'DECOUPLING' GROWER COMPENSATION
37. The centrepiece of the reorganised CAP introduced under the
2003 reforms is a single subsidy payment, made to all farms, but
no longer connected to the production activity. This is known
as the principle of 'decoupling'. This decoupling—breaking
the link between support and the production activity—is
desirable on economic grounds, as it allows farmers greater freedom
to make their own farming decisions. The Commission has proposed
making 'decoupled' payments to sugar growers, to compensate them
for the loss of income associated with the reduction in prices.
38. In agreeing the 2003 reforms, a compromise was
reached which allowed individual Member States the option of retaining
some element of coupling within their subsidy systems. Given this
historic background, some witnesses were concerned that the option
of 'partial decoupling' could find its way into the final sugar
package as well. The NFU argued that there was a "serious
risk" that partial decoupling might be included in the reforms.
The NFU insisted that such a compromise in the Council of Ministers
must be avoided at all costs.[54]
Reports from the October EU Farm Council seemed to bear out these
fears, with the suggestion that it had become increasingly probable
that "any compromise reform paper put forward by the Commission
in time for the November Council will include the option of partial
decoupling for Member States who feel they are worst hit by the
price".[55]
39. If a compromise package did allow Member States
flexibility in maintaining an element of coupling with their payments,
farmers in countries that exercised this option would be obliged
to stay in beet production in order to qualify for the full compensation.
Clearly, this would fly in the face of the whole thrust of the
reform, which is to ensure production is concentrated in the most
efficient areas of the EU and not constrained by artificial policy
instruments. Tying aid payments to the continued cultivation of
sugar beet would also contradict the aims of the restructuring
scheme, which is designed to decommission the most inefficient
parts of Europe's sugar producing capacity.
40. Processors would benefit from coupled compensation
as it would cushion the reduction in beet supply to factories
after reform. In this context, it is interesting to note how British
Sugar's thoughts on 'decoupling' have changed over time. In April
2004, it maintained that "compensation should be partly coupled
to take account of the interdependent relationship between growers
and processors".[56]
But in written evidence to our current inquiry, it changed its
stance, arguing against "any suggestion that partial coupling
should be permitted at the discretion of individual Member States",
since this would "introduce competitive distortions doing
particular damage to the UK".[57]
41. This change in British Sugar's approach may reflect
an acknowledgement that, if discretion were allowed, the UK Government
would choose full decoupling, as a matter of principle, while
other countries might not, thereby putting processors in those
countries at a competitive advantage. The fact that the Dutch
Beet Growers' Federation seemed prepared to consider partial coupling,
at least in the first few years of reform, shows the symbiotic
nature of the relationship between sugar beet growers and processors.[58]
42. Defra made its position clear, stating that it
was "absolutely behind fully decoupled support" and
indicating that it intended to implement the English payments
in that form.[59] However,
the Minister for Sustainable Farming and Food was initially somewhat
reluctant to confirm that the UK would oppose any attempt to introduce
the option of partial decoupling into a compromise package.[60]
When pressed, Lord Bach did finally confirm that the UK would
"argue pretty strongly for full decoupling".[61]
Our conclusions
43. Direct
payments to growers must be fully decoupled from production, in
order to minimise market distortion. We are pleased that Defra
seems so committed to implementing direct payments to English
farmers in a fully decoupled form.
44. The UK Government
should strongly oppose any attempt to introduce the option of
partial decoupling into a compromise package. Such a dilution
of the original proposals could frustrate the success of the restructuring
scheme and leave UK processors at a comparative disadvantage to
processors in other parts of the EU.
APPLICATION OF GROWER COMPENSATION
IN ENGLAND
45. Defra's RIA notes that, according to the Commission's
paper, Member States would have two options for paying compensation:
it could either be paid only to those farmers who have historically
grown sugar beet; or to all those who receive the main Single
Farm Payment on an area basis.[62]
Defra pointed out that the decision regarding the method of payment
is linked to its rationale and duration. If the payment is 'compensation',
it would seem reasonable to make the payment on a historic reference
basis to growers of beet. However, if payments are made indefinitely,
they cease to be 'compensation' and become simply 'support'.[63]
46. Defra's model for implementing the Single Farm
Payment (SFP), introduced under the 2003 CAP reforms, in England
was complicated. It involved a combination of individual entitlements
based on historic receipts and a flat-rate payment per hectare.
Under this model, the individual historic receipts from existing
schemes reduce over time, as the flat rate element increases.
The proportions of the flat rate and historic elements are set
out in Table 1.
Table 1: Proportions of flat rate and historic
payment elements of the English SFP
