1. What is the purpose of CAP?
The Common Agricultural Policy was created to protect European Farmers by paying them subsidies, guaranteeing a minimum price and setting quotas on foreign imported goods and ensuring a reasonable quality of food for consumers.
2. Why did CAP guarantee minimum prices to Farmers?
In order to ensure a reasonable standard of living for European farmers and to protect them from overseas competition.
3. What is the purpose of an intervention store?
During times of excess supply the EU would buy up any surplus produced by EU farmers to maintain a stable price level and would release them in times of excess demand and a shortage of supply in order to avoid price inflation of food.
4. Why did butter prices increase?
As the worlds is moving towards a carbon neutral mentality governments with each year are trying to incentives farmers to create Bio fuels instead of other foods. Furthermore transport costs due to the sky rocketing oil prices contributed to cost push inflation of food prices as the main costs involved with food is transport.
5. What is the significance of Fig 1.1 in Extract 1 (provide an interpretation of the Chart)
Fig 1.1 shows us the World wholesale price of butter and that 2006 was a fairly stable period of prices being tied between the 2,000 and 2,500 $ per tonne mark. However with decrease in Supply of Butter in 2007 we can see a quick supply push inflation starting in December 2006 at just under 2,500 rising quickly over the year 2007 to 4,500 by Christmas.
6. What is the significance of Fig 1.2 in Extract 1 (provide an interpretation of the Chart)
From Fig 1.2 we can clearly see how the price of butter has risen and the EUs intervention buying scheme was set in motion to correct the butter price inflation. In 2006 the price was stable bouncing between the 2.4 and 2.6 mark. By April 2007 the prices started increasing rapidly peaking at 4.2 by august when the EUs intervention stocks where released to get the price level of Butter under control and we can see that the intervention stocks had the desired effect of stopping the inflation by September and causing the price of Butter to fall from October on.
7. Is it feasible to compare Fig 1.1 and 1.2?
Yes and no. Under the CAP and programs such as intervention buying the EU market is fairly well protected from global demand and supply shocks as demonstrated in the in the diagrams. In Fig 1.2 we can see that the price of butter started to fall towards the end of 2007 thanks to the released intervention stocks of the CAP. However during the same time world butter prices continued to sky rocket and where not even slightly affected by the falling prices in the EU.
8. Why were Italian pasta makers urged to go on a 'pasta strike'?
Italian pasta makers import some 50% of durum wheat to make pasta and since the price of wheat has increasing dramatically as demand from countries such as china and India increased along a decrease of supply from primary producers such as Argentina due to poor weather and mismanagement. This has caused higher costs for Italian pasta makers and therefore cost-push inflation onto the consumer in form of higher prices for pasta. Therefore Italian pasta makers urged Italians to go on pasta strike to voice their disagreement of higher prices and also to ease demand a bit to lower inflation.
9. How will 'direct income supplements' reduce overproduction?
Schemes like the EU intervention buying help manage supply and inflation without making farmers worse off. If a harvest was good and there is excess supply in the market of e.g. wheat the EU steps in and buys and excess wheat off farmers in order to not upset a stable wheat price and harm farmers. Furthermore the CAP ensures that farmers that have spare land get subsidies to produce bio fuels.
10. Using Supply and Demand analysis, discuss the impact of CAP's reform on butter prices
Supply of Butter down, while demand for butter up (china, India) > price of butter up, production of butter same or less due to weather, mismanagement, bio fuel subsidies > no increase in supply therefore demand pull inflation > higher butter prices > higher percentage of household income spent on food > decrease in consumption (demand for luxury goods down) and so on.
11. What are the consequences, if any, of the trend in prices depicted in Extract 1?
Firstly higher prices of food hurt the consumer, poor people more than most. Higher food prices means that people have to devote a greater proportion of the income to food purchase and that in turn reduces consumption in other sectors of the economy. In America the increase in food prices has caused 1 in 10 Americans to apply for food stamps worth some 680$ a month to supplement their expenditure on food. This in turn is a burden on the government of some 40 billion dollar a year, which in turn reduces government spending in other sectors of the economy.
12. What are the economic consequences of changes in the prices of feed-wheat and fertiliser in the UK?
The increase in prices of both fertilizer and feed wheat has dire consequences on the further stages farming. Price of fertilizer up > price of growing wheat up> price of wheat up. Price of feed wheat up> price of feeding farm animals up> price of producing milk up> price of milk up> price of butter up.
13. With reference to Extract 1 explain the distinction between correlation and causation.
14. Why do institutions such as CAP exist?
To correct inequality and protect vulnerable industries such as agriculture. The CAP combines a direct subsidy payment for crops and land which may be cultivated with price support mechanisms, including guaranteed minimum prices, import tariffs and quotas on certain goods from outside the EU.