Just six members, France, Germany, Italy and the three smaller Benelux countries, comprised the European Union, or the Common Market as it was then called, when its structure was negotiated during the 1950s.

A European system of direct support for farmers, replacing the national policies of the six constituents, resulted from the ‘grand bargain’ between France and Germany when the Common Market was established with the 1958 Treaty of Rome.

France, fearing the strong post-war recovery in German manufacturing, secured an understanding that French agriculture would be protected, at least initially, and the European Commission ended up implementing what became the Common Agricultural Policy (CAP).

The CAP endures to this day, although it now absorbs 37% of the EU budget versus twice that share during the 1980s when ‘wine lakes’ and ‘butter mountains’ began to emerge.

The initial fears of inadequate food supplies were replaced with surpluses bought at guaranteed prices for intervention stocks. European food supply began to exceed demand as farm output responded to price supports while imports from outside the bloc were held back with the common external tariff.

Surplus product

The financial cost included the disposal of surplus product including export at subsidised prices and the conversion of wine into industrial alcohol.

Tens of thousands of hectares of French and Italian vineyards were uprooted with government and EU grant-aid while surplus butter floated at sea in refrigerated vessels.

Many countries, including Ireland after it joined in 1973, arranged for cheap state-subsidised sales of butter and other items to needy groups of social welfare recipients as an alternative to indefinite storage.

Reform was inevitable and there followed a succession of proposals including the scheme devised under Agriculture Commissioner Ray MacSharry in 1992.

One feature was limitations on farm output to get rid of the surplus production, the origin of the system of milk quotas finally abolished in 2015.

Farmers could continue to benefit from improved prices but there were now ceilings on the level of output and agricultural land began to change hands with output quotas attached.

For a small, open economy, it makes sense to encourage production in sectors where there is a prospect of domestic and export sales on advantageous terms.

This cannot be expected to happen where policy inhibits normal market functioning to keep supply and demand in balance, the principal failure of the 1960s and 1970s versions of the CAP.

The resulting lakes and mountains of surplus product in the 1980s led to the policy shift and ultimately to the end of milk quotas, widely welcomed in Ireland.

Milk quotas

The system of farm-by-farm milk quotas abandoned a decade ago was an impediment to the Irish farm sector precisely because the natural endowment of soil and climate indicate that Ireland is a sensible place to locate dairy production.

Irish primary producers are competitive within the EU and also on world markets where demand has expanded dramatically since the 1990s.

Europe has a single market without internal tariffs or import quotas and production is free to locate wherever costs are favourable. The origin of the system is only dimly remembered but its abandonment illustrates that tying agricultural income support to limits on physical output was a wrong turning for European farm policy.

The most visible impact here, as widely predicted, has been the expansion of dairy output since quota abolition and the restructuring of the processing industry.

Two priorities which will shape farm policy in the decades ahead will include competition for EU budget resources given the new urgency about defence spending and the continuing failure to reach carbon reduction targets.

There seems to be an irresistible push to expand military budgets and the EU institutions have already taken a leading role, including willingness to get involved in joint financing.

Even if Ireland succeeds in limiting direct involvement in a new EU defence architecture, there will nonetheless be an indirect impact since finance for other expenditure priorities – including agriculture – will be squeezed.

This will affect national budgets as well as the contributions from member states to the financial resources of the European Union, to which Ireland’s net outlays have been trending upwards.

The EU has a series of directives which, while respecting taxation as a domestic competence of member states, place limits on what can be done, including minimum rates of indirect tax on certain items. There are also ceilings and food products are lightly taxed, if at all, in most member states.

But climate policy concerns may encourage a fresh look at revenue raising from indirect taxation including non-zero rates of VAT on items deemed to be associated with high carbon emissions.

If calculations by the EU’s Joint Research Centre are a basis, the Irish dairy sector might be a beneficiary rather than a victim of a science-based approach to VAT reforms.