Agribusiness Master of Science

The McSharry Reform of the CAP

1. Pressures for the CAP reform.
1.1. Budgetary pressure
1.2. Consumers pressures
1.3. External pressures the Uruguay round of GATT
2. Starting the reform process
2.1. The marketing quotas
2.2. The co-responsibility levies
2.3. Agricultural stabilizers
3. The Mac Sharry reform package
1. Pressures for the CAP reform.
1.1. Budgetary pressure
The budgetary cost of the CAP provided a persistent source of pressure leading to the Mc
Sharry reform of 1992. They contributed significantly to the need to increase the total transfer
from 0.77 percent of the GDP of the nine members in 1980 to 1.03 percent of the GDP of the
twelve members in 1989. This was necessary to permit the expansion of spending on regional and
social policy. The percentage of total EU budgetary expansions on the CAP droped from 73
percent in 1980 to 66 percent in 1989. The reforms which subsequently occurred have reduced
CAP expenditure since 1993 to less than 50 per cent of the total EU budget (see the below
figure).

Figure 1 EAGGF expenditure on the CAP (millions euro);

It is the costs of agricultural surplus management which dominate the budgetary
expenditure of the European Agricultural Guidance and Guarantee Fund (EAGGF). In the early
Compared Agricultural Policies Lecture 4.
1

Agribusiness Master of Science

1990s export restitution cost alone regularly more than 30 per cent of total EAGGF expenditure.
As can be seen, Guidance Section expenditure on improving the farm structure of agriculture has
remained small, with the vast bulk of budgetary resource diverted to market support.
Some of the ad hoc measures to restraint budgetary costs and surpluses prior to the 1992
reform package were significant, such as the introduction of milk marketing quotas, and quotas
on the number of livestock eligible for subsidies. Nevertheless these measures failed to stop the
budget rise required for the CAP, and the reforms of 1992 became inevitable.
It must be recognized that budgetary costs are transfers. Funds are paid as taxes by certain
groups in society and paid out or transferred to others. In the case of the budgetary transfers,
revenue is raised as a value added tax (VAT) levy at the country level through direct national
budgetary contributions and then transferred to the EU to support the principle of common
financing of the Unions costs. It follows that countries which import more agricultural
products tend to contribute more to the EU budget and that there is a net transfer to countries
with great surpluses to store and export. For example, in 1992 the largest net contributors to the
CAP budget were (in billions of euros) Germany (9,7) and the UK (2,4) while the main net gains
were made by Greece (3,6), Spain (2,7), Ireland (2,1) and Portugal (2,1). Inevitably it has been
the case that some countries like UK for instance sustain important CAP reforms.
1.2. Consumers pressures
The estimates of the costs of the original CAP system have demonstrated, given the
assumption that any change in agricultural prices in the EU would be fully transmitted to food
consumers, that the estimated transfer costs from consumers to producers are large. Various
estimates have been made of the average cost imposed on EU non-farm families through higher
prices and taxes to support the CAP, and these range from 24 euros to 30 euros per week for a
family of four persons. Since even non-taxpayers, the poorest members of society, may have bear
the most part of this cost, and since the largest farms and generally wealthier farmers benefit the
most, the CAP could be legitimately criticized for transferring fund from the poorest members of
society to some who are relatively well off even if in the EU there are also poor farmers.
1.3. External pressures the Uruguay round of GATT1
The CAP gave rise to progressive increases in trade distortion up to 1990. This was even
more evident due to the incorporation of new Member States, which switched a significant
proportion of their agricultural imports from nonmember to Member States (this was particularly
true after the accession into the EC of Ireland, the UK, Spain and Portugal). Between 1973 and
1993, the EU became net exporter for many important agricultural commodities. From the
standpoint of non-member exporters of temperate zone agricultural products, not only have they
suffered a severe contraction of their EU market as a consequence of the principle of Community
preference, but they have had to face intensified completion on other markets from the EUs
subsidized exports. Australia and New Zealand were particularly badly affected when the UK
joined the EC and the USA suffered particularly in the early 1980s, prior to the inauguration of

The World Trade Organization (WTO) deals with the rules of trade between nations at a global or near-global level.
The Uruguay round is the name of a General Agreement signed between 123 countries. For further details visit the
site: http://www.wto.org/english/thewto_e/whatis_e/tif_e/tif_e.htm ;

Compared Agricultural Policies Lecture 4.

2

Agribusiness Master of Science

the Uruguay Round of the GATT negotiation in 1986. As an indication of this, the below figure
displays the dramatic changes in EU and US agricultural export volume in this period.
The USAs concern about CAP, and about protective policies in Japan and elsewhere. Even
so it was the USAs insistence that excluded the agricultural policies from the earlier round of
GATT negotiations, it was made the centerpiece of the Uruguay Round. Although agriculture
was only one of the fifteen negotiating heads, the USA stated that without a satisfactory solution
on agriculture it would not sign an agreement. In seeking drastically to reduce agricultural
support policies, the USA was sustained by the so-called Cairns Group2 of agricultural exporting
countries, which includes Australia and New Zealand.

Figure 1 Export volume indices of agricultural products, 1980-6 (1980=100)

2. Starting the reform process

Through the existence of the CAP, its policy instruments and regulations have been adapted
to meet changing economic and political circumstances. During the 1970s the EU attempted to
decrease the budgetary cost of an existing policy instrument, intervention buying, by changing
its rules of operation; for many commodities supported by this policy instrument, the period of
availability of intervention buying was shortened and the quality standards for acceptance
were raised whilst the price received for sales to intervention was reduces to so called buying in
price, set some percentage points below the relevant intervention price. However these
measures did not change the mounting pressures fore more radical CAP reforms.
It was not until the early 1980s that more significant changes to the CAP were initiated
with the introduction of three new supply control mechanisms: marketing quotas, coresponsibility levies and budgetary stabilizers. The introduction of these supply control
mechanisms essentially marked the end of unlimited price guarantees. They became known as the
four CAP principles meaning the producer co responsibility for surplus production.

For further details about the Cairns Group visit the site: http://www.cairnsgroup.org/ ;

Compared Agricultural Policies Lecture 4.

3

Agribusiness Master of Science

2.1. The marketing quotas
Marketing quotas were first imposed on EU dairy producers in spring 1984 against a
back-ground of long-term structural surpluses of dairy products, an extremely depressed world
market, and escalating budgetary costs of milk support. Through the 1970s and early 1980s the
milk regime accounted for the largest proportion of total guarantee expenditure of the CAP.
Prior to the introduction of quotas, in 1981 the EU had introduced a system of maximum
guaranteed threshold indented to operate in such a way that, should milk deliveries in any year
exceed the pre-fixed quantitative threshold, action would be undertaken to offset the additional
costs of the regime caused by the excess production.
Initially each Member State was allocated a national quota or reference quantity set equal
to their 1981 delivery levels plus 1 per cent (apart from Italy and Ireland, whose initial reference
quantities were based on the quantity of milk delivered during 1983). Quotas were then allocated
to individual farmers, again on the basis of their historical production level.
2.2. The co-responsibility levies
Since its introduction in 1982/1983 the system of producer co responsibility in the cereal sector
has undergone substantial changes:
- in 1982/83 a system of guarantee threshold was introduced;
- in 1986/87 the guarantee threshold system was replaced by a co responsibility levy;
- in 1988/89 the co responsibility levy arrangements were extended by the system of
stabilizers;
The system of the guarantee threshold consisted in a fixed level of production guaranteed
for buying in (as intervention measure). If the average production of cereals (except durum
wheat) during the previous three marketing years was higher that the threshold, the intervention
prices would be reduced by 1% for every million tones in excess of the threshold, subject to a
maximum of 5% reduction. This system was operated as a linear price reduction for all producers
and did not consider the particular difficulties for small producers.
In the framework of the consultations of the basis of the green paper and the Commissions
proposal for a general reform of the cereals market organization, the Council decided to replace
the guarantee threshold system by the co responsibility levy arrangements. The aim of the levy is
to make farmers more aware of the realities of the market, to contribute to the costs of disposal of
the surplus, and to develop outlets for cereals on the internal and external market. Furthermore
the linear application of the producer co responsibility has been abandoned by the introduction of
measures exempting small producers from the levy.
The levy is estimated on the basis of the difference between the production and the
unsubsidized consumption, adjusted by the imported quantity of substitutes.
These arrangements make farmers only partiality responsible for the disposal of the surplus,
first of all because farmers are not made responsible for the quantity of cereals replaced by
imported substitutes, secondly because the levy is fixed at a level which only partially covers the
costs of disposal of the above mentioned surplus, and thirdly because a substantial number of
cereals producers are exempted from the levy.

Compared Agricultural Policies Lecture 4.

4

Agribusiness Master of Science

2.3. Agricultural stabilizers

With the introduction of the agricultural stabilizers in 1988/89 the producers co
responsibility has been strengthened substantially in the cereals sector. The concept of guarantee
threshold is reintroduced in term of the maximum guaranteed quantity (MGQ). The MGQ is
fixed at 160 mlo tones for four marketing years (1988/89- 1991/92).
If the production exceeded the MGQ, intervention prices would be automatically be
reduced by three percent in the following marketing year. Furthermore an additional co
responsibility levy of maximum 3% of the intervention price for common wheat was applied.
3. The Mac Sharry reform package
The main mechanisms of the CAP between 1962 and 1992 were created in a time in
which Western Europe had known important deficits for the majority of agricultural products.
The radical change of EUs exchange position from net importer in that of net exporter imposed
the necessity of reforming the functional mechanisms of the CAP. The old principles could not be
financed anymore, so they had to be adapted to the new agricultural and political conditions. The
following CAP elements had known important modifications:
- the price guarantee system tided up directly from the production, which produced an
important incitation for yields growing;
- rising the level of stock intervention followed by a limitation of the real market actions.
These mechanism produced an enormous budget pressure in the EU;
- increasing the environment pollution risks by subsidizing intensive productive systems;
- unfair distribution of the subsidies , from which there had benefited only a small number
of farms;
The European Community adopted in may 1992 a radical PAC mechanism reform known
as MacSharry reform. This legal framework radically differs from the progressive changes which
had been already introduced from the1980s.
The new agricultural politics objectives were:
1.to assure market equilibrium for the agricultural production; an adequate offer adjustment to
the food demand;
2.increasing the commune agricultural competitiveness;
3.environment protection;
4.sustaining the farmers income directly without payments linked to the production level;
5.subsidies redistribution in order to favor smaller farms;
6.maintaining a sufficient rural population;
The immediately reform objectives were to assure the decrease of overproduction pressure
stocks and the reduction of the subsidizing level at the farm gate. So, the philosophy of the
protectionism had known an important change: from farmers sustaining by prices subsidies over
the word market level to a system in which the farmers revenue had been sustain with direct
compensatory payments;
The most important element of this agricultural reform consists in decoupling the price
support mechanism by the revenue politics. This is an important step forward in decreasing the
agricultural subsidizing level. The reform stated:
- the need to adjust the internal price to the world ones (these means to decrease the
European prices to the world market level);
Compared Agricultural Policies Lecture 4.
5

Agribusiness Master of Science

- stabilizing the producers revenues through direct compensatory payments;
The reform directly affects especially big cereals, oil, protein and tobacco producers, and
from the zoo technical branches milk and meat beef producers as well the sheep meat producers.
These items represent around 70-80 per cent of the EU exports within agricultural products. Zoo
technical productions such as pig meat fattening and poultry have known an indirect regulation
through the reduction of guaranteed cereal prices. The MacSharry reform didnt affect the market
regulation concerning products like sugar, wine, grocery and fruits.
Lower agricultural prices mainly refer to cereals. Administrative prices (orientative
prices, intervention prices) were accomplished by their approximation to the world level. It has
been estimated:
- a raise in internal demand for cereals
- production shrink, by using less intensive technologies, as a result of the lower prices
- a short term demand decrease, by using the set-aside method, - unreclaimed fields, or at
least unreclaimed with cereals, proteic, or oleaginous plants.
- better equilibrium of the cereal market, by decreasing the offer, simultaneous with a raise
in the internal demand
Lower agricultural prices are counterbalanced by the direct revenues subsidies, or so
called awards, or compensations. The products quantities over which a farmer can claim
payment are limited, and their granted is conditioned by severe restrictions. The application
of such a system requires more data about the producers, but it has the advantage of less
allowance distortions.
The preferred state resides in farmers who have fields with 92 tones of cereals potential,
and they have over 20 ha; they are not constrained to limited production. In this category,
there are 80% of the farms and 26% of the agricultural fields, obviously with country
differences. In animal breading (beef and sheep), affected by the CAP reform, they define the
small producer, the farmer who has under 15 UVM (a milk cow = 1 UVM, young cattle of 624 months = 0,6 UVM, a sheep = 0,25 UVM). Out of the 12 member states, since 1992,
almost half of the farmers were part of this category.
The objective of production growth is, on one hand, offer decrease, and, on the other
hand, environment protection. In this way, they predict a decrease in animal density on
surface unit. The award for sacrificed animals is given only to that farm in which animal
density doesnt overcome the scheduled level. The fields cropped with soilage dont include
the cereal surface, nor the surface cultivated with silo- wheat. The scheduled price decrease
doesnt necessarily facilitate the production growth in animal raise.
These reform offered large decisional possibilities for each farmer. He can accept that a
part of his farm surface entered in the set-aside mechanism or he can choose to become a
small producer in order to stay unaffected by this reform. Every farmer could estimate in
which condition he can obtain bigger revenues.
A new reform measure was the recognition of the pluriactivity function of the
agriculture:
- production of row material for the industrial alimentary activity ( the first function);
- maintenance of the natural environment;
- sustainment of the economic activities in less developed regions;
By using a territorial differentiation in the subsidies level, the policy makers tried to assure
the continuity of the production activities in all regions of the EU member states. So they prevent
the desertification of rural areas with less favorable agricultural conditions. It was decided to
increase the financial resources for several structural programs, such as: water protection; land
Compared Agricultural Policies Lecture 4.
6

Agribusiness Master of Science

forestation or grassing; developing the bio-agriculture production; incitation to use friendly
environmental technologies;
In 1988 they decided a financial delimitation of the agricultural budget expenditures. So it
was foreseen a 0,74 percent increase of the agricultural budget with 1 per cent increase of the
EUs GDP. Also, it was stipulated that until 1997 the financial FEOGA contribution for all the
EU members would increase from 1,2 percent to 1,7 percent. It was obviously that after changing
the financial support mechanisms to compensatory payments the PAC budgetary spendings will
increase. The sustaining of price mechanisms was paid in a large measure by the food consumers,
unlike the compensatory payments which were paid only from the EU budget.
A synthetic representation of the main elements of the EUs agricultural politics after the
MacSharry reform is provided in the following table:
Table 1 Agrarian EU system after the MacSharry reform
Structural policies
Structural measures:
- objective 1 economic support for undeveloped
regions ( under 75% of the EU GDP average);
- objective 3 refers to human resources
development, younger population integration,
unemployment decrease
- objective 4 farmers support and other workers
who activate in sectors where structural changes
in production may occur;
- objective 5a - restructuring agriculture and
fishing, according to the CAP policy, in areas
which have achieved at least two of the following
criteria: 1. active population percent in agriculture
has to be high; 2. the revenues from agriculture
have to be reduced; 3. the density of the
population has to be reduced, and the rural exodus
to be continued
- objective 5b is directly related to rural
development

Market regulation

Direct compensatory payments for undeveloped regions:

- objective 5a
Agro-ecological measures:
- Reg 2078/92;
Compensatory hectares payments for (per hectare):
- cereals;
- oil plants;
- protean plants;
- hop, in and hemp seeds;
- starch potatoes;
- set-aside measures;
Animal payments(per animal):
- bull and calf payments;
- cattle sucker premium;
Compared Agricultural Policies Lecture 4.
7

Agribusiness Master of Science

Production primes:
- starch production;
- tobacco production;
3.1. Practical results of the Mac Sharry reform
The main effects of the reform were:
I.
Offering calculable conditions for farm entrepreneurs:
Before the reform, the administrative prices had been published for only one year, but after
1992 the level of these prices was established for three years ahead. For the commercial years
(1993-1994-1995) the following cereal prices level was established:
Table 2 The level of cereal indicative prices (ECU/tone)
Period
Indicative price Intervention
Threshold
Compensations
price
prices
1993-1994
130
117
201
25
1994-1995
120
108
155
35
1995-1996
110
100
45
The intervention price for cereals for the 1996 1997 period, as well for the agricultural year
1997-1998 was established at 119,19 ECU/tone and the compensations level at 54,34 ECU/t.
After 1996 the indicative and threshold price werent formulated anymore due to Uruguay
Round.
II.
Assuring appropriate conditions to accomplish the Uruguay Round.
The analysis of the two years results shows the following data:
- The limitation of stocks level and production: For instance, the EU cereal production
was reduced with 4 percent due to surface reduction with about 9 percent. In the same
time the EU meat production knew a 9 percent decrease. The cereals stocks were reduced
from 44 millions tones in June 1992 to 26 millions tones in June 1995.
Improving the farms competitiveness was assured in different ways in the common
market organization. For example, the competitiveness of cereal producers increased
while the efficiency of read meat producers decreased.
Improving the farmers revenues. In France, between 1992 and 1994 the revenue of
cereal producers increased with 14 percent and the turnover for the meat bovine producer
increased with 19 percent. These results were obtained due to market stabilization and
production modernization. In the same time, the average size of the farm increased
substantially.
- Minimizing the budgetary reform costs. For 1994, the effective CAP expenses arrived
at 33,4 billions of ECU which were with 3,1 billions ECU less than the budgetary
financial resources.
- Increasing the subsidy weights in farm revenues - was explain by the fact that the
financial contribution had been transferred from the consumer to the taxpayer
The results of the EU agricultural reform are directly correlated with the word market situation.
As a result of the decrease in the subsidy level, there was a decrease of the EU cereals prices.
This in turn contributed to the decrease of export surplus which produced an increase of the word
market prices. The reform in cereal market organization had two opposite time effects: after the
decrease of the forage prices, the EU short-run milk and meat production increased. This

Compared Agricultural Policies Lecture 4.

8

Agribusiness Master of Science

phenomenon induced an increase of the forage price, in the long-run, which contributed to an
important decrease of the word wide production with this kind of goods.
The results of the EU reform obtained between the years 1993-1996 could not be considered
stable or durable ones. They are rather favorable effects of a lucky conjuncture of the world
market. High world market prices permitted the commercialization of the important EU surplus,
but their decrease would produce another important crisis. So there is a need for important further
reforms.
References:
1. Ackrill, R. (2000), The Common Agricultural Policy , Sheffield Academic Press.
2. Artis, M. and Nixon , F.I., (2007), The Economics of the European Union, Oxford
University Press;
3. C Ritson and D R Harvey, (1997) The Common Agricultural Policy 2nd Edition ,
CAB International;
4. Commission (1989), Report concerning the co responsibility levy arrangement in
the cereal sector, Brussels;
5. Swinbank, A., (1993), CAP Reform, 1992, Journal of Common Market Studies,
31 (3): pp 359- 372;

Compared Agricultural Policies Lecture 4.

9