Memorandum submitted by the National Farmers'
Union
IMPLEMENTATION OF CAP REFORM IN THE UK
1. The CAP Reform agreed by the Council
of Ministers in Luxembourg in June 2003 was by far the most radical
change in the history of the policy. The NFU had for long advocated
the principle of decoupling support from production, and fully
supported the main lines of the Commission's proposal of January
2003.
2. It was unfortunate that, in order to
get the necessary majority for an agreement in June, it was necessary
to introduce a number of compromises which allowed Member States
to only partially implement the principle of decoupling, and gave
a wide range of national options in implementing the changes.
Furthermore, the introduction of the Reform was postponed from
2004 until 2005, with an option for countries to delay until 2006
or 2007. The NFU regretted this outcome at the time and expressed
concern at the potential for distortion that would arise from
running a series of different policies within a single market.
In the event, the farming community itself in most countries now
seems to be pushing for early and complete implementation of the
reform, so the worst of these dangers may be avoided. Nonetheless,
the possibility that different options will result in very different
impacts on individual farmers and markets remains, even between
the four nations within the UK.
3. At the time of writing, Defra has completed
its consultation process on the two most important decisions that
have to be taken in England, namely whether to introduce the single
farm payment on the basis of individual historic payments (IHP)
or regional average payments (RAP) and whether to make use of
the facility to introduce a so-called "national envelope".
A decision on these items is imminent. But as these fundamental
choices will then open a number of further implementation issues;
it is almost impossible to comment in any detail on these secondary
matters in this submission. We would be happy to provide further
views at a later stage, if requested.
PRINCIPLES AND
METHOD OF
IMPLEMENTATION IN
THE UK
Individual Historic or Regional Average Payments?
4. The question whether the allocation of
the single farm payment should be according to the "individual
historic" or "regional average" method is the most
difficult the NFU has had to face, because both choices have associated
problems.
5. The NFU has carefully weighed up the
two main allocation methods, and various "hybrid" systems,
against four criteria that were unanimously agreed by the Council
of the NFU. These are:
— Minimising redistribution of existing
support
— Ensuring that the payment goes to
the working farmer
6. In the light of these criteria, the NFU
has come down firmly in favour of the individual historic approach.
[1]
7. We accept that there is a tension between
these criteria. That is why our decision has been a balanced one,
and why it is impossible to find a perfect solution.
Simplicity
8. The NFU agrees that this is an important
issue. More complex systems will almost certainly be more expensive
to administer and money spent on this will be money that is not
available for other purposes. For farmers, a more complicated
system is likely to lead to appeals, expense and delay.
9. We also agree that the simplest form
of regional average payment (where the total amount of payments
in England is divided equally over the total English area) would
be the easiest and least costly to administer. But this is precisely
the form of regional averaging that would have the most drastic
redistributional effects, and would, on these grounds, be totally
unacceptable to the NFU.
10. We readily accept that the individual
historic method is complicated as far as the initial allocation
is concerned. The biggest problem is likely to be the transitional
issue of those who have entered the industry or expanded since
the end of the reference period. The NFU made a joint industry
approach to the Commission with a proposal that would have greatly
reduced this problem; regrettably it was not adopted. We will
therefore be looking for any means possible in the implementing
regulations to reduce the burden of this problem.
Redistribution
11. The issue of the redistribution of support
is very important to the NFU, both in terms of the perception
and acceptability of the reform and the business impact on the
losers.
12. Defra's own figures indicate that the
number of winners and losers would be broadly equal. In reality,
the number who perceive themselves to be losers under a regional
average system will be significantly higher, because the move
to the single payment will take place at the same time as new
deductions (higher modulation, national reserve, possibly national
envelope) are made from the payments. This is likely to erode
support for the reform at a critical time.
13. While Defra's figures also show a relatively
modest redistribution between sectors; these are average figures
and mask very large absolute changes between individuals, particularly
in the livestock sector. [2]
14. The livestock businesses that would
be threatened by a regional averaging system would be those who
were the more productive and enterprising, often with higher investment
costs. They are also the most likely ones to be able to survive
in a post-Doha round environment with lower levels of trade protection.
Ensuring Payments go to Farmers
15. The European Commission's intention
was that the single farm payment was a decoupled payment to farmers
as managers of agricultural holdings, rather than to owners of
land. This was the explicit rationale for making the payments
a negotiable asset.
16. This is a particularly important issue
in the livestock sector, because many tenants have themselves
purchased the quotas that give rise to the entitlement to the
single farm payment. If entitlements are not transferable, the
capital value will unreasonably be transferred from tenant to
landlord. Although trade in entitlements would be possible under
a simple regional average system, the market would not be liquid
because almost all land would have a payment and all payments
would be the same value. This is, therefore, a further major reason
why the simple regional average system is unacceptable.
17. In systems where there is less scope
for trade in entitlements, the single farm payment will be more
likely to be capitalised in land prices and rents. The single
farm payment is then likely to set a floor in rents. This in turn
will blunt the commercial and competitive focus of English agriculture.
18. Another difficulty with regional averaging
is that the payments in the unsupported crop sector may be less
likely to rest with the farmer. In the cereals and oilseeds sectors
the price is principally determined by the world market (and in
cereals by intervention and export licences); local supply and
demand factors play relatively little part. In field vegetables
and potatoes the reverse is the case. There is a significant risk
that if growers of these crops receive a payment, part at least
of this will be captured by the processor or retailer.
Market focus
19. The underlying rationale of decoupling
is that farmers' business decisions will be driven by the market
and not by the requirements of the subsidy system.
20. In our view, the individual method of
allocation largely achieves that purpose.
21. There is, however, one major problem
that will be created for some growers. This arises because those
growing unsupported crops who, for commercial reasons, would like
to switch to cereals will be forced to compete with existing cereal
producers who will be receiving a substantially higher single
payment. This in itself could unfairly tip the balance of commercial
power between the grower and the processor. The NFU urges a serious
investigation into this issue and would like to discuss possible
remedies urgently with Defra.
Environmental concerns
22. The NFU is unpersuaded by arguments
that one or the other models is more environmentally beneficial.
In our view, there is no convincing case to be made either way.
23. Some environmental groups believe that
the regional average method will extend cross-compliance over
a wider area. This is, in our view, a misapprehension. Almost
all grassland and all arable land that is in a rotation that includes
supported crops will be subject to cross compliance under either
system. Land that is exclusively growing unsupported crops would
become subject to cross-compliance under a regional average system,
but it is likely that many of these growers would not wish to
claim a single farm payment as this would make them liable to
set aside very valuable land.
Summary
24. The NFU has carefully weighed up the
pros and cons of the individual historic and regional average
method. The merit of the average approach is that it is simpler,
but this only applies to the simplest regional method, which creates
unacceptable redistribution. The individual method also, on balance,
comes closer to meeting the NFU's concerns on ensuring the payments
go to the farmer and avoiding distortions. There is no significant
environmental difference between the two options.
25. We recognise that the individual method
of allocation will create significant problems for some farmers
and growers, and we urge that these issues should be seriously
addressed and solutions found wherever that is possible.
POSSIBLE IMPACTS
OF IMPLEMENTATION
The "National Envelope"
26. Defra is currently consulting on whether
or not to use the "national envelope"—the facility
to reduce the single farm payment by up to 10%, and to use the
funds for the (closely defined) purposes allowed in the Regulation.
The NFU is strongly opposed, for the following reasons.
27. The Article allowing the withholding
of amounts to make up national envelopes is found within the section
of the Council regulation that is entitled Partial Implementation.
The NFU has consistently championed full decoupling as a matter
of strong principle; at times almost standing alone in this position.
The Secretary of State has consistently argued that the UK should
fully decouple and the NFU has given its full backing to this
aim. The national envelope is, in effect, partial decoupling of
aid with remaining amounts being returned to producers on what
will, in effect, be a coupled basis. It is clearly envisaged by
the article that producers will have to be farming or producing
(paragraph 3 of Article 69).
28. We have no clear idea of the purpose
for which the national envelope could be put. We understand that
the Scottish Executive is minded to use the envelope to encourage
suckler cow production in some areas of Scotland, supposedly for
environmental reasons. If so, this will perpetuate all the negative
consequences of coupled payments: those farmers directly concerned
will be encouraged to continue uneconomic production in order
to claim a subsidy, while all other beef farmers will suffer the
consequences. Farmers in England will suffer from this just as
much as those in Scotland. Defra may not be able to do anything
about this, but they can avoid making the same mistake as Scotland.
29. The administration of the national envelope
appears horrendously complicated. The Regulation states that the
deduction must be made from the components of the single payment
(ie beef, sheep, arable, dairy, seeds etc), not the total single
payment. Once a deduction had been made from one sector, it would
then be necessary to ensure that precisely that sum was spent
in the "sector concerned by the retention". This seems
to require a very sophisticated accountancy and audit procedure.
30. The deduction appears, under the regulation,
to be a once and for all cut of up to 10% of the national ceiling.
The actual proportion in terms of the payments themselves would
be higher, after potential scale backs of reference amounts (Article
41.2) and deductions for the national reserve (Art 41.3). With
national envelope amounts being deducted from the start in this
way, there appears to be no mechanism for returning any undistributed
sums to the industry. The use of the sheep national envelope in
England has created a particularly baleful precedent here, where
the decision to make the deduction has clearly taken precedence
over any consideration of the use to which the money might be
put.
31. Farmers are already going to suffer
significant cutbacks to their payments, whether through national
reserve contributions (up to 3%), modulation, both national[3]
(possibly 7% or more in England) and European (up to 5%) and financial
discipline (unknown). We calculate that these deductions, plus
the national envelope, could easily amount to 23% in England in
2005; a significant cut in support from current levels. What is
worse, most other European farmers would face a maximum cut of
6%.
32. The NFU believes that these are compelling
arguments against the use of the national envelope. If DEFRA is
still minded to follow this course, we would strongly urge the
following approach:
33. DEFRA should come up with concrete proposals
for schemes through which such funds should be made available,
together with estimates of how much these will cost. There should
then be a further round of consultation with stakeholders.
34. We cannot understate the importance
of ensuring that all such funds are taken up. This means that
schemes must have demonstrable benefits, be accessible and involve
minimum bureaucracy. The cost of the administration is a charge
to Defra, not to the national envelope, but Defra must ensure
that the benefit of the measure outweighs the administrative cost.
35. Funds must be channelled to farmers.
The Regulation is explicit in this regard: "In this case
. . . the Member State concerned shall make, on a yearly basis,
an additional payment to farmers in the sector or sectors concerned
by the retention." The NFU would insist on this provision
and would demand an annual audit to show that this had been the
case.
Potential for Distortion in the Single Market
36. Both those who advocate the individual
and the regional average approaches have concern at the potential
for distortion of competition within the European single market.
Most countries have not yet declared their positions, but our
current knowledge is that:
— Ireland has announced full decoupling
in 2005, on the historic model;
— Germany will operate on a Länder
basis, with an average payment on arable crops and an historic
on livestock, with a transition (as yet undecided) to a full regional
average basis.
— Denmark will adopt a hybrid regional
average system.
— Other EU15 countries are understood
to be leaning strongly to an historic basis.
— Within the UK: England is undecided,
devolved Ministers in Scotland and Wales have indicated they favour
the historic approach, and Ulster is examining a hybrid averaging
system.
— Eight of the 10 applicant countries
(the exceptions are Slovenia and Malta) will adopt a simple average.
[4]
37. Unsupported crop growers in England
have been, understandably, concerned that if other countries adopt
a regional average payment there could be a distortion in that
competitors would be receiving single farm payments. If the list
of likely options given in paragraph 36 is accurate, this concern
seems to be exaggerated. Germany and Denmark are not major rivals.
Poland is potentially more of a problem, particularly for potato
growers, but these payments are being phased in over a long period.
(There is also a device to ensure that the area of fruit and vegetables
receiving the single payment cannot expand). The NFU has never
envisaged this reform as the last word. There seems every chance
that there will be a move to more uniform levels of payment throughout
the EU at some point in the future and probably before the end
of the transition period with the new Member States.
38. If there is a concern at the consequences
of an IHP system for unsupported crop growers, there is an equivalent
concern about an RAP system from both supported arable and livestock
sectors. This concern is, arguably, greater because more of our
direct competitors will be adopting an IHP basis. Thus if England
has a regional payment, cereal growers will have a significantly
lower single farm payment than their French counterparts (in addition
to much higher levels of modulation, and, possibly a further deduction
for the National Envelope, where the French farmer will have none.)
On top of that, there is a distinct possibility that France will
opt for partial decoupling, obliging the farmer to continue in
cereal production if he wishes to obtain the full single farm
payment. The consequence of all this is that production levels
would be likely to fall in England, but not in France, even though
this is not the result that the free market would have achieved.
Naturally this will have an impact on the whole of the production
chain in England.
39. Similar results might occur within the
UK. If Wales and Scotland adopt an IHP while England opts for
a RAP, the NFU predicts the following consequences:
— Beef production would be favoured
in Scotland at the expense of England;
— Sheep production would be favoured
in England at the expense of Wales and Scotland
— Dairy production would be drawn to
Wales and Scotland
— Fruit and vegetables would be drawn
to England
— Cereals production would be favoured
in Scotland.
All of these would be very divisive and have serious
social and regional implications.
CAP REFORM AND
THE SUSTAINABLE
FOOD AND
FARMING STRATEGY
The NFU supports the Strategy and many of its
individual components. We think the CAP Reform and the SFFS should
in many respects be mutually reinforcing. In particular we would
like to draw attention to the following synergies:
— Food Chain. The Curry Report made
a major feature of the need to reconnect farmers with their markets
and to improve the functioning and efficiency of the food chain.
Decoupling should greatly assist in these two objectives. It will
mean that farmers should focus on the market rather than producing
to obtain a subsidy. Removing production-linked subsidy will also
make the food chain more transparent and require those who purchase
from farmers to ensure their supply by offering remunerative prices.
— Consumer health needs. Again, decoupling
will allow producers to focus on real market needs; if health
is a consumer issue, farmers will respond. Decoupling will also
remove the perception that support policies have encouraged unhealthy
types of production.
— Better Regulation & Whole Farm
Approach. The NFU sets considerable store by the "Whole Farm
Approach" to the implementation of regulations at the farm
business level. CAP Reform offers a great opening to take this
approach further, provided the opportunity is grasped. We would
like to see the annual application for the single farm payment,
cross-compliance, agri-environmental schemes and, in future, the
Farm Advisory System consolidated into the Whole Farm Approach.
— The Entry Level Scheme. Although
not strictly part of the CAP Reform, the NFU sees the new Entry
Level Scheme as an important complement to the Single Farm Payment.
We have long campaigned for an agri-environment scheme available
to all farmers, which rewards them for responsible stewardship,
and we would like ambitious targets for take-up so that the majority
of farmland enters into the scheme. In our view the Entry Level
Scheme fits more coherently with the Individual Historic method
of single farm payment allocations.
— Environmental Protection. Cross-compliance
offers the opportunity to ensure that those in receipt of single
farm payments respect minimum and consistent standards across
the EU. It also offers the opportunity to reinforce the concept
of good agricultural and environmental condition, which should
complement EU legislative goals (eg Water Framework Directive).
Defra, and other UK administrations, should take care in developing
conditions to ensure that they do not disproportionately bear
on UK producers; that conditions are practical at a farm scale
and that they do not duplicate functions actions more appropriately
funded through agri-environment schemes.
National Farmers' Union
December 2003
330,000 and the greatest loss
50,000. Sudden reductions on this scale are bound
to be business threatening. Moreover, many of the enterprises
facing extreme changes will be the same as those that encountered
similar movements with the change from headage to area based payments
in the LFA following the last CAP Reform. There would undoubtedly
be enormous pressure for some form of safety net mechanism, or
phasing in of the changes, which in turn would negate the benefit
of simplicity that the regional average offers.
1 This view is not shared by the NFU Horticulture
Board, whose remit includes potatoes. They prefer the regional
average approach. Back
2
The NFU has examined figures from a number of real livestock
farms from a small random survey. Within this small sample the
range was extreme, with the greatest gain by a farm around Back
3
The UK will be the only country in Europe with any national modulation. Back
4
This is not surprising since they have no history of direct payments.
Note also that these payments will start at 35% of the level in
the EU, rising to 100% by 2011.
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