4. We consider that the
following raises questions of political importance, and recommend
its further consideration by European Standing Committee A:-
MINISTRY OF AGRICULTURE, FISHERIES AND FOOD
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(17826)
5217/97
COM(96)554
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Report from the Commission on the common organisation of the market in raw tobacco.
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Legal base:
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Background
4.1 Community support
for tobacco growing and first processing was introduced in 1970[15].
The accession of Greece in 1981 and then of Spain and Portugal
in 1986 increased Community production by over 50% and, in the
case of Greece, introduced oriental varieties for the first time.
Community expenditure rose from 5 million units of account (about
£2.3 million) in the first year of implementation of the
régime in 1970 to 362 million ECU (about £201.6 million)
in 1981 and to 1,329.6 million ECU (about £930.3 million)
in 1991.
4.2 At that point steps
were taken by the Community to restrict support by limiting the
quantities qualifying for premium. The Special Report of the
Court of Auditors[16]
which we recommended in March 1994 for debate[17]
expressed serious concern about the régime, pointing out
that half of the Community tobacco production is of such low quality
that it is not suitable for the manufacture of tobacco products
in the Community and is dumped on third countries' markets.
"The Community
finances a product of [sic] which there is no real demand,
instead of urgently seeking to switch to other products in areas
where quality tobacco is not, or indeed, cannot be grown. All
the facts combine to show that financing tobacco production is
a misuse of public funds."
The Court of Auditors
was also concerned about fraud.
4.3 The Commission introduced
changes to the régime in 1992 and tighter budgetary control
was introduced. Intervention and export refunds were effectively
abolished and support in the form of direct aid payments (premia)
was limited to production within quota. The quantities eligible
for support were reduced to a maximum of 350,600 tonnes from a
peak of 430,000 tonnes, with the number of premia rates reduced
from 34 to 8. The money provided in the Preliminary Draft Budget
for 1997 for this support is 1.027 billion ECU (£760 million)[18].
4.4 Italy and Greece
were required to introduce control agencies to combat fraud and
measures were introduced to encourage conversion to more marketable
varieties in Italy and Greece. Eight of the Member States have
a producer interest; Italy and Greece are the main beneficiaries.
The report sets out the operation of the scheme since 1992, with
proposals for the future of the common organisation of the market
in tobacco.
The Commission report
4.5 The 45 page report
is in five parts. Part 1 explains the nature of the product,
drawing a distinction between aromatic tobacco and filler. Part
2 sets out the economic and social importance of tobacco production
in Europe. The various sections are summarised as follows:
"provided that
they are high quality, there is great demand for flue-cured and
light air-cured tobaccos, which are basic ingredients of the American-style
mild-taste cigarettes, the popularity of which is tending to increase
in all countries, but the competition on this market is fierce.
"sun-cured tobaccos,
which are used in almost every tobacco mixture because of their
exceptional aromatic qualities, are in high demand on the world
market. The Community varieties are of excellent quality on average.
"as dark air-cured
tobaccos are more specifically ingredients of dark cigarettes,
sales of which are falling, the global demand for dark air-cured
tobacco has been dropping sharply."
4.6 The report points
out that the demand for fire-cured tobacco, which is produced
primarily in Italy, has also fallen off sharply.
4.7 In the section dealing
with tobacco growing and use the report states:
"tobacco farming
is very labour intensive, especially in the transplanting and
harvesting phase.
"tobacco farming
is a major source of employment, particularly in Greece and, to
a lesser extent, Italy. In some areas it procures the entire
population a livelihood, thereby helping to keep the rural population
in work.
"without tobacco,
practically all the farms that grow this crop would no longer
be economically viable.
"as tobacco
is generally grown on small plots, the possibilities for mechanising,
transplanting and harvesting operations are limited. Consequently,
the mean yield per hectare has increased, but slightly, over the
past ten years or so.
"so tobacco
is a very demanding crop, requires a large amount of hand labour
that will be difficult to replace by machinery in the medium-term.
"tobacco processors,
whose economic activity is directly dependent on tobacco farming
in Europe, employ a large number of people.
"the competitiveness
of publicly owned or formerly publicly owned tobacco manufacturers
depends directly on the continuation of tobacco growing in Europe.
"small, low-yield
farms that generate industrial activity provide jobs for a large
workforce and prevent the exodus of numerous families in regions
that are often characterised by developmental lags. For proof
of this, note that 46% of the Community's tobacco producers are
Greek farmers who grow, with their families, very promising sun-cured
tobacco varieties on small farms averaging 0.8 ha under soil and
climatic conditions [which] make all other alternative crops very
difficult, and all of this occurs in objective 1 regions.[19]
Community aid for tobacco farming contributes significantly to
spatial planning in the producer countries."
4.8 Part 3 analyses the
quality of European tobacco and its rank in world production,
and indicates that the average quality of the leaf produced by
certain Community varieties is very low and is not likely to improve.
Market prices in Europe are not high enough to cover tobacco
growers' production costs (according to Commissioner Fischler[20]
it was difficult to justify a régime where producers essentially
receive 90% of their income from subsidies and 10% from the market.)
The report does not see any likely increase in world prices.
Although certain varieties produced in the Community are of good
quality and can command high prices, most of the Greek and Italian
Virginia and Burley tobacco production depends on a Community
premium that is sometimes 99 times the purchase price of the tobacco.
It concludes:
"with exception
of some very specific varieties (notably the Greek Oriental tobaccos),
the very low purchase price of raw tobacco in Europe testify [sic]
to the generally poor quality of Community tobacco."
4.9 Although the Community
is not self-sufficient in tobacco, the report acknowledges that
local producers were unable to adapt to consumers' changing tastes
and concludes
"the poor quality
of a large proportion of the production and the growth and, in
certain cases, maintenance of production that is not attuned to
the Community's market needs explain why the self-sufficiency
rate is so low."
"the world raw
tobacco market is characterised by the steadily rising quality/price
ratios of the tobacco produced by developing countries, the export
market share of which is increasing significantly. China is a
major source of uncertainties; it could upset the world market
balance seriously, especially if it exports more flue-cured tobacco."
4.10 Part 4 sets out
the functioning of the market after the 1992 reform and indicates
that the new arrangements stabilised budget expenditure by reducing
production and dismantling some expensive mechanisms. On fraud,
it draws attention to the fact that the national supervisory agencies
in Italy and Greece which were provided for and encouraged by
the reform have not yet been set up.
"the nature
and scale of the irregularities as attained after the reform are
completely different compared with the previous situation. Most
of them are due to the drastic changes in the rules, the complexity
of managing the quota scheme and lack of supervision (fake producers)."
4.11 Part 5 sets out
proposals for the future of the common organisation of the market
in tobacco and highlights two potential choices. The first is
to disengage the Community from the sector, easing the growers'
problems by specific measures. It rejects this scenario largely
on social grounds, because 185,000 jobs in tobacco production
and 18,000 jobs in the processing sector would be affected. It
would also have a harmful effect on state undertakings because
they traditionally get a large proportion of their supplies from
their domestic markets. However, the report does point out that
tobacco is grown on soil that is suitable for growing other crops,
with the exception of the Greek Oriental and to a lesser extend
Italian semi-Oriental varieties, which are grown on poorer, dry
hillside plots where growing other crops is riskier. There is
therefore no purely agronomic obstacle to re-orientating tobacco
farms towards different crops. Such conversion would, however
raise employment problems. The Commission therefore rejects this
scenario, giving the following reasons:
-- Community
disengagement from the sector would have no effect on tobacco
consumption;
-- the
economic and social consequences would be likely to be very serious
in regions already experiencing major economic problems;
-- the
Community market organisation might be replaced by national ones.
4.12 The report also
rejects other scenarios, such as a system of aid per hectare which
would be difficult to monitor, particularly when the subsidy would
form such a large part of the return and there would be a risk
that growers will plant tobacco without actually harvesting it.
Direct income support is also rejected because it would go well
beyond set-aside payments and the social and political acceptability
of such payments would be in doubt. The report also rejects lowering
premia to encourage farmers to improve the quality of their crops
because this would not help those regions producing tobacco for
which there is a low market price.
4.13 However, the report
admits that retaining the scheme in its present form is clearly
ruled out, because the low market price to premia ratio jeopardises
the public support for growers, because the scheme's inflexibility
makes access to this sector difficult, and because the complexities
of the present régime cannot be appropriately managed.
4.14 The Commission therefore
proposes modifying the premium scheme to improve the quality of
the tobacco produced. This will be coupled with "modulated"
Community aid by linking the payment of part of the premium to
the value of the tobacco produced. This would provide a fixed
portion and a variable portion designed to give tobacco farmers
a minimum income, but also to encourage production of quality
tobacco better suited to the internal market's needs. Such a
scheme would be implemented by increasing aid to producer groups.
The new system would not be fraud-proof but in the Commission's
view it would be easier to check and simpler to manage.
4.15 There will be no
change in the current levels of premia nor in the volume of the
quota. However, within the principle of budget neutrality, the
Commission believes that the volume of quota for the least marketable
varieties should be decreased, and help given for those producing
unsaleable varieties to leave the industry through a permanent
scheme for buying back quotas. Such a scheme would ensure the
viability of farms and processing facilities likely to weather
the transition, by aid for investment and environmental conservation.
The flexibility of the quota and guarantee threshold scheme should
be made more flexible, encouraging the consolidation of holdings
and dealing with groups of producers rather than individual producers.
4.16 The Tobacco Research
and Information Fund financed by a percentage of growers' premiums
would be maintained, on the grounds that one of its tasks is to
search for varieties and cultivation methods which are less harmful
to human health. The amount withheld from the premium would be
increased to 2%.
4.17 The Commission expresses
concern that Italy and Greece have not yet set up supervisory
agencies. It stressed that these are needed to identify bogus
producers, verify deliveries, and inspect processing plants and
warehouses to prevent the payment of several premia for the same
tobacco. It suggests the use of integrated area control systems
that already exist for other crops. Warehouse inspections and
checks on stocks leaving the processing plants should also be
instigated or stepped up.
The Government's view
4.18 In his Explanatory
Memorandum of 27 January the Minister of State at the Ministry
of Agriculture, Fisheries and Food (Mr Baldry) states:
"The UK does
not grow any tobacco on a commercial scale. The Government is
highly critical of the Community tobacco régime on expenditure,
health and control grounds and has consistently argued against
it. The 1992 reforms were a significant step in the right direction
and the Community now has an opportunity to build on this.
"From the Report,
it is clear that the problems facing growers are essentially socio-economic.
It is, therefore, very disappointing that the Commission has
rejected the option of addressing these problems directly through
the appropriate structural measures and phasing-out of the tobacco
régime. The Government will argue that this option needs
to be more fully explored. On the Commission's recommendations
themselves, the idea of modulated premia seems complicated and
open to fraud. Reducing premia generally could be a more direct
way of encouraging growers to react to market signals and would
also reduce expenditure. This rejected option should be considered
further. On the question of controls, the Government has concerns
about placing more responsibility for implementation on producer
groups and it is disturbing that Greece and Italy have failed
to introduce the control agencies specified in the 1992 reform."
Conclusion
4.19 The report on
the common organisation of the market in raw tobacco raises many
of the same concerns as those highlighted in the report by the
Court of Auditors. In particular:
(a) the
justification for the use of such large EAGGF funds in support
of Community tobacco production;
(b) the
lack of adequate controls, exemplified by the failure of Italy
and Greece to introduce control agencies to help combat fraud;
(c) the
health costs associated with Community support for tobacco production.
4.20 The report clearly
indicates the reasons why many varieties of tobacco are grown
only for subsidy. The arguments for maintaining rather than withdrawing
support from tobacco growing need to be thoroughly and critically
examined. The report itself indicates that the present arrangement
cannot continue. The argument that the Community is not self-sufficient
in tobacco is refuted in the report itself, since it points out
that the varieties preferred cannot be economically grown in the
Community. The justification given for the highly expensive régime
in relation to the relatively small number of jobs at risk needs
to be looked at not only at cost per head, but also in the light
of the fact that other countries' (particularly developing countries')
tobacco production is steadily improving, whereas that in many
parts of the Community shows no such improvement.
4.21 Sooner or later,
the non-marketable varieties will have to be eliminated. The report's
preferred solution does no service to the long term interest of
the producers, as it continues a régime which is costly,
open to fraud and misuses Community resources. In view of the
considerable interest in the whole question of the imbalance between
the Community's health aspirations and the money it spends on
subsidising tobacco a debate on the appropriate way forward
is clearly desirable. A full debate on the Commission's proposals
is scheduled for the 17/18 February Agriculture Council, although
it is unlikely that decisions will be taken at that time. We
therefore recommend debate in European Standing Committee A, to
take place as soon as possible.
15 OJ No. L 94, 28.4.70, p.1. Back
16 (15153) 4311/94; see HC 48-xi (1993-94), paragraph 1 (9 March 1994). Back
17 See Official Report, European Standing Committee A, 20 April 1994. Back
18 At 1 ECU = £0.7399. Back
19 Objective 1 of the Structural Funds: promoting the development and structural adjustment of the regions whose development is lagging behind (defined as where per capital GDP is less than 75% of the Community average). Back
20 Agra-Europe, 24 January 1997, p E/2. Back
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