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


6  The Single Payment Scheme post-2013

87.  Within the UK, the future of the Single Payment Scheme is probably the most divisive issue among the interested parties, with views expressed to us ranging from 100% preservation to 100% abolition. Moreover, given that direct payments dominate the CAP budget, it is not surprising that they dominate the mind-set of those negotiating the future CAP.

Divergent perspectives on the future of direct payments

88.  The Commission's Communication gives three options for the future of direct payments; however, Commissioner Ciolo? made it clear to us that he did not expect them to be abolished soon.[131] The Agriculture and Fisheries Council "broadly agrees that this support has proven its worth and will remain an essential element in the CAP towards 2020".[132]

89.  Defra's position on direct payments is that:

While direct payments will continue during the next Financial Perspective, they should have a clear downward trajectory and be positioned as part of a programme of managed transition planning for their abolition.[133]

In oral evidence, the Minister emphasised that Defra is "not proposing to end direct payments tomorrow", but that "during this seven-year period, from the beginning of 2014 to 2020, we should be moving in that direction. In an ideal world, yes, we would like to see them end soon after that".[134]

90.  The devolved administrations have publically questioned Defra's stance on direct payments. The Northern Ireland Agriculture Minister wrote to the Committee that:

... I take the view that while the next CAP reform should certainly seek to improve the competitiveness of EU agriculture, it cannot be assumed simplistically that an attack on the level of direct support is the way to achieving this.[135]

The Welsh Assembly Government's Rural Affairs Minister called a cut in subsidy "counterproductive".[136] The Scottish Cabinet Secretary for Rural Affairs and the Environment said "We cannot and will not support any UK response which supports the abolition of direct subsidy payments to Scotland's farmers".[137] Nonetheless, Defra have repeatedly said that there is a unified position on the CAP in the UK.[138]

Arguments for the retention of direct payments

Poor business conditions in agriculture

91.  The economic dependence of many parts of the UK's farming sector on their single farm payment led several witnesses to argue that they had to be retained. The TFA said:

If you look at Pillar 1, when you look at how many agricultural producers are actually producing, and living, below the official poverty line, it just makes you realise just how important Pillar 1 is, particularly in the tenanted sector, where they have to pay a rent before they take any drawings. Take Pillar 1 away, and I think you take, you snatch the rug from a huge proportion of the tenanted sector.[139]

The CLA warned that abolition of the SFP would be "hugely detrimental".[140] While the NFU share Defra's ambition to reduce reliance on subsidies, they view it as an aspiration rather than as a definite end-point. Peter Kendall, NFU President, said "We want to be in a place where the market returns us a fair living. We want to set a target to try to get there, rather than just say this is about abolishing subsidy [...] There is a lot more to be done before we talk about abolition".[141]

92.  The RSPB agreed that "just taking away the rug of the single payments from farms at the moment would have a devastating impact on farm businesses" but felt that farmers would adapt if support was phased out slowly, even over 10-20 years.[142]

93.  A recent study commissioned by Defra supports the position that the profitability of the UK agricultural sector would be severely undermined by abolition of the single farm payment.[143] While about 15% of farms in the UK had negative incomes even with the direct payments, this position worsens to nearly 60% if the payment is removed. This analysis also suggests that the UK would be the worst-affected of all the Member States (Figure 4).

Figure 4: Viability of EU farms after abolition of the single farm payment

Source: Vrolijk, H.C.J., de Bont, C.J.A.M., Blokland, P.W. and Soboh, R.A.M.E., Farm Viability in the European Union: Assessment of the impact of changes in farm payments, LEI report 2010-2011, April 2010.

94.  Econometric analysis conducted by AFBI suggested that "the impact of reducing the SFP is greater in all the Devolved Administrations than in England".[144] The Pack inquiry into Future Support for Agriculture in Scotland concluded that "for most farm types, the subsidy support that farmers receive is greater than their farm income. It is likely that any major change in direct support will result in business failure and widespread reduction in agricultural activity".[145] The Northern Ireland Assembly said "some £290m was paid through Single Farm Payment (SFP) to local farmers in 2009 and without CAP support, the income of our agricultural sector would have been negative".[146] The Welsh Assembly Government told us that the Single Payment Scheme (SPS) typically contributed 80%-90% of Farm Business Income in Wales.[147]

95.  The weak position of farmers in the supply chain was given by many witnesses as a reason for retaining direct support to farmers. The TFA said:

The Commission's document, with which we agree, indicates that the reason why we continue to need a Pillar 1 is that agriculture has a weak position in the supply chain and is unable to really have its costs of production properly covered, with an element of profit, in the supply chain which exists.[148]

The NFU said that "A very important part for us of making us less dependent on Pillar 1 is a properly functioning supply chain".[149] However the Society for Biology did not agree that direct payments were an appropriate response to supply chain imbalances, stating that "One aspect of market failure is that the value in agricultural output is largely at the processing and retail end of the chain, not at the farmers' end. This is an issue which European policy should address more vigorously, but not by subsidising the farmer".[150]

96.  According to some farming groups, direct payments are also needed to help farmers manage price volatility. The NFU's policy statement on the CAP post-2013 argues that direct payments "provide a degree of income stability to farmers which enables them to maintain productive capacity despite volatile agricultural markets".[151] Dairy UK believed that "The single farm payment provides a degree of income stability which also facilitates investment planning".[152]

ENSURING EU FOOD SECURITY

97.  A poll of farmers across six countries found the majority thought that protecting national or regional food supplies was the best purpose for agricultural subsidies.[153] However, the impact of direct payments on food production is predicted to be moderate rather than severe, not least because the SPS has been designed not to influence production in order not to contravene WTO regulations.[154] The Agri-Food and Biosciences Institute modelled the effects of abolition of the SPS alongside implementation of likely Doha trade agreement modalities (on the assumption that an agreement on Doha would probably be reached before 2020). They found that abolishing the single farm payment would result in significant reductions in sheep and beef production thus reducing the availability to consumers of British beef and sheep meat and potentially increasing the price.[155]

98.  The moderate effects of the SPS on food production led Professor Swinbank to claim "it is a fallacy to believe that the CAP has much influence on European food security".[156] Defra's written evidence also argued that "the argument that future food shortages justify blanket subsidies is weak".[157]

99.  While direct payments may only weakly influence immediate production levels, they have an important role in determining future food production capacity. Dr Moss said:

maintaining the agricultural land is very important. How intensively it is used at any one time is not as important as making sure that we are retaining our potential for food production in the future, because we are facing a very uncertain future, not just in terms of climate [...] but in terms of global political issues, population growth and various instabilities in international politics. I think it is very important that we are maintaining our agricultural land, and if that means paying people to retain land that may otherwise not be kept in agriculture, I believe that is a price worth paying.[158]

The CLA agreed, stating that "European contribution to global food security demands we protect and develop our food production capacity (not our current production) i.e. keeping land in GAEC [Good Agricultural and Environmental Condition]".[159] Commissioner Ciolo? argued that support to farmers in less favoured areas in particular was in the long-term interests of the EU by preventing over-exploitation of the most productive areas.[160] In addition to the physical condition of the land, preventing land being turned to other uses is an important part of our food production capacity, as is the availability of an agriculturally-skilled labour force.

DIRECT PAYMENTS MAKE EU FARMERS GLOBALLY COMPETITIVE

100.  Ability to compete against subsidised trading partners is one of the reasons given for the retention of direct payments to farmers.[161] The Scottish Executive said direct payments "enable producers to meet the cost of complying with the higher production standards required by European society".[162] The TFA argued that "direct support through Pillar 1 must continue in order to ensure that producers are properly recompensed for the cost of producing to higher standards".[163]

101.  The Organisation for Economic Co-operation and Development (OECD) calculates annually the amount of money transferred from government and consumers to agricultural producers as a result of policies (the percentage Producer Support Estimate).[164] The EU's level of producer support in 2009 (24%) was slightly above the average across all OECD countries (22%), and considerably lower than some neighbouring countries, for example Switzerland (63%) and Turkey (37%).[165] Mr Lyon MEP argued that the EU could not afford to phase out its own agricultural support system "while the rest of the world's still piling support into their agricultural industries".[166]

102.  Trade barriers, such as tariffs and quotas, also protect EU producers from being undercut by third-country products that are subsidised or produced to lower standards. Professor Swinbank told us that this rendered the direct payments unnecessary.[167] On the other hand, uncertainty over the future trajectory of trade agreements would argue for retaining direct payments.

REWARDING FARMERS FOR DELIVERING PUBLIC BENEFITS

103.  Direct payments to farmers are conditional on their meeting certain animal welfare and environment standards, known as cross-compliance. The Agriculture and Horticulture Development Board (AHDB) said:

… if all direct subsidies to support production agriculture were to be removed, it would seriously hamper the policymakers' ability to have any effect on the environment, because in order to claim the single farm payment one has to comply with cross compliance.[168]

However, the Minister was sceptical that cross-compliance offered any great environmental benefit beyond that delivered through pre-existing EU regulation.[169]

104.   Maintaining agricultural activity in some areas of low agricultural productivity delivers numerous public benefits.[170] An analysis of the impact of abolishing direct payments on Scotland concluded that their removal could hasten the decline in rural employment and undermine the viability of rural populations.[171] Similar impacts could be envisaged for other regions of the UK that have large areas of low productivity grazing livestock. Mr Lyon MEP argued that these were compelling reasons to continue to financially support farms in disadvantaged areas.[172]

105.  The Minister argued that measures to support farmers in less productive areas should take the form of Pillar 2 payments, presumably similar to England's Uplands Entry Level Stewardship (UELS).[173] We gave detailed consideration to UELS in our Farming in the Uplands inquiry and concluded that the current system fails to properly reward farmers as it is based on a system of 'income foregone' (which for many upland farmers is negligible) rather than the value of the public goods they deliver.[174] We also expressed concern that many farmers, especially tenants, found UELS hard to access. It seems unwise to consider replacing direct payments with stewardship schemes in less favoured areas until these issues have been addressed.

Arguments against the retention of direct payments

Direct payments do not make farming more competitive

106.  The main reason given for abolishing the Single Payment Scheme is that it hampers the industry from becoming more competitive, and profitable, by slowing innovation and restructuring. Defra were particularly critical of direct payments' effect on competitiveness or productivity:

The CAP is partly responsible for this [the UK losing ground to the US in productivity terms], by first guaranteeing prices and then, through compensatory and then decoupled payments, guaranteeing a large slice of farmers' income and ossifying existing farm structures; this has dampened incentives for investment in greater farm competitiveness.[175]

The Andersons Centre agreed that "support simply allows more (inefficient) businesses to continue".[176]

107.  Dr Moss pointed out that farmers might choose to remain farming in order to claim direct payments even if they are not economically competitive as businesses.[177] However, Commissioner Ciolo? disagreed, stating that the direct payment was "not enough for a farmer to live on if he is not competitive at the same time".[178] When we met with the Polish Permanent Representative to the EU, he emphasised that the basic farm payment should be low, in order to incentivise farmers with small holdings to consolidate or leave the industry.

108.  An additional criticism of direct payments is that they become capitalised into land values and into higher prices for inputs, reducing the value of the payment to the farmer or tenant. However, capitalisation into land values occurs with other forms of agricultural support as well, including agri-environment schemes.[179] Moreover, the impact on landowners' equity of major changes to their entitlement to direct payments must be borne in mind.[180]

THE SINGLE PAYMENT SCHEME IS NOT TARGETED

109.  The current system of direct payments does not constitute efficient income support, as Dr Moss pointed out:

... the vast bulk of Single Farm Payments are not going to recipients who by any stretch of the imagination would qualify for welfare under our normal meaning of welfare where you have these transfers from taxpayers to recipients of welfare grants. So if it was to just be income support for those in need, it is a very blunt instrument.

However, she caveats this by noting that the SPS may be the "the least worst option".[181]

110.  The current definition of a 'farmer' does not require the SPS recipient to be actively producing food, or other agricultural products. For this reason, the CAP has been accused of merely rewarding people for owning land rather than incentivising behaviour that contributes to food security and the other CAP objectives.[182]

MORE MONEY NEEDS TO BE SPENT ON THE ENVIRONMENT

111.  Environmental NGOs and the CLA have stressed the short-fall in funding for environmental protection, suggesting that abolishing direct payments would free up money to spend on the environment.[183] A report produced for the Land Use Policy Group in 2009 estimated that £1-3 billion would be required each year to meet publicly defined environmental objectives through agri-environment schemes in the UK.[184] The RSPB noted that this "is considerably less than the current Pillar 2 allocation for the UK but comparable to the CAP allocation as a whole".[185]

COMMERCIAL PROSPECTS FOR AGRICULTURE ARE IMPROVING

112.  Defra argued that, while the industry was currently dependent on direct payments, future trends would render them unnecessary. According to Defra:

The UK believes that Europe's farmers have bright prospects. Given a clear enough commitment to improving underlying competitiveness they will earn enough from the produce they sell and from payments for the provision of public goods to provide them with a sustainable income.[186]

One of the reasons for optimism, according to Defra, is that rising food prices will mean more income for farmers.[187]

113.  Farming groups were sceptical whether rising prices would deliver more income for producers. The NFU called the analysis "flawed" because input prices were rising as well as output prices, farmers were more exposed to price volatility, and greater concentration in the supply chain created a downward pressure on prices, reducing the extent to which farmers could benefit from commodity price increases.[188] A report commissioned by the Foresight Food and Farming Futures project noted that the benefits from previous productivity improvements had accrued mainly to processors, retailers and consumers, not producers.[189]

114.  Defra also felt that "increased demand for the sort of high quality, sustainable and ethically sound produce European farmers are skilled at producing" meant farmers would not need permanent income support in future.[190] The RSPB and BRC agreed that the UK could benefit from developing its competitive advantage in products from systems with higher environmental standards, such as organic or the LEAF marque.[191]

115.  The extent to which increasing demand for high value products would benefit most UK farmers is questionable. Defra's food industry statistics indicate that price and value for money have become increasingly important in driving product choice, being the main factor determining choice for 47% of shoppers (up from 36% in 2009).[192] The NFU said the "the vast majority of UK production is either commodity or commoditised",[193] and the BRC agreed that niche products such as organic were only a small share of the market.[194] The Minister recognised that it would not be an option for all producers, particularly large ones or those in markets such as grain where it is difficult to generate a 'niche'.[195]

Conclusions on the future of the Single Payment Scheme

116.  Direct payments currently have an important role in enabling UK farming businesses to compete in a global market while securing an acceptable level of public goods through cross-compliance, which in turn contributes to our future food security. It is clear that without direct payments the majority of UK farm businesses would not be profitable; this risks eroding our food production capacity and diminishing agriculture's ability to deliver social and environmental public goods.

117.  We agree that the current system of direct payments is a blunt instrument and that high levels of direct payments may insulate farmers from the need to become more competitive. Nonetheless, we must recognise the internal and external political constraints on agricultural policy, and that agriculture's twin roles of maintaining the land and providing food make it unlike other industries. Therefore, while we support Defra's aim to reduce the industry's reliance on direct payments, we believe that it is not realistic to expect that the support provided by the direct payment can be stripped away, at least until the causes of the low profitability of many UK farms have been addressed.

118.  There are convincing reasons to maintain direct payments to farmers under the current conditions in agriculture, where over half of UK farms would be unprofitable without subsidy; where UK farmers are expected to adhere to higher standards than their competitors in third countries; and where farming businesses face high levels of price volatility. We recommend that direct payments be retained, at least until the end of the next financial period in 2020. They should be set at a level that is low enough to encourage farmers to seek greater returns from the market; while actions that deliver public goods beyond the basic level provided by cross-compliance should be rewarded through additional payments.

119.  We are not convinced by Defra's arguments as to how to reduce reliance on direct payments: it is not clear that merely shrinking the direct payments will be sufficient to deliver a viable farming industry that can be competitive without government support. We recommend that Defra develop its position more clearly, setting out precisely the conditions that must be met before direct payments can be abolished and how reduced reliance on the single farm payment is to be achieved, including the measures needed.

120.  It seems inevitable that direct payments will be retained in some form in the next financial perspective. There is pressure within Europe to increase the level of payments to farmers in the new Member States but financial constraints on the EU budget overall suggests that this increase will have to be met within the existing CAP budget.[196] Given financial constraints on the EU budget, Defra should ensure that UK farmers are prepared for the level of direct payments to fall over the financial period to 2020.

Defra's handling of the debate over the Single Payment Scheme

121.  Defra argues that it has changed position from that outlined by the previous Government in its 2005 Vision for the Common Agricultural Policy. The Minister told us that Defra was successfully building support in Europe "because we are taking a very different approach from our predecessors to negotiations—a constructive, at-the-table approach—and we have dropped the rather daft proposition that Single Farm Payments should end tomorrow, which was never going to get us any credibility".[197]

122.  However, the Commissioner rebuffed the Minister's assertion, pointing out that the UK is only one of 27 Member States and saying he did not think there was majority support for an abolition of direct payments.[198] The Commissioner's view was borne out by subsequent events in the Agriculture and Fisheries Council: while Presidency Conclusions on the Communication have been adopted, the UK refused to support them. Agra Europe said:

... the UK, Denmark and Sweden took issue with the paper's outright calls for direct payments to be maintained [...] little progress appears to have been made in reconciling the almost diametrically opposed views of the liberal states and the rest on this key issue, suggesting a major roadblock to reaching unanimity on the paper.[199]

123.  It appears that the Defra position has not been well-understood, particularly by farming groups and in the media. At the National Farmers' Union Scotland conference in 2011, the Minister said he needed to "set the record straight" about Defra's intentions.[200] The NFU President told us that the choice of words used by the Secretary of State had not been helpful in winning support to Defra's cause as "using the phrase 'abolition of support' immediately makes farmers very nervous about the long-term trajectory".[201]

124.  Ending direct payments is unachievable in the short-term. Defra's adherence to this policy reduces the UK's ability to engage constructively with other Member States and could diminish the UK's influence in this round of reform. Defra should adopt a more pragmatic approach to the negotiations.


131   Q 172, 175 Back

132   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, p 2. Back

133   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

134   Q 462 Back

135   Ev w29 Back

136   "Devolved Administrations furious over 'UK' CAP stance", Farmers Guardian, 3 February 2011. Back

137   Ibid. Back

138   "NFU11: UK united about subsidies", Farmers Guardian, 15 February 2011. Back

139   Q 50 Back

140   Q 91 Back

141   Q 132 Back

142   Q 7. Professor Swinbank agreed that the effects of removing support would be manageable, at least in a global context, if it took place over a number of years (Q 261). Back

143   Vrolijk, H.C.J., de Bont, C.J.A.M., Blokland, P.W. and Soboh, R.A.M.E., Farm Viability in the European Union: Assessment of the impact of changes in farm payments, LEI report 2010-11, April 2010.  Back

144   Ev 151 Back

145   The Road Ahead for Scotland: Final Report of the inquiry into Future Support for Agriculture in Scotland, p 57. Back

146   Ev w28 Back

147   Ev w31 Back

148   Q 50 Back

149   Q 142 Back

150   Ev w19 Back

151   NFU, NFU Policy: The CAP after 2013, May 2010, www.nfuonline.com Back

152   Ev w16 Back

153   "Global Poll result: Subsidy delivers food security", Farmers Weekly, 7 February 2011. Back

154   The modelling work on the impact of changes to the SPS referred to by Dr Moss (Ev 127-150) assumed that the single farm payment did have a moderate production-stimulating effect, based on the effects of reducing farm subsidies on production in the US (FAPRI-UK, Impact of HM Treasury/Defra's vision for the Common Agricultural Policy on Agriculture in Scotland, July 2009, p 3). The extent to which UK farmers view the SFP as a production-linked subsidy is not well captured by econometric models. Back

155   Ev 124 and 127-150, Q 448 Back

156   Ev 153 Back

157   Ev 173 Back

158   Q 232 Back

159   Ev 117 Back

160   Q 175 Back

161   See also the European Parliament resolution of 8 July 2010 on the future of the Common Agricultural Policy after 2013, TA(2010)0286, para R and Explanatory Statement);the Department of Agriculture and Rural Development, Northern Ireland Assembly (Ev w29); George Lyon MEP (Ev 61). Back

162   Ev w28 Back

163   Ev 110 Back

164   OECD defines the Producer Support Estimate (PSE) as: an indicator of the annual monetary value of gross transfers from consumers and taxpayers to support agricultural producers, measured at farm gate level, arising from policy measures, regardless of their nature, objectives or impacts on farm production or income. The percentage PSE is the ratio of the PSE to the value of total gross farm receipts, measured by the value of total farm production (at farm gate prices), plus budgetary support. (OECD glossary of statistical terms, http://stats.oecd.org/glossary) Back

165   OECD, Producer support estimates (subsidies), Agriculture and Food: Key Tables from OECD, No. 1, 2010, doi: 10.1787/20755104-2010-table1.  Back

166   Q 288 Back

167   Ev 154 Back

168   Q 361 Back

169   Q 463 Back

170   Box 3 and paras 49-52 of this report; Farming in the Uplands, p 3. Back

171   FAPRI-UK, Impact of HM Treasury/Defra's vision for the Common Agricultural Policy on Agriculture in Scotland, July 2009, p 22. Back

172   Q 291 Back

173   Q 460 Back

174   Farming in the Uplands, paras 55, 58. Back

175   Ev 171 Back

176   Ev w27 Back

177   Ev 124 Back

178   Q 175 Back

179   Q 212; Farming in the Uplands Q 72. Back

180   DG Agri policy brief, January 2011; "Flat rate payments inequitable and impractical-Commission", Agra Europe, 21 January 2011. Back

181   Q 229 Back

182   Q 179 Back

183   Wildlife and Countryside Link, Beyond the Pillars, March 2008; European Landowners Association and Birdlife International, Proposals for the future CAP, January 2010. Back

184   Q 20, Ev 107 Back

185   Ev 107 Back

186   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, p 4. Back

187   Speech by the Secretary of State to the Oxford Farming Conference, January 2011. A transcript is available from www.ofc.org.uk Back

188   Q 132. Rothamsted Research agreed that recent price rises would not solve the problem of the erosion of the value of primary production (Ev w24). Back

189   Professor Chris Pollock, UK Options for sustainable increases in agricultural production, January 2011, p 28. Back

190   Ev 170 Back

191   RSPB (Ev 107), BRC (Q 401). LEAF, 'Linking Environment and Farming', is a membership organisation that promotes 'environmentally-responsible farming'. The LEAF logo indicates that the product is produced on a certified farm to high environmental standards. Back

192   Defra Food Statistics Pocketbook, 2010, p 39. Back

193   Q 143 Back

194   Q 404-405 Back

195   Q 496-497  Back

196   See George Lyon MEP (Q 287), the Minister (Q 486) and the Central Association of Agricultural Valuers (Ev w5) Back

197   Q 442 Back

198   Farming Today, 7 January 2011. Back

199   "Liberal dissenters seek to stamp authority on Council CAP reform paper", Agra Europe, 8 March 2011. Back

200   "Paice sets record straight on CAP support", Farmers Weekly 15 February 2011.  Back

201   Q 132 Back


 
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