The Common Agricultural Policy after 2013 - Environment, Food and Rural Affairs Committee Contents

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.


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.


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: 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, 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: 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 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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