Impact of the Common Agricultural Policy on food price volatility for developing countries

Research reports and studies
November 2012
Nicola Cantore

The recent discussion about the reform of the Common Agricultural Policy (CAP) should lead us to reflect on the possible consequences for developing countries, given that the European Union (EU) is committed to Policy Coherence on Development (PCD).

This paper analyses the effects of the CAP (of both existing measures and proposed changes) on price volatility in developing countries, an issue of considerable importance to them. Research finds that existing protectionist measures may continue to exacerbate price volatility at world level.

When world prices increase, mechanisms such as EU quotas in the sugar and dairy markets reduce the production of EU farmers and further increase prices. When prices are decreasing, CAP mechanisms such as export subsidies increase EU farmers’ production and further accelerate such price decreases. CAP instruments thus stabilise EU farmers’ income but accentuate price volatility at world level.

This paper argues that the abolition of CAP instruments will help stabilise prices in world commodity markets, and therefore that the CAP reform proposal to abolish the sugar quota is a step in the right direction.