Select Committee on Environment, Food and Rural Affairs Minutes of Evidence

Examination of Witnesses (Questions 100 - 118)



  100. Would you think it is important that there is a clear single set of rules about cross-compliance which do not give rise to the kind of question that often happens in the United Kingdom that we in some way are applying the rules more zealously than the rest of the Community because you have a talked a little in your evidence earlier about the need for some local flexibility reflecting in fact the comments of Mr Tipping about different environment and how you micro-manage. I am getting a little confused between some macro requirements and their local application and who is going to manage and who is going to make the judgement against whatever criteria it is deemed that you have cross-complied. It seems to be a very complicated mixture of potential factors that somebody or something is going to have to assess, notwithstanding your earlier comments about on farm audits. I have visions of an army of inspectors with tick sheets going round saying, "This dale has this, the next one has another one . . ." It is a nightmare picture.
  (Mr Felton) I can certainly see that you could imagine a nightmare. I think we are getting to the stage where the basic cross-compliance minimum obligations need to be easily enforceable, easy to check and are as consistent as you can make them everywhere really. We are talking about what figure they have mind, but say £3 billion or so of subsidy in the UK. The only figure I can give is that there are about 65,000 farms above the small farm threshold in England and, if you had to do those every five years, it would not require a huge army and it would not cost a very large portion of the £3 billion. In order to get that money spent wisely, I would argue that it was worth it. I actually think that the fine-tuning needs to be about what you are positively paying for and making sure that that has been spent in ways that actually deliver the results you are looking for seem to me to be a worthwhile investment and it should not just be seen as an overhead. To the question of who should do it, if you set your standards appropriately, there is no real reason why, say, some of the current advisers used by commercial farmers should not pick that up as a piece of this business.

  101. Moving on to dynamic modulation and indeed capping. I was very interested in your evidence where you say and I quote, "English Nature supports the principle of the Commission's proposal to distribute Pillar II funds according to three criteria of need: agricultural area; agricultural employment; and a rural deprivation index." One of the things we discussed earlier was the question of the efficiency and the profitability of farming and yet, if you distribute some of these moneys according to employment, is there not a potential conflict in terms that less people, more efficient farms, better returns, more good stewardship of the countryside but, hang on a minute, we have Pillar II money which is going in the opposite direction? Is there a recipe for conflict?
  (Mr Felton) Our key concern was the recognition of agricultural area as a basis because, under current Pillar II arrangements, the UK gets 3 to 3.5 per cent, that is the UK, despite having 12.5 to 13 per cent of the area and we believe that agricultural area is a pretty good proxy for the work that needs to be done to enhance the countryside and our argument would be that a significant proportion of whatever is redeployed should be done on that basis to make sure that there is sufficient money to achieve bio-diversity changes. Quite a lot of that, if it were spent in that way, would create employment.

  102. There is a difference between the on farm consequence and the effect of the use of that Pillar II money in the wider rural community/environment and I have to say that it did not come through with great clarity quite what the term "agricultural employment" that you used meant but I think you have clarified that. Do you think therefore, going back to your point about the distribution mechanism for the modulated moneys, that, in some way, what is collected in the UK should be ring-fenced as opposed to going back into this big central pot for redistribution?
  (Mr Felton) From an ability to deliver nature conservation and countryside benefits in the UK, that would be quite a comfortable position. On the other hand, this is an EU policy and we do understand that there is a cohesion element to the EU and it has to work across the Accession 2 counties as well.

  103. You made the point that, under existing arrangements, it is 12 to 13 per cent, if you like, in comparator points. What is not clear to me is the mechanism by which moneys will be redistributed to Member States. There is talk about the need but there is no definition of quite what that means. Can you give us a feel for how you think the money would come back. Would we get our fair share?
  (Mr Morgan) This is if dynamically modulated?

  104. Indeed.
  (Mr Morgan) I suspect that there would be dangers to the UK in going down that route. I am not sure whether we would actually benefit.
  (Mr Rutherford) The estimates that I have seen on the contribution that the UK would make to dynamic modulation to the EU pot would be in the order of about 12 per cent of total contribution. The amount we would receive would be in the order of about 10 per cent, so we would be, in net terms, losers if that model were applied. These are fairly broad brush figures that were applied by DEFRA. That, however, is a considerable improvement on the situation we are in at the moment where the rural development planning is based on historical allocations and, as Mark Felton has said, we currently receive only about 3 per cent of the total EU allocation which is disproportionately small according to the need. So, the new arrangement would end up with the UK being a net contributor but we would be a lot better off than we are at the moment.

  105. Can I just ask you to say a word on compare and contrast between the way we currently operate our modulation under the present arrangements and the new arrangement which gives the best deal for UK farming in the countryside.
  (Mr Rutherford) The model that is operated in the UK at the moment is transparent, it is simple, everybody contributes and it is also progressive because the more you receive, the more you give, and it is also relatively straightforward to operate. The only other model of modulation you get at the moment is operated in France and that is a very complicated model and it is more on the basis of whatever is being proposed.
  (Mr Felton) Do I understand you to say as well with which of the two models, the dynamic modulation model or the current one, would the UK countryside get more back into it?

  106. Anything you could add on to that because, if you moved to the proposed scheme for Europe as opposed to UK modulation, there would obviously be a transition period and you would have to go from where we are now to where we would be. Do we lose out in such a process because the two things that I am not clear about is that, in cultural terms, we are the winners and losers in this game and, secondly, at the moment, Member States following our particular proposal for modulation have to match pound for pound in terms of rural development programme the redistribution of the moneys coming out of the modulation process? As I understand it, under the Commission's proposal, that would end. So I am not certain in terms of total moneys whether we are again winners or losers under these proposals.
  (Mr Felton) Again, all we can say is that there is a transition problem because the current rate of modulation as proposed is lower than we would get to and therefore there is potential for an expenditure gap in the current rural development programmes which would cause concern. Under the Commission's proposals, assuming you would get something back, then the UK would still have to find 40 per cent of the money because, in Pillar II, the co-financing rate will go down from 50 per cent to 40 per cent which is the amount that we have to pay. My current view is that it is quite difficult to work out exactly what the implications will be.

  107. Just to be clear because there is an area of lack of knowledge on my part, under the revised arrangements, there is still a co-financing element.
  (Mr Felton) Yes, that is right, 40 per cent as opposed to 50 per cent which it is at the moment.

  108. Why was it thought necessary to have this co-financing? Why was that introduced?
  (Mr Rutherford) It was introduced with the idea of imposing some degree of discipline on Member States so that they developed programmes not just to suck money out of the EU but to develop programmes that they were willing to contribute to themselves and develop as a partnership with the EU, otherwise Member States would develop very large programmes that they themselves could not afford to pay for and then it would simply be a bidding process to Brussels for the maximum amount of resources available. So it was introduced as a kind of rigour in the process. I think our view is that it is highly unfair that Pillar I is not co-financed and Pillar II does have this co-financing requirement. So, the Commission's proposals to be changing the co-financing rates we actually welcome.

  109. What about the question of capping? Where do you stand on capping? Is it a good thing or a bad thing in your view?
  (Mr Felton) You are meaning the 300,000 euro million?

  110. Yes.
  (Mr Felton) There are two pictures on that. One is, if it is an income payment and that is all it is for, there is no real justification for not having some form of move towards a maximum limit. If it is for benefits, for example you are actually using cross-compliance to buy something that you would otherwise not get, there is no justification for capping at all because just because you own a big farm does not mean that you should give two-thirds of the public benefit free. So, you have to decide what it is for. It is for buying something that you want, then you should not have it, you should get the money providing you deliver the benefit.

  111. Does the efficiency and profitability of farming still matter to you? Let me put it in this context. One of the concerns expressed in the UK farming surveys is that, relatively speaking, our farms are large. Our farmers' perception is that there is a large number of very small farms in continental Europe, some of which are, by their judgment, inefficient economic units and the point I made earlier is that efficient farmers with a very good idea of their responsibilities to the countryside, if you like, even before any of these packages were introduced, were prepared to take advantage of indigenous schemes to assist in good environmental practice in whatever way they thought was a good idea, but they did it on the basis that they got a successful farming enterprise and looking at this whole subject with the background of the period, there is a very rapid decline in farm incomes. So, if suddenly farmers said, "Good environmental practice is an extra, I'll afford it when I can", then you would be wanting the Mid-Term Review to promote efficient farming to restore some of that profitability, hence my question, does farm profitability matter to you in the context of what we have been talking about?
  (Mr Felton) I think that the viability of businesses that manage the land—and I do not really mind whether they are land managing businesses, and there has been a big increase in farm businesses which are part of wider businesses which include non-land managing businesses—is absolutely important. There is no way that we will continue to get the countryside managed as we wish with people who are scratching and saving. So, that is why we are so keen on the Pillar II payments reflecting "a proper return" on the business of delivering these public goods because if you expect them to be cross-subsidised, then they are always vulnerable to changing market conditions and changing technology. The structure of business in both areas will continue to change even under the new model that we have idealised in terms of the presentation here and who is to say what the best size of farm is or what the best mix of land management with other businesses is, but what we are absolutely clear about is, yes, efficient in the sense of that they have a grip on what they are doing, they know about their costs, and effective in terms of they deliver what they are signed up to deliver, whether that is through the market to customers or through the artificial market that we might create through Pillar II type payments. It is obviously much easier to deal with people who are in control of their businesses and making a reasonable return or a normal return from it in return that reflects the effort, the costs and so on and delivers the benefits. That is the important part, I think.

Paddy Tipping

  112. There is an awful lot you have told us, Mark; let us try and unpick some of it. Just tell us how you see agriculture going in the UK over the next five years. You have just been talking to Michael Jack about the size of farms, the efficiency of farms. If we have to have profitable farming, is it undeniable that farm holdings are going to get bigger?
  (Mr Rutherford) Can I just say that it is a bit of a misinterpretation to say that the bigger the farm, the more efficient it always is. DEFRA farm income statistics will show that there is a distribution of efficiencies, or farm returns, and they are not always proportional to the area of the farm. Medium size and small farms can be just as efficient as large farms, so I think it is a characterisation to be saying that big farms are always the most efficient.
  (Mr Felton) The answer is I do not think you can predict what is going to happen to farm size and business size. It depends on lot on choices and options that an individual business makes. I have met a dairy farmer with 100 hectares who is undoubtedly efficient and making a living without intensifying by farming in ways that receive some of the subsidies and so on. The standard business advice there would be to intensify, buy some more milk quota and so on, and some of his neighbours have done it and, frankly, are not making as much money as he is. A lot of it depends on the skill of the businessman. I am sure there are successful strategies for small farms to succeed as well as for large farms. To some extent, by the sort of market we are creating, if we go down the route we are talking about, I suspect a land management for wildlife and a land management for countryside would make it harder to run really big businesses compared to just running an agri business, which still requires very strong management skills but the economies of scale for managing the countryside that is more sensitive to environmental qualities are likely to be less, I would guess. But evidence? I cannot point to a study that says that.

  113. So what you are saying to us is that there has to be good management practice whether it is for small, middle or big farms, but in a sense whoever is managing the farm has to be able to understand the payment regime and the payment regime switching from Pillar I to Pillar II. Pillar II payments are still ill-defined because we are not sure of the shape of it. You have a Curry broad-and-shallow scheme, or an entry level scheme as I think it is called now, with the hierarchy above that and in a sense that is in the control of the British government; you have the whole decoupling argument that is coming as part of the mid-term review, and it makes it very hard to make some business decisions, does it not?
  (Mr Felton) I think you are absolutely right. The no-change scenario or let us keep secure and stay where we are is not much better, I would suggest, in terms of what might happen in the future. I think if you are making Pillar II type payments more important as an option for a viable farm business you have a political risk instead of a commercial one, but there is still a risk associated with those payments because after all you may end up deciding that the public does not want that any more. Is that a worse risk than on the commercial side, opening up trade to the wider world? It is a different sort of risk, is the answer. I think it would help if whatever came up was as simple and understandable as possible so it was transparent, to use the term Gareth used, so it was absolutely clear where the money was coming from and what it was for, and (b) if it left as much discretion as possible to the individual business about the way they proposed to interact with that. We have had 32 market schemes before—that is nightmarish. They were all politically risky as well as risky in the general commercial sense. I think we could make it better but it depends upon what the enabling legislation allows us to do, does it not?

  114. And the enabling legislation is in part that the UK government could switch more money from Pillar I to Pillar II through the English rural development regulation—that is in our gift and we could do that today or we could wait for the mid-Term Review—and I think in your paper you arrive at a figure, albeit a rough one and it is qualified, I acknowledge that, of a billion pounds. How do you get to a billion pounds?
  (Mr Felton) In the absence of a spreadsheet and a wiring diagram and so on let me just give you some broad approaches. First of all, we used Countryside Survey 2000 data to get an estimate of the rural area of England and what it was used for, and excuse me if off the top of my head I do not have it right but there is about 2.5 million hectares of semi natural habitat of which about 1 million is SSSI , and then the rest of it is half and half grass and I think about 4.5 million hectares of each or something of that order. We submitted this to Curry so we can actually provide the data if you want. We then used current payment rates, so how much do you get paid to create grass and what are the sort of things that a broad-and-shallow would look like, and we made estimates of the total area that we thought using the targets and so on, and simply we multiplied it up and added it up and that is what it came to. What else might happen? Well, the whole decoupling process might change the price of land, so that would have a big impact. The whole restructuring of business over the next ten years would change the cost structure of businesses. The cost of various inputs is likely to change, and then cost is a point in time and so on, but that is what we did. So it was basically using current payment rates which are probably not quite sufficient in some areas and applying it to an estimate of the total area we thought would need to be managed in the way we have outlined.

  115. But Pillar II payments are not just about environmental benefits, are they? There is talk that they could be used for animal welfare benefits or indeed rural enterprise benefits, and I thought one of the points Gareth made earlier on supported by Alastair was that maybe it is not going to be enough. There was this 10 per cent versus 12 per cent discussion going on. Is the billion pounds going to be enough?
  (Mr Morgan) There is no price tag on the Commission's proposals for the welfare proposals in particular and for the food quality assurance chapter that they wanted to introduce, and until that is costed we will not have any idea but it could potentially be very expensive, and our pitch for the environmental portion of it will have to be very strong. You are competing against those arguments. In our evidence we have suggested that, until those elements are costed, we have to be very cautious.
  (Mr Rutherford) The billion pounds was an estimate for English Nature's interests. Others will have their interests that they wish to bid for as well. I think we have to be very careful in using that figure. It is a figure that indicates an order of magnitude rather than anything definitive, as Mark has said, that figure might change as circumstances change, but I think what it does do is give an indication of the order of magnitude and if we want to secure a high quality countryside that can provide the habitats and species that we want, that is about the order of money that we are going to need to buy it.

  116. Finally, on the payment cap proposed of 300,000 euros and, as you told us, Mark, earlier on, provided that is firmly fixed to targets and outcomes then you are not too fixed upon that cap, provided the big farmers are delivering the goods. But I cannot remember—is it a fact that 80 per cent of all payments in the UK go to farmers with an income of more than 300,000 euros?
  (Mr Felton) I do know that a large proportion of the payments goes to a small proportion of the total number of farmers but if you looked at it in terms of the total area of land farmed it would be far less. That is a reflection of the distribution of pattern of the land holdings as much as it is anything else, and we happen to have large farms in this country. We also have a fairly large number of small farms that occupy—what, 10 per cent of the land or something like that. They get very little, probably slightly less than 10 per cent. The other thing is the direct payments go to arable people and some go to livestock people. If you then spread those payments, if you like, the same pot of money evenly over all land in terms of environmental benefits they were trying to get, there would be some redistribution. There is no doubt about that.

  117. Tell us about the redistribution because suppose we have this brave new vision of different ways of making payments, and you said, "Well, if we move from where we are at to where conceptually we might like to be, what is the switch in payments and what is going to happen?", what is your analysis of that because presumably big arable farmers in the east of England would lose out and livestock farmers in the west would gain?
  (Mr Felton) Superficially, if you look at it, the arable area payment has a figure and the entry level scheme for the broad-and-shallow farming pillar type scheme has a lower figure, so to some extent it depends on what other options are available for enhancing the arable landscape in East Anglia. If putting back some other habitats and perhaps some livestock systems is there, then of course that would give them opportunities but if you are paying for public benefits and you want to stay as a current commercial arable specialist business, you go into the broad-and-shallow scheme and that is all you are really willing to do because actually it does not really knock your ability to manage an arable farm profitably.
  (Mr Morgan) So it is quite difficult to predict how this redistribution would happen because it is within the gift of the farmer. They would have to decide whether they want to provide public goods and be compensated. Presumably if you are Oliver Walston you have gone on record as saying you would like to be a commercial farmer and farm to the basic minimum standard, and then you will make a decision about whether you want to do those other things on your land but it would be up to you to make that decision.

  118. But these are public goods, are they not, that the public are paying for and that the state ought to have a say in, and there ought to be decisions about our priorities. It may well be that some people would take the view that East Anglia is a desert and will always remain so and that we ought to be focusing on increased payments and creating a heath land which you talked about earlier on, or creating biodiversity in the Dales?
  (Mr Morgan) Presumably the state will then decide what is the regulatory level at which it wishes to enforce its vision and beyond that it will be paying for benefits which farmers will choose to provide or not.
  (Mr Rutherford) English Nature has been particularly enthusiastic about the entry level scheme. That was one of our key issues that we promoted to the Curry Commission because we want to see more farmers engaging in these agri environment schemes, receiving public reward for producing public good, because if we are going to get the kind of farming environment that we want where we see a reverse in the decline of sky lark numbers, then farmers in arable counties are going to have to be engaging with appropriate schemes. So yes, there will be a redistribution, but I think we would want to be providing more schemes and more opportunities for farmers with all kinds of farming systems to be engaging in that and securing those public payments for producing those public goods.
  (Mr Morgan) Until recently they have not had that option in East Anglia.

  Chairman: Thank you very much indeed. You have been most helpful to us.

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