The MacSharry Reform marked the first time that Germany faced significant resistance to agricultural policy from industrial and economic circles, with the Federation of German Industry stating a preference for agricultural policy reform, albeit cautiously . This opposition from industry marked a major change, given that industrial and agricultural interests had been bonded in a close alliance dating back to Bismarck . A GATT deal could not be reached without progress in the agricultural sector, and a reduction in price supports would go a long way towards making GATT progress possible. Kohl therefore broke with Germany’s traditional stance against price cuts, announcing that “the EC agricultural reform was not possible without substantial price cuts, especially for cereals” . France’s acceptance of reform was made possible by four developments. First, there was recognition that a structural change needed to be made. Production that continued unchecked would lead to increasing expenditure and thus an endless cycle of budget crises. Second, French officials realized that the structural reform on the table, price cuts paired with compensation, favored the French production profile. At the time, France was not only an efficient producer but also Europe’s leading exporter of agricultural goods and the world’s second leading exporter of cereals, a position the French were bent on maintaining. Given the strong position of the agricultural sector, particularly in cereals, the French government and the French Grain Farmers Association recognized that France could remain competitive, if not gain market share,vertical greenhouse under a system of price cuts while less efficient farmers in other countries would not be able to compete with the French.
The status quo in the CAP, with its system of export subsidies, high prices, and import tariffs allowed even small and inefficient producers to sell their goods competitively alongside those of the largest and most efficient producers. If prices were cut, large grain producers would remain competitive, due to their efficiency, but the smaller farmers would be rendered uncompetitive. With these producers driven out of the market, the larger and more efficient French farmers could then gain market share. The third development that pushed France toward accepting the reform was the acceptance that for some products, the status quo was no longer tenable. The AGPB was warned by Guy Legras, DGVI director and part of the EU’s GATT team, that new GATT rules were likely to require duty free importation of PSCs, or “products to substitute for cereals” and that, without a cereals price cut, French farmers would be unable to compete with PSCs . Cereals producers grow grains for both human and animal consumption. If the system of high prices was maintained and the GATT agreement proceeded as expected, grains produced for animal feed would be far more expensive than the PSCs, and French grain growers would lose market share and revenue as livestock farmers turned to alternative food sources for their animals. So, while the main French farmers’ union, the FNSEA maintained its “no reform and no discussion of reform” position, the powerful grain farmers, represented by the AGPB broke with the FNSEA and lent their formal support to the French government’s acceptance of the MacSharry Reform. The fourth factor that led to France swinging to support the reforms was the fear of the consequences of a failed reform. Specifically, what was most feared was a quota system, a possible alternative way to check spending and production if price cuts failed.
In other words, while the possibility existed to impose reform via price cuts now, the failure to adopt reform would put the CAP into a position where the only possible alternative to control CAP spending would be to impose a quota system. At this point, a quota system existed, but only for the dairy sector. It was controversial, because it placed a strict limit on production, dividing up “shares” among producers and prohibiting production beyond the specified amount, even if it could be done more cheaply and efficiently than a competitor. A quota system would potentially cost France market share both internally and externally. In terms of the internal market, if demand exceeded production limits in France, milk would have to be brought in from producers in countries where quota limits exceeded domestic demand. Externally, efficient French producers would be unable to produce and sell milk beyond their strict quota limit, restricting their ability to expand their market share. A quota system would place a hard limit on production, continuing to prop up smaller and less efficient producers by guaranteeing them a market while restraining the ability of the efficient producers to expand into and serve new markets. While French farmers were split over price cuts, they were united in their opposition to a quota system. In sum, on this first core issue of the negotiations, price cuts, Denmark, the Netherlands, and the United Kingdom were in favor of them from the start. The southern bloc of Greece, Spain, Portugal, and Italy were not opposed, as these proposed cuts did not affect their main agricultural products. The final three member states took a more circuitous path to support for the price cut element of the reform.
Germany, though traditionally in favor of high prices, ultimately supported price cuts in an effort to ameliorate a domestic financial crisis brought on by the costs of reunification and to help clear the way for a hugely beneficial GATT agreement. Though initially opposed, France ultimately accepted the proposed price cuts thanks to support from the AGPB, an acceptance that reform had to happen in order to preserve the CAP, and a recognition that the reforms on the table favored the existing French production profile. Finally, Ireland’s stake was only in the beef sector- it did not grow cereals, and its cattle were all grass fed. As in France, support from the Irish Farmers Association led to support for these measures from the country’s representatives. The second major issue under discussion concerned the measures to redirect support to small farmers. The support of the pro-market countries, Denmark, the Netherlands, and the UK, was won with two key concessions. While none of these countries opposed price cuts, they all opposed modulation. Home to some of the largest farms in Europe, these countries felt that their farmers would be disproportionally punished by a system that reduced compensatory payments for large farmers and redirected those savings to smaller farmers. The Commission ultimately dropped all systems that would modulate income payments to the benefit of small farmers. This concession was necessary for reasons that again echo welfare state reform. Under modulation,vertical grow towers it was very clear which farmers would be subjected to financial loses but it was far more uncertain which farmers would benefit, how much, and when. With certain losers but uncertain winners, it was easy to rally opposition to the program. The lackluster defense of the program was exacerbated by the wide variation in production size and style in the member states. The clear losers could rally their leaders against the reform, but winners, not knowing who they would be, did not mobilize. Finally, it was broadly understood that the inclusion of modulation was a deal breaker for Denmark, the Netherlands, and the UK. In order for negotiations to proceed, it had to be dropped. Denmark, the Netherlands, and the UK also won a concession over their other major sticking point. They objected to the compulsory land set-asides, which would require only farmers with the largest holdings to remove land from production. Under the proposal, farmers would not receive any compensation for this set-aside land. As they were home to some of the largest farms in the EU and thus also the farmers who would be subjected to this set-aside policy, Denmark, the Netherlands, and the UK staunchly opposed this program, arguing that it was unfair to their farmers.
To quell these objections over compulsory land set-asides, and the “inequity” of small farmers being exempted from them and thus being eligible to receive some form of income support for all of their land, the Commission offered a further concession that all set-aside land would be eligible to receive compensatory payments. The third core issue in the negotiations was the milk quota. While the proposed reform called for a reduction in milk quotas, Italy, Spain, and Greece demanded an increase. This demand was strongly opposed by Belgium, Denmark, Luxembourg, the Netherlands, and the UK. These “northern bloc” countries were upset that the southern European countries were not respecting the system already in place . These countries, and Italy in particular, were singled out for demanding an increase its quota while not respecting the existing quota. Italy, for example, had still not implemented or adhered to the quota system adopted by the EU in 1984. An agreement was reached that included a guarantee not to cut quotas and an offer for a quota “adjustment” once the previous quotas had been applied satisfactorily . Though not directly specified as such, an “adjustment” was understood to be an increase. The final reform package included four central components. The first component was price cuts for the three sectors most affected by overproduction: cereals, beef, and dairy. These sectors were subjected to price cuts of 29%, 15% and 5% respectively. These cuts were to be lagged, coming into effect gradually over a period of roughly five years. Within dairy, milk production, which is regulated via quotas rather than price controls, was not subjected to any alteration of quota amounts, despite proposals to reduce their levels. The second component of the agreement was the adoption of a series of payments to compensate farmers for revenue lost due to the price cuts. Instead of being paid based on output through a series of high, fixed prices and export subsidies, farmers would now be paid a direct payment that had no connection to current production levels. The direct income payment would be calculated based on the historic yield of a given crop for that region. At this stage, the direct payment based on historic regional yields would only be applied to a portion of the farmer’s land. The portion of land affected varied by type of production. Financial support for the rest of the land would come as before, via a system of guaranteed prices. In other words, direct income payments were only partially decoupled from production. The third component of the agreement was a mandatory land set-aside program, to remove land from production with the objectives of reducing output and improving the health of the land. Reducing output would also in the long run reduce CAP expenditures, as costs for storage and dumping would decrease. While long-term savings was an oft-repeated refrain of the reforms, details of exactly when these savings would come and how much they would be were murky at best. Contrary to the stipulations of the initial proposal, in the final agreement, land that was required to be set aside was eligible for compensatory payments for price cuts. The final component of the agreement was a set of three non-binding accompanying measures. These measures sought to improve the environmental health of the land via a series of programs, including agri-environmental initiatives, afforestation, and early retirement. These measures were significantly watered down from the initial proposal circulated by Agricultural Commissioner Ray MacSharry. A fifth major proposal, modulation, which would redirect money from the biggest CAP beneficiaries to the smallest farmers, was defeated and thus did not make it into the final agreement. Table 3.1 below presents the initial and final form of each key measure included in the agreement. As Table 3.1 indicates, every measure of actual substance was watered down. Price cuts were smaller than desired for all the main sectors, cereals, beef, and dairy. Moreover, the beef and dairy sectors actually received an additional benefit from cuts to cereals. As grains are a major input for the beef and dairy sectors in the form of animal feed, livestock farmers’ costs were lowered by the price cuts to the cereals sector. Not only were price cuts much smaller than initially proposed, but compensation was extended further. Specifically set-aside land, which was not supposed to be eligible for a compensation payment, was included in that scheme.