House of Commons - Agriculture

Select Committee on Agriculture Second Report

III. AGENDA 2000 (continued)

Direct payments

The rationale of direct payments

35. Although the extent of the support price cuts envisaged in Agenda 2000, and of the compensatory direct payments to producers, varies between cereals, beef and dairy, the switch from market support to direct payments, continuing in the direction established in the 1992 CAP reforms, forms the kernel of Agenda 2000. We will consider the specific proposals for each of the three regimes in our next section, but it makes sense at this stage to subject the general principle of direct payments to examination.

36. The Commission acknowledges that, in the cereals sector, there has been an "over-compensation of producers in the last few years"[27] under the 1992 reforms, and states that, under the Agenda 2000 proposals, direct payments "will be set at an appropriate level while avoiding any overcompensation"[28]. In particular, the non-crop specific area payment to be introduced in the crop sector "will be lowered if the market prices are sustained at a higher level than currently foreseen"[29]. In addition, the Commission proposes to extend to arable crops the availability of an option for member states to make direct payments conditional upon the observance of environmental provisions. At various points in Agenda 2000, the Commission employs the terminology of "direct payments", "direct income payments" and "direct compensatory aids", though it appears to envisage direct payments continuing to function as compensation for lower market prices received by farmers, despite the fact that full compensation is not proposed for cereals. There are also signals that such payments could be further tied to environmental conditions and "modulated" or limited to achieve other socio-economic or budgetary objectives. Miss Kate Timms described the language used in Agenda 2000 as "not particularly helpful". She said that the payments were there "to serve the purpose of compensation, buying out change..... If that is what they are let us be honest and candid and call them compensation..."[30].

37. The Commission does not postulate, in Agenda 2000, either an end-date for direct payments, or any decrease in payments over time. For the Government, this is one of the most serious weaknesses in the Commission's proposals. Mr Andy Lebrecht, Head of MAFF's European Union Division, said that "securing degressive payments and the eventual phasing out [of payments]" was one of the Government's priorities in the forthcoming negotiations over Agenda 2000[31]. A note submitted by MAFF to the European Commission sets out the reasons behind the Government's position: "We... strongly doubt that payments to farmers simply because they are farmers will be tolerated by the public as a permanent feature of the Union. For this reason, as well as to ensure that the necessary adjustments to farm structures take place over time, they should be degressive. Existing direct payments to farmers should be placed on the same basis as new ones"[32].

38. Farmers' representatives were cagey on this subject. The NFU conceded that if direct aids were to be justified as "economic payments" they would ultimately have to be regarded as transitional, though they were not willing to be specific about the length of any transition period[33]. The NFU argued that the EU should not "unilaterally" decide to make its payments degressive, and they considered that it would be a "tactical mistake for the British Government to make this a major issue in discussions with its EU partners"[34]. We recognize that the NFU's approach to this matter is much less conservative than the majority of its sister farming unions throughout the EU, but its views on the nature of direct payments do appear to contradict their other statements in evidence to us, when they criticize the Commission for failing to address the new constraints on European agriculture which are likely to result from the next round of WTO negotiations and for allowing the USA to "take the high ground" in these negotiations[35].

39. Direct payments are being made to compensate farmers for reduced levels of price support. An explicit recognition that these payments to farmers are compensatory in nature must, in our view, be accompanied by a recognition that they cannot be permanent. We agree with the Government that the rationale of direct payments must be to assist farmers to adjust to the new market circumstances resulting from reductions in market support prices. Such compensatory or adjustment aid should not be available indefinitely to farmers. It must be time-limited, and decrease over time. Moreover, it would be absurd to contemplate the provision of compensatory direct payments to central and eastern European farmers when they accede to the EU, just as it would be absurd to provide payments to farmers in the existing 15 member states and not their eastern colleagues once they are fully integrated into the EU. In negotiations on the Agenda 2000 package, the Government must be vigilant against any attempts to muddle these clear principles.

Decoupling support from production

40. The USA has effectively decoupled support for agriculture from production and imposed a schedule for support payments to decline and terminate, under the Federal Agricultural Improvement and Reform Act 1996. It therefore has no interest in prolonging the protection afforded to certain production-linked subsidies under the so-called "blue box" provisions of the Uruguay Round Agreement on Agriculture into the next round of WTO negotiations, as we have already remarked (see paragraph 28). Because of this, and other developments, the Government has pointed out that the EU is likely to come under strong pressure in those negotiations to decouple support[36]. The Government's assumption was confirmed by evidence which we received from the New Zealand and Australian Governments. The New Zealand Government said that the direct payments proposed in Agenda 2000 would "lock in subsidies based on inflated production capacities.... and will therefore continue to distort production"[37]. The Australian Government declared its intention to look for "a move away from production-linked support with removal of the separate so-called "blue box" domestic support"[38].

41. The UK Government's case for decoupling subsidies from production does not rest solely on likely international pressures: the strategy is also seen as desirable in itself "in helping agricultural structures to adjust and become more competitive"[39]. In oral evidence Miss Timms expanded on the type of arrangements which the Government wanted to see introduced:

Strong support for the concept of decoupling direct payments come from the Consumers in Europe Group[41], and from the Council for the Protection of Rural England[42].

42. We sensed a degree of nervousness from representatives of farmers and landowners about a policy which promoted the full decoupling of support from the means of agricultural production. Sir David Naish, then President of the NFU, said that the issue had to be looked at "commodity by commodity"; he argued that a move towards decoupling would have to take account of support for agricultural and food industries throughout the world, including in the USA[43]. The Country Landowners' Association advocated greater decoupling of support, including the transformation of livestock headage payments into area payments, but baulked at the possible detachment of support from land. Mr Tony Bailey, Director of Policy at the CLA, thought that wholly decoupled support through, for example, transferable income-bearing bonds, could, in circumstances where producers ceased production and land had no alternative use, have a direct economic impact on the value of land. He was also concerned that the introduction of transferable bonds could result in resources being transferred away from rural to urban areas. Nevertheless, he conceded that detachment of compensation payments from land could be contemplated if other resources were made available for rural areas[44]. More robust opposition to the strategy of decoupling compensation payments was expressed to us by an arable and dairy farmer, Mr Malcolm Read, who claimed that there was no logic or common sense behind the view that decoupled payments were acceptable and production-linked payments were not. Mr Read's strictures were not confined to the decoupling of payments: he foresaw dire consequences, for European farmers and consumers alike, flowing from the entire direction of CAP reform advocated by the Government and the NFU[45].

43. Naturally the different characteristics which direct payments might have, such as their absolute level, their duration, any element of decrease in them, and the extent to which they are decoupled, are all part of the same equation defining their overall acceptability. If it were clearly understood that payments were to be phased out over a specified period, so the pressures for them to be decoupled would diminish. Likewise, if payments were to be truly decoupled, they would be likely to be protected from reductions, in WTO terms at least, by achieving "green box" status.

44. Full decoupling of payments might produce considerable political challenges. Even if resources were to be made available to rural areas through agri-environmental and rural development programmes, to supply environmental services demanded by the public and to stimulate alternative sources of employment and income for those currently dependent on farming, there can be no guarantee that the overall level of resources would or should remain the same. The recipients of agri-environmental and rural development funding could be very different, both in terms of regions and individuals, from the current and future recipients of compensation payments under the 1992 CAP reforms and the reforms proposed in Agenda 2000. Mr Read further argued that decoupled payments would be unpopular with the public and taxpayers, and that politicians would be able to harness this unpopularity to "reduce or abolish the payments, leaving farmers with no support"[46].

45. We consider that, in principle, the full decoupling of direct payments to farmers is both necessary and desirable if European agriculture is to re-structure itself to become competitive on world markets. However we also consider that a coherent framework for agri-environmental and rural development policies must be developed along with decoupling to sustain the viability of agricultural and rural communities. Funding for such policies could flow from reductions in decoupled direct compensation payments.

Modulation

46. Agenda 2000 proposes the introduction of "an individual ceiling covering all direct income payments granted under the Common Market Organisations" and also indicates that member states "would be allowed to introduce differentiation criteria according to commonly agreed rules".[47] The first of these proposals, for individual ceilings, appears to represent the return, clothed in different terminology, of the concept of "modulation" as it has generally been understood in the UK since it formed a part of the Commission's proposals for the 1992 MacSharry reforms - though, in the end, only a minor element of the modulation proposal was adopted in 1992. Ceilings on direct payments have consistently been opposed by UK Governments because farm sizes in the UK are on average larger than in other member states (70 hectares compared with 17.5 hectares for the EU as a whole): so ceilings would mean a disproportionately severe loss for the UK. MAFF also argued against ceilings on the grounds that they would discourage competitiveness and penalise relatively efficient producers.[48] The NFU echoed these objections, and pointed out that there would be "no direct benefits for small farmers from an aid ceiling".[49] The arguments against capping payments, at least for so long as they are linked to production, were succinctly summarized by Cargill plc.[50]

47. Despite the NFU's contention that small farmers would not benefit from a ceiling on aid to individual producers, the Family Farmers' Association (FFA) favoured the idea of such a ceiling. Recognising the strong objections to such a proposal, however, they suggested possible alternatives of relating the ceiling to the number of people supported by a business, or of tapering payments above a certain limit. The FFA envisaged that budgetary savings achieved by such methods could allow funds to be re-deployed towards agri-environmental ends.[51] Support for utilizing ceilings as part of an explicit policy of redistributing funding, on income support grounds, from larger to smaller farms, also came from Professor Martin Whitby of The University of Newcastle upon Tyne.[52] Yet to use direct payments for such redistributional purposes would confound the logic that such payments are compensatory, and there is no clear correlation between farm size, however measured, and incomes of people engaged in farming.

48. The arguments that savings from the imposition of aid ceilings could be used to pursue environmental or socio-economic objectives appear to us to conflate the two separate proposals from the Commission, of "ceilings" and "differentiation". This is not surprising, as the Commission has given no details of the reasons for each of the proposals, the level of the ceilings which might be set or the types of "differentiation" which might be countenanced. The Central Association of Agricultural Valuers (CAAV) speculated about the level of the ceiling which the Commission might have in mind, and the Commission's motives for the inclusion of the ceilings proposal: "It is possible that it has been included precisely to attract the attention of the UK as a point for it to gain by conceding on other matters".[53] Pointing out that no figures on the financial effects of the introduction of ceilings had been given in the Agenda 2000 documents, the CAAV hypothesized that the proposal was "a token, not ... a genuine policy tool".[54]

49. Given that the sole rationale for individual aid ceilings would appear to be the financial savings which they would achieve, we see no virtues in the imposition of such ceilings which could not be better attained by reducing direct payments gradually over time. We also consider that ceilings would militate against the efficiency and competitiveness of UK and EU agriculture. Though a form of "differentiation" applied at a member state level would be more acceptable, it would still be open to the objections that, in attempting to meet wider socio-economic concerns through fine-tuning production-linked payments, it would distort agricultural competitiveness both within and between EU member states, and that it would add to the bureaucracy of the CAP. We recognize widespread concerns about the effects of CAP reform on smaller and family farms in this country, but given that we see no long-term role for direct payments, we do not consider that modulation of such payments is the appropriate way to address these concerns. Separate agri-environmental and rural policy instruments are the best way to deal with these problems.

Environmental conditions on direct payments

50. The Agenda 2000 document holds out the prospect of introducing "optional conditionality", or "environmental cross-compliance", to use the jargon, on the direct payments to be made in the crop sector:

"As is already the case in the beef and sheep sectors, the Commission will table a proposal enabling Member States to make the granting of direct payments for arable crops and set-aside conditional on the respect of environmental provisions, allowing them to be increasingly used to pursue environmental objectives"[

51. The European Commission's proposals on environmental conditionality were attacked from two different directions in evidence to us. The Government argued that the attachment of environmental conditions to direct payments would confer a spurious respectability upon those payments which would decrease the likelihood of reducing or ending them. According to the Government, environmental objectives could be better achieved by re-directing funds from direct payments to "precisely targeted" environmental measures[56]. Environmental organisations, on the other hand, in their written evidence, criticized the Commission for failing to make environmental conditionality mandatory, rather than optional, for member states. The Countryside Commission described the Agenda 2000 proposal as "very disappointing"[57]; the CPRE extolled the benefits of "applying environmental conditions to all support payments from the public purse"[58]; and the RSPB called for the European Commission to "be pressed to table a proposal enabling (and requiring) Member States to introduce environmental conditions for area payments"[59]. In oral evidence, however, the environmental organisations conceded the point that the attachment of environmental conditions to direct payments was not the ideal solution. Dr Roger Clarke, Director of Programmes at the Countryside Commission, for example, stated that: "We only advocate conditionality because for the foreseeable future most of the CAP money will go into commodity support and it makes sense to get at least some environmental benefit out of that"[60].

52. In their March 1997 Report on agri-environmental schemes, the previous Agriculture Committee considered the desirability of attaching environmental conditions to arable area payments, in the light of concern expressed about the detrimental effects of arable farming on the environment and wildlife in the UK. That Committee concluded "We consider that it is essential to strengthen or introduce cross-compliance requirements for those subsidies which are clearly most antagonistic to environmental benefits"[61]. However, now, Agenda 2000 points the way towards effectively addressing agri-environmental concerns through other discrete policy mechanisms. Should the UK Government succeed in its objective of securing an end date for direct payments, we see little benefit in the attachment of environmental conditions to such payments. On the other hand, should no end date be agreed, specific environmental conditions should be attached to direct payments, provided that these can be defined and enforced in a workable way. These conditions should be mandatory for all EU member states, and infringement of the conditions by farmers should lead to the loss of a substantial proportion of direct payments. With financial incentives available to farmers who wish to farm in environmentally beneficial ways, we do not consider that it is unduly harsh to penalise farmers who cause environmental degradation while in receipt of public funds.

Expenditure

53. The Commission's calculations of the likely effects of the Agenda 2000 proposals on CAP expenditure show that, even taking into account the prospect of enlargement, expenditure will remain comfortably within the agriculture guideline, assuming it remains defined as now, over the period 2000 to 2006. The Commission envisages that the reforms proposed to the cereals, beef and dairy regimes will result in savings in market support of 3.7 billion ecu a year by 2006, with an increase in 7.7 billion ecu a year on direct compensatory aid by the same date. Even with additional expenditure within the agricultural guideline on agri-environmental and rural development accompanying measures, and on pre-accession aid and expenditure relating to the accession of new member states, the growth in the guideline over the period in question will lead to a safety margin, or underspend in relation to the guideline, rising from 0.5 billion ecu in 2003 to 4.7 billion ecu in 2006[62].

54. Most witnesses, including the Government, broadly accepted the Commission's financial analysis, although MAFF felt that the net increase in expenditure of 4 billion ecu predicted by the Commission in respect of the reforms in the cereals, beef and dairy sectors might be an over-estimate, and suggested that it was more likely to be in the region of 2 to 3 billion ecu[63]. MAFF argued that the Commission's estimates of future expenditure on direct payments were rather high[64]. Nevertheless, far from reducing CAP budgetary expenditure, it is clear that the Commission, in Agenda 2000, is resigned to increasing it. This is totally unacceptable. It could have been avoided by reducing direct payments over time.

55. Agenda 2000 does not deal directly with fraud and irregularity associated with CAP expenditure, but the Government's view was that, in general, the direction of reform proposed by the Commission would have beneficial effects in reducing the level of fraud. MAFF stated:

The outcry from farmers which greeted the introduction of the Integrated Administration and Control System (IACS) has now virtually subsided, and there is widespread acceptance of the need for such controls to prevent fraud. We welcome the fact that opportunities for fraud will decrease as reform of the CAP progresses.

Consumers

56. Apart from a reference to the expectation that consumers will benefit from lower prices as a result of the proposed reforms[66], the Commission is silent on the cost to consumers of the CAP in its current form and the magnitude of the savings to consumers which would arise from the implementation of the Agenda 2000 market reforms. The latest OECD figures show that in 1996 the agricultural producer subsidy equivalent of the EU as a whole (i.e. the value of transfers to agriculture from EU consumers and taxpayers) amounted to $85 billion (£54 billion), or 43 per cent of the value of agricultural production, and of this the consumer subsidy equivalent (i.e. the value of transfers to agriculture from EU consumers) stood at $35.4 billion (£23 billion)[67]. MAFF estimated that, if lower market prices were to feed fully through to the retail level, the Agenda 2000 reforms would reduce consumer expenditure in the EU as a whole by about 10 billion ecu (£6.77 billion). In the UK, the saving would be around 1.5 billion ecu (£1 billion)[68]. The Consumers in Europe Group translated the figures for the consumer subsidy to producers, resulting from the artificially high prices within Europe compared with world prices, into a sum of £18 per week for a family of four in 1995, reducing slightly to £16 a week in 1996[69].

57. There are uncertainties about the calculations of the cost to consumers of the CAP. In particular, it is generally assumed that the proposed reforms of the CAP would reduce EU exports, which, other things being equal, could lead to an increase in world market prices. If this were to happen, the savings to European consumers from reduced protection would be somewhat lower, though it is difficult to calculate this precisely. We nevertheless find it unacceptable that the Commission has failed to provide, as a component part of its Agenda 2000 analysis, any assessment of the probable benefits to consumers from its reform proposals. We also find the Commission's silence on this subject mystifying, as the likely benefits to consumers constitute one of the strongest arguments in favour of the direction of CAP reform advocated by the Commission. We urge the Government to ensure that the consumer interest is kept high on the agenda during the forthcoming negotiations over CAP reform.

27 Agenda 2000, Vol 1, p 23 Back

28 ibid p 28 Back

29 ibid p 29 Back

30 Q 54 Back

31 Q 97 Back

32 Ev pp 11-12 Back

33 Ev p 31; Q 142 Back

34 Ev p 31 Back

35 Ev pp 30-31 Back

36 Ev p 8 Back

37 Ev p 295 Back

38 Ev p 293 para 18 Back