year but i n a modified form involving lower payments.

From 1974 through 1976 the EEC has been confronted f o r t he first time with major problems i n the beef sector . I n response, a large number of ad hoe and temporary measures have been adopted i n an e f f o r t t o p ro t ec t the domestic EEC market, t o support producers' incomes and t o reduce intervention purchases. Most of these have been taken within t h e framework of ex is t ing EEC beef policy, although measures such a s the variable slaughter premium represent an a l t e rna t ive form of support t o intervention and hence a s ign i f i can t development in terms of Cornunity beef market regulations. However, i t now appears t h a t these may b e phased out completely a f t e r the 1976-77 marketing season as moves have been made already i n t h i s direct ion, A fu r the r important development was the un i la te ra l action taken by some member countr ies t o support t h e i r domestic beef indus t r ies even though such act ion contravened the r u l e s and the s p i r i t of CAP. This i s discussed i n d e t a i l in a l a t e r sect ion. Such developments indicate the problems and d i f f i c u l t i e s involved i n reconciling, i n a s i t ua t ion of severe market s t r a i n , the i n t e r e s t s o f various countries by means of a s ing le a l l encompassing regional policy.

Dairy Products

Since the current Common Market arrangements f o r milk and milk products were introduced i n 1968, the EEC da i ry s ec to r has been characterised by very high support fo r market pr ices r e l a t i v e t o world pr ices (Graph I) and a consequent tendency f o r t he sec tor t o per iod ica l ly accumulate la rge intervention s tocks, p a r t i c u l a r l y of bu t t e r . I n f a c t , the Co~nmission has described the FEC milk sec tor a s having a ' pe r s i s t en t s t ruc tu ra l production surplus i n r e l a t i o n t o possible ou t le t s t (18) and a t various times during the past f i v e years the EEC has amassed huge s tocks of both bu t t e r (450 000 tonnes in July 1973) and of skimmed milk powder (1.3 mill ion tonnes i n May 1976).

Despite t h i s tendency towards excess production, t he EEC has introduced only l imited measures t o change the s t ruc tu re of i ts d a i r y industry and t o make it more responsive t o domestic and world market developments, Trad i t iona l ly the EEC has sought t o regula te domestic d a i r y production by manipulating support p r ice leve ls and t o dispose of a major portion of i t s accumulated surpluses on export markets by means of substant ia l export subsidies. In 1973, for example, some 200 000 tonnes of bu t t e r were shipped t o the USSR with an export subsidy a t a l eve l i n excess of $A1200 per tonne. A t the same time, the intervent ion p r i ce for bu t t e r was reduced while support f o r other dairy products w a s increased and t h i s tended t o make b u t t e r production less a t t r ac t ive . The Community a l so introduced some special b u t t e r disposal measures i n 1973 including sa les a t concessional p r ices t o manufacturers and t o various i n s t i t u t i o n s .

While these measures resu l ted i n a s ign i f ican t reduction i n bu t t e r stocks, other EEC measures, i n conjunction with market forces , have

(17) Under t h i s scheme U.K. c a t t l e producers received d i r e c t payments from the government on the d i f f e r ence . between the market p r ice of c a t t l e and a predetermined guaranteed pr ice which was fixed annually.

(18) Commission of the European Commlmities, O p . cit., p. 47.

subsequently encouraged increased production and stocks of SMP. For example, t h e r e was a 22% r i s e i n t he in te rvent ion p r i ce f o r SMP i n 1973-74 and i n excess of 25% i n 1974-75. While t h e r e was an overal l increase i n Community production, consumption declined i n both 1974 and 1975. This came about mainly a s the r e s u l t of a dec l ine i n SMP u t i l i s a t i o n i n l ivestock feeds tuf fs . I n addi t ion, t he s i t u a t i o n on the world market did not allow t h e disposal of the bulk of surp lus production as exports. Consequently, t h e r e was a build-up i n Comunity SMP stocks i n 1974 and 1975, p a r t i c u l a r l y i n t h e l a t t e r year. The EEC1s approach t o t h i s was t o re-introduce export r e s t i t u t i ons , t o r a i s e subsidies on t h e use of SMP f o r stockfeed and t o increase SMP food a id shipments. Also, t he intervent ion p r i ce fo r SMP was increased by only 7% f o r 1975-76 compared with a 14% increase f o r bu t t e r .

I n March 1976 despi te EEC SMP stocks of over 1.2 mil l ion tonnes t he Council again re jec ted more rad ica l reform measures proposed by the Commission and opted f o r t he reinforcement of ex is t ing pol ic ies . Thus, i n t h e 1976-77 pr ice package t h e intervent ion p r i ce f o r SMP was again increased by a l e s s e r amount than f o r but ter . A scheme was agreed upon t o enforce t h e incorporation of SMP i n compound animal feeds and it was decided t o increase shipments of SMP as food aid. The subsidy for feeding SMP t o calves was a l so increased.

The above measures taken by the Comunity a r e all of a short-term nature and designed t o a l l e v i a t e an excess supply problem confronting one o r more of the d a i r y products. The only attempt i n recent years t o make bas i c long-term changes t o t he d a i r y s ec to r a s a whole was the dairy-to-beef conversion scheme which was re-introduced i n 1973(19) a f t e r being suspended i n 1971. The major ob jec t ive of t h i s scheme was t o encourage producers, through subsidies, t o switch from da i ry t o beef production. The scheme appears t o have had l i t t l e impact on da i ry industry adjustment, the conversion premium being granted on only about 1% of the Community's da i ry cow population, and i n view of the depressed beef market it was discontinued a t t h e beginning of 1975.

Another recent development f o r t h e EEC da i ry industry has been the increasing use of consumer subsidies within t h e Community t o encourage t h e consumption of da i ry products. Subsidies on dairy consumption a r e common throughout the EEC and a re pa r t i cu l a r ly large i n t he U.K. (current consumer subsidies on b u t t e r of about $A225 per tonne). A p a r t of t h e U.K. b u t t e r subsidy is met from Community funds. While consumer subsidies have helped t o expand d a i r y consumption i n t h e Community t he cos t of such subs id ies has been immense (for example, i n 1974 EEC expenditure on p r i ce subs id ies f o r da i ry products amounted t o t h e equivalent of about $A650 mill ion) and they have not s i g n i f i c a n t l y reduced t h e tendency of the EEC t o produce per iodic da i ry surpluses.

The Impact of Major Economic Problems

Largely a s a r e s u l t of changes i n supply/demand balances t he re have been numerous regulatory and o ther adjustments t o the common

(19) For de t a i l ed discussion of the dairy-to-beef conversion scheme see BAE , 'Dairy Products : Si tua t ion and Out look I , NAOC Doctmsnts rind Discussion, Vol. 2, Canberra, 1974, p. E36.

organisation of the EEC's major agr icu l tura l commodity markets over t h e past f i ve years. I n addit ion, t h i s period has been one of g rea t economic and monetary i n s t a b i l i t y and these developments have had a s ign i f i can t e f fec t on the operation of the CAP. Of fundamental importance i n t h i s respect was the severe economic downturn i n EEC economies (and i n other indus t r ia l economies) during 1974 and 1975 and the evidence of increasing economic d i s p a r i t i e s between member countries. The economic ind ica tors shown i n Table No. 2 highl ight t he economic i n s t a b i l i t y i n recent Years and a l so the ser ious de te r iora t ion i n economic circumstances, pa r t i cu l a r ly the widespread negative GDP growth t h a t occurred i n 1975. The high degree of monetary i n s t a b i l i t y i s r e f l ec t ed i n the number and extent of exchange r a t e var ia t ions amongst member countr ies (Graph 11).

These economic and monetary developments have had a major and pervasive impact on European agr icul ture . There has been a s teep r i s e i n t he pr ice of EEC farm inputs, pa r t i cu l a r ly i n 1974 When they rose by over 18%. This placed great pressure on the incomes of many European producers, especial ly beef producers. In f ac t , t he squeeze on beef producers'margins was s~lch t h a t some EEC countries have taken independent action t o protect t h e i r beef i ndus t r i e s . Furthermore, t he high cos t of support i n times of economic recession, accompanied by widespread inf la t ion and the spread of consumerism, fostered increasing c r i t i c i sm of the cost of the CAP, especial ly amongst the major food importing member countries which bear a disproportionate share of the cost of farm support. The exchange r a t e f luc tua t ions have resu l ted i n t he introduct ion of a system of compensatory measures which have complicated t h e operation of the CAP and threatened the uni ty of the Community's ag r i cu l tu ra l markets.

Monetary Adjustments and Intra-Connnunity Fann Trade

One of t h e basic pr inc ip les of the CAP i s the harmonisation of pr ices of agr icu l tura l products throughout t h e EEC. These common pr ices are fixed i n tenns of the Community's un i t of account (UA) by agreement between the Ministers of Agriculture of the member countries. The UA which has i t s value fixed i n r e l a t i on t o gold (1UA = 0.8887 grams of f i ne gold) i s the b a s i s of the management of the common organisat ion of markets.(20) The currency of each member country has an o f f i c i a l p a r i t y re la t ionship t o gold and hence t o t he u n i t of account. During the past f ive years there have been several o f f i c i a l pa r i t y changes but more important has been the decision of individual member countr ies t o allow t h e i r exchange r a t e s t o f l oa t . As n r e s u l t of f loa t ing , t h e market values of individual member currencies d i f f e r from the o f f i c i a l p a r i t i e s used i n determining domestic agr icu l tura l prices. This has necessi ta ted the introduction of border compensatory measures t o prevent t h e i n t r a Community movement of agr icu l tura l commodities based s o l e l y on this monetary aberration.

Changes i n the o f f i c i a l gold p a r i t y of an EEC currency have a more or l ess automatic e f f e c t on domestic agr icu l tura l p r ices . In t he case of a devaluation the pr ices expressed i n loca l currency r i s e , while i n the case of a revaluation they f a l l . A f a l l i n ag r i cu l tu ra l p r ices

(20) Thc uni.t of account in the Community has a twofold object ive, namely t o prevent f inanc ia l contr ibut ions agreed jo in t ly from being affected by uni la te ra l decisions and t o enable au tho r i t i e s t o es tab l i sh common prices.

Table No. 2

ECONOMIC INDICATORS IN MAJOR EEC COUNTRIES -- - --

Item 1971 1972 1973 1974 1975 1976(a)

Percentage Growth of Real GDPCb)

France 5 , s 5.5 6.5 3.9 -2.4 6.3 Germany CGNP) 2.7 2.9 5.3 0.4 -3.4 5.5 I t a l y 1.6 3.4 6.3 3.4 -3.7 1.5 U.K. 1 . 7 3.4 5.2 -0.1 -1.6 2.3 Netherlands 4.5 4.5 4.2 3.3 -1.0 4.0

I n f l a t i o n @) France Germany I t a l y U.K. Netherlands

Percentage

Unemployment (d) France Germany I t a l y U.K. Netherlands

Percentage o f CiviZian Labour Force

$US bizZion Balance of Payments

France 0.53 0.27 -0.69 -6.00 0.30 -2.75 Germany 0.17 0.41 4.31 9.70 3.70 2.00 I t a l y 2.03 2.57 2.67 -8.00 -0.60 -2.00 U. K. 2.56 0.07 -2.88 -8.70 -3.80 -2.50 Netherlands 0.17 1.05 1 .77 2.00 1.60 2.50 EEC 4.94 5.47 0.50 -12.00 1.25 -5.25

lndex Nwnbers Indexes of farm income(e) pe r annual labour u n i t cf) i n r e a l terms (Base 1968=100)

France Germany I t a l y U.K. Netherlands

(a) Forecasts . (b) In consumer p r i ce s . Cc) National Accounts impl ic i t consumption d e f l a t o r . (d) 1976 f igures a r e f o r t h e f i r s t quar ter only. (e) 'Wages of farm workers' plus 'o ther income' = net value added a t f ac to r c o s t l e s s ' r en t s ' and ' i n t e r e s t payments'. ( f ) Adjusted f o r t he t rend of t h e GNP d e f l a t o r . na, no t ava i lab le .

Sources: OECD, Economic Outlook (various i s sues ) ; Commission of t h e European Communities, The AgricuZturaZ Situation i n the C o m n i t y , Report 1975, Part 111.

GRAPH II

EXCHANGE RATE ADJUSTMENTS OF SELECTED EEC CURRENCIES 164-

(Percentage change against the U.S. dollar between 1971 and 1976)

IS0 -

140 -

130 -

120 -

110 -

90 -

m -

I I I I 1 1 1 1 I I I I 1 I I I I I I 1 M I 5 D M 1 S D M 1 S D M 1 S D H 1 s D "L

1971 1972 I973 1974 1975 1976

S+wra OECD. Mun Ecommrc indk.tan luonous w a l

t h a t is exp l i c i t i n an o f f i c i a l currency revaluation disadvantages domestic ag r i cu l tu ra l producers and, consequently, countr ies t h a t have revalued, such as Germany and the Netherlands, have cushioned t h i s impact by grant ing spec ia l national producer subs id ies o r compensation. For example, between 1970 and 1974 German farmers received revaluation compensation equivalent t o about $A2000 mi l l ion and t h i s ass i s tance w i l l not be f i n a l l y phased out u n t i l the end of 1978. A s ign i f i can t p a r t o f t h i s has come from Community sources.

With f l o a t i n g exchange r a t e s t h e r e a r e no corresponding automatic adjustments made t o support p r ices i n terms of un i t s of account which therefore continue t o be converted i n t o nat ional currency a t t he o f f i c i a l par i ty . However, the o f f i c i a l p a r i t y no longer corresponds t o t he value of a member's currency as determined by foreign exchange markets. In terms of market exchange r a t e s f o r currencies , t h i s leads t o a d i spa r i t y between t h e agr icu l tura l p r i ce leve ls guaranteed i n t h e var ious member countr ies and tends t o d i s rup t t he organisation of Community markets. For example, producers i n a member country whose currency has f loa ted downwards would be inc l ined t o d i r e c t t h e i r products towards an intervent ion centre i n a member country with an appreciating exchange r a t e as t h i s would give them a higher re turn i n terms of t h e i r country's currency. Since 1971 most of t he EEC currencies have been f l o a t i n g e i t h e r j o in t ly o r individual ly and t h i s has necessi ta ted a system of f r o n t i e r compensatory payments ( referred t o as monetary compensatory amounts, or MCAs) .

The purpose of these compensatory payments as applied t o i n t r a Community t rade i s t o o f f s e t t he dif ference between the o f f i c i a l exchange r a t e s applied under CAP and the value of the currencies as determined pr imari ly by market forces. When a currency i s revalued on foreign exchange markets without a corresponding change t o i t s o f f i c i a l pa r i t y , compensatory payments a r e charged on ag r i cu l tu ra l imports and granted f o r a g r i c u l t u r a l exports t o o f f se t t he d i f fe rence between the market and o f f i c i a l p a r i t i e s . Al ternately when a currency i s devalued, payments a r e charged on exports and granted on imports. Compensatory payments a r e a l so applied i n a s imi l a r manner t o EEC t r ade with non-member countr ies and a r e e i t h e r added t o o r , a s the case may be, deducted from import l ev ies and r e s t i t u t i o n s .

The operation of the f r o n t i e r compensatory payments systems has become increasingly complicated as a r e s u l t of the enlargement of the EEC and more importantly by the frequent d i f fe rences between the o f f i c i a l and market p a r i t i e s of member currencies since 1973.(21) Farm support p r ice l eve l s , i n terms of nat ional currencies, have lo s t t h e i r comparability between member countr ies and the f r ee flow of ag r i cu l tu ra l products throughout t he Community has been impeded by the imposition of border taxes and subsidies . Frequent a l t e r a t i o n s i n the leve ls of compensatory payments have a l so increased the uncer ta inty of intra-Community farm t rade .

(21) The three new member countries, the U.K., I re land and Denmark, apply accession compensatory amounts which w i l l be eliminated i n s i x s tages . For those member countries t ha t a r e f l oa t ing i n i so l a t i on , France, I t a l y , the U.K. and Ire land, the EEC Commission f ixes the f r o n t i e r compensatory amounts each week. For those countr ies t h a t a r e f l o a t i n g together i n t he so-called 'snake', Germany, Denmark and the Benelux countr ies , compensatory amounts do not change during the marketing year.

In fac t it has become c l e a r t h a t while t h i s mechanism has enabled the CAP t o function, despi te frequent exchange r a t e f luc tua t ions , important cos t s have a l so been involved. In t he first place, t he d i r e c t f inanc ia l burden of monetary compensatory measures is considerable and i n t he f i r s t s i x months of 1975 alone, f o r example, Community expenditure f o r t h i s purpose was estimated by the Commission t o have been about 299 mill ion UA.(22) In addi t ion, compensatory payments have a l so caused severe d i s tor t ions t o resource a l l oca t ion i n Community agr icu l ture and t o agr icul tural t rade flows within t he Community.

The r e su l t of compensatory payments has been t h a t a g r i c u l t u r a l production and consumption within member countries of t h e Community have been shielded from the f u l l e f f e c t s of currency changes. Normally a revaluing country w i l l b ene f i t from a r e l a t i v e decline i n t he u n i t cos t of i t s imports ( in terms of i t s currency) while a t the same time it w i l l be disadvantaged by a r e l a t i v e decl ine i n t he un i t value of i t s exports (again i n terms of i t s currency). Consequently, i n broad terms, a revaluation w i l l tend t o bene f i t consumers through cheaper imports and

I disadvantage exporters through reduced export returns. ?he reverse is

i applicable i n the case of a country with a depreciating currency. I n the Community, however, the normal economic consequence of currency adjustment

I have not been allowed t o occur. For example, i n countries with r e l a t i v e l y

I strong currencies, such a s Germany and the Netherlands, t h e monetary compensatory mechanism has tended t o benef i t producers, penal ise consumers and ensure the continuance of t h e strong balance of payments pos i t ion of these countries. Thus the d i r e c t r e s u l t of the imposition of d i r e c t charges on agr icu l tura l imports and subsidies on ag r i cu l tu ra l exports i s t o pa r t l y offset t he expected impact o f an appreciating currency.

I

Furthermore, monetary compensatory payments have a l so influenced the a l locat ion of resources within t he ag r i cu l tu ra l s ec to r and between agr icul ture and other sectors . For example, i n I t a l y i n mid-1974 border compensatory payments of about 28% of market p r ice were being levied. This represented the extent t o which I t a l i a n farm pr ices t r a i l e d behind the general level of p r ices i n t h a t country. The r e s u l t was a corresponding pr ice d i s to r t i on between the farming sector and t h e r e s t of 'the economy.

The d i f f i c u l t i e s involved i n attempting t o maintain common p r i c e leve ls have encouraged the Community t o adopt measures t o improve t h e functioning of in te rna l ag r i cu l tu ra l markets during monetary i n s t a b i l i t y . A major objective has been t o reduce the s i z e and importance of compensatory payments. This has been achieved, a t l e a s t p a r t i a l l y , by moving from a system whereby ag r i cu l tu ra l p r ices ( i n na t iona l currencies) are based on the o f f i c i a l gold p a r i t y t o one where farm pr ices a r e derived from so-called representat ive exchange r a t e s which a re more i n l i n e with

', actual conditions on t he exchange markets. The representat ive, o r 'green' r a t e s , indicate the re la t ionsh ip between the u n i t of account and na t iona l currencies. 123)

(22) Office for Of f i c i a l Publications of the European Communities, OfficinZ JournaZ of the European Comunities, No. C.277, 4 December 1975.

(23) Representative r a t e s were f i r s t s e t f o r the currencies of the three ncw member countries. Rates were subsequently s e t f o r t he I t a l i a n l i r a and the Dutch guilder. In February 1975 the Council s e t representative r a t e s f o r the currencies of a l l member countr ies .

Representative r a t e s i n the EEC have been pr imari ly used t o reduce the compensatory payments appl icable on those currencies t h a t have undergone a s ign i f i can t depreciation such a s the l i r a and the ' pound (see Graph 111). Since the e f fec t of adjust ing the representat ive r a t e s is s imi l a r t o a change i n a currency's gold pa r i t y , common farm pr ices expressed i n na t iona l currency have r i s e n i n those ' coun t r i e s with r e l a t i v e l y weaker currencies.

The Community's a t ten t ion has a l s o been focused on the composition and appl icat ion of the un i t of account. The u n i t of account defined i n terms of gold and e n t a i l i n g a conversion procedure, based on currency p a r i t i e s , ra ised no major problems f o r as long as fixed exchange re la t ionsh ips prevai led i n the i n t e rna t iona l monetary systan. However, t h e f l o a t i n g of exchange r a t e s away from the o f f i c i a l gold p a r i t i e s has meant t h a t t he conversion operations provided f o r i n Community regulat ions have l o s t t he foundation upon which they were based. There i s c l ea r ly a need t o devise a more f l ex ib l e un i t of account enabling the present d i s p a r i t i e s between a l l t he Community currencies t o be reconciled, whether they a r e f l o a t i n g j o i n t l y or separately. Consequently, t o modify the undesirable e f f e c t s of f loa t ing currencies t h e Commission proposed, i n December 1974, a new type of un i t of account based on a 'currency basket ' o f members1 currencies.(24) Under t h i s system sudden var ia t ions i n t he u n i t of account t)?s-&v7:8 a l l the currencies i n t he basket, r e su l t i ng from exchange r a t e movements, would be absorbed. A change i n t he exchange r a t e of a currency a f f e c t s the value of t he u n i t of account only i n terms of i t s r e l a t i v e weight i n t he basket. The Commission bel ieves t h a t a 'currency basket1 type u n i t of account would cons t i t u t e a s t ep towards the establishment of a Community monetary iden t i t y . While t h e r e a r e c l ea r advantages with t h e currency basket concept t h e r e a r e no plans a t present fo r its introduct ion t o the CAP. This is l i k e l y t o require lengthy bargaining by member countries and complex adminis t ra t ive adjustment of EEC a g r i c u l t u r a l t r a d e arrangements.

However, desp i t c the d i f f i c u l t i e s and cos t s involved i n the adminis t ra t ion of t h e current CAP monetary arrangements, pa r t i cu l a r ly those a r i s i n g from the MCA system, the Community is apparently unable t o agree on any permanent solution t o these problems. The Commission i s i n favour of complete abol i t ion of MCAs and has suggested t h a t t h e system be phased out i n s tages t o avoid excessive disruption.(25) But, on recent ind ica t ions , t he many inter-country compromises which a re an e s sen t i a l p a r t of the CAP decision making process w i l l make t h i s object ive very d i f f i c u l t t o a t t a i n . For example, i n l i n e with i t s policy, t he Commission put forward a s p a r t of i t s 1976-77 p r i c e proposals t h a t t he Dutch and Belgian MCAs be eliminated al together and t h a t those of o ther members be cut by varying amounts by the adjustment of representat ive r a t e s . However, the Benelux countr ies were unwilling t o have the pr ice increases fo r t h e i r farmers reduced t o t he extent implied by these proposed adjustments and the U.K. successful ly r e s i s t e d devaluation of i t s

(24) A fore-runner i n t h i s respect was the first un i t of account, the EURCO, which was introduced i n 1973 by the European Investment Bank. Several loans denominated i n t h i s u n i t of account have been issued by the Bank. In addi t ion the Special Drawing Right (SDR) of the IMF i s a l s o based on a basket of currencies concept.

(25) Commission of the European Communities, Memorandwn : AgricuZtu~e 1973-1978, Brussels, November 1973.

GRAPH I l l

ADJUSTMENTS IN EEC REPRESENTATIVE EXCHANGE RATES AND IN MONETARY COMPENSATORY AMOUNTS

( mca: monetary cornpensatow amounts

I er: exchange rama

rp: repretentative Breed rates

Sources: Commission of the Eumpean Comm"nitisr. Infwmstion. Economy andFlnenca, March 1975, and The AgricuItural Situation k ihe Communiw. 1976

Rapom. Pa* I-Synthesis: AGRA Eump, 19 March 1976.

represen ta t ive r a t e a s t h i s would have added t o the consumer food pr ice increases brought about by the annual pricesagreement. Therefore, the Cornmission's moves towards phasing out the MCAs were considerably diluted.

The rapidly escalat ing cos t of t he MCAs i n ea r ly 1976 brought about mo the r attempt t o solve the problems a r i s ing from use of the system. The Commission estimated t h a t the cost t o the EEC's 1976 budget would r i s e f r o m t he 248 mill ion UAs o r i g i n a l l y provided f o r t o 800 mill ion UAs a s 8 r e s u l t of depreciation of the pound and the lira. A special meeting of t he Council of Agriculture Ministers was held i n April, therefore , t o consider how t o a l l e v i a t e t he s i tua t ion . Once again no fundamental solut ions were reached and it was decided instead t o devalue t h e representat ive r a t e o.? t he l i r a by about 6% and t o t r ans fe r t o the expor&nR country the Yayment of TICAS on intra-Community s a l e s of ag r i cu l tu ra l products t o I t a l y and t h e U . K . This l a t t e r measure i s bas i ca l ly an accounting device ~ihici! w i l l have the e f f e c t of reducing the auparent cost o:? the ?.4CAs as expressed i n the Community budget i .e. making the system appear cheaper. (26)

The MCA system continues t o operate, therefore , despi te t he considerably increased cost i n 1976 and the Commission's policy i n favour of i t s abol i t ion and t h e res tora t ion of un i ty of agr icu l tura l markets i n t h e Community.

NatimZ A i d Measures i n Individual Member Countries

An important new fea tu re a f fec t ing European agr icul ture over the pas t th ree years has been the extent t o which individual member countries have taken u n i l a t e r a l act ion with respect t o po l i c i e s a f fec t ing t h e i r ag r i cu l tu ra l production and t rade. These ac t ions which have been taken outs ide the provisions of the CAP and without Council endorsement have stemmed from e i t h e r a ser ious de te r iora t ion i n the economy of a pa r t i cu l a r country or i n t he economic circumstances confronting an individual industry.

The chief example of the former was the import r e s t r i c t i o n s imposed by I t a l y i n May 1974 on a wide range of products including ag r i cu l tu ra l products. The aim of these measures was t o curb domestic demand and t o improve the country's ser ious balance of payments s i t u a t i o n caused l a rge ly by the g rea t ly increased cos t of o i l imports. These import r e s t r i c t i o n s , as applied t o ag r i cu l tu ra l products, involved t h e deposit by importers of 50% of the c.i.f. value of t he imports f o r s i x months i n the Bank of I t a l y , i n t e r e s t f ree .

(26) This apparent reduction i n t he cost of MCAs occurs because the Community's budget i s drawn up i n u n i t s of account d i f f e r en t t o those used for t he CAP. Exchange r a t e s used f o r budget purposes a r e s t i l l derived from pre-1971 (Smithsonian agreement) p a r i t i e s while t h e ' r epresen ta t ive ' r a t e s used i n ag r i cu l tu re a r e i n f a c t c loser t o ac tua l market exchange r a t e s . Therefore, the stronger currencies of recent years (e.g. t he Deutsche Mark) a r e now undervalued i n budget terms and the weaker currencies (the pound and the l i r a ) are now overvalued. Because of these anomalous conversion r a t e s , the EEC farm budget appears to cost l e s s i f more operations are conducted i n t he s t rong currencies e.g. by paying MCAs i n Germany ra ther than i n t he U.K. or I t a l y .

In view of the t h rea t t o the un i ty of EEC agr icu l tura l markets posed by these r e s t r i c t i o n s , the Commission reached a compromise agreement with the I t a l i a n Government f o r a l i f t i n g of the deposi ts f o r a l l agr icu l tura l products except beef, on which it remained at a l eve l of 25%, i n re turn f o r a number of concessions. These included a 12.5% depreciation of the 'green ' l i r a (the representat ive r a t e ) and the temporary suspension of compensatory payments on beef and veal imports f o r a period of three months together with a reduction of compensatory payments on other I t a l i a n ag r i cu l tu ra l imports. The import deposit fo r beef was not l i f t e d u n t i l March 1975.(27)

Although the I t a l i a n r e s t r i c t i o n s on agr icu l tura l imports were almost en t i r e ly removed shor t ly a f t e r they were f i r s t imposed they provided a good example of a member country being obliged by domestic economic conditions t o take independent act ion regard less of t he disrupt ive e f fec t s o f such act ion on the f r e e flow of agr icu l tura l

' commodities within t he Community.

An example of un i l a t e r a l ac t ion t o support a pa r t i cu l a r industry o r indus t r ies occurred i n 1974 when France and Belgium introduced nat ional subsidies t o support t h e i r a i l i n g l ivestock sectors. I n J u l y 1974, the French Government announced a group of farm income subsidies valued a t about 2000 mill ion francs ($A282 mil l ion) designed t o a s s i s t l ivestock and ho r t i cu l tu ra l producers. In the beef industry the measures included a premium of 200 francs per head (about $A28) payable f o r the first f i f t e e n breeding cows on a farm and i n the p ig industry a premium of 100 francs per sow, a l so payable on the f i r s t f i f t e e n sows per farm. A t t h e end of Ju ly the Belgium Government announced a number of d i r e c t , once and fo r al l , subsidies t o beef producers and a slaughter premium f o r p ig producers. For beef producers t he subsidy was the equivalent of $A32 per head for the first ten animals and the equivalent of $A24 per head f o r t he next ten.

These nat ional income support measures contravened the regulations and the s p i r i t of t he Common Agricultural Policy and met severe c r i t i c i sm from other Community members and t h e Commission. Nevertheless, the impact of l a rge increases i n farm c o s t s and the worsening income posit ion of many EEC farmers, especial ly i n the l ivestock sector , was widely recognised and resu l ted i n the EEC Council agreeing i n September 1974 t o an increase of 5% i n Community farm pr ices . A t t he same time, Germany, through i ts th rea t t o ve to the farm pr ice increases , extracted an agreement from o ther count r ies t o phase out na t iona l a ids and an acceptance i n pr inc ip le t o review the e n t i r e operation of the CAP, which resul ted i n t h e 'Stocktaking' exercise .

Despite t h i s agreement and e a r l i e r c r i t i c i sm it appears t h a t t he Council subsequently adopted a more accommodating a t t i t u d e towards national measures t o a s s i s t domestic beef producers. This was exemplified i n France being authorised by the Council i n May 1975 t o pay a breeding cow subsidy, similar t o i ts 1974 scheme, i n l i e u of s laughter premium payments.

(27) A s imilar import deposit scheme was re-introduced by I t a l y f o r a period of three months from May 1976 onwards, but on t h i s occasion the action was taken with the agreement of the other EEC members.

More recent ly , the Council has been embroiled i n a dispute between France and I t a l y over wine trade. This ~ i g i n a t e d wken France, i n response t o pressure from domestic producers, imposed a un i l a t e r a l ban on imports of I t a l i a n wine i n April 1975. The Commission informed the French Government t h a t t h i s action was i l l e g a l and, with the I t a l i a n Government, proposed court ac t ion against France under t h e Treaty of Rome a r t i c l e s guaranteeing free t r ade throughout t he Community and under t he common wine market regulat ion banning the operation of quan t i t a t i ve r e s t r i c t i o n s on produce from o the r member countries. France l i f t e d the import ban following a spec ia l meeting of the Council a t which a number of concessions , aimed a t a l lev ia t ing the wine surplus s i t u a t i o n , were adopted. However, France did not consider these adequate and i n September 1975 imposed an import t a x of up to 15% on I t a l i a n wine. The Commission informed France t h a t t h i s action was a l so a v io la t ion of t he EEC f r e e t r a d e ru les but t h e t a x was not removed again u n t i l April 1976 following a reduction i n I t a l i a n exports of wine t o France and Council moves t o reform EEC wine market regulat ions .

The above developments have highlighted the f r a g i l e nature of Community ru l e s governing agr icu l tura l production and t rade i n the face of determined act ion by individual member countries t o pro tec t t h e i r econolaies and t h e i r agr icul tural producers. On the other hand, the CAP has a t the same time demonstrated a considerable r e s i l i ence i n its a b i l i t y t o withstand the in t e rna l s t r a i n s caused by these act ions , Member s t a t e s have a l so shown a will ingness t o compromise and t o make adjustments t o t he r u l e s , thus preventing the s t ruc ture breaking apar t .

Constoner Interests and Cost of the CAP

One of t he objectives of the Common Agricultural Policy as specif ied i n the Treaty of Rome is t o ensure t h a t supplies reach consumers a t reasonable pr ices . The Treaty does not, however, def ine what is reasonable. Despite t h i s objective the operation of the CAP has r e f l ec t ed a s t rong producer b ias . This has been due i n par t t o the s t rength of t he influence of ag r i cu l tu ra l i n t e r e s t s within the Community, i n conjunction with the continuing attempt t o maintain producers'incomes a t reasonable l eve l s i n r e l a t i o n t o those earned i n o ther economic sectors. A s a r e s u l t , fo r much o f the time s ince the inception of the CAP, producer pr ices have been maintained a t l eve ls which have been i n some cases well above world pr ices . Developments i n recent years such a s EEC enlargement, double d i g i t i n f l a t i on and the economic recession, however, have resul ted i n increasing a t t en t ion by EEC consumers and member governments t o i s sues such a s the cos t of food and the cost of a g r i c u l w r a l support.

Pr ior t o 1973, r e t a i l food pr ices within the Community, although r e l a t i v e l y high, were a l so r e l a t i ve ly s t a b l e showing only moderate annual increases. The increases since 1973 have been much grea te r largely as a r e s u l t of sharp r i s e s i n the cost o f ag r i cu l tu ra l production and subsequent increases i n farm support pr ices . However, t o some extent t he CAP successful ly insulated the EEC from the unprecedented increases i n t he pr ices of many ag r i cu l tu ra l commodities on world markets. I n f a c t i n 1974 the increase i n consumer pr ices for foodstuffs was 10.4% i n the or ig ina l s i x countr iss of t he Community compared with 14.6% i n the United S ta tes and 29.0% i n Japan. In Australia the consumer food pr ice index rose by 10.0% i n 1974.

Within the enlarged Community the impact of r i s i n g commodity prices has been pa r t i cu l a r ly important i n the United Kingdom. Pr ior t o EEC accession, food pr ices i n the U.K. were r e l a t i v e l y low compared t o those in the or ig ina l Community, p a r t l y as a r e s u l t of the U.K.'s open import pol icy and i t s system of def ic iency payments t o l oca l producers. Following the adoption, a t the beginning of 1973, of t he t r a n s i t i o n a l arrangements of the CAP, the United Kingdom has experienced a rapid increase i n r e t a i l food pr ices of 15% i n 1973, 18% i n 1974, and 26% i n 1975. Imports by the U.K. of foodstuffs and beverages a l so increased from E2200 mil l ion i n 1972 t o E4200 mi l l ion i n 1975,

These developments were instrumental i n t he U.K. 's renegotiation, during much of 1974 and ea r ly 1975, of its t e rns of accession t o the EEC. Important Br i t i sh object ives i n t he renegot ia t ions were to make the CAP more f l e x i b l e i n regulat ing the production and marketing of ag r i cu l tu ra l commodities, t o ensure t h a t g rea t e r p r i o r i t y be given t o the i n t e r e s t s of consumers and t o introduce 'new and f a i r e r methods' of financing the Community budget.(28)

In the event, the U.K. obtained Community approval f o r a number of special arrangements designed t o pro tec t U.K. consumers from the f u l l e f fec t s of producer pr ice increases, i n support f o r market prices. These measures include consumer subsidies f o r b u t t e r and a system o f var iab le slaughter premiums on beef c a t t l e . These slaughter premiums, which were referred t o e a r l i e r , represent an a l t e r n a t i v e t o intervent ion buying s ince they allow consumers t o buy beef a t lower market p r ices while d i r e c t subsidies are paid t o producers t o br ing t h e i r r e tu rns from the market up to a predetermined level . he cost of the b u t t e r and the beef subsidies are borne jo in t ly by the U.K. and the EEC.

However, despi te these indicat ions of a p a r t i a l s h i f t i n emphasis towards consumer i n t e r e s t s i n recent years, progress i n this direct ion has been only s l i gh t o r has proved t o be temporary. For example, the beef slaughter premium system was weakened f o r the 1976-77 season by Council agreement and in i t s modified form it involves lower payments. I n addit ion, the Commission issued a repor t on the s laughter premium system i n April 1976 which c r i t i c i s e d the system on the grounds of cost and suggested t h a t it should not become a permanent p a r t of t he EEC beef market support regime. Furthermore, consumer i n t e r e s t s appear t o have l e s s inf luence on the CAP decision making process than do t h e agr icu l tura l producers. Unlike the farmers' lobby group,COPA,which i s now v i r t u a l l y a p a r t of the i n s t i t u t i o n a l s t ruc ture , consumer groups a r e not yet c losely involved in the consul ta t ions held p r i o r t o t he annual p r ice f ix ing process. I n general t he CAP has remained b a s i c a l l y producer oriented.

i I The second and associated reason f o r the increasing challenge t o

I! the longstanding producer b ias of t he CAP i s the high cos t of ag r i cu l tu ra l support and the asser t ion t h a t importing countr ies bear a disproport ionate share of the cost of t h i s support. The bulk of the EEC budget expenditure is channelled i n t o the EEC farm sector , mainly t o support ag r i cu l tu ra l producer pr ices through the Guarantee Section of the European Agricul tural

(28) Membership of the European Commity: Report on Renegotiation, Presented t o Parliament by the Prime Minister, March 1975, London, H.M.S.O. Cmnd. 6003.

Guidance and Guarantee Fund (EAGGF) . In 1974 and 1975, f o r example, the EAGGF accounted for 66% and 81% respec t ive ly of t o t a l Community budget expenditure (see Table N0.3). The Guarantee Section accounted f o r over 90% of the amount directed t o agr icu l ture i n these two years. The balance of expenditure on agr icu l ture was spent by the Guidance Section which is involved e s s e n t i a l l y i n financing measures t o achieve s t ruc tu ra l reform i n EEC agr icu l ture .

Table No. 3

EEC EXPENDITURE PATTERNS

Total Expenditure Expenditure Total Expenditure of the Year Community of

of t he EAGGF a s

Expenditure EAGGF 'Guarantee' 'Guidance' a share Section Section of GDP

mi l l ion UA mil l ion UA mi l l ion UA mil l ion UA %

1976(e) " 7577 5485 5160 325 0.50

(e) Estimated.

Sourc@s: Agence Europe, No. 1769, June 1975, Bul le t in of t h e European Communities, No. 7/8, 1975; Commission of t he European Communities The AgricuZturaZ Situation i n the C o m i t y , Report 1975, Vols I and 111, and OfficiaZ Journal of the Europerm C o m i t i e s , 15 March 1976.

Between January 1971 and January 1975 expenditure by the EAGGF was covered from three main sources namely:

- l ev ies and charges i n s t i t u t e d under t he CAP on t rade with non-member count r ies ,

- a progressive proportion of t he Common Customs Tar i f f , and

- f i nanc ia l contr ibut ions from member countr ies i n order t o ensure a balanced budget.

A s from the beginning of 1975 the t h i r d of these sources was t o have been abolished and replaced by the revenue from a r a t e of Value Added Tax (VAT) no t exceeding 1%, appl icable i n each member s t a t e on a uniform basis . However, t he introduction of t h i s has been delayed by an i n a b i l i t y t o agree on a uniform bas i s f o r assessment of t he VAT. In t h e meantime the t h i r d source of revenue cons i s t s of f inanc ia l contributions based on members1 shares of t o t a l Community GNP.

EAGGF expenditure i s not high i n r e l a t i on t o t o t a l Community GNP, having been well below 1% i n every year between 1971 and 1975. Expenditure a lso sometimes f a l l s from one year t o the next, a s happened i n 1974, f o r example, when it was i n f a c t lower i n r e a l t e n s than expenditure i n 1970. This came about la rge ly a s a r e s u l t of higher world commodity pr ices and r e l a t i v e l y low EEC commodity surpluses. Nevertheless, t he cos t of support i s a contentious issue, espec ia l ly among the major food importing member countr ies such as Germany, s ince i n effect it involves a t r a n s f e r of f i nanc ia l resources from these countr ies t o major agr icu l tura l exporting countr ies . These countr ies have expressed concern a t the poss ib i l i t y t h a t Community farm expenditure could r i s e s teeply i f surpluses appear over a wide range of commodities. In f a c t t h i s has already pa r t l y occurred i n 1975 and 1976 with t h e build-up of EEC surpluses of beef, dairy products and wine. Estimated expenditure by t h e guarantee sect ion of EAGGF i n 1975 was 4572 mil l ion u n i t s of account compared with actual expenditure of 3107 mil l ion un i t s of account i n 1974. It i s estimated tha t the budget f o r t h e guarantee sect ion i n 1976 could exceed 5100 mill ion u n i t s of account.

A s a r e s u l t of t he U.K./EEC renegot ia t ions t h e U.K. managed a t t he beginning of 1975 t o achieve some moderate reduction i n i t s budget commitments. The EEC Commission has a l s o recent ly acknowledged t h a t t h e cost of t he CAP i s a major problem and i n i ts 'Stocktaking' document it suhmitted various proposals d i rec ted a t l imi t ing EEC farm expenditure. These are discussed i n a l a t e r section.

Despite these r e l a t i v e l y minor developments, however, t h e cost of EAGGF Guarantee Section expenditure i s l i ke ly t o be a continuing source of problems f o r the Community budget. The system of ag r i cu l tu ra l support in the Community continues t o generate subs tan t ia l commodity surpluses which a r e a d i r e c t and major charge against t he EAGGF. Similar ly , monetary developments such a s t he depreciation of the pound and the l i r a in ear ly 1976 also r e s u l t i n subs tan t ia l and la rge ly unpredictable addit ional expenditure whilc the MCA system remains i n operation. Finally, although the EAGGF represents only a small f r a c t i o n of t o t a l Community GNP, it is the major EEC budget item and the uneven d i s t r i bu t ion of the cost can and does cause f r i c t i o n within t he Community.

S t r u c t u r a l Adjus tment i n EEC A g r i c u l t u r e

Under the Treaty of Rome a p r i o r i t y object ive of t h e CAP is t o increase agr icu l tura l product ivi ty and t o improve t h e u t i l i s a t i o n of labour and other resources i n EEC agriculture.(29) I t i s d i f f i c u l t ,

!' however, t o reconci le t h i s ob jec t ive with the s t r u c t u r a l imbalances i n many of the EEC' s commodity markets caused by t h e CAP mechanism. I

Community farmers a r e . l a rge ly insulated from. the e f f e c t of marke t . forces

(29) Ar t ic le 39( l l (a) o f the Treaty of Rome s t a t e s t h a t t he first object ive of the Common Agricultural Policy i s ' t o increase agr icu l tura l productivity by promoting technical progress and by ensuring the national development of agr icu l tura l production and the optimum u t i l i s a t i o n of the f ac to r s of production, i n pa r t i cu l a r labour'.

through a11 elaborate ..system of high p r i ce supports and t r ade b a r r i e r s which, as described e a r l i e r , have led t o periodic production surpluses of severa l ag r i cu l tu ra l products. I t is apparent t h a t support f o r farm incomes through the pr ic ing mechanism has become the main fea ture of the CAP system and has i n prac t ice taken precedence over t h e object ive of e f f i c i e n t resource use. Community expenditure on s t ruc tu ra l reform programs, therefore , has been r e l a t i v e l y small compared .with expenditure on pr ice support arrangements (see Table No. 3 ) .

Nevertheless, expenditure by individual countr ies on s t ruc tu ra l programs is s t ~ b s t a n t i a l . For example, i n 1974 such expenditure by member count r ies was an estimated 3146 mil l ion u n i t s of account, which was s l i g h t l y g rea t e r than the amount spent by the Community on pr ice support under the Guarantee section of the EAGGF. The major ro l e of t he Community i n t he f i e l d of ag r i cu l tu ra l s t r u c t u r a l pol icy has been t o provide some f inanc ia l ass i s tance and to co-ordinate the s t r u c t u r a l measures taken by member countr ies . In t h i s respect it pa r t i c ipa t e s on a j o in t bas i s with member countr ies (with funds provided by both national and Community budgets) i n pro jec t s t o a s s i s t persons wishing t o leave agr icu l ture (through r e t r a in ing programs and retirement premiums), i n pro jec t s t o a s s i s t those persons remaining i n agr icu l ture (farm enlargement programs and low i n t e r e s t loans) and i n pro jec t s t o promote development of information serv ices and vocational t ra in ing of farmers.(30)

Undoubtedly the impact of Community and na t iona l s t r u c t u r a l reform programs on resource movement and ag r i cu l tu ra l product ivi ty has been reduced hy the Community's p r ice support arrangements which have tended t o discourage and slow down the adjustment process. Nevertheless t he re has been a re1;l t ively high percentage movement (about 4% per annum i n the origi.na.1 Community members) o f labour out of EEC agr icu l ture . Between 1961 and 1971, 5.5 mill ion farmers moved out of agr icu l ture i n t h e EEC, while t o t a l agrj .cultu~ral production rose by about 20%. The average annual percentage reduction i n the ru ra l labour force i n each of t he member c o t u ~ t r i e s i s shown i n Table No. 4. This high leve l of labour o i~ t f low from the FEC farm sector has been l a rge ly responsible f o r t he favourable leve ls of growth achieved i n terms of labour productivity. In the ten years t o 1971 the labour product ivi ty index f o r agr icu l ture i n t h e EEC rose from 100 t o 188 and f o r industry from 100 t o 166.

Despite t h i s favourable t rend t h e r e a r e s t i l l important s t r n c t u r a l weaknesses i n EEC agr icu l ture . The great number of r e l a t i v e l y small farms ( i n terms of area) is a t l e a s t a p a r t i a l indicator of t h i s weakness. Approximately 78% of EEC farms a r e l e s s than twenty hectares and these farms cons t i t u t e only 30% of t he t o t a l u t i l i s e d agr icu l tura l area i n t he enlarged Community. Furthermore, t h e average s i z e of farms has increased by only th ree hectares s ince 1958, bringing the average a rea

( 3 0 ) For a de t a i l ed discussion of s t r u c t u r a l programs i n member countries see OECD, Struc+maZ Reforin Measures in AgricuZture, Par i s , 1972.

Table No. 4

LABOUR MOBILITY AND PRODUCTIVITY I N EEC AGRICULTURE

Average Annual Change i n Growth i n Labour t he Number of Persons Productivity between

Member Engaged In Agriculture 1968 and 1973

States 1964 1969 1973 t o t o t o Final Gross Value

1974 1974 1974 Production Added

% % % %

Germany -5 - 5 -4 7.2

France -4 -4 -4 6.3

I t a l y - 4 -5 -3 6.4

Netherlands -3 - 2 - 2 7.9

Belgium - 6 -6 -3 10.4

\ Luxembourg -6 - 9 0 6.5 5.1 i

EEC - 6 -4 -4 -3 7.6 5.9

\ U. K. - 2 - 1 - 2 4.4 4.1

Ireland - 3 - 3 -2 na na

Denmark na -4 0 na na

EEC - 9 na -4 -3 na na

Source: Commission of the European Communities, T h e AgricuZturaZ Situation i n the C o m i t y , Report 1975, V o l . 111.

,, ,

\

- r '4

t o 13.3 hectares i n 1973. Changes i n the average s i z e of Community farms and i n the t o t a l farm area within various s i z e categories a re shown i n Table No. 5.

Table No. 5

CHANGES I N THE NUMBER AND SIZE OF COMMUNITY FARMS : EEC-9

- -

Annual Rate Annual Rate

Farms of Change Ut i l i sed of Change Farm Agricultural i n Size 1973 1960 1967 Area i n 1960 1967

t o t o 1973 t o t o 1973 1973 1973 1973

ha no. % % '000 ha % %

1 and under 5 2 296 879 -2.9 -3.7 5 791 -3.0 -3.8

Over 50 317539 1 .5 2.6 36 229 na na

Total 5 404 153 -2.3 -2.9 88 313 na na

Source: Commission of t h e European Communities, !I'he Agmkultural Situation i n the Cornnunity, Report 1974, Vol. 111.

Since 1972 the C o m i t y , through the CAP, has taken a more ac t ive and concerted r o l e i n attempting t o d i r e c t change i n EEC agr icu l tura l s t ructures . On t h e b a s i s of Community c r i t e r i a and some Community f inancia l assis tance, manber countr ies have adopted several new s t ruc tu ra l measures. A key element i n t h e Community's s t ruc tu ra l objectives is the concept of 'farms su i t ab le f o r developmentr. With investment and other assistance it is proposed t h a t such farms should be able t o a t t a i n a re turn to labour comparable t o t h a t obtained i n non-agricultural a c t i v i t i e s i n the regions concerned, allowance being made fo r an adequate re turn on invested capi ta l .

In April 1972 the EEC Council adopted three direct ives designed .to improve farm structures.C311 The f i r s t d i r ec t ive focuses on the

(31) For a more de ta i led discussion of these d i rec t ives see OECD, AgriculturaZ Policy of the European Economic Comnunity, op, . cit.', pp. 89-92.

modernisation of farms and requires member countr ies t o introduce a se lec t ive system of a id t o those farms hbich submit development plans and a re po ten t ia l ly able t o a t t a i n a l eve l of income comparable t o t h a t received i n the non-farm sector. The second d i r ec t ive concerns a system of aid t o those persons wishing t o discontinue agr icu l tura l a c t i v i t y and takes the form of an annuity for e l d e r l y farmers o r a premium t o other farmers t o encourage them t o move t o a l t e r n a t i v e occupations. Land t h a t becomes vacant as a r e s u l t of these measures i s a l located t o farms i n t he process of modernisation. The t h i r d d i r ec t ive aims t o improve the vocational guidance and t ra in ing of persons engaged i n agr icul ture , through the provision of information, advisory and counselling f a c i l i t i e s . Under the present arrangements member countr ies a r e refunded, from the EAGGF Guidance Section, 25% of t he cos t s incurred i n the implementation of the above d i r ec t ives although t h i s refund is as high as 65% f o r the so-called 'disadvantaged' ag r i cu l tu ra l areas, which have a higher percentage of the agr icu l tura l labour force than the Community average.

In April 1975, the Council adopted another d i r ec t ive which provides special ass is tance, through d i r e c t annual payments, t o farmers i n d i f f i c u l t farming areas , especial ly i n h i l l y areas. The object ive of t h i s d i rec t ive is t o maintain the incomes of farmers i n regions w i t h na tu ra l , disadvantages. Total expenditure over the th ree years of operation of t he scheme is expected t o be about 340 mil l ion un i t s of account. Of t h i s , the amount avai lable from the EAGGF w i l l be 25% i n i t i a l l y , with provision fo r an increase i n t h i s r a t e i n subsequent years.

The above d i rec t ives ind ica te t h a t the CAP is being increasingly recognised and used as a vehicle f o r s t r u c t u r a l adjustment i n EEC '

agricul ture . However, recent developments a l so h igh l igh t t he problem of reconciling the product ivi ty and income objectives of t he Community's s t ruc tu ra l policy. For example, while a major purpose of present s t ruc tu ra l measures is t o increase agr icu l tura l product ivi ty through the enlargement and modernisation of farms, another aim i s t o reduce farm income d i s p a r i t i e s through d i r e c t income subsidies t o farms i n l e s s favoured areas. More generally there i s an important and fundamental conf l ic t between the Community's measures t o increase agr icu l tura l productivity and i t s p r i ce support a c t i v i t i e s . Under the l a t t e r , many marginal high cost farms have been a s s i s t ed and supported by the influence on income levels of the high support p r ice regimes maintained by the CAP. This consequently slows the flow of resources out of agr icu l ture and within agr icu l ture and has a detrimental e f f e c t on leve ls of productivity.

P r o p o s a l s f o r Reform

The various economic and f a n problems t h a t t h e Community has encountered i n recent years have been outl ined i n the previous sections. The major ones have been: the widespread economic depression following boom conditions which has affected the EEC and other developed nations; the periodic accumulation of commodity surpluses; t h e slow progress towards solving s t ruc tura1 problems which i s p a r t l y the r e su l t of the continuing need t o devote t h e bulk of EEC budget expenditure t o agr icu l tura l p r ice support; r e l a t i v e l y low and unevenly d i s t r i bu ted incomes i n agr icu l ture ; and monetary complications brought about by

' exchange r a t e i n s t a b i l i t y and d i f f e r i n g economic performance amongst t he member countries. Although these f ac to r s have prompted a more c r i t i c a l

'7 examination of the CAP within t he Community t h i s has had a l imited e f f e c t so f a r on i t s bas i c s t ructure .

I

Two major reform documents have been prepared by the Commission. The Commission's 'Memborandum1(32) on t h e reorganisation of the CAP was submitted t o the Council i n October 1973 and i t s 'Stocktaking1(33) of the CAP was completed i n February 1975. The first was prepared a t t he i n i t i a t i v e of the Commission but the second was due la rge ly t o t he i n s t i g a t i o n of the Gennan Government, which in s i s t ed on a comprehensive review of the CAP i n re turn for i t s approval of the proposed increase i n EEC farm pr ices i n September 1974.

The two documents have a great deal i n common and both canvass ways and means of improving the operation of the CAP. Both documents contain various recommendations and proposals f o r the consideration of the Council of Ministers.

The 'Memorandum' which presents a reform program f o r the period 1973 t o 1978 has three main object ives; namely t o reduce the d i s e q u i l i b r i a on ce r t a in agr icu l tura l markets, pa r t i cu l a r ly t he b u t t e r market, t o simplify the machinery of the common organisation of markets and t o reduce expenditure under t he Guarantee Section of t he EAGGF. To achieve these object ives the Memorandum submitted a number of proposals including:

- That farmers should assume some degree of f inanc ia l r e spons ib i l i t y for s t ruc tu ra l surpluses, especial ly i n the da i ry s ec to r ( t o be achieved f o r example through a var iab le levy on surplus production).

- That a b e t t e r p r ice r e l a t i onsh ip be established between ag r i cu l tu ra l products (basedon so-called object ive c r i t e r i a such as the leve l of costs on 'modern' farms).

- m a t the monetary compensatory payments system be phased out by 31 December 1977.

The 'Memorandum' a lso ca l led f o r a reduction i n t he number of CAP regula t ions , t h e introduct ion of a common organisation of t he mutton and lamb market, a s torage policy f o r cerea ls and, somewhat i ron ica l ly , improved incent ives f o r meat production.

Although the implementation of these proposals i s not mandatory, some of t he recommendations have been introduced. A s explained e a r l i e r , monetary compensatory payments which a r e a d i s rup t ive influence on intra-Community farm t r ade have been reduced below what they would otherwise have been by the increasing use of representat ive o r 'green' r a t e s . They a re s t i l l a continuing problem however. Secondly, i n present ing i t s p r i ce proposals f o r t h e 1976-77 season, t he Commission s t a t e d e x p l i c i t l y t h a t i n preparing i t s pr ice proposals i n recent years i t had increasingly r e l a t ed them t o 'modernised farms' as well a s taking in to

(32) Comission of the European Communities, Memorandm : Agriculhcre 1973-1978, Brussels, November 1973.

(33) Commission of the European Communities, Stocktaking of the Comma A@cuZtu.aZ Pol icy , Brussels, March 1975.

account the supply and demand posi t ion f o r individual markets.(34) This implies t ha t the Commission is seeking t o reduce Community support through prices policy for t he l e s s e f f i c i e n t r u r a l producers. Thirdly, fo r the 1976-77 season onwards, an attempt i s being made t o improve the price r e l a t i v i t i e s between various cerea ls , as has been described ear l ie r . Finally, the Commission agreed i n September 1975 f o r the CAP regulation of the EEC sheepmeats sector . However, a t the time of writ ing, the scheme had not yet been agreed upon by the Council. Basically the Co~mission proposals f o r sheepmeats would, if introduced, only a f f e c t domestic production and intra-Community t rade. I f i n the longer term, however, the proposed regime was extended t o include mechanisms t o protect Community producers from non-EEC suppl iers , as has been the case f o r other agr icu l tura l products covered by the CAP, t h i s would have important implications f o r sheepmeat exporters such a s Australia.

The 'Stocktaking' i s complementary t o the 'Memorandum' and examines how ef fec t ive ly t he mechanism and regulat ions of the CAP have achieved CAP objectives and f u r t h e r suggests ways of improving the'system. The 'Stocktaking' i s c r i t i c a l of c e r t a i n aspects of t he CAP and r e f e r s t o short-term and s t r u c t u r a l imbalances i n ce r t a in ag r i cu l tu ra l markets, t o the lack of spec ia l i sa t ion within the Community, t o the high d i s p a r i t y of incomes between regions, t o the lack of uni ty within the Community market as a r e s u l t of monetary i n s t a b i l i t y and to the high budgetary cos t of current agr icu l tura l po l ic ies . While i t s proposals and recommendations a r e s imilar t o those of the 'Memorandum', the 'Stocktaking' does introduce some new and important i n i t i a t i v e s including:

- That Community consumers should be able t o obtain more bene f i t from the occurrence of agr icu l tura l surpluses and t h a t p r i o r i t y be given t o disposing of these surpluses on in t e rna l r a the r than external markets through the use, f o r example, of consumer subsidies.

- That Community exporters be encouraged t o en te r i n t o long-term contracts f o r the supply of ce r t a in agr icu l tura l products t o non-member countries.

- That d i r e c t income subsidies be more widely used i n EEC farm policy.

The 'Stocktaking' and the e a r l i e r 'Memorandum' a r e evidence of the ongoing review and debate within the Community of t he CAP and i t s policy instruments. I n broad terms, probably the most s ign i f i can t aspect of these documents i s the increased emphasis they give t o consumer i n t e r e s t s both i n r e l a t i on t o food pr ices and t o the overa l l cos t of the CAP. This i s highlighted through proposals f o r consumer subsidies , producer co-responsibi l i ty for commodity surpluses and a more 'object ive ' basis f o r the s e t t i n g of support p r i ce levels . A t the same time, however, the basic and e x p l i c i t l y s t a t ed CAP pr inc ip le of support f o r ag r i cu l tu ra l producers' incomes which has been pursued through the maintenance of high guaranteed pr ices and the use of var iab le l ev i e s on imports has been subject t o l e s s sc ru t iny and c r i t i c a l evaluation.

(34) Commission of the European Communities, Commissiun ProposaZs to the ~ottn&Z on the Fixing o f Prices for Certail AgricuZtmaZ Products and on CertaiZ Related Measures, Vol. I . Brussels, December 1975.

While t he 'Stocktaking' recommends the use of d i r e c t income subsidies , such measures a r e seen by the Canmission pr imari ly a s a means of reducing farm income d i s p a r i t i e s within t h e EEC r a the r than a s an a l t e r n a t i v e t o p r i c e support arrangements. The 'Stocktaking' does not recommend t h e widespread introduction within t h e Community of deficiency payments schemes similar t o those previously i n use i n the U.K. This i s l a rge ly because i t is considered t h a t the adoption of such schemes by the Community i n place of t r a d i t i o n a l market and p r i c e policy measures would be l i k e l y t o g r e a t l y increase t h e budget cos t of EEC farm pol icy (although consumer pr ices would be lower and there would be l i t t l e change i n the ' r ea l ' cos t of farm support) . I n addi t ion, the financing of deficiency payments type schemes from na t iona l budget revenues would almost ce r t a in ly c rea te more problems than current support measures which a r e mainly financed d i r e c t l y from Community sources.

There has been l i t t l e progress t o date on the implementation of t h e major reform proposals contained i n t he 'Stocktaking'. For example, t he re has been no extension of the use of d i r e c t income subsidies or of consumer subsidies. A t the main Council meeting t o consider t he proposals he ld i n November 1975 the re was some agreement on general pr inciples (e.g. t h a t i n the milk sec tor , the aim i s t o r e s t o r e market balance and prevent an excessive build-up of s tocks) . On the o the r hand, there were no recommendations made f o r any act ion on spec i f i c proposals.

However, t he two reform documents a r e of some importance insofar a s the Commission does include recommendations from them i n i ts annual p r i ce proposals t o the Council. I n some ins tances these recommendations a r e wholly or p a r t i a l l y accepted (e.g. t h e reduction i n MCAs and adjustments i n the cerea ls sector f o r t h e 1976-77 season). Nevertheless, t h e prospects of s ign i f i can t changes t o the CAP a r i s i n g from these i n i t i a t i v e s a r e s t r i c t l y longer term and t h e r e a r e no indicat ions of a r ad i ca l new farm pol icy emerging i n t he EEC i n the near future . Indeed the complex bargaining and the p o l i t i c a l na ture of decision making i n the Community farm sec to r makes any s ign i f i can t short-term departure from ex i s t i ng pol icy both d i f f i c u l t and unlikely.

Imp1 ications o f Recent EEC Devel oprllents f o r Australia

The accession of the U.K. t o the EEC i n 1973 and the build-up of Community beef s tocks i n 1974 and 1975 have had a major impact on Australian t rade . As a r e s u l t of t he former, Austral ia has l o s t i t s p re fe ren t i a l access t o the 3 . K . market wfiile the l a t t e r has meant t he v i r t u a l c losure of the EEC market t o beef imports. The sever i ty and suddenness of the loss of ag r i cu l tu ra l export s a l e s t o the U.K. and t o the enlarged Community a r e c l e a r l y i l l u s t r a t e d i n Tables No. 6 and No. 7. Australian r u r a l exports t o the U.K. slumped from $283 mi l l ion i n 1970-71 t o $100 mil l ion i n 1975-76. Australian exports of wheat and b u t t e r t o t he U.K. were p a r t i c u l a r l y affected, f a l l i n g from 1.7 mil l ion tonnes t o 73 thousand tonnes f o r wheat and from 55.6 thousand tonnes t o negl igible leve ls f o r b u t t e r between 1970-71 and 1975-76.

The Australian beef and veal industry has been very se r ious ly affected by developments i n the EEC beef sec tor . The value of Australian beef and veal exports t o the enlarged Community plummetted from $108 mil l ion i n 1972-73 t o only $11.5 mil l ion i n 1975-76. Since the suspension of EEC beef and veal import l i cences i n July 1974 almost a l l of

Table No. 6

AUSTRALIA : GROSS VALUE OF EXPORTS OF RURAL

COMMODITIES TO THE UNITED KINGDOM : 1970-71 TO 1974-75

(Mill ion Dollars)

E ." C It- 1970-71 1971-72 1972-73 1973-74 1974-75 1975-76

h' I Wheat 81.5 27.5 28.7 - (a) 6.9 1 I Barley 10.6 10.4 2.2 3.4 1.5 3.1

I Other coarse gra ins 1.1 0.8 0.7 1 .9 1 .2 1.2

1 Rice 1.6 1.9 4.0 4.2 3.6 2.3

I Sugar 40.4 43.6 39.2 28.0 33.8 15.1

1 Butter 29.1 9.9 27.7 (a) - - Cheese 3.6 2.7 0.8 (a ) - 0.1

F'rocessed milk products 0.8 (a 1 (a I (a 1 (a (a 1

Beef and veal 21.0 34.4 101.0 48.1 13.5 7.0

Apples and pears 11.7 10.2 7.0 10.4 6.7 5.4

Dried v ine f r u i t s 7.1 6.6 6.4 5.4 3.5 7.4

Canned f r u i t 27.7 19.7 23.7 21.7 17.8 12.7

Mutton and lamb 14.4 12.7 15.2 13.1 5.9 5.0

woo 1 30.1 32.5 55.5 43.1 24.6 32.8

Oilseeds 0.2 (a) 0.7 0.2 0.5 1.1

Total 283.1 214.4 316.5 179.5 112.6 100.1

(a) Negligible,

Source: ABS, Overseas W e (various i s sues ) . > 0

Table No. 7

AUSTRALIA : GROSS VALUE OF EXPORTS OF RURAL COMMODITIES

TO THE ENLARGED COMMUNITY : 1972-73 TO 1974-75

m i l l i o n Dol lars)

Item 1972-73 1973-74 1974-75 1975-76

- -

Wheat

Barley

Other coarse g ra in s

Rice

Sugar

But ter

Cheese

Processed milk products

Eggs

Beef and vea l

Apples and pears

Dried v ine f r u i t s

Canned fruits

Mutton and lamb

Woo1

Oilseeds

Tot a1

Ca) Negligible.

Source: ABS, Overseas Dcuie (various i s sues )

Austral ia ls beeC shipments t o t he enlarged Communjty have been a share 0 4

t he EEC's levy Cree quota under GATT and have been between 10 000 and 15 000 tonnes. There is not l i k e l y t o he any marked improvements i n t h i - s i tua t ion i n the near fu ture as the enlarged EEC i s expected t o have l i t t l e requirement f o r imports of beef u n t i l a t l e a s t 1977, and even then the s i t ua t ion does not appear pa r t i cu l a r ly favourable if the new beef import levy arrangements, discussed e a r l i e r , a r e introduced.

The enlargement of the C o m i t y has a l so meant the e f fec t ive closure of the s izab le U.K. market t o Australian exports of cerea ls and dairy products. In the case of ce rea l s t h i s has had l i t t l e impact on the Australian industry a s a1 t e rna t j . v~ o u t l e t s have been r ead i ly avai lable since 1973, notably the USSR.

The en t ry of the U.K. i n t o t he EEC has excluded Australian da i ry supplies from t h i s major market. The adverse e f f e c t of t h i s developmen on the Australian industry was i n i t i a l l y o f f se t t o some extent in 1973 and 1974 by increased exports of b u t t e r and cheese t o other countr ies , notably Japan, Canada and the United S ta tes . There was a l so a boom i n Australian exports of skim milk powder which almost doubled from 48 000 tonnes i n 1972-73 t o 94 000 tonnes i n 1973-74. However, many of these improvement.; i n other markets were only temporary. During 1975 and 1976 the re has been a marked decl ine i n the level of world t rade and p r i ce s of most dairy products largely a s a r e s u l t o f increased supplies i n major producing regions, espec ia l ly the enlarged EEC. In t h i s s i t ua t ion the Australian dairy industry has now f e l t the f u l l impact of the loss of t he U.K. market and the increased competition on o the r world markets.

The Australian dr ied vine f r u i t and canning f r u l t indus t r ies were, u n t i l thc end of 1974, l a rge ly cushioned from the f u l l e f f e c t s of the progressive imposition by the 1I.K. of the EEC ' s common external t a r i f f through a general ly buoyant world market s i t ua t ion . However, world market prices for these products declincd i n 1975 and have remained low. This has led t o a s ign i f ican t decline i n t he value of Australian exports t o the U.K. Australian apple shipments t o t he I1.K. have f a l l e n sharply s ince 1973 although t h i s reduction has rcsu l tcd t o some extent from reduced Australian export a v a i l a b i l i t i e s . The export market f o r Australian apples has been decl ining since about t he mid- 1960s and the market outlook has deteriorated fur ther as a r e s u l t o f the U.K. entry t o the EEC.

A s a r e s u l t of t i g h t world supplies and high pr ices the detrimental e f f e c t s on the Australian sugar industry of the termination ot' the Commonwealth Sugar Agreement a t the end of 1974 have been cushioned t o some extent. This agreement gave Austral ia an assured market a t s t ab l e pr ices f o r a minimum of 340 000 tonnes of raw sugar each year. Therefore, for the sugar industry, the need t o replace t h i s guaranteed market with others has obviously increased the degree of uncer ta inty involved i n exporting. Although the U.K. proposed t h a t there should be continued access for sugar from e f f i c i e n t producers such as Austral ia as p a r t of i t s renegotiation discussions t h i s object ive was not achieved.

Some Australian r u r a l exports, pa r t i cu l a r ly beef and daLry products, have already suffered the consequences from e i t h e r t he accession of the U.K. o r recent changes i n t he organisation of EEC commodity , markets. On the other hand t h e Australian sugar indus t ry has had some degree of success i n divers i fying i t s export markets. Overall , the most important e f f e c t of the diversion of n i r a l exports from the U.K. market

has probably been t h e increased uncer ta in ty facing Australian ru ra l exporters i n new and a l t e rna t ive markets. (35)

Some Australian ru ra l i ndus t r i e s have a l so benef i ted, although only marginally, from the special compensation provided by t h e EEC under t he GATT i n respect of t a r i f f concessions l o s t by Australia on the U.K. market. The compensatory t a r i f f concessions include:

I - Bound duty reductions on products such as dr ied vine f r u i t , A 1 apples and pears, and oranges. 7

- An increase i n t he E C 1 s levy-free beef import quota, from 22 000 tonnes t o 58 500 tonnes. This increase i s shared by Aus t ra l ia and other GATT members.

- A binding of the EEC duty a t present l eve ls on mutton and lamb, honey, canned f r u i t , h ides and skins and greasy wool.

The above concessions have been applied t o FEC imports s ince the beginning of January 1975. The value of these concessions t o Australian exports is r e l a t i v e l y small and i t is relevant t h a t although exports of d r ied .v ine fruit , apples and pears, and canned pears t o the Community now face lower d u t i e s than previously, the new r a t e s are i n f a c t much higher than the old duty r a t e s which applied on exports t o t h e U.K.

While the U.K. accession has had an immediate and d i r e c t impact on t h e d i r ec t ion and level of exports of some Australian r u r a l commodities, t h i s f a c t o r i n conjunction with o the r developments within t h e Community is a l s o l i k e l y t o have a continuing e f f e c t on Australian farm t rade . However, i n t he longer term the importance of the Community is more l i k e l y t o be a s a competitor i n t h i r d country ag r i cu l tu ra l markets r a the r than as a l a rge po ten t ia l export market f o r Austral ia a s it h a s general ly been considered i n the past. This is because there seems t o be l i t t l e prospect a t present of any fundamental change of emphasis and d i r ec t ion f o r the CAP.

The various pressures t o which t h e CAP has been subjected i n recent years and t h e Community's responses t o these pressures have been discussed i n e a r l i e r sect ions . A s a r e s u l t t h e r e emerged a more c r i t i c a l a t t i t u d e t o a g r i c u l t u r a l pol icy within t he EEC and the p o s s i b i l i t y of some bas i c pol icy changes.The main manifestations of t h i s new a t t i t u d e were the Commission's 'Memorandum' and 'Stocktaking', containing a number of important reform recommendations which i f implemented would have had import ant implications for l eve l s of EEC agr icu l tura l production, consumption and t rade. However, on present ind ica t ions any subs tan t ia l adoption of t h e more important proposals w i l l be d i f f i c u l t t o achieve, as long-term r a t i o n a l i s a t i o n i s cont inual ly being hampered by short-term and often p o l i t i c a l considerations. For example, t he Council has been unable t o agree t o bas i c reform of t h e da i ry industry d e s p i t e t he periodic recurrence of s t r u c t u r a l surpluses i n t h i s sec tor .

Although t h e r e have a l so been ind ica t ions i n recent years of more a t ten t ion being p a i d t o Community-wide s t r u c t u r a l reform programs 1 (35) N.D. Honan, Agriculture : Aust ra l ia ' s Options on the World Scene,

paper presented t o the Australian I n s t i t u t e of Agricultural Science N a t i m a l Conference, Canberra, August 1976.

t h i s aspect of the CAP s t i l l plays a r e l a t i v e l y minor r o l e and t h e Guidance Section of the EAGGF which finances such programs continues t o receive only a very small f rac t ion of t he t o t a l funds a l located t o agr icul ture through the Community budget, S t ruc tura l reform on a s ca l e suf f ic ien t t o s ign i f i can t ly reduce the periodic production and accumulation o f surplus commodity s tocks i s ce r t a in t o occur only Slowly.

On the demand s ide , t h e CAP continues t o maintain Community pr ices f o r most major ag r i cu l tu ra l products a t l eve ls higher than world market pr ices (with the exception of a period i n which world pr ices f o r cereals and sugar were very high). In addi t ion, because of a range Of

d i f f i c u l t i e s , there are no indicat ions of an extension of t he use Of consumer subsidies or of deficiency payment type schemes i n t h e EEC, both of which have a dampening influence on consumer pr ices . These fac tors constrain domestic consumption growth and increase the need f o r export subsidies which have had a depressing and des t ab i l i s ing e f f e c t on world trade.

The major implications of recent developments f o r Austral ian ru ra l t r ade are , therefore , t h a t t he U.K. has now ceased t o be a major market f o r Australian r u r a l exports s ince i t s accession t o t he EEC and i t s increasing absorption i n t o the CAP. I n the absence of any ind ica t ions of the Community's import regime becoming more f l ex ib l e o r l i b e r a l , there i s no reason t o expect any s ign i f i can t increase i n t he leve l of t he Community's agr icu l tura l imports. Final ly , it i s evident t h a t reform of the CAP i n any meaningful way is going t o be a very slow process. This suggests the continuing appearance of periodic commodity surpluses while a t the same time moves t o s ign i f i can t ly increase domestic consumption have apparently stagnated. The disposal of t he EEC's surplus agr icu l tura l production on overseas markets w i l l , therefore , be a continuing and perhaps increasing problem f o r o ther ag r i cu l tu ra l exporters such as Australia, although a re turn t o g rea t e r s t a b i l i t y on world agr icu l tura l markets could reduce the impact of the problem.

Conclusions

During the past f i v e years, agr icu l ture i n the EEC has had t o cope with several new and major developments. Some of these, such as t he enlargement of t he Community and the problems associated w i t h depressed and unstable economic and monetary conditions, have been ex te rna l t o t he agr icu l tura l sector but have never theless been important i n shaping agr icu l tura l policy. Others, such a s the extreme f luc tua t ions i n world commodity pr ices , have necessi ta ted major adjustments i n t he organisation of Community markets.

The performance during t h i s period of t he Common Agricul tural Policy i n dealing with t he growing number and complexity of problems confronting the farm sec tor has been increasingly questioned. While it i s c l ea r t ha t the CAP mechanism has , during times of high world commodity pr ices s ince 1973, ensured lower and more s t a b l e domestic consumer pr ices f o r some agr icu l tura l comodi t ies such as cerea ls and sugar than would otherwise have occurred, it i s a l s o apparent t h a t i n o the r important respects i t s actual performance has f a l l e n shor t of i t s own objectives.

'rhe pr ice support po l i c i e s ' of the ' ' CAP have ' insu la ted many Community producers from the i n f l u e n c e o f in te rna t iona l market' f o rces and have ?n several cases encouraged excess production and contributed t o the

accumulation of l a rge cos t ly surpluses. A t the same time measures t o -we; t he s t ruc tu re and t h e e f f ic iency of t h e European agr icu l tura l s ec to r have only received r e l a t i v e l y modest support from the Community f a n budget. A l a rge p a r t of EEC ag r i cu l tu re i s s t i l l character ised by r e l a t i v e l y low l e v e l s of labour product iv i ty and small farms. I n f a c t some so-called s t r u c t u r a l measures such a s t h e special ass is tance t o h i l l farmers i n the Community are not l i k e l y t o improve leve ls of agr icu l tura l product ivi ty and may instead aggravate problems of surplus supplies.

Furthermore the un i ty of EEC ag r i cu l tu ra l ,markets, a bas ic p r inc ip l e of the CAP, has been ser ious ly undermined by the exchange r a t e f l uc tua t ions s ince 1971. These currency f luc tua t ions have been p a r t i a l l y o f f s e t by monetary compensatory payments which have i n e f f ec t introduced d i f f e r e n t p r ice leve ls within the Community. The CAP system has a l so been s t ra ined by the increasing will ingness of member countries, i n t he face of se r ious economic and industry problems, t o adopt independent agr icu l tura l and t r ade po l i c i e s , sometimes i n d i r e c t contravention of CAP regulations.

' The past f i v e years have been a pa r t i cu l a r ly d i f f i c u l t period f o r t he operation of t h e CAP and several weaknesses of the system have been highlighted. Nevertheless t he system has shown considerable f l e x i b i l i t y and has proved amenable t o change i n the use of various pol icy instruments. The need t o find quick and e f f ec t ive so lu t ions t o immediate pmblems has led t o the introduction of many ad hoe measures. These have of ten been influenced more by perceived economic needs of a short-term nature than by the need sometimes f o r more fundamental changes which would have longer-term e f f e c t s . However, there has a l so been a considerable wil l ingness amongst members t o compromise on d i f f i c u l t i ssues and a determination t o maintain the CAP a t a l l cos t s despi te i t s weaknesses.

I

Although the Commiss io~~~s ag r i cu l tu ra l reform documents were i nd ica t ive of a more c r i t i c a l approach t o Community farm policy, few of t he documents1 recom~nendations have been implemented. Furthermore it seems unl ikely t h a t i n the near fu tu re t h e r e w i l l be any s ign i f i can t movement i n Conununity ag r i cu l tu ra l policy away from a dependence on high producer support p r ices ' and s t r ingent import ba r r i e r s . I t i s these elements of Lhe CAP t h a t have been pr imari ly responsible f o r t h e production surpluses t h a t charac te r i se most a reas of EEC agr icu l ture . They have a l so made t h e object ive of s t r u c t u r a l adjustment through improved resource use more d i f f i c u l t t o achieve.

While t h e r e have been some s igns over recent years of a s h i f t i n the emphasis of the CAP towards more consumer oriented po l ic ies i t is apparent t h a t by the first ha l f of 1976 the more t r a d i t i o n a l producer b i a s had been reasser ted with a run-down of the s laughter premium system and the re jec t ion of t he use of consumer subsidies.

I n conclusion, moves t o implement s t ruc tu ra l reforms, t o improve eff ic iency and resource a l loca t ion i n t he Community's agr icu l tura l s ec to r and t o reduce the tendency t o generate commodity surpluses have received more emphasis i n recent years, bu t progress has continued t o be very slow. The Community's unpred ic tab i l i ty as an agr icu l tura l t rading group seems l i k e l y t o continue therefore , w i t h l i t t l e prospect of any s ign i f i can t reduction i n the d i sn lp t ive influence of t r a d i t i o n a l CAP measures on world a g r i c u l t u r a l t rade.

R75/2519(19) CAT NO 76 3567 3