Select Committee on Environment, Food and Rural Affairs Ninth Report


57. The European Commission has said that "the reform of 1992 was generally regarded as successful, with positive effects on European agriculture".[84] However, as the end of the twentieth century drew closer further reform was mooted. In 1997, in readiness for the planned accession of several central and eastern European countries and the beginning of a new round of world trade liberalisation talks, the European Commission brought forward Agenda 2000, a blueprint for the future of European Union policy which included proposals for the reform of the CAP.

58. The aim of the reform proposed under Agenda 2000 was "to deepen and widen the 1992 reform by replacing price support measures with direct aid payments and accompanying this process by a consistent rural policy".[85] The key priorities in formulating the proposals for the CAP were:

  • to ensure the competitiveness of the European Union agricultural sector both on the Community market and on growing export markets;

  • to promote ways of farming that contribute to the maintenance and enhancement of the rural development and landscapes;

  • to contribute to sustaining the livelihood of farmers while promoting the economic development of the wider rural economy.[86]

The main features of the original proposals made in 1997 by the European Commission for CAP reform under Agenda 2000 are set out below, compared with elements of the final agreement reached at the European Council in Berlin in 1999.

59. One of the key components of Agenda 2000 was modulation, the possibility of transferring funds from direct support for agriculture (the 'First Pillar') to other payments, such as rural development (the 'Second Pillar'). The Commission's proposals envisaged "an individual ceiling covering all direct income payments granted under the Common Market Organisations. ... Member States would be allowed to introduce differentiation criteria".[87] At Berlin it was agreed that individual member states should be able to modulate direct payments to farmers, an agreement enshrined in Article 4 of Regulation 1259/1999. We discuss modulation in more detail below.

60. The agreement over Agenda 2000 reached at Berlin was far less radical than that proposed by the Commission, primarily as a result of the refusal of the French President to accept a programme agreed by the other fourteen nations. The Commission made the following observation on the agreement reached in Berlin:

    "While in some respects the [reform of the] policy as finally agreed is not as far-reaching as had originally been proposed, it remains the most radical and wide-ranging reform of the CAP in its history. The reformed CAP represents a step towards supporting the broader rural economy rather than agricultural production, and ensures that farmers are rewarded not only for what they produce but also for their general contribution to society".[88]

Table 5: CAP financial perspectives, 2000 - 2006[89]

(Million Euros)
CAP expenditure*
Rural development**

*excluding rural development and accompanying measures
** Rural development and accompanying measures

Table 6: Agenda 2000 - a comparison between the proposals and the agreement

  Proposals[90] Agreement[91]
Cerealsintervention price reduced from 119.19 ECU/t to 95.35 ECU/t in one step;
a non-crop specific area payment set at 66 ECU/t (adjusted by regional yields);

set-aside fixed at 0 per cent.
intervention price cut by 15 per cent (to 101.35 Euro/t), in two equal steps;
area payment increased in two steps from 54 Euro/t to 63 Euro/t (to apply to oilseeds from 2002/03);
set-aside fixed at 10 per cent.
Beefreduction in effective market support from 2,780 ECU/t to 1,950 ECU/t;
increased direct payments:
suckler cow premium 145 to 215 ECU/hd,
beef special premium (BSP) -
 bull (one payment) 135 to 368 ECU/hd
 steer (two payments) 109 to 232 ECU/hd
dairy cow premium introduced at 70 ECU/hd.
basic price set 2,224 Euro/tonne from 1 July 2002;
direct payment rates from 2002:
suckler cow premium 200 Euro/hd
BSP (bull) 210 Euro/hd
BSP (steer) 150 Euro/hd
Slaughter premiums introduced at:
(under 160 kg) 50 Euro/hd
(over 160 kg) 80 Euro/hd
Dairyquota regime extended to 2006;
reduce prices by 10% (2000-2006);
introduce a dairy cow premium of 145 EC/hd (making 215 ECU/hd with the beef element)
quota regime extended for eight years;
reform to enter into force from 2005/06: quotas will be increased and intervention prices cut by 15% for butter and skim milk powder;
milk target price cut by 17%;
a basic premium, based on quota holding, will be introduced from 2005[92] to offset the price cut.
Ceilings for direct payments"an individual ceiling covering all direct income payments granted under the Common Market Organisations. ... Member States would be allowed to introduce differentiation criteria." See comments below on the modulation regulation.
Rural policya policy reorganisation, existing measures (agri-environment scheme, afforestation and early retirement) supplemented by:
less favoured area scheme;
rural development measures co-financed by the CAP budget in all areas (not just Objective 1 or 2 areas).
See comments in Chapter on the environment below.

61. The effect of the changes made under Agenda 2000, coupled with the earlier MacSharry reforms, has been to reduce the proportion of European Union farmers' incomes derived from subsidies. The Organisation for Economic Co-operation and Development (OECD) has developed a measure of "support to agricultural producers as a percentage of total farm receipts" or the producer support estimate (PSE). In its 2002 report on changes in agricultural policy, the OECD reported that in the European Union PSE had fallen from more than 42 per cent in the late 1980s to 35 per cent in 1999-2001.[93] Such levels of support remain high relative to many other countries: over the same period the proportions in the United States fell from 25 per cent to 21 per cent, in Australia from around 9 per cent to 4 per cent, and in New Zealand from approximately 11 per cent to 1 per cent. That said, the proportion of farm revenues attributed to subsidies in 1999-2001 was 70 per cent in Switzerland, around 65 per cent in Norway, and 60 per cent in Japan.

62. The Berlin Council agreed to apply budget limits on the CAP for the length of the agreement (up to 2006), and to review a number of elements of the agreement in 2002-03. The Commission was charged with bringing forward in 2002 proposals for this Mid-Term Review. David Roberts a senior official in the European Commission, writing in December 2001, on the basis of statements made by Commissioner Fischler, expected the review to cover: cereals; oilseeds; beef; milk; and rural development.[94] In the Spring of the 2002, Commissioner Fischler published his expectations of the Mid-Term Review (see below). The eventual outcome of his deliberations was announced on 10 July 2002, and we discuss his proposals in more detail later in this Report.

Commissioner Fischler's Expectations of the Mid-Term Review:

Published in Spring 2002

Agenda 2000 - Time for a Mid-Term Review

"Agenda 2000 has been one of the most ambitious and wide-ranging reform programmes of the common agricultural policy yet. By putting forward a new approach to farm policy, it equips our rural economies to face the challenges that lie ahead. The reform is a further step towards sustainability and supporting the broader rural economy. It is not a sectoral approach. On the contrary, it recognises the multifunctional role of agriculture and ensures that farmers are rewarded for their services to society.

"At the 1999 Berlin Summit, where the Agenda 2000 was decided, the Commission was invited to examine in 2002 the functioning of the arable crops and oilseeds system, to monitor the beef market situation, to present in 2003 a report about the future of the milk quota system, and to submit an account in 2002 on the development of agricultural expenditure.

"The Mid-Term Review, which will be tabled in June 2002, will give us the opportunity to examine whether the reform measures taken actually meet the aims set in 1999. Furthermore, we will assess whether the policy instruments need further adjustments, and notably how to find ways to "green" the CAP, and foster the second pillar of the common agricultural policy by shifting more funds to rural development.

"Following the Agenda 2000 reforms, CAP expenditure has been fixed until 2006. Our budget freeze has been maintained in the face of low commodity prices and considerably increased spending by certain trading partners. By ensuring its competitiveness, the new CAP strengthens the position of the European Union agricultural sector in the present round of World Trade Organisation talks and helps to prepare the European Union for enlargement".[95]


63. The definition of modulation enshrined in Agenda 2000 differs from that when it was originally proposed at the time of the MacSharry reforms. Then it signified the setting of a limit on the amount of direct payments that individual farmers could receive above which farmers did not qualify for further compensation payments although they still received their full entitlement up to the limit; according to the National Farmers' Union that was a "Robin Hood principle".[96] Modulation, as defined by Agenda 2000, is regarded as "fund switching":[97] that is, a means of switching support from agricultural production to a broader set of rural development objectives.

Article 4 of Regulation EC 1259/1999: Modulation

1.  Member States may decide to reduce the amounts of payments which would, but for this paragraph, be granted to farmers in respect of a given calendar year in cases where:

  • the labour force used on their holdings during that calendar year, expressed in annual work units, falls short of limits to be determined by the Member States, and/or
  • the overall prosperity of their holdings during that calendar year, expressed in the form of standard gross margin corresponding to the average situation of either a given region or a smaller geographic entity, rises above limits to be decided by Member States, and/or
  • the total amounts of payments granted under support schemes in respect of a calendar year exceed limits to be decided by Member States.

"Annual work unit" shall mean the national or regional average annual working time of adult full­time farm workers employed throughout a calendar year.

"Standard gross margin" shall mean the difference between standard production value and the standard amount for certain specific costs.

2.  The reduction of support to a farmer in respect of a given calendar year, resulting from the application of the measures referred to in paragraph 1, shall not exceed 20% of the total amount of payments which would, but for paragraph 1, be granted to the farmer in respect of the calendar year concerned.


Article 1 determines which payments are permitted to be reduced. It says:

This Regulation shall apply to payments granted directly to farmers under support schemes in the framework of the common agricultural policy which are financed in full or in part by the "Guarantee" section of the European Agricultural Guidance and Guarantee Fund (EAGGF), except those provided for under Regulation (EC) No 1257/1999.

64. Farmers hold mixed views about modulation. The National Farmers' Union told us that it had "opposed, and remained fundamentally opposed, to the principle of modulation".[98] The Country Land and Business Association told us that it was "in favour [of modulation] in the sense that this helps move policy in the direction we have been arguing".[99] The Tenant Farmers' Association said that its membership was "broadly in favour" of the principle of modulation, but was concerned about the limited access that some tenants had to the schemes that were funded.[100]

65. A number of organisations we heard from thought that the original principle of maintaining the full levels of support to the very smallest producers, and then scaling back entitlement for larger businesses was appropriate. For example, Friends of the Earth called for modulation to be "structured in such a way that support payments are taken away from the biggest farmers ... and directed to smaller farmers".[101] However, others, such as the Council for the Protection of Rural England, thought that a flat rate of up to ten per cent modulation should apply for all farms, beyond that though better understanding of the differential impacts was needed.[102]

Modulation in the United Kingdom

66. The English Rural Development Plan[103] introduced the modulation of all direct payments to farmers in the United Kingdom. It proposed that modulation should gradually increase from 2.5 per cent of direct payments in 2001 to 4.5 per cent of direct payments in 2006. However, the Policy Commission on Farming and Food recommended that it be increased to 10 per cent in 2004 and that the Government should consider increasing this to 20 per cent if substantial CAP reform is not delivered in 2006-07.[104] Calls for modulation to be increased to 20 per cent within a similar time-frame were made to us by the Countryside Agency,[105] the Council for the Protection of Rural England,[106] and Friends of the Earth,[107] among others.

Questions over modulation

67. Modulation is in one sense very straightforward: expenditure for rural development and agri-environment schemes would come from monies that were previously channelled to supporting agricultural production. In other words, an objective widely seen as desirable can be attained by eliminating expenditure no longer seen as appropriate. However, there are a number of concerns about the process and implications of modulation:

  • the impact of changing incentives on domestic farmers; and

  • the competitive implications when some European Union member states choose not to modulate direct payments, and when some choose different ways to use the monies obtained from modulation. (This is another area where Scotland may pursue a wholly different approach to England or Wales.)

68. The requirement that the Treasury matches monies modulated from direct payments raises a number of issues. Sustain argued that the Treasury must be "encouraged to match the funds freed up [through modulation] to support a far wider programme of agri-environment and rural development schemes".[108] However, there is obviously a cost to the Exchequer as a result of such match-funding. There would also be implications for both the Treasury and for rural areas if the required rate of match-funding changes.[109]

69. As direct payments are modulated the returns that farmers receive for crops and livestock for which they receive direct payments also change. This may make alternative enterprises which do not receive direct payments relatively more attractive. As a result the pattern of production may change over time, particularly as the proportion of direct payments that is modulated increases beyond the marginal levels that are currently envisaged by the Government. In turn, there may be implications for the budget available to take forward rural development measures since the funds available through modulation are derived from the direct payments which United Kingdom farmers receive. It is possible that modulation may cause changes to enterprise mixes on farms, and so affect the United Kingdom's total entitlement to direct payments. In turn that will mean that the amount available from modulation and Treasury matched funding would also fall. The impact of such a development is something which the Government must consider, and it should produce a report showing who the 'winners' and 'losers' would be under the proposed modulation schemes.

70. Finally, there is the issue of differences in the competitiveness of farmers across member states if different rates of modulation are applied in different countries. The Secretary of State acknowledged that "there is a possibility that farmers in those member states [that have chosen to modulate funds] could be at a competitive disadvantage to other farmers because they are not having access to the same level of payment in the usual way".[110] Here and elsewhere modulation in one country has different consequences to a common pattern of modulation in all.

84   European Commission, Agriculture - IntroductionBack

85   European Commission, Agenda 2000 - Reform of the common agricultural policy, see: Back

86   European Commission (undated) The CAP reform: a policy for the futureBack

87   European Commission, Agenda 2000 ­ Vol. I: For a stronger and wider Union, COM/97/2000, pp. 28-34. Back

88   Ibid. Back

89   Presidency conclusions, Berlin European Council, 24 and 25 March 1999, p. 6. Back

90   European Commission, Agenda 2000 ­ Vol. I: For a stronger and wider Union, COM/97/2000, pp. 28-34. Back

91   Presidency conclusions, Berlin European Council, 24 and 25 March 1999, see: /sources/docoffic/official/regulation/pdf/berlin_en.pdf and French Ministry of Agriculture, The Berlin Agreement: the new CAP, see: Back

92   The basic premium will be introduced at 5.75 Euro/t in 2005, rising to 11.49 Euro/t in 2006 and to 17.24 Euro/t in 2007. Back

93   Figures published by the OECD; see Agricultural Policies in OECD Countries: Monitoring and Evaluation 2002, at Back

94   Memorandum submitted by David Roberts, Deputy-Director General, Agriculture Directorate General, European Commission, Ev 2. Back

95   Commissioner Fischler's homepage, see: Back

96   Evidence taken on 8 May 2002, Ev 297, Q.989. Back

97   Evidence taken on 8 May 2002, Ev 298, Q.998. Back

98   Memorandum submitted by the National Farmers' Union, Ev 283, para 10. Back

99   Evidence taken on 8 May 2002, Ev 297, Q.990. Back

100   Evidence taken on 8 May 2002, Ev 298, Q.994. Back

101   Memorandum submitted by Friends of the Earth, Ev. 164. Back

102   Evidence taken on 6 March 2002, Ev 172, QQ.659-661. Back

103   See below. Back

104   Farming and Food - a sustainable future, p. 77. Back

105   Memorandum submitted by the Countryside Agency, Ev 349, para 22. Back

106   Memorandum submitted by the Council for the Protection of Rural England, Ev 156, para 24. Back

107   Memorandum submitted by Friends of the Earth, Ev 164. Back

108   Memorandum submitted by Sustain, Ev 204. Back

109   Evidence taken on 8 May 2002, Ev 298, Q.998. Back

110   Evidence taken on 15 May 2002, Ev 312, Q.1055. Back

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