9 Additional
proposals for direct payments
The future of coupled payments
163. The key development in the evolution of
the CAP over the past decade has been the major shift away from
payments linked to production to decoupled payments. It is expected
that 94% of Pillar 1 payments will be decoupled by 2013.[263]
Importantly, this ensures that direct payments are compliant with
WTO regulations.[264]
There is clearly no advantage in a CAP reform that would risk
breaking our current agreement with the WTO, given the common
desire to make progress on the Doha Development Round. Unlike
most Member States, the Single Payment Scheme in the UK is fully
decoupled.
164. The Commission proposes no major changes
in terms of coupling: the majority of subsidy would continue to
be through the decoupled direct payment while retaining voluntary
coupled support for vulnerable areas or sectors within clearly
defined limits (equivalent to the current Article 68 measures).[265]
The Commissioner explained that retaining coupled support was
needed to maintain agriculture in certain regions:
We also have to recognise that, in mountain areas
for example, without coupled payments, we used to not have milk
production. Milk production is important not only for the production
of milk, but also for the maintaining of the landscape and maintaining
the population in this area.[266]
165. We heard many objections to coupled support.
Defra questioned why the Commissioner had not completed the process
of abolishing coupled payments, stating "This type of payment
is particularly damaging to competition and with Article 68 payments
running at some €800m, this is an issue which we expected
the Commission to tackle".[267]
The Welsh Assembly Government said "We see a continuation
of voluntary coupled support as an anathema and contrary to fair
competition".[268]
The RSPB were "vehemently opposed" to any retention
of coupling.[269] Dairy
UK agreed that voluntary coupled payments risked creating distortions
and should be minimised.[270]
166. On the other hand, the Scottish Executive
argued that coupled payments had to be retained in the future
CAP "in order to guard against undesired outcomes such as
land abandonment in the most vulnerable areas".[271]
The Pack Inquiry considered coupled payments in depth and concluded
they were the most appropriate means of stabilising livestock
production in less favoured areas (which make up 85% of Scottish
agricultural land) because the low productivity of this land meant
that payments based on area alone were nonsensical. However, noting
that the previous system of coupled payments encouraged "the
keeping of breeding stock solely to collect the subsidy cheque",
they advised that the budget be fixed at the outset to prevent
over-production.[272]
The Scottish Agricultural College agreed that the principle of
decoupling as a means of freeing farmers to react to the market
is sound, but argued that coupled payments might be justified
for food security or protection of ancillary industries if their
removal would lead to collapse of the industry.[273]
167. In our inquiry into Farming in the Uplands,
we concluded that unrestrained coupled payments could lead to
over-grazing but headage payments coupled to strict environmental
safeguards might be useful in some circumstances.[274]
Specifically, where maintaining livestock production is seen as
advantageous for the delivery of public benefits, payments per
head may offer a more simple, transparent and fair means of paying
farmers, particularly tenant farmers. The current system of income
foregone fails to properly reward farmers in areas of low productivity
for their delivery of public goods. We also note that, while Defra
may dislike coupled payments, they must take into account the
views of the devolved administrations as they have a greater proportion
of less favoured land that would be eligible for coupled payments.
168. We support the decoupling
of subsidies from production. However, we note that coupled payments
may be an effective way of supporting particular production methods
where these deliver public benefits, such as livestock farming
in the uplands. We recommend that optional coupled payments should
be retained in the future CAP, as long as these are held within
strict limits and are compatible with the EU's existing World
Trade Organisation commitments.
Targeting of direct payments
to active farmers
169. The Commission's Communication states that
payments need to be better targeted on "active farmers"
in order to make a more efficient use of funds and legitimise
the CAP. The Communication intimates that a more exclusive definition
is needed but gives no details on who might be excluded. In oral
evidence, the Commissioner explained his thinking as "a farmer
produces products for the market and a public good, and I think
both objectives have to be covered by a farmer".[275]
This implies that farmers who are not actively producing agricultural
goods should not receive payments.
170. The current definition of a farmer is:
A natural or legal person who exercises an 'agricultural
activity', defined to mean the production, rearing or growing
of agricultural products including harvesting, milking, breeding
animals and keeping animals for farming purposes, or maintaining
the land in good agricultural and environmental condition (GAEC).[276]
Member States can choose to exclude natural or legal
persons from the direct payments schemes whose business objectives
do not consist of agricultural activities or whose agricultural
activities are insignificant.[277]
This raises questions about the status of institutions such as
charities that farm for environmental purposes primarily, e.g.
the RSPB,[278] and
whether tenants or landowners should be entitled to payments.[279]
171. Several witnesses raised objections to the
Commission's ideas for an EU-wide definition of an active farmer.
The CLA questioned whether a better definition of an active farmer
was needed at all, stating "This isn't a problem in the UK
because we have a perfectly adequate description of what is eligible
land and what isn't".[280]
Professor Swinbank argued that restricting payments to farmers
that were actively producing agricultural products could contravene
WTO regulations as non-trade distorting subsidies should be decoupled
from production.[281]
Several witnesses expressed concern that a definition of an active
farmer linked to production in any particular year would generate
increased complexity for auditing of payments.[282]
There is also a risk that the new proposals would deter businesses
from adopting more competitive business structures, such as contract
farming, in case it erodes their right to payments.[283]
More fundamentally, the Commission's proposal to allow only individuals
producing agricultural products to receive direct payments would
appear to challenge the role of direct payments as a reward for
the delivery of basic public goods, for example, keeping grazing
livestock to maintain landscapes.
172. A significant concern for the Tenant Farmers
Association (TFA) is "the extent to which support accrues
to owners of land as opposed to active farmers".[284]
The TFA recommended three criteria in addition to the current
definition of a farmer: first, they must be in occupation of the
land concerned; second, they must be in day-to-day management;
and third, they should be taking the entrepreneurial or business
risk of operating the land. The Country Land and Business Association
(CLA) agreed that the definition proposed by the TFA was "not
unreasonable".[285]
While we recognise that this is an important issue for tenants
and landowners, our discussions with the Commissioner did not
suggest that the new definition of an active farmer is specifically
intended to reconcile the tenant/landowner question. The TFA also
felt that the UK's system of tenanted land was not well understood
by the Commission.[286]
173. In evidence to our Farming in the Uplands
inquiry, we heard that tenant farmers and commoners were disadvantaged
by the replacement of the Hill Farm Allowance with the Uplands
Entry Level Stewardship Scheme (an agri-environment scheme) in
England, for example, because they could not get permission from
landowners to enter the scheme.[287]
It is essential that if more of the overall CAP budget is to be
channelled through agri-environmental measures rather than direct
payments, tenants and commoners are able to access these funds.
174. We are not convinced that
a more restrictive EU-wide definition of an active farmer is needed,
and are concerned that this will contravene the principle of simplifying
the CAP through adding additional audit requirements. The onus
should be on Member States to determine if additional criteria
are needed to exclude particular groups beyond the existing regulations.
175. Defra must ensure that
the Commission's final proposals do not disadvantage the UK's
tenant farmers or commoners through restricting their access to
direct payments or payments linked to agri-environmental measures.
Capping of payments
176. The capping of payments above a particular
level of income has been a controversial feature of Commission
reform proposals since the 1990s.[288]
The Commissioner has suggested a payment ceiling of €200,000-€300,000
that could be modified to take into account salaried labour intensity
(for example to reward farms that make a substantial contribution
to local employment).[289]
The Agriculture and Fisheries Council appeared to reject the Commission's
proposals.[290]
177. The underlying argument for capping appears
to be public disquiet around wealthy or large landowners receiving
large CAP subsidies.[291]
Commissioner Ciolo? said "It is difficult for me as
Commissioner to explain to the taxpayer that we will give €1
million or €2 million a year as subsidies to these farmers
to support their minimum level of income".[292]
We agree that this poses a presentational problem for the
Commission if it attempts to justify the CAP as an income support
policy. However, as Professor Swinbank noted, most taxpayers would
view even €300,000 as a very generous ceiling for any sort
of income support payment.[293]
As discussed in Chapter 2, we do not agree that direct payments
should be viewed primarily as income support.
178. Part of the rationale for direct payments
is to secure a basic level of public goods and compensate producers
for the high costs associated with meeting EU standards.
It is reasonable to expect that the provision
of many environmental public goods and the costs of cross-compliance
would scale with the farm area or the size of the business.[294]
This weakens the case for capping if payments are distributed
more objectively in future. The CLA said "part of the payments
are compensating for the higher costs, and bigger producers incur
more of these higher costs".[295]
179. Aside from its lack of coherence with policy
objectives, capping direct payments could have perverse consequences
for the competitiveness of EU agriculture. Many witnesses pointed
out that farmers could simply restructure their businesses to
avoid losing the payment; this could generate additional business
costs and result in less competitive businesses while not freeing
up additional revenue.[296]
The Commissioner argued that large farmers based their business
decisions on factors other than the level of their direct payment,[297]
but the NFU were not convinced by this argument.[298]
Capping of payments is likely to disproportionately affect UK
farmers as our farm sector has already undergone rationalisation
and consolidation, leading to increased farm size.[299]
This could place the UK at a competitive disadvantage compared
to other EU countries.[300]
180. A few witnesses, including the Northern
Ireland Assembly, the Farmers' Union of Wales and the TFA did
not actively object to capping. The TFA noted that a cap at €300,000
was unlikely to affect their members.[301]
181. Capping of Pillar 1 payments
risks hindering the industry from becoming more competitive by
discouraging farm consolidation and could be ineffective in the
long-term as farm businesses find ways to avoid the payment ceiling.
Defra should not support the Commission's proposal to place a
payment ceiling on Pillar 1.
Support for small farmers
182. The Commission's Communication advocates
a new approach to small farmers, recommending that a "simple
and specific support scheme for small farmers should replace the
current regime in order to enhance the competitiveness and the
contribution to the vitality of rural areas and to cut the red
tape".[302] The
Communication does not provide a definition of a small farmer.
However, there is an accepted EU definition based on the predicted
profit from a particular area or number of livestock.[303]
More simply, there is a broad consensus that semi-subsistence
farms or small farms are those that operate on an agricultural
area of 5 ha or less.[304]
There are an estimated 11 million semi-subsistence farmers in
the EU, mainly in the new Member States.[305]
183. The Communication is vague on the nature
of this support scheme; it could refer to additional funding,
simplified cross-compliance, or other administrative changes.
The Commissioner told us that he did not intend to increase the
direct payments for small farms but rather to simplify it and
bring in other instruments, such as training or promoting access
to local markets.[306]
Options for reducing the administrative burdens for small farms
include lowering their cross-compliance (or greening) requirements
or allowing them to submit an SPS application only once every
few years, rather than annually.[307]
184. Much of the evidence that we received expressed
concerns about the Commissioner's drive to support small farmers.
Farming organisations felt it could be anti-competitive through
discouraging farm consolidation,[308]
and Dr Moss noted that small farms were less likely to innovate.[309]
Similarly, Defra said that "a minimum level of direct payment
for small farms—however defined—would provide a perverse
incentive to such farms to remain small and would impede consolidation,
which is one potential route to competitiveness".[310]
George Lyon MEP also questioned "whether it ends up actually
supporting small farmers to stay small farmers all their life?"[311]
However, some witnesses supported a simplified application system
for small farmers, for whom the cost of administering the payments
can be close to the value of the payment itself.[312]
185. The lack of detail in the Communication
makes it difficult to assess the impact of the proposed support
scheme for small farmers on UK agriculture, but it is unlikely
to benefit much from a scheme based on size or income alone as
our farms tend to be larger and the cost of living higher than
in other Member States.[313]
It is also important to note that merely receiving a small direct
payment does not mean that the individual is a subsistence or
family farmer—the recipient could be a large organisation
that holds only a small amount of farm land. This strongly argues
that any support scheme must be explicitly targeted at helping
farm businesses become more competitive or profitable, rather
than blanket income support.
186. An EU-wide support scheme
for small farmers is unlikely to offer many benefits to UK farmers
and risks distorting competition if it takes the form of additional
payments to farmers with holdings below a particular size. Options
for reducing the administrative requirements for small holdings
should be developed further, consistent with the overarching aim
of simplifying the CAP.
Support for Less Favoured Areas
or Areas of Natural Constraint
187. Under the current CAP, areas designated
as 'less favoured' are eligible for additional support payments
under Pillar 2. Payments must be paid annually per hectare, and
"should compensate for farmers' additional costs and income
foregone related to the handicap".[314]
Currently, over 50% of the EU agricultural land area is classified
as Less Favoured, although not all of this receives extra payments.[315]
188. The Commission proposes an additional income
support to all farmers in 'areas of specific natural constraint'
in the form of an area-based payment as a complement to the support
given in Pillar 2.[316]
It is unfortunate that we do not have a definition of what the
Commission means by 'areas of specific natural constraint' as
this hampers our ability to assess the impact of the Commission's
proposals. The Commission is reviewing a new set of criteria for
designating Less Favoured Areas (or areas of specific natural
constraint) based on biophysical conditions, for example temperature,
following impact assessments by Member States. As discussed in
our report, Farming in the Uplands, Defra has indicated
that the new criteria would exclude areas of the South West and
parts of the Welsh borders as they failed to take account of the
UK's maritime climate (such as rainfall patterns). We recommended
that the Government put up a robust defence of the English uplands
in its discussions with the European Commission.[317]
189. We carried out a detailed examination of
support to English hill farmers from the CAP in our Farming
in the Uplands inquiry. We draw Defra's attention to our recommendations,
in particular noting that payments based on compensating farmers
for 'income foregone' through carrying out agri-environment measures
fail to adequately reward farmers for providing public goods,
such as the valued landscapes, heritage and biodiversity of the
uplands.[318]
190. We received little evidence on the impact
of the Commission's planned changes to support for Less Favoured
Areas. However, supporting Less Favoured Areas in Pillars 1 and
2 would appear to be adding additional complexity, without a clear
indication of what the benefits would be. Moreover, as Less Favoured
Areas payments are currently co-financed, Member States have an
interest in restricting how many farmers receive them. If payments
were entirely EU-financed (which they would be if payments were
made through Pillar 1), this check would be removed. We are concerned
about the financial implications of this, particularly without
a robust definition of an 'area of specific natural constraint'.
191. Drawing on our conclusions
in the Farming in the Uplands report, we urge
Government to ensure that the areas currently recognised as uplands
are properly represented by the new definition of areas of specific
natural constraint. We are not convinced that the Commission's
proposals for payments for areas of specific natural constraint
in Pillar 1 offer any improvements over the current system.
263 European Parliament Directorate General for Internal
Policies (DG IPOL), The Single Payment Scheme after 2013: New
Approaches-New Targets, March 2010, PE 431.598, p 21. Back
264
'Green Box' payments are deemed to be non trade-distorting and
under the Uruguay Round Agreement on Agriculture there is no limit
on the amount of Green Box support. Coupled payments are seen
as trade-distorting because they influence production. In order
to comply with Green Box conditions, support for a number of Article
68 measures, such as payments for disadvantages faced by particular
sectors, is limited to 3.5% of national ceilings. Back
265
Under Article 68 of the Treaty of the Functioning of the European
Union, Member States can use 10% of their national envelopes,
without co-financing obligations, for particular targeted measures.
There are now five purposes for which the money can be used: protecting
the environment, improving the quality and marketing of products
(which was permissible under Article 69 prior to the Health Check)
or for animal welfare support; payments for disadvantages faced
by specific sectors (dairy, beef, sheep and goats, and rice) in
economically vulnerable or environmentally sensitive areas as
well as for economically vulnerable types of farming; top-ups
to existing entitlements in areas where land abandonment is a
threat; support for risk assurance in the form of contributions
to crop insurance premia; contributions to mutual funds for animal
and plant diseases. In Scotland, Article 68 measures are used
to finance the Scottish Beef Calf Scheme, which is a headage payment
scheme to support specialist beef producers with an annual budget
of around £20 million. Back
266
Q 193 Back
267
Ev 172 Back
268
Ev w30 Back
269
Q 30 Back
270
Ev w17 Back
271
Ev w39 Back
272
The Road Ahead for Scotland: Final Report of the inquiry into
Future Support for Agriculture in Scotland, p 77. Back
273
Ev w34 Back
274
Farming in the Uplands, para 46. Back
275
Q 179 Back
276
Article 2 of Regulation (EC) N° 73/2009). Back
277
This provision is optional for Member States under Article 28(2)
of Regulation (EC) N° 73/2009, but no Member State currently
chooses to apply it. Back
278
Q 262 Back
279
Ev 111 Back
280
The CLA added that, under the UK implementation of the Single
Payment Scheme regulations, land that is being used for non-agricultural
purposes for more than 28 days per year can be excluded (Ev 118). Back
281
Ev 156 Back
282
Including Professor Swinbank (Q 263), the CLA (Q 121, Ev 118)
and the Department of Agriculture and Rural Development, Northern
Ireland Assembly (Ev w29). Defra's response to the Commission's
consultation states "The UK would also be concerned with
any proposals that imposed significant new checks and burdens
that would be disproportionate to the benefits, and it will be
important for any proposals on "active farmers" not
to create significant new uncertainty or audit risk for paying
agencies" (UK Response to the Commission Communication
and Consultation: "The CAP towards 2020: Meeting the food,
natural resources and territorial challenges of the future",
p 6). Back
283
Ev 116 Back
284
Ev 111 Back
285
Q 122. In supplementary evidence (Ev 119),the CLA gave this definition:
An active farmer is a person with management control of agricultural
land appropriate to the purpose of the payment, who is taking
business risks in managing it to produce agricultural products
or environmental public goods. With specific reference to UK tenancy
law, the CLA added: "we would of course expect that in the
case of 1986 Act (succession) tenancies the active farmer who
has the necessary control and who will be the payment claimant
can only be the tenant farmer. For any multi-year FBT [Farm Business
Tenancy], it would also normally be the case that the tenant is
the only person in a position to have the land at his disposal
for a SPS [Single Payment Scheme] claim. In all other cases it
could in principle be the land owner or another party to whom
the land owner has devolved the appropriate authority who can
make the SP [Single Payment] claim. Back
286
Q 41 Back
287
Farming in the Uplands, para 52-55, see also the TFA's
evidence to this inquiry (Q 66). Back
288
Cunha and Swinbank, An Inside View of the CAP Reform Process,
February 2011, p 108. Back
289
Q 185, The CAP towards 2020, p 8. Back
290
The Presidency conclusions on the communication from the Commission:
The CAP towards 2020: meeting the food, natural resources and
territorial challenges of the future state "Notes the
significant opposition of Member States to the introduction of
an upper ceiling for direct payments received by large individual
farms, as well as the request that any proposal should be made
in a manner which does not affect the competitiveness of agricultural
holdings and the necessary simplification of the CAP" (para
14). Back
291
Q 322 Back
292
Q 185 Back
293
Ev 154 Back
294
See the Central Association of Agricultural Valuers (Ev w8), the
CLA (Q 106), George Lyon MEP (Q 323); The Road Ahead for Scotland:
Final Report of the inquiry into Future Support for Agriculture
in Scotland, p 69. Back
295
Q 106 Back
296
For example, the Central Association of Agricultural Valuers (Ev
w8), Dairy UK (Ev w16), the Andersons Centre (Ev w27), the CLA
(Q 106), the NFU (Q 129), the AHDB ( Q 387-388), and Defra (Ev
96). The CLA also noted that the modification based on salaried
labour intensity could create a disincentive for improving labour
productivity (Q 100), while the Agricultural Valuers felt this
would be damaging to UK farmers that make extensive use of contracted
labour ( Ev w8). Back
297
Q 186 Back
298
Ev 122 Back
299
Average UK farm size in 2007 was about 81 ha compared to an EU-27
average of about 12 ha (Sources: EUROSTAT, http://epp.eurostat.ec.europa.eu;
European Parliament resolution of 8 July 2010 on the future of
the Common Agricultural Policy after 2013 (TA(2010)0286), para
J). Back
300
Ev 172 Back
301
Q 50 Back
302
The CAP towards 2020, p 9. Back
303
The EU Farm Accountancy Data Network defines 'small farms' as
eight European Size Units (ESU) or less, which is a reflection
of the estimated gross margin of the farm per hectare or animal.
1 ESU represents €1200, but the purchasing power of this
varies between Member States. In the UK, a farm of 16 ESU or more
is defined as commercial whereas in Romania, a farm of more than
1 ESU is commercial (http://ec.europa.eu/agriculture/analysis/fadn/index_en.htm)
Back
304
Davidova, S., Semi-subsistence farming in Europe, Background
paper for the European Network for Rural Development, April 2010.
Back
305
Eurostat Farm Structure Survey 2007. Back
306
Q 194 Back
307
Tangermann, S., Direct Payments in the CAP post 2013,Note
to DG IPOL, January 2011, PE 438.624. Back
308
See for example the NFU (Ev 120), Dairy UK (Ev w17) and the AHDB
(Ev 162). Back
309
Q 209 Back
310
UK Response to the Commission Communication and Consultation:
"The CAP towards 2020: Meeting the food, natural resources
and territorial challenges of the future", p 6. Back
311
Q 282 Back
312
Including the NFU (Q 149) and George Lyon MEP (Q 282). Back
313
Ev 162 Back
314
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
315
European Union Committee, 13th Report of Session 2008-09,
The Review of the Less Favoured Areas Scheme, para 8. Back
316
The CAP towards 2020, p 9. Back
317
Farming in the Uplands, para 24. Back
318
Farming in the Uplands, para 60; see also the RSPB's evidence
to this inquiry (Q 36). Back
| 
