TESTING INTERNATIONAL PRICE TRANSMISSION UNDER ...

International Soft Wheat Markets Under Policy Intervention
4.2.2 European and international trade policies for soft wheat
In order to understand how the CAP is likely to have influenced international
price transmission mechanisms, a short description of its main instruments, as
well as an examination of the major changes it underwent in the past 30 years, are
necessary. Indeed, the CAP has evolved considerably, moving from a heavy
market regulation policy to the use of less distortive instruments, due to various
forces which have contributed to make it go towards the direction most third
countries desired (Anania 2007b, p. 1). These factors were concerns regarding its
increasing financial costs and the competition with other sectors in the EU budget
allocation, but also the growing exploitation of natural resources implied by
supply-supporting policies, their inadequacy to the new needs of agricultural and
rural areas (such as the protection of the environment), and the growing
international pressure. All these reasons, over the years and especially in the past
decade, caused an increasing share of the total expenditure to be removed from
aids coupled to production, and from market intervention, and then allocated to
decoupled aids, i.e. subsidies not requiring production but only eligible land,
provided the respect of the environmental cross-compliance.
In this reform process, which is still underway, some major periods can be
identified (Thompson 1999, p.5):
1971:01-1988:6 These years are characterized by the full functioning of the socalled
Common Market Organizations (CMOs), that regulated the markets of
various agricultural products. If necessary, to ensure that domestic prices never
fell below the minimum guaranteed price on the domestic market (called
“intervention price”), the European Commission, by means of private or public
stockholding, would implement the withdrawal from the market of the excess
supply. When not stocked, transformed, destroyed or even delivered through
public nutrition programmes, the excess supply would be sold in international
markets with “export refunds” paid to exporters, meant to cover at least the
difference between the intervention and the world price 41 . To restrict imports
(otherwise, intervention prices above the world price would result in large inflows
of product and unsustainably high stocks levels), “variable levies” were set as the
difference between the world price and the so called “entry price”. The price on
the internal market was then bounded between the intervention price and the entry
price (figure 4.7). Since intervention prices were constantly set above what would
have been the market equilibrium prices this system caused, in the 1980s,
41 Actually, export subsidies are calculated as the difference between a current domestic EU price and the
world one. However, to be effective, in theory, export refunds have to cover at least the difference between
the intervention price -the minimum guaranteed price on the EU market- and the world one. For the sake of
simplicity, this is what is assumed henceforth.
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