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The CAP doesn’t fit – why the EU’s farm subsidies are ripe for reform

The Farmer

With the support of the Atlas Network, CapX is publishing a new series of essays on the theme of Illiberalism in Europe, looking at the different threats to liberal economies and societies across the continent, from populism to protectionism and corruption.

Richard Findlay is a farmer in the North York Moors National Park between York and Newcastle. As the Financial Times reported last year, Mr Findlay garners a profit of around £12,000 a year by grazing some seven hundred sheep. But even that £12,000 is quite a lot if one looks closer. Indeed, if it weren’t for subsidies delivered by the EU’s Common Agricultural Policy (CAP), Mr Findlay would be facing a loss of £32,000. Simply put, this farm would not exist if it were not for Brussels.

But Mr Findlay is far from the only farmer keeping his business alive through subsidies – the same thing is happening all over Europe. In the UK, 61% of the average farm’s profit comes from the EU’s direct payment scheme. On farms specialising in livestock farming, more than 90% of what is called ‘profit’ comes from subsidies.

The Common Agricultural Policy has been one of the most controversial parts of the EU’s work for decades – and it has certainly been a bugbear for many Brexiteers, who have long argued that it symbolises everything wrong with the way the bloc works.

When it was established in 1962 the original purpose of CAP was to secure that there was enough food for Europeans on a continent that was still wrought from war – or, in more technical terms, to achieve “food sovereignty”. And yet, as Europe became a continent of peace and trade with the world increased, the arguments for food sovereignty began to look a bit thin. Nonetheless, CAP was going nowhere. Not only did it stay in place, it actually expanded. By the 1980s, CAP accounted for over two-thirds of the entire EU budget.

While the share of the overall budget has since gone down – to 38% under the current six-year budget – it is still the largest financial program of the union. In addition, despite having decreased in relative terms, CAP payments still increased in absolute numbers until 2013.

At 38% of the budget, European taxpayers send more than €58bn to farmers each year – a shocking amount if one considers that farmers only make up 3% of the EU’s total population and are responsible for no more than 6% of its GDP.

Indeed, while the original goal of CAP was to enable farmers to feed Europe after decades of conflict, now it’s Europe that is feeding farmers through its massive subsidies. Their businesses often only survive because they are effectively bailed out – unlike big financial institutions, these are not one-off bailouts, but day in, day out.

If all of this sounds like protectionism and an illiberal economic policy it’s because that’s exactly what it is. That much was also clear from the strongly expressed opposition to a recent free trade agreement with Latin American countries from French President Emmanuel Macron and his colleagues from Ireland, Belgium, and Poland – all countries where farmers are profiting much from CAP. Politicians across Europe are fond of telling us that farmers need “protection” from the scourge of cheap imports, as if consumers’ interest in cheaper food were of no consequence at all.

And it’s worth looking at just how high the costs to consumers is. Even Oxfam, not exactly famed for its opposition to government spending, calculated in 2006 that a British household had to pay an additional £832 a year for food because of CAP (it should be noted that another study for eastern and southern European countries that just entered the EU found a smaller inflationary effect on consumer prices). Most hit are, of course, low-income households, where higher prices on day-to-day goods have the greatest effect on their overall means.

Worse still, Brussels’ protectionism seems to explicitly favour big business over small and medium-sized farmers. The Heinrich-Böll Foundation, a think tank associated with the German Green Party, found that between 2003 and 2013, over 25% of farms in Europe went out of business. And indeed, it is mostly small farms that vanish, while bigger corporations get even bigger.

The figures certainly bear this out – more than 30% of the direct payments go to only 2% of recipients and 80% go to 20% of farm businesses. These are not even necessarily farmers, but include companies like Tate & Lyle, the British food and beverage supplier. You might not expect a company that is included in the FTSE 250 and had £2.7 billion of revenue last year to be in need of government help. Still, according to Farm Subsidy, they have received €896.2 million since 1999.

They are not the only ones. Nestle has received €625.9 million, the German sugar producer Südzucker has trousered €77.3 million despite taking in €7.7 billion of revenue, and the French producer of sugar, starch, and bioethanol, Tereos, despite revenues of €3.6 billion, was eligible for €355.8 million.

Perhaps even more surprising, Queen Elizabeth II’s country retreat in Norfolk, the Sandringham Estate, has received £700,000 annually, the Windsor Castle £300,000, and Prince Charles £100,000 thanks to CAP. Indeed, the Royals get about £1m a year in CAP subsidies. Is this really what the EU was designed for, to redistribute money from taxpayers to big companies and aristocrats?

But it gets worse. As has been well-documented, subsidising farms that would otherwise have gone out of business inevitably leads to oversupply. In the early stages of CAP this was perfectly depicted by the infamous “butter mountains,” where much more butter was produced than was actually needed.

Today the butter mountains have been replaced by less visible byproducts of overproduction. Excess European farm products, from milk to wheat, is sold to African countries for an extremely low price made possible by the subsidies. The prices are often so low that they make it impossible for African farmers to compete, driving those very farmers out of business and destroying their already meagre incomes.

A German documentary details how the perverse incentive structure works in the case of Senegal: local farmers are unable to compete with wheat imported from Germany – the local products are often three times as expensive as the imported goods. That is partly because African farmers have been unable yet to increase productivity to similar levels as in Europe, but also because German companies are able to sell their goods at low prices because of subsidies.

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