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

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,; 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 (  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

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