House of Commons - European Scrutiny

Select Committee on European Scrutiny Eleventh Report

ELEVENTH REPORT

The European Scrutiny Committee has agreed to the following Report:—

1. MID-TERM REVIEW OF THE COMMON AGRICULTURAL POLICY: LEGISLATIVE PROPOSALS

—

COM(03) 23

Draft Council Regulation establishing common rules for direct support schemes under the common agricultural policy and support schemes for producers of certain crops.

(b)

Draft Council Regulation amending Regulation (EC) No. 1257/1999 on support for rural development from the European Agricultural Guidance and Guarantee Fund (EAGGF) and repealing Regulation (EC) No. 2826/2000.

(c)

Draft Council Regulation on the common organisation of the market in cereals.

(d)

Draft Council Regulation on the common organisation of the market in rice.

(e)

Draft Council Regulation on the common organisation of the market in dried fodder for the marketing years 2004-05 to 2007-08.

(f)

Draft Council Regulation amending Regulation(EC) No. 1255/1999 on the common organisation of the market in milk and milk products.

(g)

Draft Council Regulation establishing a levy in the milk and milk products sector.

Legal base:	Article 37 EC; consultation; qualified majority voting

Document originated:	21 January 2003
Deposited in Parliament:	4 February 2003
Department:	Environment, Food and Rural Affairs
Basis of consideration:	EM of 3 February 2003
Previous Committee Report:	None, but see footnotes
To be discussed in Council:	See paragraph 1.27
Committee's assessment:	Politically important
Committee's decision:	For debate on the Floor of the House (together with earlier Commission Communication)

Background

1.1 The 1992 reforms of the Common Agricultural Policy (CAP) introduced major changes by shifting the emphasis of Community support away from intervention in favour of direct income payments to farmers. However, it was recognised that further changes would be needed both to accommodate the accession of countries in central and eastern Europe, and for the Community to comply with the relevant World Trade Organisation (WTO) rules. This eventually led to the Agenda 2000 measures agreed by the European Council in Berlin in March 1999, which (although considerably weaker than the Commission's original proposals) extended the earlier reforms and consolidated rural development as a second pillar of the CAP.

1.2 The Berlin European Council also asked the Commission to carry out a mid-term review of the Agenda 2000 reforms, which was contained in a Communication[1] produced last July. The contents of that document were described at some length in our Report of 15 January 2003, but the main recommendations were:

that the final 5% reduction in the intervention price for cereals (from _101.31 per tonne to _95.35 per tonne) envisaged in Agenda 2000 should take place in 2004-05, with direct payments being increased by an amount equal to 50% of this reduction;

that, although the robustness and flexibility of the Agenda 2000 changes for beef had been demonstrated, concerns remained over the complexity of the direct payments in this sector, and the extent to which they provided incentives towards intensification, leading to the conclusion that these should be de-coupled from production;

that all the existing direct payments (with a few minor exceptions) should be integrated into a single decoupled income payment per farm, determined on a historical reference basis;

that the full granting of the decoupled income payment should depend upon certain environmental, food safety, animal health and welfare, and occupational safety standards being met;

that rotational set-aside on arable land should be replaced by compulsory long-term set-aside (10 years), with the existing aid for non-food crops on set-aside land being replaced by a non-crop specific "carbon credit" of _45 per hectare for energy crops on a maximum area of 1.5 million hectares to be allocated between Member States;

that there should be a system of compulsory dynamic modulation for all Member States, involving all direct payments being reduced progressively in steps of 3% a year, up to 20%, subject to a franchise of _5,000 for each farm: the resultant savings would be devoted to rural development, distributed to Member States on the basis of agricultural area and employment and a "prosperity criterion" to target specific rural needs;

that, after the application of the franchise and modulation, the maximum sum paid to a farm should be _300,000, with any direct aids beyond this amount being capped and made available for transfer to the rural development pillar in the Member State concerned.

1.3 We also noted that this Communication had been accompanied by a separate Commission Report[2] on the future of the milk quota system, where four main options for the period 2008-2015 had been identified (see paragraph 1.12 below).

1.4 In our Report, we noted that, although the Government had provided an initial Regulatory Impact Assessment, it had said that a full Assessment would be possible only after the Commission had released its legislative texts. However, since it was clear that this was a document of major importance, we recommended it for debate on the Floor of the House, adding that the timing of the debate would need careful consideration, given on the one hand the need for this to take place well before the end of June — the target set by the Commission for an agreement — and on the other hand the desirability of taking into account the Commission's legislative proposals.

The current document

1.5 The Commission has now produced in this document seven draft Regulations aiming to give legislative effect to the proposals in its Communication, though it has also sought in the process to take into account both the earlier reactions to those proposals and the budgetary ceiling for CAP market expenditure agreed last October by the European Council in Brussels.[3]

1.6 By and large, three of the proposals — on the common organisation of the markets in cereals, rice and dried fodder (documents (c)-(e)) — do little more than implement the various changes to support levels and aid rates set out in the Communication, though, in the case of dried fodder, the aid would now be phased out by 2007-08. Likewise, the amendments proposed to the Regulation governing support for rural development (document (b)) follow broadly the lines laid down previously. Consequently, the main changes now proposed arise on the rules for direct aid schemes (document (a)) and on milk (documents (f) and (g)).

— Direct aid schemes

1.7 The Commission has maintained its earlier approach, based upon a single decoupled payment being made available subject to recipients observing certain statutory requirements ("cross compliance"), though the latter requirements would now be extended to include plant health and an obligation to maintain in that state land under permanent pasture on 31 December 2002.

1.8 The details of the single payment still lack clarity, but the key points are that the main existing direct schemes for arable, beef and sheep farmers would be abolished in favour of a single annual payment, equivalent to that farmers received on average under those direct aid schemes during the reference years (2000-2002). Dairy cow premium payments, which were not scheduled to be introduced until 2004, will also be absorbed into the single payment, based on milk quotas held on 31 March 2004. Special provisions are envisaged for 'hardship cases' where claim patterns in the reference period were abnormally low due to exceptional circumstances, and for new entrants.

1.9 There are, however, two main changes as compared with last year's Communication. First, the earlier Commission Communication proposed an upper limit of _300,000 in direct payments per farmer, but, following subsequent discussions in the Agriculture Council, this proposal no longer appears. Instead, the Commission has proposed that direct payments to farmers receiving more than _5,000 should reduced by progressive percentages between 2006 and 2012 (degression), with those receiving more than _50,000 being subject to higher percentage cuts. This would result in the following reductions in direct payments:

2006
2007
2008
2009
2010
2011
2012

Total percentage reductions in direct payments

_5,001-50,000
1
3
7.5
9.
10.5
12
12.5

Over _50,000
1
4
12
14
16
18
19

1.10 Secondly, whilst part of the funds raised will still be used for rural development programmes (modulation), they will also be used to enable future reforms of market support to be financed from within the budget ceilings laid down. The patterns proposed and the sums generated would be as follows:

2006
2007
2008
2009
2010
2011
2012

Percentages for Rural Development

_5,001-50,000
1
2
3
4
5
6
6

Over _50,000
1
2
3
4
5
6
6

Percentages for future market needs

_5,001-50,000
0
1
4.5
5
5.5
6
6.5

Over _50,000
0
2
9
10
11
12
13

2007
2008
2009
2010
2011
2012
2013

Revenue for Rural Development (_ million)

228
475
741
988
1,234
1,481
1,481

Revenue for future market needs (_ million)

0
276
1,289
1,432
1,576
1,719
1,862

1.11 Other more detailed changes proposed include:

allowing Member States to authorise rotational set-aside for duly justified (principally environmental) reasons in place of the obligatory non-rotational set-aside which would otherwise be required;

the creation of a farm advisory system, which within five years of its inception would be a mandatory part of the cross-compliance requirements for farmers receiving more than _15,000 of direct payments a year or with annual business turnovers greater than _100,000 (voluntary use of the system would be open to all farmers);

the removal of any allocation between Member States of the new aid proposed for energy crops, and the exclusion of "permanent crops" from the range of agricultural activities that will be permitted on holdings;

splitting the existing aid payable to producers of starch potatoes into two separate aids, with half being included within the single income payment calculation, and the remaining half being paid as a crop- specific aid.

— Milk

1.12 As we noted in our Report of 15 January, the Agenda 2000 proposals for the dairy sector had envisaged a 15% reduction in intervention prices in four stages from 2000, with a 2% increase in quotas. However, the Berlin European Council had delayed the entry into force of the price cut until 2005-06, and had provided for this to take place in three equal stages. We also noted that, in a separate Report, the Commission had identified four main options for the period 2008-2015, namely:

a simple maintenance of the Agenda 2000 measures;

a repeat of the Agenda 2000 approach, involving a further 3% increase in quotas and a lowering of the intervention price (by 15% for butter, and 5% for skimmed milk powder);

the introduction of a two-tier quota system, with a 5% reduction in the quota for domestic production being offset by an unlimited export quota;

the abolition of the quota system, coupled with a 25% reduction in intervention support.

1.13 The Commission is now proposing to take the Agenda 2000 support price cuts a stage further by bringing them forward one year to start in 2004 and by adding two further (compensated) 5% price cuts at the end of the period, resulting in an overall 25% price cut spread over 5 years beginning in 2004. Also, although Agenda 2000 envisaged price cuts affecting both butter and skimmed milk powder equally, the new proposal would be asymmetric, with each 5% cut overall reducing the butter price by 7% and that for skimmed milk powder by 3.5%.

1.14 At the same time, the Commission has proposed changes in the milk quota system, which was established to curb excess production (and which imposes a punitive levy on deliveries or sales in excess of a producer's quota if the Member State as a whole exceeds its national quota, as laid down in an Annex to Council Regulation (EEC) No. 3950/92).

1.15 After considering the options it had identified for the reform of the dairy sector in its mid-term review, the Commission has now decided against abolition of quotas, in favour of their extension to 2014-15. It has also proposed that the start of the increase in quotas should (in parallel with the changes proposed in support prices) be brought forward to 2004, with an extra 1% increase being applied in both 2007 and 2008.

1.16 The Commission has also taken the opportunity to clarify and simplify the existing quota rules. Many of these are of an administrative nature, but there are two substantive changes from the UK point of view. A more interventionist approach to the national reserve is proposed, with Member States having to adopt rules for allocating quota from the reserve to active or new producers, and a compulsory siphon to the national reserve being proposed on all sales of quota. In addition, the ability for Member States to introduce a blanket break on the link between quota and land has been removed.

1.17 The proposal also includes new arrangements for the intervention of butter, which would be restricted to the period from 1 March to 31 August. In addition, the current tendering system would be replaced with direct buying in of butter (up to a maximum of 30,000 tonnes) at 90% of the intervention price when the price in a member state falls below 92% of the intervention price for a representative period. When this amount has been reached, the Commission may (after consulting the Management Committee) suspend purchasing under this system. Should this occur, an alternative system for intervention purchases (which will be determined by the Commission in consultation with the Management Committee) may be initiated.

The Government's view

1.18 In his Explanatory Memorandum of 3 February 2003, the Parliamentary Under-Secretary of State at the Department for Environment, Food and Rural Affairs (Lord Whitty) says that the Government broadly supports the Commission's proposals, which accord with its strategy on sustainable development and sustainable agriculture. However, its final position on the acceptability of the texts will depend on the results of negotiation with other Member States.

1.19 The Minister notes that the annual CAP budget in 2001 was around _40 billion, after taking account of receipts from agricultural levies. For the existing Community, the Commission estimates that the implementation of the changes to market support and specific direct payment regimes (i.e. before degressivity/modulation) will lead to savings of around _350 million in 2006 and around _185 million from 2010 onwards. For the new member states, the proposals are estimated to lead to an increase in expenditure of around _88 million in 2010, increasing to _240 million in 2013. For the enlarged Community, the Commission therefore estimates an increase in expenditure of around _50 million in 2013. The implementation of modulation and degressivity, after taking into account the proposed transfer of funds into rural development measures, will reduce expenditure by around _275 million in 2007, rising to _1.8 billion in 2013, thus ensuring that CAP expenditure remains below the limits agreed at the European Council in October 2002 and providing some headroom for the financing of future reforms to other CAP market regimes. Without such reductions, the Commission estimates that CAP expenditure on market support and direct payments would exceed _50 billion in 2013 — some _1.5 billion above the budgetary ceiling. The Commission estimates that CAP expenditure will be around _340 million below the financial ceiling in 2013 following implementation of the mid-term review proposals.

1.20 The Minister also points out that the financial implications of the reform are not solely budgetary, and that these figures do not include the impact of the reductions in price support on the costs incurred by consumers through higher food prices (estimated by the Organisation for Economic Development (OECD) at _53 billion in 2001). Also, the introduction of a single decoupled payment and modulation will lead to economic benefits, with producers' decisions being based on the costs of production and market prices. He adds that research carried out in Denmark suggests that the Community would also gain welfare benefits of _10.5 billion in 2013, with the overwhelming majority of these gains being achieved through a more efficient allocation of resources.

1.21 The Minister also comments that there is a strong economic argument for reducing the level of direct payments as these tend to encourage production above the level of the free market. Modulation provides a mechanism for reducing the monies spent on direct payments and increases rural development expenditure, which is likely to result in a range of positive environmental effects and a positive impact on the wider rural economy. He says that reform of the CAP would also lead to substantial benefits from the liberalisation of trade.

1.22 The Minister also comments on a number of detailed aspects of the proposals, as follows:

on cross-compliance, the Government supports in principle attaching conditions to direct aid payments in order to help ensure farmers are providing the goods society wants, but believes that many of the new detailed requirements require further examination to establish whether they are appropriate, practical and cost-effective: in particular, the new permanent pasture condition will need careful consideration, since on the one hand there would be environmental benefits in ensuring that the land in question continues to be grazed, whilst on the other hand it would restrict producers' flexibility to respond to market demands;

on degressivity, the Government estimates that, for the Community as a whole 34% of direct payments fall within the zero to _5,000 band (16% in the UK); 56% fall within the _5,000to _50,000 band (63% in the UK); and 10% above _50,000 (21% in the UK);

on modulation, the UK supports the principle of transferring funds to rural development programmes, but considers that the Commission's proposals do not go far enough in this direction, and that there should be a fair, transparent and simple method, with flat-rate, across-the-board reductions: he adds that the proposal discriminates against various Member States, including the UK, on the basis of farm structures, and that a simpler approach would avoid these discriminatory impacts, encourage efficient restructuring in rural areas and provide a simple way of raising funds for rural development;

because the Commission proposes to end the current voluntary modulation, the amount of funding diverted to rural development would actually fall in the early years, and the proposed UK share of the rural development funds would be inadequate to maintain the existing level of activity: the Minister adds that the Commission has recognised that there will be a need for transitional arrangements for Member States currently operating modulation, and says that the UK will push for generous transitional arrangements, a fairer share of all available rural development funds for the UK, and the option to continue voluntary modulation;

although the Government will want to consider the details of the Commission's proposals very carefully, it continues to believe that the idea of decoupling support and the creation of a single payment, which formed the heart of the reforms outlined by the Commission in its earlier Communication, represents a "brave and radical" move, which, by allowing farmers to make business decisions based on a realistic appraisal of market opportunities, would at a stroke remove many incentives to over-production and the consequential environmental damage: it would also put the Community in a stronger position in WTO negotiations;

the Government welcomes the new aid proposed for energy crops, and, since biomass energy is not currently competitive in the UK, it would also welcome the option to pay national supplements: the UK also considers that the position of energy crop producers with existing plantings on set-aside land should be protected, and that these multi-annual crops should not be classed as permanent crops;

since obligatory set-aside was originally introduced as a means of controlling surplus production, the Government believes that, as markets are brought into better balance, the case for any supply control is weakened: however, it recognises that set-aside can deliver significant environmental benefits, provided it is properly managed, and it says that its attitude to this aspect of the proposals will be determined in the course of negotiations, and will be likely to depend on the extent to which the overall environmental consequences of the package meet UK objectives;

if there is to be a continuing requirement for set-aside, the Government welcomes the Commission's proposal that it could either be rotational or non-rotational, but it regrets that the proposed exclusion of any form of commercial production on set-aside land does not contain an exemption for existing growers of long term energy crops, who it considers have a right to expect that they would be able to continue to claim as set-aside the land devoted to this form of production;

on the proposed premium for protein crops, the UK believes that crop-specific aids of this sort are less efficient than normal market mechanisms for meeting demand.

1.23 On the proposals on milk, the Minister says that a further reduction of the support prices for butter and skimmed milk powder would produce a benefit to consumers and a stimulus to consumption in the Community. He adds that the asymmetric price cuts proposed would result in prices for these commodities moving closer to world levels, thus reducing the amount of expenditure on export refunds, especially for skimmed milk powder, where the eventual support price is expected to be almost equal to the world price. Lower support prices would also make it less attractive to sell butter and skimmed milk powder into intervention. However, the savings to the Community budget resulting from reduced support prices would be more than offset by the cost of the compensatory direct payments for dairy farmers.

1.24 He says that the UK still wants to see an end to the quota system, which distorts production and inhibits efficiency, and is thus disappointed that an extension of the regime is proposed, despite the clear mandate for abolition under Agenda 2000. Quota increases, together with further cuts in support prices over and above those agreed in Agenda 2000, are nevertheless welcome as a further stage in the orderly transition towards abolition, but it is not clear where the end point for the process lies. In particular, he notes that there is no statement that quotas will definitively end after the 2014-15 marketing year, thus leaving the way open for a further extension, which the UK would not support.

1.25 The Minister comments that the UK has to date practised a non-interventionist approach towards the operation of the quota system, leaving much to market forces. It would therefore prefer the introduction of a siphon on quota sales to be discretionary (as it is now) rather than compulsory. Active allocation of quota from the national reserve, apart from across the board proportional allocations, would be new to the milk quota regime, and would require careful consideration of the criteria to be applied.

1.26 Finally, the Minister points out that the current regulation allows Member States to introduce blanket breaking of the link between quota and land, and says that his department had intended to go out to consultation on this later in the year in the light of a ruling in the European Court of Justice that non-producing quota holders (i.e. quota holders who no longer produce milk themselves but earn an income from leasing it out) will have to sell their quota after one year of non-production or have it confiscated. He says this will mean more quota being released for sale, and that the Government had hoped that tenant farmers would be able to benefit from having greater flexibility in buying and taking quota with them on moving between holdings. He adds that, although the Commission has concluded that the provision is no longer necessary, it has stated that it is open to arguments for its reinstatement in the context of the mid-term review negotiations, and the Government will be pursuing this.

1.27 The Minister reiterates that the European Commissioner (Mr Fischler) has stated that he would like to secure agreement to a reform package by the end of the Greek Presidency in June 2003. He comments that this is an ambitious timetable, but that the Government supports a deal being reached in good time for the WTO Ministerial meeting in Cancun, in September 2003.

Conclusion

1.28 Although we originally expressed the view that it might be sensible if the debate we have recommended on the Commission's Communication and its report on milk quotas were to take place during March, we understand that this has now been arranged for 11 February. In view of this, we think it right to produce a Report to the House on this latest document, which has only just been deposited, and which supplements (and in a number of important respects overtakes) the two earlier documents. In doing so, we recommend that it should be debated alongside them.

1 (23670) 10879/02; see HC 63-vii (2002-03), paragraph 2 (15 January 2003). Back

2 (23732) 10896/02; see HC 63- vii (2002-03), paragraph 3 (15 January 2003). Back

3 That the level of market support expenditure under the CAP should between 2007 and 2013 rise by no more than 1% a year as compared with 2006. Back