Memorandum submitted by the Department
for Environment, Food and Rural Affairs
IMPLEMENTATION OF CAP REFORM IN THE UK
INTRODUCTION
1. This memorandum provides Defra's written
evidence to the EFRA Committee's inquiry into the implementation
of CAP reform in the UK. Although Defra has formal responsibility
only for implementation of CAP reform in England, the memorandum
includes an outline of the implementation process in Scotland,
Wales and Northern Ireland which has been approved by the relevant
authorities there.
2. The beginning of the implementation process
can be traced back to the publication of the Commission's reform
proposals in January 2003. The UK's initial negotiating position
was drawn up in close consultation with our delivery bodies, principally
the RPA, who were involved at every subsequent stage. The end
of implementation process will only be reached when the Farm Advisory
System is introduced in 2007. In the meantime, we have several
major milestones including the introduction of new or revised
coupled schemes in 2004 and, most significant of all, the introduction
of the new Single Payment Scheme (SPS) in 2005.
3. A number of the most fundamental decisions
affecting implementation of the SPS have already been made. Following
a consultation exercise, Defra Ministers are now considering how
to exercise other discretionary elements of the package, including
the basis for allocating entitlements under the SPS. This memorandum
aims to set out the main options which remain to be decided upon
in England, how these inter-link with other programmes and where
we stand in the decision making process in relation to those options.
Defra will provide the Committee with a supplementary memorandum
once further decisions, in particular on the basis for allocating
SPS entitlements, have been taken. Some decisions will be affected
by the timing of delivery of the European Commission's detailed
Implementing Regulations, proposals for which are expected to
come forward in January with a view to adoption by the end of
March.
CONTENT OF
THIS MEMORANDUM
4. Defra notes the scope of the inquiry,
and has set out this memorandum and annexes to cover:
(a) the relationship between CAP reform and
the Defra's over-arching Strategy for Sustainable Farming and
Food (which builds on the Policy Commission recommendations);
(b) the key issues to be considered within
the UK in implementing the June CAP reform agreement, and the
process for implementation;
(c) Defra's assessment of the impact of implementation
on the agricultural sector, including the effect of decisions
taken in other Member States;
(d) The current state of knowledge about
implementation in other EU Member States;
(e) Progress on implementing the Strategy
for Sustainable Farming and Food.
THE CAP REFORM
AGREEMENT
5. EU Agriculture Ministers reached political
agreement on the European Commission's CAP reform proposals on
26 June, which was given legal effect by the adoption of a package
of regulations agreed on 29 September. The main elements of the
agreement are:
— breaking the link between farm subsidies
and production by "decoupling" direct subsidies to agriculture;
— cross compliance to make subsidies
dependent on meeting standards in key areas like environment,
and animal health and welfare, underpinned by a new Farm Advisory
System;
— a further switch of resources to
the 2nd pillar and an earlier start date for modulation. For the
first time, modulation applies on an EU-wide basis, switching
support from production subsidies to targeted support for environmental
and rural development objectives;
— national envelopes which provide
for the possibility to develop targeted schemes to promote sustainable
and environmentally friendly farming;
— changes to the Rural Development
Regulation to widen the options for expenditure;
— reduced support prices for butter
and rice bringing them closer to world prices to the benefit of
consumers. Additional detail on market support measures is not
considered further in this memorandum; and
— a new financial discipline which
will trigger action to reduce subsidies if CAP expenditure looks
to be in danger of exceeding the agreed ceilings.
6. This agreement will make a major contribution
to the delivery of the Government's objectives set out in the
Strategy for Sustainable Farming and Food (SFFS) in England launched
in December 2002, which builds on the work done by the Policy
Commission on the Future of Farming and Food. This Strategy defines
the framework for Defra's policies on agriculture, food, animal
health and welfare, protection of the rural environment and securing
a sustainable future for rural communities.
7. The CAP reform package , in setting out
a new course for agriculture in Europe will contribute to achieving
the Strategy in five key ways:
— reconnecting farmers to the market,
by enabling farmers to produce what consumers want to buy, rather
than chasing subsidies;
— reducing negative environmental impacts,
through removing the artificial incentive to produce, along with
the use of cross-compliance and unlocking funds for an entry level
agri-environment scheme, as recommended by the Policy Commission;
— entrenching wider rural development
goals within the CAP by making modulation mandatory across the
EU;
— reducing bureaucracy; and
— providing a long-term regulatory
framework that will enable farmers to plan for the future.
8. Overall, good progress has been made
towards delivering the Strategy's objectives, as set out at Annex
A.
ARRANGEMENTS FOR
IMPLEMENTATION
9. It is a considerable challenge to implement
the reforms in England by the 2005 deadline, which all stakeholders
support. There are a multitude of options available to member
states in the package, together with complex inter-linkages between
decisions on any of these options and other key Defra activities.
There is also a substantial amount of work involved in designing
and building new IT systems and processes. The likely absence
of agreement on detailed EU implementing rules until at least
March is a complicating factor.
10. Against that background, we have applied
programme and project management techniques to ensure that:
— all elements of the implementation
process from policy formation in core Defra through to delivery
in the Rural Payments Agency is managed as a coherent whole;
— all relevant inter-linkages within
the programme and with other Defra programmes are identified;
and
— there is effective governance of
the programme, including active risk management.
11. Together with ongoing feedback from
key stakeholders, arrangements have been made to build a common
understanding of requirements and to share ideas with the devolved
administrations.
KEY DECISIONS
ALREADY MADE
12. Within that framework, some key strategic
decisions concerning the implementation of CAP reform have already
been made collectively by UK agriculture Ministers. These are:
— implementation of the SPS in the
UK will be on a regional basis: Agriculture Departments in England,
Scotland, Wales and Northern Ireland will be responsible for implementation
in their respective countries; and
— the SPS will be introduced in the
UK from the earliest date permitted under the agreement, namely
1 January 2005.
13. In addition the Secretary of State has
already announced that, with the possible exception of seed aid,
none of the options for partial coupling of payments will be taken
up in England.
14. These decisions reflected the clear
majority of views expressed by stakeholders in response to earlier
consultation exercises undertaken by Agriculture Departments during
the negotiations.
15. Other elements will require decisions
to be made on a country by country basis. Among these are:
— the basis for allocation of entitlements;
— use of the national envelope;
— partial coupling possibilities in
the arable and livestock sectors (not in England);
— the timing of decoupling in the dairy
sector;
— implementation of cross-compliance;
and
— the possibility of different voluntary
modulation rates across the UK.
16. Close consultation with the devolved
administrations is therefore necessary to ensure that, wherever
legally required or operationally efficient, the arrangements
are compatible throughout the UK.
17. In England, a formal consultation on
the major options available under CAP reform ended on 24 October.
A copy of the consultation letter can be found at:
http://www.defra.gov.uk/corporate/consult/capreformthree/index.htm
Copies of responses will be available on request
from the Defra Library, and a summary of responses will be published
on the Defra website. Analysis undertaken by Defra of the impact
of different decoupling models is available at:
http://www.defra.gov.uk/corporate/consult/capreformthree/econanalysis-031031.pdf
Defra is currently consulting on the detailed
implementation of dairy reform, and further consultation on other
detailed implementation issues is planned for the new year.
18. The Scottish Executive is currently
undertaking a consultation exercise which runs until 6 January
2004. Key aspects of the consultation include the basis for allocating
SPS entitlements, use of the national envelope or recoupling options,
whether to apply higher rates of national modulation and views
on how funds raised in this way should be spent, taking account
of the revised Rural Development Regulation.
19. The Welsh Assembly Government issued
a consultation paper on 2 October seeking views on key aspects
of the reform package. Consultation ended on 28 November. The
Minister is expected to announce decisions on the model of the
SPS that will be adopted for Wales, and the implementation timetable,
in the new year. Consultation has been initiated on CAP reform
and the dairy sector. Further consultations, covering the national
reserve, national envelope, the cross compliance regime and entitlement
issues are planned for February 2004.
20. Consultations are currently ongoing
on the main implementation options to be deployed in Northern
Ireland. Much attention is being focused on the model of decoupling
to be used. The Department of Agriculture and Rural Development
has provided extensive information and analysis on the decoupling
models available, including hybrids, to inform the debate. The
consultation period has been extended from 5 December to 16 January
2004.
SINGLE PAYMENT
SCHEME
21. The most fundamental change under CAP
reform is the introduction of the SPS. The Council Regulation
gives Member States a degree of discretion in the method of allocating
entitlement to this payment. Broadly, there are three possible
models. The default position is that the number of entitlements
would equate to the number of relevant hectares farmed during
the 2000-02 reference period, with the value of those entitlements
calculated on the basis of on individual subsidy receipts in the
reference period. Where Member States regionalise administration,
as the UK has already done (see para 12) it is also possible adopt
a flat rate approach. (Additional regions could be established
according to objective criteria eg LFA and non / LFA land.) At
its simplest, this involves dividing the pot of money available
to England ("the regional ceiling") by the total area
farmed in the first year of the scheme, 2005, to create a uniform
flat rate payment to all eligible farmers in England. However,
different rates for grassland (or permanent pasture) and other
land may be set. It is also possible to combine the two models
above into various hybrids, with the number of entitlements calculated
as for the flat-rate model, but with part of the regional ceiling
used to top-up the value of those entitlements according to historic
subsidy receipts. One further possibility is to devise an option
that moves progressively from a hybrid to a flat rate model or
to equalise the value of all entitlements allocated under the
historical model.
22. Defra's consultation in England has
revealed a wide range of views among interested organisations
as to the preferred method of allocation. Those producers benefiting
from past patterns of subsidy—and the NFU as a whole tend
to favour the historic approach because this limits the degree
of redistribution of support within the industry. However, those
sectors that would not receive allocations on this basis eg vegetable
growers or deer farmers favour a flat rate or hybrid approach
which is also favoured by the CLA. Reflecting a common perception
of how different options impact on negotiating positions in the
rental market, tenants favour allocation on a historic basis and
landlords a flat rate or hybrid model. Environmental groups favour
a flat rate model largely because it would involve a symbolic
break with the past. Whichever way the decision goes, it will
be perceived as favouring one group over another.
23. At the time of submission of this memorandum,
Defra Ministers are considering each of the options, having regard
to the views expressed in the consultation and to the potential
to further the Government's objectives for sustainable farming
and rural communities. A decision on the approach to be taken
in England is likely to be announced early in the new year. Ministers
in the devolved administrations are also considering the options
within their own countries.
24. It is important, however, to underline
that the benefits derived from decoupling (which are addressed
further at paragraphs 37-43) will be achieved whichever allocation
mechanism, or variation of it, is finally chosen for the SPS.
Similarly the CAP reform package will reinforce measures to protect
and enhance the environment through the use of agri-environment
schemes. Such schemes will be funded from modulation, the product
of which will remain the same irrespective of the basis on which
SPS entitlements are allocated.
NATIONAL ENVELOPES
25. Member States have the option to retain
up to 10% of of the value of the total payments in each sector
to support specific types of farming important for the protection
or enhancement of the environment, or for improving the quality
and marketing of products. National envelope money must be returned
by way of payments to farmers in the sector or sectors from which
it was taken. A maximum deduction of 10% would yield some £170
million for envelope schemes. Defra considers that national envelopes
would be a potentially useful tool to counter significant negative
environmental impacts in England that might result from decoupling.
The scope for using National Envelopes within the confines of
EU regulations is still being defined, but Defra Ministers are
currently considering options for using envelopes in England.
26. In Scotland and Northern Ireland consultation
on national envelopes is still ongoing, whilst the Welsh Assembly
Government plan to consult early in the new year.
CROSS COMPLIANCE
27. In order to qualify for the new subsidy,
farmers will have to comply with specific provisions of 18 existing
EU directives and regulations on the environment, public health
and animal health and welfare; and maintain their land in "good
agricultural and environmental condition". Member States
are required to define standards of good agricultural and environmental
condition consistent with a framework set out in the Council Regulation,
which places particular emphasis on protection of soils and avoidance
of land abandonment.
28. Defra will be consulting in the new
year on approaches to cross compliance in England. In determining
appropriate measures, Ministers will wish to have regard to a
range of considerations. These include the views of stakeholders,
the Government's objectives for sustainable farming and sustainable
development, consistency and compatibility with other instruments,
cost effectiveness, compliance costs and the regulatory burden
on the industry together with the principles of better regulation.
Standards need to be readily understood and verifiable, and achievable
by farmers.
29. In Scotland, Wales and Northern Ireland
work to take forward the definition of "good agricultural
and environmental condition" is progressing, and cross compliance
will be subject to consultation in early 2004.
MODULATION
30. Member states will be required to levy
3% of subsidy from 2005 to fund rural development and agri-environment
schemes, rising to 4% in 2006 and 5% from 2007 onwards. In addition,
the UK will be able to modulate at a higher level in line with
its plans under the current voluntary system. In England this
will fund the Government's sustainable food and farming proposals,
and specifically the introduction of a new entry level agri-environment
scheme.
31. Under compulsory EU modulation rules,
the first
5,000 of farmers' direct payments will be unaffected,
and every Member State is guaranteed to get back at least 80%
of what it pays in.
32. Defra is working closely with the Devolved
Administrations to ensure there is a coherent approach to modulation
across the UK.
CHANGES TO
THE RURAL
DEVELOPMENT REGULATION
33. The changes made to the Rural Development
Regulation as part of the CAP Reform package were mainly to add
new options for spending in the following areas:
— support to producers for activities
linked to quality food production, including support for certification
costs;
— time limited aid to farmers facing
new legislative requirements;
— support for farmers who use production
methods that are over and above standard practice in terms of
animal welfare; and
— aid for the management of integrated
rural development strategies by local partnerships under Article
33.
34. Defra's initial view is that these new
measures do not provide strong enough grounds for the diversion
of resources away from the existing England Rural Development
Programme (ERDP) schemes. The widening of scope of Article 33
to provide aid for the management of integrated strategies by
local partnerships may, however, be a useful option under the
Rural Enterprise Scheme. The objective and principles of the animal
welfare option are welcomed, but since extra funding (beyond that
already required for the introduction of an entry-level agri-environment
scheme) will not be available in the short term, difficult decisions
on reductions in other schemes would have to be taken if it was
wished to broaden the ERDP in this way.
35. The recent Defra consultation exercise
on CAP reform options included a question on the changes to the
Rural Development Regulation. We will take into account the responses
to that consultation, and the detailed Commission implementing
regulations, before making a decision on whether to introduce
schemes making use of these measures under the current England
Rural Development Programme.
36. In Scotland and Northern Ireland consultation
on whether to make use of changes to the Rural Development Regulation
is currently ongoing. Decisions will also need to take into account
responses to consultation on whether to use the option of additional
voluntary modulation. The Welsh Assembly Government is also considering
these issues in detail, although no decisions have yet been taken.
ASSESSMENT OF
THE IMPACT
AND BENEFITS
OF DECOUPLED
SUBSIDIES
37. Following the initial reform proposals
in 2002, Defra commissioned a range of economic research from
external bodies to make a preliminary assessment of the likely
market impacts of decoupling. Based on this research, and following
the final agreement, it is estimated that the effect of CAP reform
will be to increase UK farm incomes by £100-£150 million,
around 5% of forecast Total Income From Farming in 2003. These
gains will be even greater to the extent that farmers can retain
the gains from higher productivity.
38. The farm business impacts are set against
the backdrop of a recovery in farm incomes in 2003 largely due
to a weaker sterling. The graph shows various projections of TIFF
per head, and includes the broad impact of overall CAP reform,
including sectors (particularly dairy) where the impact of reform
is likely to reduce incomes. Several economic and policy factors
shape the projections, but little change is expected over the
medium term if exchange rates remain at current levels (the baseline
projection).
39. The income benefits of CAP reform will
be triggered largely by the market impacts of decoupling. Defra
has estimated that there will be production decreases of between
10-25% and increases to the market price of up to 15% depending
on the sector. Producers stand to benefit from these changes in
two ways: by no longer having to incur market losses in order
to secure subsidy, and by receiving higher market prices as market
surpluses are reduced across the EU. By removing the link between
subsidy and production, decoupling will encourage producers to
make decisions based more fully on costs of production and market
prices rather than the availability of subsidy. This should improve
farm incomes, enhance the dynamic productivity of the industry,
reduce burdens on farmers and bring producers much closer to the
needs of the market. The sooner and more fully decoupling is adopted
the sooner and more fully these benefits can be reaped.
40. These changes in output are also likely
to have some environmental benefits. Research commissioned by
Defra has indicated that decoupling is likely to lead to more
extensive production, an increase in fallow land, reduced inputs
and reduced grazing pressure. These effects will be generally
positive for a wide range of environmental indicators. However
the research also indicated that there may be some cases where
increased specialisation could lead to environmental problems.
The impacts will vary from region to region depending on current
farming patterns and trends as well as environmental characteristics
and trends.
41. There are competing pressures on farm
structures arising from decoupling. In the short term the availability
of a decoupled payment might serve to maintain in business those
farms which might otherwise have been inclined to sell up. In
the longer term the removal of the coupled subsidy should have
the effect of encouraging farmers to seek improvements in efficiency
including through securing greater economies of scale. This is
likely to reinforce the trend for farm businesses to expand and
thereby replace businesses that quit the industry.
42. The impact of CAP reform on the wider
rural economy will be, to a considerable degree, dependent on
business decisions farmers take as a result of receiving decoupled
instead of coupled payments. These decisions will have knock on
effects for upstream (eg fertiliser and agro-chemical companies)
and downstream (eg auction markets, abattoirs) businesses, and
also on the local economy (eg shops, post offices). The level
and direction of this impact will be dependent on what decisions
are taken and how important farming is to the local economy. However,
since any changes in farmers' activities are likely to take place
over a period of time, any impact on the wider economy in rural
areas would be gradual, allowing the local economy a greater chance
of adjusting. Elements of CAP reform, such as decoupling, cross
compliance and possible use of national envelopes, may also have
an effect on the landscape due to changes in agricultural activities,
and this could affect the levels of tourism in rural areas and
the amount of money it brings into the local economy.
43. The use of modulation and associated
national co-financing will result in a net inflow of funds to
the rural economy. To the extent that it is used to fund agri-environment
schemes, this may result in more employment in agri-environment
related activities, and fewer jobs in input supply industries
due to less intensive farming.
THE EFFECT
OF DIFFERENTIAL
RESPONSES TO
CAP REFORM
44. Under the CAP reform agreement member
states may choose not to decouple fully and to delay decoupling
until 2007. Our estimates assume that other countries only decouple
by the minimum required whilst the UK fully decouples; consequently,
overall EU production is greater compared to full decoupling,
price increases are somewhat smaller, and producer gains correspondingly
lower. If other member states decoupled further than the minimum,
we would expect price rises within the UK to be greater, and output
falls smaller. There is already some sign that the move to full
decoupling will be faster than assumed. For example, Ireland is
committed to full decoupling, which should mean less competition
from Irish beef in UK meat markets, and the Spanish have said
they will decouple from 2006, though probably only partially.
Whilst the precise gains from decoupling will depend to some degree
on how far other member states decouple, decoupling within the
UK will always provide economic and farm income benefits compared
to the current system of support. This is because the welfare
gains from decoupling do not depend purely upon market price changes,
but on freeing farmers from "chasing subsidy".
45. There is also some concern that differential
payment methods might distort competition between countries. This
argument suggests that English producers could be disadvantaged
if paid through one method (eg a flat rate basis) whilst other
UK countries or member states choose a different (historic) option.
There is no clear evidence to support this view and the idea that
the market impacts of decoupling will depend on payment methods
assumes that farmers will use their decoupled subsidies to cross-subsidise
their farming activities. Farmers have no financial incentive
to do this; they would be better off by not doing so. Some farmers,
however, may take time to adjust to the new policy environment,
and the decoupled payment itself will have effects on wealth,
attitudes to risk and ability to borrow or fund investment. To
this extent, the distribution of payments (and hence the method
of payment) may have some effect on farm business decisions but
it is decidedly less important than the fact of decoupling itself.
It is difficult to quantify these effects but over time they are
likely to be small, because if farmers are not making a profit
from production (for which there are no coupled subsidies) they
would be better off stopping production. We would therefore not
expect any distortions between regions or countries to be very
significant.
APPROACH TO
CAP REFORM IN
OTHER MEMBER
STATES
46. Existing Member States have until 1
August 2004 to make decisions on adoption of the main options
open to them. Only two have made formal announcements as to their
intentions. Ireland will decouple fully from 2005 using the historical
approach to allocating SPS entitlements. Germany have also announced
that they are minded to decouple fully from 2005, but using a
hybrid model which will be adapted over time to reduce the range
of values of individual entitlements both within and between Länder.
The debate in other Member States appears to be moving towards
early implementation and fuller decoupling than might have been
thought likely in June. At the time of submission, all the new
Member States, with the probable exception of Malta and Slovenia,
are expected to opt for the temporary Simplified Area Payments
scheme agreed as part of the Accession Treaty.
Department for Environment, Food and Rural Affairs
January 2004
Annex A
Progress in delivering the Sustainable
Farming and Food Strategy
1. The Sustainable Farming and Food Strategy
(SFFS) was launched by the Prime Minister, the Secretary of State
and Lord Whitty on 12 December 2002. It builds on the work done
by the Policy Commission on the Future of Farming and Food, accepting
all but four of the Policy Commission's recommendations. The Strategy
sets out how the food and farming industries, Government and consumers
must work together to secure a profitable and internationally
competitive future for our industries, whilst contributing to
a better environment, improved nutrition and public health and
prosperous communities. Defra is now leading implementation of
the SFFS, and has set up an Implementation Group of nine, senior,
independent members to oversee and drive forward delivery of the
strategy at national and regional level. Sir Don Curry chairs
the Group, which reports to the Secretary of State.
2. Whilst recognising that good progress
has been made in 2003, but that much remains to be done, the Group
have been asked by the Secretary of State to continue in this
role until the end of 2004. The Secretary of State has also written
to ministerial colleagues to seek their agreement. It is almost
certain that the Group will continue in 2004.
3. Much has been delivered already in 2003,
including the following highlights:
— An EU deal on CAP Reform—CAP
Implementation underway
— Entry Level Agri Environment Scheme
pilots successfully launched with over 270 applicants for the
Scheme and evaluation completed.
— Animal Health and Welfare Outline
Strategy & Veterinary Surveillance Strategy launched
— School Fruit Scheme rolled-out to
North West and East Midlands and 5-A-Day initiatives launched
— English Farming and Food Partnerships
and Regional Food Strategy launched
— Food Chain Centre, Red Meat Industry
Forum and Organic Action Plan delivering help to the industry
— Reformed Assured Food Standards operational
— Significant progress on sustainable
public procurement of food including a national conference
— Demonstration farm pilots launched
and evaluation underway
— Research Priorities Group set-up
and Non-Food Crops Centre launched
— Tenancy Reform Industry Group report
sent to ministers
— Whole Farm Approach initial pilot
developed
4. Further major milestones to be delivered
in 2004 will be:
— Completion of the review of agri-environment
schemes and securing approval from the European Commission for
the introduction of the new Entry Level and Higher Level Stewardship
Schemes in 2005
— First phase of roll out of the new
Genesis IT system for delivering the England Rural Development
Programme
— Whole Farm Approach—ensuring
the pilot is delivered on schedule and expanded to plan, preferably
as an e-enabled pilot.
— Publication of Food and Health Action
Plan
— Launch of Non Food Crops Strategy
— New Assured Food Standards and English
Farming and Food Partnerships fully operational and delivering
— Publication of Food Industry Sustainability
Strategy
— Completion of the Learning Skills
and Knowledge Review and taking forward significant improvements
in the skills and advice area
— ublication of the Full Animal Health
and Welfare Strategy
Department for Environment, Food and Rural Affairs
January 2004
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