1 Introduction
1. Agriculture is the main land use in the European
Union, covering nearly half of its land area. The agri-food sector
represents 8.6% of EU employment and 4% of the EU's GDP.[1]
The EU is one of the largest global exporters and importers of
agricultural products: its export of agricultural goods, mainly
high value or processed products, accounts for about 17% of total
global trade.[2] Consequently,
the Common Agricultural Policy (CAP) is one of most important
components of the European Union, both in terms of budget and
its impact on the EU's 500 million citizens. The CAP accounted
for around 43% of the total EU budget in 2010 (expected to fall
to 39% by 2013), which is equivalent to about 0.45% of the EU's
GDP.[3] Through a combination
of direct payments to farmers, measures to regulate agricultural
commodity markets and grants for improving the environment, the
CAP exerts significant influence over the European countryside
and rural livelihoods, as well as global food prices and availability.
Moreover, as a key player in the World Trade Organisation (WTO),
the EU's agricultural policy can shape global trade agreements.
2. In 2006, the European Commission was invited
by the Council of the European Union to "undertake a full,
wide-ranging review covering all aspects of EU spending, including
the Common Agricultural Policy".[4]
Although there is no requirement to reform much of the underpinning
legislation, the Commission has signalled its intention to carry
out a review of the instruments within the CAP. Reform of the
future CAP is proceeding in tandem with negotiations over the
next EU Financial Framework, which must be in place by the end
of 2013.[5]
3. The CAP has undergone periodic reform since
its inception in 1957, with the overall aim of becoming more market-orientated
and less trade-distorting, as well as maintaining discipline within
the EU budget. This round of reform will be conducted against
a background of financial constraints in many Member States, including
those that are major recipients of the CAP. The EU's flexibility
over its agricultural policy is further constrained by existing
WTO regulations and subsequent commitments that it has made during
the Doha Development Round of trade talks.[6]
In addition, concerns over food security are giving a new gravity
to agricultural policy.
4. This is the first major CAP reform with 27
Member States, representing a greater diversity of farm structures
and priorities. The accession of 12 Central and Eastern European
Countries after 2003 brought an extra seven million farmers into
the EU.[7] An additional
and unpredictable factor is that, under the 2009 Lisbon Treaty,
the European Parliament will now have joint decision-making powers
with the Council of the European Union. This may make the negotiating
process more transparent, but also more complex. Reconciling the
varying objectives of 27 Member States and the European Parliament
will unquestionably be a political challenge for the EU.
5. The European Commission initiated the dialogue
over the 'CAP post-2013' with a public consultation held over
the summer 2010,[8] followed
by a Communication on The CAP towards 2020 published
in November 2010.[9] The
Agriculture and Fisheries Council produced initial conclusions
on the Communication in March 2011; however, these failed to win
unanimous support from Member States.[10]
The European Parliament is expected to pass a resolution in response
to the Commission's Communication in June 2011. Further, more
detailed legislative proposals are expected in autumn after the
proposals for the post-2013 EU Multiannual Financial Framework
have been published. The Commission hopes to conclude negotiations
on the CAP by the end of 2012 to allow one year for implementation.
6. This Committee has a long-standing interest
in CAP reform. The previous Environment, Food and Rural Affairs
Committee published reports on the UK Government's Vision for
the Common Agricultural Policy in 2006, Implementation
of CAP Reform in the UK in 2004, and The Mid-Term Review
of the Common Agricultural Policy in 2003, as well as scrutinising
the work of the Rural Payments Agency.[11]
Purpose and Scope of the inquiry
7. In this inquiry we have scrutinised the Commission's
proposals in light of UK interests in particular.[12]
Defra is going into negotiations on the CAP that will determine
our future food prices and availability and shape Europe's countryside
and rural communities until 2020, or beyond. Our recommendations
and analysis set out where we believe the limits to Defra's negotiating
position should be.
8. The CAP is a convoluted policy, having been
moulded to fit the multifarious wishes of governments and Agriculture
Commissioners over the years. Since the Treaty of Rome in 1957,
the requirements of EU agricultural policy have shifted, notably
with a much stronger focus on preserving natural resources, while
our future policy will have to meet the challenges of food security
and climate change. For this reason, we start with a fresh analysis
of the CAP's objectives towards 2020 (Chapter 2) and the internal
and external factors to take account of when shaping the new CAP
(Chapter 3).
9. The overall size of the CAP budget and the
way that it is distributed between Member States will be one of
the most important issues for the UK. We give consideration to
high-level issues surrounding the CAP budget in Chapter 4. However
this report precedes EU-level discussions on the Multiannual Financial
Framework post-2013, precluding detailed analysis.
10. The UK tends to take a reformist stance on
the CAP, having argued for over ten years that direct payments
and market support should be phased out in favour of increased
spending on targeted measures to protect the environment.[13]
This places us in a minority within Europe, particularly compared
to influential old Member States such as France and Germany. It
is already clear that the future of direct payments will be the
central issue in the debate over the post-2013 CAP. We address
the nature and distribution of direct payments from a UK perspective
in Chapters 6 and 7. In Chapter 8, we scrutinise the Commission's
ideas for legitimising the CAP by bringing agri-environment measures
into its core policy.
11. Turning to the substance of the Commission's
Communication, the proposals to restrict payments to active farmers,
to give more support to small farmers and to cap payments to large
farmers were highlighted by many of our witnesses as issues of
importance to the UK. We discuss these and other specific elements
of the proposals in Chapter 9. Reflecting Defra's aim to deliver
a thriving farming sector, we then discuss ways in which the CAP
can enhance the competitiveness of UK agriculture (Chapter 10)
and reduce red-tape for farmers and administrations (Chapter 11).
12. We announced this inquiry on 4 November 2010.
We held seven oral evidence sessions and heard from 14 organisations
or individuals including farming groups, environmental NGOs, the
European Commissioner for Agriculture and Rural Development and
Rt Hon James Paice, the Minister of State for Agriculture and
Food (a full list is given at the end of the report).We received
written evidence from 34 individuals or organisations. We also
took part in a visit to Brussels to discuss aspects of CAP reform.
We are very grateful to all those who helped us with our inquiry.
This report is necessarily limited to the details given in the
Commission's Communication. This is a rapidly moving area and
additional details of the proposals have emerged between evidence-taking
and publication of this report.
Background to the Common Agricultural
Policy
13. The Common Agricultural Policy sets out the
EU's common approach to agriculture and its system of payments.
It is structured around three groups of instruments: direct payments,
market measures and rural development.[14]
The CAP receives 98% of the EU's Preservation and Management of
Natural Resources budget, which was allocated €416bn
for the 2007-2013 Financial Perspective.[15]
In 2010, the UK's contribution to the EU accounted for 10.4% of
the CAP budget and the UK's share of the allocation for direct
payments was 9.5%. France contributed about 18.0% of the CAP budget
and received about 20.1% of the direct payments allocation. Greece
contributed 2.2% and received 5.2% (Figure 1).[16]
Figure 1:
Member States relative contributions and receipts from the CAP
Source: European Parliament (2010/117/EU), Definitive
adoption of the European Union's general budget for the financial
year 2010, p 20; Council Regulation (EC) No 73/2009, Annex VIII.
The graph shows Member States' receipts from Pillar 1 of the CAP
in 2010 as a percentage of the total budget for Pillar 1 and Member
States' contributions based on the relative share of each country's
payments to the EU Budget. Pillar 2 is not included.
THE ORIGIN AND EVOLUTION OF THE CAP
14. The Common Agricultural Policy was established
in the aftermath of the Second World War, following a long period
of rationing and food shortages. As a result, a key driver of
the original CAP was enhancing self-sufficiency through boosting
domestic production; to facilitate this, European prices for agricultural
commodities were maintained at levels in excess of the world market.
Market price support required a combination of high import tariffs,
intervention buying and export subsidies.
15. As yields and production rose, the requirement
for public storage (the 'wine lakes' and 'butter mountains') and
for subsidies for exporting excess goods also increased. This
had negative implications for the perception of the CAP among
EU citizens and in international trade negotiations—disagreements
over agricultural support were one of the factors leading to the
collapse of the WTO Uruguay Round trade negotiations in December
1990. Moreover, the cost of the CAP almost trebled between 1980
and 1992.[17]
16. The 1992 MacSharry reforms aimed to reduce
expenditure on the CAP and remove some of the incentives for farmers
to over-produce. Payments were decoupled from production for cereals
and beef and the intervention prices for cereals, dairy and beef
were reduced. Direct payments for cereals and beef, known as the
Single Farm Payment, were brought in to compensate producers for
the resulting loss of income. For the first time, measures to
support rural economic diversification and environmental protection
were included in the CAP.
17. The Agenda 2000 reforms, agreed in 1999,
were inspired by preparations for the policy and budgetary consequences
of the Central and Eastern European Countries (CEECs) joining
the EU. These reforms included further reduction of the intervention
prices, extension of the dairy quota and the establishment of
the rural development regulation. Modulation, which is a transfer
from the single farm payment to fund rural development, was introduced
on a voluntary basis.
18. The 2003 Mid-term Review of the Agenda 2000
package, also known as the Fischler Reforms, is generally considered
to be the most radical of the CAP reforms in that it decoupled
farm income support from production in most sectors (Figure 2).[18]
The Fischler Reforms also made it compulsory for recipients of
the Single Farm Payment to meet environmental and animal welfare
standards. In 2002, the Council agreed to limit CAP spending on
Pillar 1 at its 2006 levels for the financial perspective to 2013.
The 2008 Health Check consolidated the Fischler reforms through
decoupling the remaining sectors (except the suckler cow, goat
and sheep premia) and confirming the abolition of milk quotas
in 2015. The requirement for farmers to keep 10% of their land
in set-aside was abolished.
19. The percentage of the EU budget spent on
the CAP has fallen from a high point of about 75% in the mid 1980s
to under 40% by 2013, even though the agricultural land area has
increased by 40% following the 2004 and 2007 enlargements of the
EU.[19]
Figure
2: The evolution of CAP expenditure
Data source: European Parliament Committee on
Agriculture and Rural Development, Report on the future of the
Common Agricultural Policy after 2013, 21 July 2010, A7-0204/2010,
p25
20. Awareness of the CAP's history is an important
part of understanding its current logic. Direct payments, the
main element of the CAP, were brought in initially as compensation
for policy changes that disadvantaged producers. Over time they
have acquired new functions, and, through being extended to the
new Member States, have arguably become more entrenched within
the CAP than was originally envisaged.
THE CURRENT STRUCTURE OF THE CAP
21. Direct payments and market measures make
up Pillar 1 of the CAP and are fully financed from the European
Agriculture Guarantee Fund (EAGF).[20]
Pillar 1 accounts for about 80% of CAP spending.[21]
Rural development programmes make up Pillar 2 of the CAP and are
co-financed by the European Agricultural Fund for Rural Development
(EAFRD) and national governments.[22]
The UK is the fifth largest recipient of direct payments but has
one of the smallest shares of the rural development fund.[23]
22. Direct payments are principally decoupled
from production and take the form of the Single Payment Scheme
(SPS). SPS entitlements must be matched to eligible land. The
payment is called the Single Farm Payment (SFP) in the EU-15 Member
States.[24] The method
by which the SFP is calculated varies among the EU-15, either
historic or area-based. In historic systems, the payment depends
on the individual farmer's receipts in the reference period 2000-02.
In area-based systems, a flat rate is paid per hectare and the
rate is based on the subsidies received by farmers in the region
during the reference period. England opted for a 'dynamic hybrid'
system, shifting individual recipients from a historic to a regional
per hectare basis over a number of years. Scotland and Wales retained
the historic system and Northern Ireland uses a static hybrid
system. In most of the new EU-12 Member States, payment is calculated
on a flat rate per hectare system, which is called the Single
Area Payment Scheme (SAPS).[25]
23. In return for receipt of the direct payment,
the farmer must keep his land in Good Agricultural and Environmental
Condition (GAEC) and meet the Statutory Management Requirements
(SMRs). This is known as cross-compliance. SMRs are determined
by existing EU legislation, while GAEC is defined by the Member
States.[26] Under EU
regulations, at least 1% of farmers receiving direct payments
must be inspected annually to ensure they are compliant, and fines
are imposed for infractions.[27]
24. Pillar 2 funds three types of activity (called
Axes):
- Axis 1: Improving the competitiveness
of agriculture and forestry, for example grants for new machinery.
- Axis 2: Improving the environment and countryside,
mainly through agri-environment schemes. The CAP provides the
majority of funding for environmental protection in Europe.[28]
- Axis 3: Improving the quality of life in rural
areas and diversification of the rural economy, such as grants
to help farmers to diversify or to establish information centres
to encourage tourism.
25. Each Member State can choose how to allocate
its Pillar 2 budget as long as at least 10% is spent on Axes 1
and 3 and 25% on Axis 2. The Commission has stipulated over 40
measures that can be applied, from which Member States can choose
which to fund.[29] In
the UK, the choice of measures funded by the rural development
programme is a devolved issue.
26. There is considerable disparity between Member
States in terms of their allocation to different objectives within
Pillar 2. England, under the previous Government, opted to spend
about 80% of its total rural development programme budget (the
Rural Development Programme for England—RDPE) on Axis 2
agri-environment schemes (the Environmental Stewardship schemes),
and about 10% each on improving the vitality of rural areas and
competitiveness.[30]
In comparison, the EU-wide average is about 50% on Axis 2 (environment)
and 33% on Axis 1 (competitiveness) (Figure 3).
Figure 3:
Relative importance of the three thematic RD axes by Member State
for the programming period 2007-2013
Data source: European Commission, Agricultural
Policy Perspectives Briefs, No. 1, January 2011, p5
1 European Parliament resolution of 8 July 2010 on
the future of the Common Agricultural Policy after 2013 (TA(2010)0286),
para F. Back
2
Ibid, para P. Back
3
Ibid, para U; Ev 170. Back
4
Official Journal of the European Union, C 139, 14 June
2006, p 15. Back
5
In October 2010, the Commission published its review of the EU
Budget (Communication from the Commission to the European Parliament,
the Council, the European Economic and Social Committee, and the
Committee of the Regions, The EU Budget Review, COM(2010)
700 final, 19 October 2010). The Commission must present its proposals
for the next Multiannual Financial Framework before 1 July 2011.
Back
6
The Doha Development Round is a round of world trade talks organised
by the World Trade Organisation (WTO) with the aim of negotiating
changes to the General Agreement on Trade and Tariffs that was
agreed in 1993 at the conclusion of the Uruguay Round. The Doha
Round talks have been stalled since 2008, but the WTO is drafting
new texts with the hope of restarting talks this year ("Doha
talks running at snail's pace, agree negotiators", Agra
Europe, 11 March 2011). Back
7
European Parliament resolution of 8 July 2010 on the future of
the Common Agricultural Policy after 2013 (TA(2010)0286), para
G. Specifically, the EU was enlarged in 2004 to include: Hungary,
Poland, Slovakia, Latvia, Estonia, Lithuania, the Czech Republic,
Slovenia. Bulgaria and Romania acceded in 2007. Back
8
The public consultation was concluded with a public conference
in July 2010. A summary of the responses to the consultation together
with a video recording of the conference can be viewed on the
European Commission's Agriculture and Rural Development website:
http://ec.europa.eu/agriculture/ Back
9
Communication from the Commission to the European Parliament,
the Council, the European Economic and Social Committee, and the
Committee of the Regions, The CAP towards 2020: Meeting the
food, natural resources and territorial challenges of the future,
COM(2010)672/5; hereafter "the Communication". Back
10
Council of the European Union, Presidency conclusions on the
communication from the Commission: The CAP towards 2020: meeting
the food, natural resources and territorial challenges of the
future, 3077th Agriculture and Fisheries Council
meeting, 17 March 2011, www.consilium.europa.eu. Seven Member
States voted against the document: Denmark, Sweden, the UK, Latvia,
Lithuania, Estonia and Malta. "Latest EU Farm Council Wrap",
Agra Europe, 17 March 2011. Back
11
The UK Government's "Vision for the Common Agricultural
Policy", Fourth Report of Session 2006-07, HC 456; The
Rural Payments Agency and the Implementation of the Single Payment
Scheme, Third Report of Session 2006-07, HC 107; The Implementation
of CAP Reform in the UK, Seventh Report of Session 2003-04,
HC 226; Rural Payments Agency, Sixth Report of Session
2002-03, HC 382; The Mid-Term Review of the Common Agricultural
Policy, Third Report of Session 2002-03, HC 151. Back
12
The terms of reference are available on the Committee's website:
http://www.parliament.uk/business/committees/committees-a-z/commons-select/environment-food-and-rural-affairs-committee/inquiries/cap-reform/ Back
13
Cunha and Swinbank, An inside view of the CAP reform process,
2011, p 121; Defra and HM Treasury, A Vision for the Common
Agricultural Policy, December 2005; Defra, UK Response
to the Commission Communication and Consultation: "The CAP
towards 2020: Meeting the food, natural resources and territorial
challenges of the future", January 2011. Back
14
There are some additional programmes directed by the Commission
such as plant and animal health inspections and promoting fruit
in schools. Back
15
European Commission, European Union Public Finance (Fourth
Edition), 2008. Back
16
European Parliament (2010/117/EU), Definitive adoption of the
European Union's general budget for the financial year 2010, p
20; Council Regulation (EC) No 73/2009, Annex VIII. Back
17
Cunha and Swinbank, An inside view of the CAP reform process,
2011, p 69. Back
18
Member States were given the option to retain some coupled payments
for both cereals and livestock. Back
19
European Parliament resolution of 8 July 2010 on the future of
the Common Agricultural Policy after 2013 (TA(2010)0286), para
U. Back
20
Regulation (EC) No 1290/2005 on the financing of the common agricultural
policy established a common legal framework for CAP spending.
Regulation (EC) No. 1234/2007 describes the organisation of the
common market in agricultural products. Regulation (EC) No 73/2009
established common rules for direct support schemes and certain
support schemes for farmers under the common agricultural policy. Back
21
Pillar 1 was allocated about €313bn for the Financial Perspective
2007-2013 and Pillar 2 €96bn (after modulation). There are
other smaller funds in Heading 2, such as the European Fisheries
Fund and LIFE+. Source: European Commission, Investing in our
future: the European Union's Financial Framework 2007-2013,
June 2010, p 5. Back
22
Regulation (EC) No 1698/2005 on support for rural development
by the European Agricultural Fund for Rural Development (EAFRD). Back
23
During 2007-2013 the UK is projected to receive €23.6bn in
direct payments, accounting for approximately 8.5% of the EU total
post-modulation (the exact figures will vary). Over the same period,
the UK will receive €2bn, or about 2% of the Pillar 2 budget.
Sources: Commission Decision of June 2007 (2007/383/EC); Defra,
Rural Development Programme for England 2007-2013 Programme
Document, 2007, informal briefing from Defra. Back
24
The 'old Member States', also known as the EU-15, comprise Germany,
France, Italy, the Netherlands, Belgium, Luxembourg, Denmark,
Ireland, United Kingdom, Greece, Spain, Portugal, Austria, Finland
and Sweden. The 'new Member States', or the EU-12, are those states
that joined after 2003, which are: Czech Republic, Cyprus, Estonia,
Latvia, Lithuania, Hungary, Malta, Poland, Slovenia, Slovakia,
Bulgaria and Romania. Different mechanisms are used in the old
and new Member States because the EU-12 acceded after the 2003
Fischler reforms established the Single Farm Payment. Back
25
In this report, the term 'Single Payment Scheme' will refer to
the system of deciding the level of direct payments and the Single
Farm Payment (SFP) will mean the actual payment received by farmers. Back
26
Examples of Statutory Management Requirements include regulations
on water pollution in Nitrate Vulnerable Zones, protection of
the habitats of wild birds and other vulnerable species, regulations
on livestock identification and movement. GAEC standards include
crop-rotation, maintaining terraces, minimum livestock densities,
buffer strips next to watercourses, and hedgerow management. A
guide to cross compliance in England is available from www.crosscompliance.org.uk Back
27
In England, separate inspections are performed by the Rural Payments
Agency, Environment Agency and the Animal Health and Veterinary
Laboratories Agency (AHVLA) to check different aspects of cross-compliance.
The Rural Payments Agency (RPA) imposes a fine of 3% of the SFP
for the first breach. Back
28
The main other EU financial instrument for the environment is
LIFE+, which was allocated about €2.2bn between 2007-2013.
Source: European Commission, Investing in our future: the European
Union's Financial Framework 2007-2013, June 2010, p 5. Back
29
Council Regulation (EC) No 1698/2005 of 20 September 2005 on support
for rural development by the European Agricultural Fund for Rural
Development (EAFRD). Back
30
EFRA Committee, Farming in the Uplands, Third Report of
Session 2010-11, HC 556, Ev 45. Back
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