ELEVENTH REPORT
The European Scrutiny Committee has agreed to the
following Report:
1. MID-TERM REVIEW OF
THE COMMON AGRICULTURAL POLICY: LEGISLATIVE PROPOSALS
(24234)
COM(03) 23
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(a)
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.
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Legal base: | Article 37 EC; consultation; qualified majority voting
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Document originated: | 21 January 2003
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Deposited in Parliament: | 4 February 2003
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Department: | Environment, Food and Rural Affairs
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Basis of consideration: | EM of 3 February 2003
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Previous Committee Report: | None, but see footnotes
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To be discussed in Council: | See paragraph 1.27
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Committee's assessment: | Politically important
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Committee's decision: | For debate on the Floor of the House (together with earlier Commission Communication)
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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
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2008 |
2009 |
2010 |
2011 |
2012
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Total percentage reductions in direct payments
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_5,001-50,000 |
1
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3 |
7.5 |
9.
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10.5 |
12 |
12.5
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Over _50,000 |
1
|
4 |
12 |
14
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16 |
18 |
19
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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
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2008 |
2009 |
2010 |
2011 |
2012
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Percentages for Rural Development
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_5,001-50,000 |
1
|
2 |
3 |
4
|
5 |
6 |
6
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Over _50,000 |
1
|
2 |
3 |
4
|
5 |
6 |
6
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Percentages for future market needs
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_5,001-50,000 |
0
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1 |
4.5 |
5
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5.5 |
6 |
6.5
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Over _50,000 |
0
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2 |
9 |
10
|
11 |
12 |
13
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2007 |
2008 |
2009
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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)
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0 |
276 |
1,289
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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
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