FORMULATED in 1960, the Community Agricultural Policy (CAP) of the European Community guaranteed high prices for the main agricultural produce -- cereals, sugar, dairy products, meat and wine of poor quality -- owing to two mechanisms: an intervention price and a tax on imports from non-EC countries.

The intervention price guaranteed that if the European market price fell below the intervention price, the EC would buy all the produce at the latter price. This produce was then either kept till it could be sold or destroyed. The import tax raised the import prices above the European market price.

These mechanisms guaranteed outlets to European farmers (when there are no buyers, the EC buys) and encouraged them to produce more (the more sold, the more gained because of high prices). But high prices stood in the way of exports outside the EC countries. The EC, therefore, subsidised these exports with a financial aid called restitution.

Modified CAP Reforms were effected in the CAP in 1992 because it was felt the policy had become too expensive to afford. In the modified CAP, the intervention prices were lowered. This reduced the incomes of farmers and so the EC created a direct subsidy for them. This subsidy was not linked to the level of production but was based on the area under cultivation. Moreover, in order to decrease the production that was resulting in a surplus, the EC decided that this new subsidy would be paid only to farmers who left 15 per cent of their cropped lands fallow. These fallow areas received an additional subsidy if sowed with oil-based plants (rape-seed, for example) in order to make fuel for cars.