24 Nov 2015

A brief review of the new CAP reform in Germany

Cajus writes*

The idea of distributing money to poorer people to help them improve their standard of living has been proven to be a successful way to fight poverty. The organisation “GiveDirectly” claims on their webpage that they have increased earnings by 34%, assets by 58% and defeated 42% of hunger by applying this method in Kenya.

Also the EU seems to have gotten caught up on this Idea recently. The Common Agricultural Policy was introduced in 1962 to help European farmers sustain their business. This was important to secure food production and especially in this time as due to other new economic possibilities (industrialisation as a driver for example), being a farmer doesn't seem attractive for most people. (Witzke; Noleppa, 2007) The CAP has since its creation been revised many times. It is often argued, that the CAP is rather unsuccessful, especially compared to the money invested (40% of the EU budget). The EU increased incentives for higher food production, which led to a overproduction of food in the 1970-80s. Therefore, the CAP shifted from market to producer support, where price support is replaced with direct aid payments, similar to the aid payments by GiveDirectly. The European Commission claims [pdf] that this led to an “increased emphasis on food quality, protecting traditional and regional foods and caring for the environment.”

In Germany this method keeps many farmers in business. The revenue of most farmers in Germany consists of such aid payments by more then 50%. Therefore, this system does not punish inefficient farms. Also, this method leads to inequality of benefits received under German farmers and creates unnecessary incentives. Aid received correlates with farm size, while smaller farms gain less benefits, larger farms gain more. This seems reasonable as incorporated farms (and therefore larger) tend to have lower profits.

A slightly newer adjustment of the CAP introduces a budged limit to direct payments. This budged limit is at €300,000. Since smaller farms receive less benefits, this will not have an effect on smaller farms, but larger incorporated farms will partially suffer and possibly forced out of business.It creates an incentive to split up larger farms into smaller farms. (Witzke; Noleppa, 2007)

Bottom Line: Using direct payments to help farmers in Germany has its ups and downs. On the one hand, it secures food production and local farmers, but on the other it promotes an unnecessary shift from incorporated farms into smaller farms. Also it does not incentivise farmers to be productive. Since more then 50% of German farmers revenue comes from the CAP, actual performance does not make a big difference in total revenue for farmers. Therefore, this method needs adjustment to create incentives for farmers to be productive, as well as giving them an economic surplus. This surplus however may also be created in other ways such as cheaper land for example. Higher food prices in Germany would also be an option, especially as inflation German food inflation rates are the lowest in Europe. However, to prevent overproduction as already occurred during 1970-80s due to high incentives to be productive, a limit of food production for each farm maybe helpful to allocate production efficiently.

* Please comment on these posts from my growth & development economics students, to help them with unclear analysis, other perspectives, data sources, etc.