UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 671-v

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Environment, Food and Rural Affairs Committee

The impact of Common Agricultural Policy reform on UK agriculture

Wednesday 26 January 2011

George Lyon MEP

Brian Pack OBE

Evidence heard in Public Questions 277 - 352

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Environment, Food and Rural Affairs Committee

on Wednesday 26 January 2011

Members present:

Miss Anne McIntosh (Chair)

Tom Blenkinsop

Richard Drax

George Eustice

Barry Gardiner

Mrs Mary Glindon

Neil Parish

Dan Rogerson

________________

Examination of Witness

Witness: George Lyon MEP, Rapporteur to the European Parliament report on the future of the Common Agricultural Policy after 2013, gave evidence.

Q277 Chair : Thank you very much for agreeing to be with us on this side of the channel. Just for the record, George, if you’d just say who you are and describe yourself.

George Lyon: I’m George Lyon, and I’m the Liberal MEP for Scotland. I sit on the Agriculture Committee of the European Parliament, and I was appointed Rapporteur to write the first report from Parliament. I think also it would useful if I put on the record that I have no financial interest in agriculture or agricultural activities at all, as of last November.

Q278 Chair : Excellent. I own half a share of two fields in the north of England-half a farm-so I have a farming interest. We had a very useful visit when we were over in Brussels, and one of the people we met was from the Cabinet of the Budget Commissioner. Do you think that spending on farming, going forward, is going to be the same across the European Union?

George Lyon: In terms of the budget debate, there are going to be three main drivers. One is the need to see the European budget in its totality either constrained or possibly even reduced. We have the letter from the five Prime Ministers that seems to indicate that at least flat rate seems to be where it might end up. We have the second driver, which is, of course, the need to find money for some of the other priorities that the European Union now has competence over, as a result of Lisbon. The third one is, of course, the big push by the new member states for more equal distribution. So there are serious budgetary issues. I don’t think that we are likely to see any increase whatsoever in the Common Agricultural Policy budget. Indeed I think it’s more than likely that it will start to decrease over time. The question is not "if"; it is a question of "when". It will be down to timing.

Q279 Chair : In the European Parliament you’re in a very privileged position, for the first time, having co-decision this time. What do you think the priorities of the next stage of reform of the CAP should be?

George Lyon: I think we should look at the challenges first, because it’s important to try and answer two fundamental questions: what is the CAP for going forward, and what is its relevance in the 21st century? That seems to be the starting point on this one. I think that the single biggest challenge we face going forward is global food security, which is linked to the growth in world population and the rising economic wealth of developing countries. The FAO is predicting somewhere between 70% and 100% growth in demand over the next 40 years, through to 2050. Now, in the past we’ve met similar demand-from postwar right through to today, we’ve doubled output. Unfortunately, the constraints this time around will rule out the good old solutions of the past, where you threw lots of energy at land with the help of new crop varieties and-lo and behold!-you produced. Plentiful land and plentiful water went hand in hand with that. That is not going to be possible this time around.

Unless we want to cut down the rest of the rainforest, I don’t think there are going to be huge, extra tracts of land around coming into production. Water’s already a serious issue in many, many countries; we use 70% of the world’s water in food production. Energy is going to be a major constraint as well. On top of that we’ve got the need for agriculture to play a role in climate change, and we need to start seeing a move towards a more sustainable agriculture. The current model, which is based on cheap energy prices and cheap inputs, is not fit for the future, and it will not deliver the expected increase in production that we need. I think that’s the fundamental challenge that the CAP has to face up to, and that Europe has to face up to. We have to look at how we incorporate sustainability, and the drive towards a new, more sustainable and more competitive agriculture should be at the heart of that reform. So I think that’s the first point to make.

There are two other points that are still important. One is a fairer CAP-I have referred to the new member states wanting a fairer distribution of the moneys. There’s also a need to ensure the farmers are in a better place to command a better market price, and that’s about fairness in the food chain. I think the third issue that’s still a very important issue is whether we want to see agriculture still continue across Europe. There are great fears in many member states-I come from Scotland, so I know a fair bit about this-that if we see support disappearing away, food production will move out of much of the less favoured areas of Europe, because it’s uneconomic. I think local communities want to see local food production and therefore that is a priority we must still address in the future. Less favoured areas still have a very important role to play in the production of local food for local communities, as well as the many other functions and public goods that they provide as well.

Q280 Chair : You expressed a view at the Oxford Farming Conference, where the Secretary of State expressed her view that we should end our reliance on direct payments. Do you think that’s a good view to hold?

George Lyon: I don’t see us being in a position to end direct payments at this time. I think we have to look at the global context when we start discussing this. Every developed country supports its agriculture. The US, a great free trade nation, pumps billions of dollars in every year through its food schemes for those who are less well off and the direct support it offers to its industry. It’s also directed at a very aggressive export policy; it’s looking to secure markets around the world. So I think, if we are going to be sensible about this, we need to negotiate reductions through the WTO agreement. In the meanwhile, in preparation for a reducing the level of support in the future, which I think is likely because of the outcome of the budget discussions in CAP, I think we need to start looking at how you target the direct payments. It’s interesting that both the Commission and the European Parliament have opened the door for the first time to the idea that you might actually start to target payments at specific objectives, rather than just a handout that has no objective at the moment other than supporting incomes on its own.

Q281 Chair : Could I just ask you, when you mention less favoured areas and public good, do you think those terms are sufficiently well understood, both in this country and across the European Union?

George Lyon: I think that less favoured areas and areas of natural disadvantage are well understood. I think that society, and the public in general, support the notion that we should keep food production in these areas, because they not only deliver food but they also deliver a lot of other public goods. It is a managed landscape; there is nothing that is natural about the landscape that we currently see. My grandfather, my great grandfather, and everyone else’s who was involved in agriculture, shaped that landscape through their agricultural activities, whether it be with cattle, sheep, felling of woods, you name it. It is a managed landscape, always has been, and I don’t think that people, or society, would wish to see that completely abandoned and walked away from. If you asked that question in the United States I suspect you would get a different answer to it. There would be a shrug of the shoulders and they’d say "Well, that’s just the way it is. We don’t really care." I’m not convinced that in Europe that’s the case, or indeed in the UK.

Q282 Chair : Could you just be more specific when you said that you wanted to target specific projects? This is something we may expand on, but could you be more specific on what you mean?

George Lyon: Well if you look at the proposal the Parliament put forward, it suggested that you start to aim the direct payments. We suggested three different categories and there’s actually a fourth one. There was a basic direct payment linked to crosscompliance. You had a second payment on top, which was linked to sustainability, to try and drive that whole change in the type of food production systems we have. You had a third option on top of that, which was LFAs; bringing them into the direct support. Fourthly you had still the use, in extreme circumstances, of the coupled payments linked to the WTO agreements that you can’t use any more than 3.5% of your total SAP to do that. In quite a number of countries-for example, Finland-they value that ability to do that in order to keep any kind of livestock industry in place there.

The Commissioner has gone further in his one and he’s introduced something called the small farm scheme, which is an interesting development. It’s something that needs to be explored a little further, because I think there are a series of questions that need to be answered as to what he actually means by the small farm scheme. As I understand it, it’s about simplification and reducing the bureaucracy and cost of delivering the CAP. The figure that he quoted to us, in some of the private discussions I’ve had, is the 6 million, out of the 13 million EU farmers, who currently receive less than €2,000. As this Committee’s no doubt well aware, in this country it can be close to €2,000 to deliver and administer one payment. So there does seem to be some merit in looking at that. I think the real question is whether it ends up actually supporting small farmers to stay small farmers all their life, and also how do you define that, member state to member state? Or do you define it as someone who’s in receipt of a small amount of single farm payment, because there could be a huge organisation that only claims a very small amount. There are so many questions where I am unclear as to what he actually means by that.

But for the first time we are actually seeing a debate about how you have a stratified direct payment system. Given the UK Government’s position for many years that has argued for targeting, albeit through a different route, I think it’s a door that’s opening up that I’d be surprised if they weren’t keen to try and walk through.

Q283 George Eustice: For as long as I can remember, the term, "CAP", has been followed by the word, "reform". Do you think this current round is a reform to end all reforms, or is it just another incremental step along the way?

George Lyon: Well I’ve been involved in CAP reform since 1992, first as a lobbyist with the National Farmers Union, and now as a legislator. No, I think what you’ve got to recognise is the Common Agricultural Policy has changed in response to demands that it move to meet society’s particular issues at the time. If you look at the history of the Common Agricultural Policy, 80% to 90% of the funding went to export restitutions and intervention purchases, and that was the system that they first came up with. Now, that system failed completely, it created surpluses, it blocked off the marketplace and farmers didn’t respond to market signals. In 1992 Mr McSharry, the Commissioner, introduced the first of a series of reforms that moved us away from that system of supporting end price to one where we now have a pretty liberalised CAP, where the market by and large determines what people grow. The last significant reform was the decoupling of payments to make them nontrade distorting.

It’s interesting to see we have moved from that position, where 80% to 90% of the budget was spent on what you would term as market distortions and measures that harmed the third world markets and developing country markets, to one today where we spent less than 1% on export restitutions last year, which I hope are phased out completely by 2013, and the market intervention measures, i.e. intervention buying, were below 10% of the total budget. So there’s been a huge transformation, and during that time Rural Developments also started to play a significant role; it didn’t exist before 1992.

So CAP has evolved over time. Is this reform going to end it? No, I don’t think so. It’s like one of these super tankers-it ain’t going to come to an end. I think the question for us all is to try and reform it to face up to the challenges that we now face. In the document that was published this week by DEFRA, "The Future of Food and Farming: Challenges and Choices for Global Sustainability", some of the answers about where we need to go in the future are very pertinent. It should be taken into consideration in deciding where we go in the longer term with this policy.

Q284 George Eustice: One of the striking things, having studied this now for a while in this Committee, is how there are lots of competing interests, as always with these things. There is therefore the sense that you can end up with the lowest common denominator incremental change that everyone’s happy with. If that wasn’t the case and you didn’t have that, what would an optimum farming policy look like, if there wasn’t the historical situation that we’ve got and you started from scratch?

George Lyon: If you didn’t have a historical one, first, you would have fair distribution between member states. I think, as I set out at the beginning, in the context of where we are today it seems to me that the fundamental challenge in farming policy is delivering sustainable agriculture that will meet the growing worldwide demand for food. You can argue that Europe should have no role to play in that; after all we’ve got full bellies, we’re very wealthy and we’ll always be able to purchase the food anyway. But I do think we have a leadership role, and given that there is not a lot of extra land lying around, Europe will have to play some sort of role in contributing to that demand. There is not a large amount of land that is going to come into production over the next 30 to 40 years, unless you’re advocating cutting down the rainforest, and I don’t think anyone here would do that.

So it seems to me that sustainability should be at the heart of any agricultural policy going forward. I think both sustainability and competiveness as well, because that’s the other part of the equation. There are some who will argue that sustainability and competitiveness are actually in conflict. I believe they’re compatible with each other. A sustainable agricultural production system, I believe, will be a very economically competitive agricultural system as well.

Q285 Richard Drax: You’ve expressed broad support for the Commissioner’s ideas, but you were critical of the lack of detail. What are likely to be the key areas of debate during the negotiations between Parliament and the Council?

George Lyon: I think the biggest and most difficult issue is the budget, and how you distribute it. As I have said, you’ve got the twin drivers: a likely smaller budget in the first place, and the second one, which is this issue of fairness. So how do you deliver both? In terms of the EU old 15 member states, which by and large, apart from the UK, have an above average number of euros per hectare, if you choose to look at it in that way, the bottom line is that any cut, and then any redistribution, will mean transferring money from their budget to someone else’s. So, as you well know as a politician, that’s one of the most difficult issues to sell back home. Therefore, I think the biggest debate will be around this whole issue of fairness.

I think the second one will be about this notion of greening the Common Agricultural Policy and, for the first time, introducing targeting as a concept. Already I can see the backlash in our Parliament from those who would love to see the status quo. They’re thinking, "Now we seem to see a wee bit of light as to what the overall EU budget is like, and therefore maybe the pressure’s not quite a great as we thought, and we can somehow slip back to defending the status quo." I think that’s the other great area where there are going to be real arguments. I hope that the UK’s actually in the vanguard of arguing that we need radical reform and that this is the way to do it. There’s a door opening that hasn’t been there before.

Q286 Neil Parish: Isn’t there a danger that the Parliament will try and support the status quo?

George Lyon: Well given that the Parliament’s first report actually managed to argue for reform and the opening up of this opportunity, I think we’re in a strong position to argue for reform. What I’m saying to you is, there are no two doubts, and you’ll know this from experience Neil-by the way, my colleagues send their good wishes to you-that the forces of conservatism are quite strong in the Parliament, and we have to be very careful that in the next report we produce we don’t actually see an argument to go back and hold what they’ve got. I’m certainly doing everything possible to make sure that does not happen, but we shall see. It’s going to be an interesting debate, which will reflect the debate in Council as well. There will be some who say, "Greening? Let’s just do a little bit of light touch and stuff that doesn’t really mean very much." I think, given the challenges that are set out in this document-those of us who know agriculture well understand these are the real challenges for the future-it seems to me that the starting point must be how we make a new agricultural model that’s more sustainable and can deliver for the future.

Q287 Barry Gardiner: Mr Lyon, can I just try and tease something out? If you could help us to try and understand the position of the Parliament, as well as your own position, because the Parliament, as I understand it, has said that it’s essential that the CAP is at least maintained at current levels. Now, in your preliminary remarks you said that over the longer term you saw the budget diminishing. Then, when asked about direct payments, you said they should not end "at this time". There’s a St Augustine plea here-"Lord make me virtuous, but not yet." What I’m trying to tease out is precisely what your own position on these two is; does it vary somewhat from the stated position of the Parliament? If you say "not yet", then what are the criteria and the actions you wish the European Commission and national Governments to take, to ensure that we can move through to the "Yes, now is the time" scenario.

George Lyon: To answer your first point, you’ve got to remember that the voted-through report contained quite a number of compromises. The compromise position that the Parliament eventually came to was a stand on budget at 2013 levels, which is actually a 4% cut from where we are today. It takes us down to 39.3%. My view was that that was an opening negotiating position, to be bluntly honest. I’d be very surprised if we could actually hold that over the period. I think, given the pressures and the depth of public spending cuts around Europe, I think it’s very, very difficult to argue that the Common Agricultural Policy should not take at least some of the strain in that debate as well. In some ways, that’s for Finance Ministers to decide.

Coming back to your last point about when it will end, first, I think for us ever to see a complete phase-out, you’ve got to talk about two different types of agriculture here. If you look at the DEFRA report, "Farm Viability in the European Union", which analyses of what would happen if you withdrew farm support, the five countries that are most affected are the UK, France, Germany, Finland and Sweden. What are the sectors that are most affected by it, where the most damage would be done? It’s the extensive livestock sector. It takes me back to my original point that we need to think seriously about targeting. Where are those producers and types of farms that are going to need support in the longer term, and where could we maybe see reductions take place which will not affect profitability? If you look at some of the farm income figures from around, for example, Scotland or Wales, you will see that the level of farm support far exceeds the actual income. I don’t see how in the longer term, or certainly in the medium term, we are going to be able to see these farms become sustainable without support.

That takes you back to the question of whether, if Europe were to phase out, we would need to see the rest of the world phasing out, too. I’m not sure it’s a sensible argument to say, "Well, we’re going to end then regardless of what the rest of them are doing." I think we need to see a proper WTO discussion on that one. That’s the way you actually take that argument properly forward.

So, first, I think the Parliament’s view is an opening negotiating position at trying to hold at around 2013 levels. My view is that you’re going to need support, certainly at targeted areas, for the ongoing future, and I think there’s an opportunity for where you could start to target that support at those who maybe need it more than others.

Barry Gardiner: Thank you, that’s extremely helpful.

George Lyon: I hope that clarifies my point.

Q288 Barry Gardiner: No, indeed. In a sense, in answering the last part of my question you’ve answered the mirror image of it, but not the question itself. That was about what the actions are that you would wish our Governments to take in order to be able to say, "Yes, now’s the time when actually we can do away with it."

George Lyon: I think that the most fundamental thing that we need to do, coming back to my original point, is to make sure that we drive the sustainability agenda and competitiveness agenda. These are the two that I hope will make farming more able to stand on its own two feet in the longer time. Clearly a more competitive agriculture does help you to be able to stand on your own without support, but you can’t do it while the rest of the world’s still piling support into their agricultural industries. So, as a question, it is similar to "How long is a piece of string?" I think the first thing is that Governments around the world need to start entering into a serious discussion in the WTO.

Barry Gardiner: So it’s the WTO.

George Lyon: Yes, it has to be.

Q289 Chair : It’s taken 10 years and they’ve not got anywhere.

George Lyon: I think that shows just how difficult an issue it is to overcome. For Governments around the world-for the free market US, which believes that the market is everything-where is the stumbling block in the WTO? It has always been around agricultural policy. So I’m sorry, that’s the real world we live in, not some pretend parallel universe. There are serious vested interests by politicians in every one of those countries. First, they want to make sure they can protect their ability to feed their own people. Secondly they like cheap food policy, and by and large if you strip a lot of the support out, you’re going to see a rise in prices; I don’t think there are any two doubts about that. And thirdly that, if you actually see that rise in price, it’s going to create a lot of poverty and hunger in certain sections of society, which leads to political instability. Food and fuel are the two things that, where they’re in short supply and very expensive, have the recipe for real political instability in individual countries. That’s why agriculture’s always been a very difficult issue to try and resolve in the WTO, because there are politicians around the world in every developed country who think there are good reasons why we need to protect our capacity to feed ourselves.

Q290 Barry Gardiner: So, just to get it on the record, you support Monday’s Foresight report, "The Future of Food and Farming", which states that the key elements are trade liberalisation and the abolition of agricultural subsidies.

George Lyon: Well, I think we’d certainly support the trade liberalisation, yes. Well, dare I say, you need one before you get the other.

Q291 Barry Gardiner: Right, but are both of them ultimately necessary?

George Lyon: Ultimately, if you can get all countries to agree to reduce support barriers, yes I think you would get to that position. I’m not convinced enough in some of our disadvantaged areas, where you might actually be able to see them rely on the marketplace; I think that is just not going to happen. Society then has to take a view: do you want them there or do you want to abandon them? I think society’s answer, certainly in Europe, would be that we do want them to be there, to not only deliver local food for local communities but also to deliver all the other public good that they do at the same time.

Q292 Barry Gardiner: That, perhaps, could be delivered in different ways.

George Lyon: Yes, it could be, but it would be a policy of some kind. Whether you would call it the Common Agricultural Policy or what, but right now that’s the vehicle that we have at the moment, and it’s one that we want to see continue to support those areas.

Q293 Neil Parish: You raised an interesting point on America, which I think always get away with murder on agriculture policy. They actually support their prices, whereas Europe has at least moved away from that position. The question that I want to ask you really, and you’ve talked a bit about it, is that many member states want the CAP to be greener but they also want the farmers to be more competitive. Do you think that sometimes the Commission, and all of us, perhaps look in two different directions? So what sort of tools would you like to see in a reformed CAP to increase our competitiveness?

George Lyon: The tools we need, I think, are a serious driver in the direct payments that actually takes us towards a more sustainable farming system where we use precision inputs, measure nutrients and do nutrient plans. All those things will actually allow you to reduce the inputs while still maintaining outputs. There’s a whole series of them that you could list. Most importantly, they will play into the climate change agenda, which will help to reduce carbon emissions as well. If you examine them in some detail, they are a bottom line issue as well. They make farming more profitable and these individual businesses more profitable and, I would argue, more competitive. So I think that’s one.

I think the second one is the use of the rural development for farm modernisation, for R and D and for trying to develop some of the new tools that are going to be needed to take us into a more sustainable farming system. So Rural Development has a very big role to play there. Also they need to add value as well. That’s most importantly away from commodity, which is too often the first port of call for the farming industry. It would be useful to see us actually trying to develop greater added value, especially in those areas such as LFA where the local food for local communities is quite a strong driver in the marketplace.

Q294 Neil Parish: I agree exactly with what you say, but I don’t see much evidence of that in the Commission or in any of the Commission’s proposals.

George Lyon: I think that’s the challenge. I think that’s where the Commission’s report and our own tended to differ. Our focus was very much on sustainability linked to competitiveness, not just a general greening that could end up making us very uncompetitive. That’s one of the serious concerns I have about how you define what this greening is. The doors are open; in actual fact there’s a role for governments and Parliament to try and start to find what you mean by that. My view is that it has to make sure it’s about sustainability and competitiveness, and they’re not in conflict as a concept.

Q295 Mrs Glindon: Following on from that-there was an argument that the single farm payment prevents the EU farming sector from becoming more globally competitive because income support enables unprofitable farmers to stay in business. Do you agree with that statement?

George Lyon: You could argue that most of the developed world is in the same boat. If every country’s subsidising its farmers apart from the Cairns Group, then I’m not convinced it necessarily means that you’re any more or less competitive. I think the things that really make us uncompetitive are access to some of the new technologies, access to some of the tools that other countries have, and you’ve also got to be very careful and think about the kind of restrictions, regulations and rules you put on, as to whether that makes you uncompetitive. There are no two doubts that if you want higher welfare standards and higher environmental standards, the market won’t pay for that. So the public and society would, because in every test of public opinion, UK and European consumers do want to see higher welfare and higher environmental standards. Now, that comes with a price and therefore I think it’s only right and proper that the agricultural policy should help make sure that that price is met, because it won’t be met out of the marketplace.

Q296 Mrs Glindon: So do you think that potentially, if everything was equal, that there wouldn’t be unprofitable farmers?

George Lyon: There’ll always be unprofitable farmers, because it’s all down to individual ability to manage. What I can say, despite the Common Agricultural Policy, we’ve probably seen the greatest shake out in the number of farming businesses in the last five to 10 years that I’ve seen in my lifetime. Where I used to farm, say 15 years ago, we had 40 dairy farms, and that’s down to 13 now, and I think in three or four years it’ll be down even less. So I don’t think you can argue that’s because they’re inefficient. They are running, working seven days a week, 365 days a year, most on their own labour, no rented labour on the farm at all, and still they can’t make a return from the marketplace.

It takes you back to one of the other issues about fairness, which I think is going to be part of this reform. It’s about how on earth we make sure that the farming community can exert a better return from the marketplace. In some ways they’re caught with these two gigantic forces, you get five or six major retailers as your buyers on the one hand, and you’ve got a couple of dozen large multinational suppliers on the other hand supplying all the inputs, and you’re kind of crushed in the middle of all that. It’s very hard to try and get the necessary clout to extract a better return from the marketplace, and I think that’s fundamental to seeing the future profitability of farming continue.

Q297 George Eustice: Some of the evidence we’ve had from economists has questioned the argument of food security for direct payments, in particular it said that actually it’s food on the supermarket shelves that counts more than a capacity to produce food as a nation. Therefore trade liberalisation was perhaps a better way to secure food security. Have you got a view on that?

George Lyon: I’m not sure I have a philosophical view on that. It comes back to the fundamental question of why all developed countries have a view that supporting agriculture is still a priority in the 21st century. I do think it comes back to this view that food is one of these key consumer goods that, if it’s in shortage, or if there is a big rise in prices, political instability can fall on the back of that. There is this notion that we like to try and retain the ability to feed our own people from our own resources, maybe not in its entirety. I think if you moved to the position where you’re utterly reliant on imports then that’s a very dangerous position to be in, and some countries might end up in that position if the market was to determine completely and utterly where the farming took place.

Q298 George Eustice: The other angle on this is that separate studies have shown that you could reduce the direct payments quite significantly without having too much of a knock-on impact on production. I think there was the Scenar report on 2020. Have you got a view on that particular piece of work?

George Lyon: I think that’s one of the reasons that I argue that targeting is the right way to go in this one, because there is no doubt that there are some who might be able to cope better without as much direct support. There are others, as I’ve argued, in the less favoured areas, the extensive livestock producers, who I don’t think that’s going to be possible for. So you have to think seriously about targeting the support, but also what the public goods or benefits are that you also want from that support. That’s where I think the whole sustainability agenda fits into this, because the reality is that, when it comes to arguing to do away with the direct support, the UK and Sweden are out on the extreme on that one; you are not going to win that argument. I think the cleverer argument is to think that the door’s now open to some sort of targeting, and this is the better approach to take at this particular time, especially with some of the challenges that I explained earlier on.

Q299 Barry Gardiner: Can I just again move to get clarity here? You are saying targeting within direct payments, perhaps to achieve a better use of resource. The Scenar report suggested that you could actually reduce direct payments by 30% without impacting what you call the philosophical aim of food security against, I think you said, rising demand globally. Philosophically I think we’re all there, but looking at it, to achieve that 30% reduction that the report said was possible in direct payments, where would your targeting be and who would suffer? Which farmers would not be getting the direct payments?

George Lyon: The study here will actually tell you who might survive better than others. It’s those who previously were in the unsupported crops; it’s probably those who produce grain on some of the best land we’ve got in Europe. These are the ones who possibly could do with a little less, who could survive with less. So, it comes back to what your priorities are, and society has to decide that.

Q300 Barry Gardiner: I absolutely agree with you. You’re our witness; what are your priorities? Where would you make those calls? Which sectors would you say no longer require that?

George Lyon: Well, as I say, my view is that traditionally unsupported sectors and those on the best land at least have options and choices, which those in the less favoured areas and upland areas do not. So I think that’s self-explanatory.

Q301 Tom Blenkinsop: I think you’ve alluded to this already, but what’s your definition of an active farmer?

George Lyon: That’s a very good question, and one that I have to say is not easily answered. It’s interesting that the Scottish Government had tried to do it through the use of the crosscompliance rules, where they were going to introduce an extra category of minimum stocking rate allied to inspections to see if there had been grazing of the land and activity on it. This fell foul of the EU auditors and had to be dumped about a month ago. I think the starting point is to look at article 28 of the health check regulations, which, as of January 2010, for the first time gave member states the power to take away single farm payments from those who had no agricultural business activity whatsoever, as a first step. I think that’s the starting point for trying to build on something like this. The great worry in all this is always unintended consequences. I think article 28, which I take it you’ve had a look at, is the starting block for that. No member state’s used it so far, and during the whole debate in Scotland, I was encouraging the Scottish Government to try and use it. So it might be worth your while taking evidence from them as to why they chose not to use that and use the alternative through crosscompliance rules, which unfortunately, as I understand, has fallen foul of the EU Auditors, who said it was illegal; basically, they would lose a court case.

Q302 Tom Blenkinsop: Are we in danger though, if there are certain products or projects that are to be targeted, that it could be prescriptive, and that farmers could not be following the market but could be following prescriptive measures?

George Lyon: I don’t think so. No, I think you have to make it an optin system, so they would decide whether they want to buy into the sustainability agenda and do the things that are required-if they don’t, they don’t. It’s as simple as that; it’s a business decision. I very much prefer the carrot to the stick in all these things, so you put some value on it and people will decide if it is in their interest to do it or not. That’s my view, and it always has been. Society then places a value on it, because it is a public good so therefore you have to put some value on it that says it is in the public interest to move in this direction, so either let’s incentivise it or otherwise. Indeed, paragraph 6.2 of "The Future of Food and Farming: Challenges and Choices for Global Sustainability" states that that’s one of the areas that we need to look at.

Q303 Tom Blenkinsop: If money is then being targeted to actively producing farms that produce agricultural products, as opposed to land owners who manage for environmental purposes, do you see an increased bureaucratic burden?

George Lyon: Well, for a start you can’t target them at someone who’s producing agriculture, because they’re decoupled, so you can’t do that. This comes back to how you define an active farmer, which is very difficult. I think the starting point is asking whether there is any agricultural activity whatsoever in the business. If there’s not, then that gets rid of those who’ve sold up and who are basically are putting it on to another farmer’s land and taking the payment. This is more prevalent in Scotland, because we’ve got huge amounts of unused acres.

Q304 Tom Blenkinsop: Do you see a bureaucratic cost in having to follow that up though?

George Lyon: There’s always a bureaucratic cost in some ways, in these measures. The key question is whether we can design something relatively simple that actually works. That, as I say, is most difficult. I think article 28 in the health check regulations is at least a starting point; it gets a finger in the door and starts to say, "Let’s do that and see how that works." As I have said, it would be interesting for your Committee maybe to take evidence on why the Scottish Government rejected that view and rejected that course of action. Brian Pack actually alluded to it in his report, so it might be well worth asking him.

Q305 Chair : We asked the Scottish Government, and we’ve been offered Brain Pack, so we will ask him.

George Lyon: Is Brain Pack now a Minister?

Chair : No, no. Stranger things have happened.

Q306 Neil Parish: This is another thorny issue. I’m going to take you into something you said earlier on. You were talking about the payments to the good land, such as East Anglia and the Paris basin. If you look at the overall level of payments in the old 15 Member states, that’s really how they get their payments. They got it on the level of payments they were getting for arable aid in 2001. It’s got to be redistributed in the end because the 15 old member states may be wealthier, but they can’t carry on getting the higher payments while the new member states get lower ones. So, if you have an area payment, because that’s what, I think, all the new member states are on, what objections have you got to having a uniform area hectare payment, and what criteria would you put into that, if you didn’t object to it?

George Lyon: You mean an area payment decided at European level?

Neil Parish: Not necessarily at a European level, but I think when you’ve got Latvia on €70 a hectare and Greece on €550, because of their dodgy tobacco, basically, something’s got to be done. You see, I don’t belong to the politically correct.

George Lyon: Well, there are two issues you highlight there. One is how you redistribute between the old and new member states, because as I say, there’s going to be pain for the old member states in that and gain for the new member states. Interestingly, if you look at the graph of real development, it’s the reverse: old member states are not as high in terms of the amount of money they get per hectare, so that has to be taken into consideration as well. Some of the suggestions have been that you use GDP and cost and reduction figures as well in trying to do any redistribution. But that would only be an interim measure, because if you move to a more targeted direct payment system, the amount of LFA land moved into doing the sustainability or green stuff, allied to the basic direct area payment, would actually redistribute on its own. So there’s a question of how do you get from where we are to there, given that Member states will demand at least another seven years to change over to an area-based payment system. The only two countries that have done it out of the old Member states are England and Germany, and it was a pretty painful process here.

Q307 Chair : And farm incomes have gone down in England, proportionally.

George Lyon: Yes. So, that’s a very difficult one, and I don’t have an easy answer to that, but there has to be a movement. If you look at the Commissioner’s paper, he’s suggesting that you have some form of minimum payment or minimum allocation per hectare to each country. That doesn’t answer the question of who gives up. At the end of the day, as you well know, Neil, this will be a political deal at some stage; absolutely a political deal. There is no mathematical formula that can tell you how this is going to come out, but what it will do is make sure that the graph which accompanies it-with Greece at one end and Latvia at the other-will level.

Q308 Neil Parish: Yes, but what you can’t do is, when you get to 2013, you can’t be paying a farmer for what he was producing back in 2001, in my view. Especially as you move towards 2020 you’re talking of nearly 20 years later. So, you talk in the Parliament about a fair distribution of CAP payments. It’s easier to make that statement than to carry it out. How do you see it? Do you see it being distributed over a certain period of time? I understand you can’t do everything in five minutes, especially in Europe.

George Lyon: On that one we got agreement about the fairer distribution; the hardest job is getting an end date. That’s where the biggest fight took place, where there were seven European countries, older Member state countries, that were utterly against any end date whatsoever. But there has to be an end date and we have to move away from the historic system. It just does not stand up to scrutiny whatsoever. So that’s absolutely essential. The reason why agricultural ministers in Member states are so worried about it is because of the redistributive effect inside their own countries, when you move from a historic to an area system.

You’ll be speaking to Brian Pack later, who did a piece of work about how it would be implemented in Scotland. He did a series of public meetings, about 20 or so, and the figures he quoted to me were that he found about 13,000 losers in totality out of every meeting, and only found three people who admit to benefitting from the redistribution. Given it’s a zero sum gain just shows you how politically difficult it’s going to be. That’s why there is intense pressure from the old Member states to try and grant a longer timeframe to phase it in.

Indeed, if you look at the decoupling, France has only recently finished decoupling this year. The beef payments have just been decoupled; their arable payments were only decoupled last year as well. It’s quite interesting to see the French model. They took money from the arable people, when they decoupled, and put it back up into the grassland and livestock areas, much to the arable lobby’s disgust in France. They used that opportunity to redistribute money to where they thought priorities should be, and it was to the grass-based livestock industry.

Q309 Neil Parish: Having taken you down that route, would you support that idea?

George Lyon: I think that there will be demand for that to happen, yes. I think Member states will want the flexibility to be able to have different rates in different regions. If you take Germany, they’ve got different rates in every Lander. Here in England you’ve got three different payment bands, as I understand. I don’t know it closely, but you’ve got: lowland, upland and rural-

Q310 Neil Parish: Moorland line, seriously disadvantaged and nonseriously disadvantaged.

George Lyon: I think agricultural ministers will demand that type of flexibility to deal with some of the issues that arise out of the redistribution in their countries. It’s only logical.

Neil Parish: Okay, I’ll leave it at that.

Q311 Chair : I think you said it wasn’t possible to target payments?

George Lyon: Sorry?

Chair : Can I just play back to you what Commissioner Cioloş said in response to Dan Rogerson’s question by video link? The question was: "Just to confirm, you would expect some agricultural goods to be produced for someone to be defined as an active farmer?" The Commissioner replied: "Yes. If not, we cannot talk about agriculture or the farmer." Are you consistent with what the Commissioner’s saying to us there?

George Lyon: The Commissioner has spoken about active farmers being very important and the need to make sure that the monies go to them. The point I was trying to make is that that’s easy to say, but in terms of regulations the real question is how do you do it. He hasn’t answered that question, in my view. I haven’t seen what the Commissioner said, but what I’m saying to you is that there is an existing regulation that attempts to start doing that, and it’s called article 28 of the health check regulations. I think that’s at least a starting point. Someone who is trying to claim but has no agricultural business activity in his financial returns: then he’s out, simple as that. The advantage is that you’re then able to put it into your national reserve and give it to a young farmer or someone who’s more deserving.

Q312 Chair : Can I phrase it in a different way?

George Lyon: You can try.

Chair : Do you think tenant farmers in this country are discriminated against?

George Lyon: No, because the current payments are entitlements and they go to whoever registered for the entitlements. So they go to the tenant farmers; it doesn’t go to the landowners.

Q313 Neil Parish: It’s slightly different in Scotland from in England.

George Lyon: Maybe it’s a different system, but certainly the entitlements belonged to the tenant because I was a tenant farmer. If that’s not the case down South then forgive me, I don’t know the system as well. In Germany they go to the farmer there; the entitlements belong to the actual farmer, not the landowner. That’s the way it should be: it should be those who are producing.

Q314 Chair : I think there is an issue in England that perhaps doesn’t pertain-

George Lyon: That’s something that I don’t know in any great detail I’m afraid.

Q315 Chair : We’re hoping that the CAP will become simpler. Do you think that the way the Commissioner’s framed the various stages of reform, it actually might be becoming more complex?

George Lyon: If you take his communication at face value it’s a little bit like a Christmas tree: there’s a small present in it for everyone. The reality is that it’s drawn so widely to make sure that he got it through the interservice consultation and that, in the first instance, there would be a welcome by agricultural ministers. There is something in there for everyone. The real question is how we boil that down to hard reality. What are the legislative proposals, what do you mean by greening, what do you mean by a lot of the other bits and pieces, such as the active farmer stuff, that are in there? Also, what do you mean by this toolkit, which is an interesting one, because the other big debate that is going to be part of this reform, and we see in the Parliament, is the whole argument about further liberalisation versus reregulation of the marketplace. I have to say, in my report, I lost that argument every time. If you look at the report, it’s quite strong on the need to reregulate the marketplace. I didn’t put that in, but it was forced in by my EPP and Socialist colleagues, who are very hot on that and they voted that stuff through. So, that is going to be another big debate.

The phasing out of milk quotas is seen by some as a very negative move, and there are real worries about how businesses will survive in the future. I am opposed to any reregulation. I’d like to continue to see us liberalising the policy. I do think there is a role for intervention as an emergency safety net, but it shouldn’t be in conjunction with the use of export restitutions; it should be buying and selling back on to the market at the appropriate time, and the Commission take profit on it, as they are doing with the milk powder and grain that they had in store from last year. So that’s the kind of safety net that should be there.

Maybe you could devise some new tools about crop insurance, but it should be about trying to make sure that farmers do it themselves, rather than the state doing it. I wouldn’t underestimate just how powerful is this whole agenda of, "Well, we need to reregulate because there’s lots of price volatility now." I’m not convinced that higher prices every now and again is not actually a good thing after 20 years of consistently low prices, which made it very difficult to make a return on farming.

Q316 Chair : The European Parliament resolution referred to outcome agreements. How would they work in practice?

George Lyon: Well, outcome agreements are about making sure that you get farmers to sign up to some targets. When I was Deputy Finance Minister in the Scottish Government, we looked at that to try and build a relationship with local government and get away from the idea of telling them exactly what they should do. What I was trying to say about the use of outcome agreements was that we should set the targets, agree it through agrienvironmental schemes or whatever types of schemes you put in place, and then let the farmer get on and deliver it. If he doesn’t meet the targets then he loses the support. I think that’s a much preferable way to a whole lot of rules and regulations because that makes it seem like an imposition to farmers, rather than something that’s actually worth doing because there’s a financial return on it. It leaves them the freedom to design the way that they do it rather than the state telling you how to do it.

I have to say the Commission’s quite nervous about this, and for reasons of audit. Clearly they’re worried about auditors’ reports, especially in Member states where the process is not quite as robust as it is in others. I don’t think that those that have robust audit trails in place should be held back by the fact that others can’t deliver to that same standard. So we’ll continue to push for it.

Q317 George Eustice: You talked a lot earlier about the importance of putting the environment at the heart of the CAP. I think I’m right that in the resolution the European Parliament passed there was a suggestion that the vast bulk of land should be under an agrienvironment scheme. Could you just confirm whether you envisage that being through some kind of greening and pillar one, or are you saying they should be under pillar two?

George Lyon: No, if you looked at the design model we designed, we intentionally kept the whole sustainability and climate change agenda separate into the direct payments, because we believed it was compatible with building a more competitive agriculture. It’s pan-European; it’s a global issue, so therefore you can do it at a European level. I believe that the biodiversity agenda, and the protection of the environment, should be done through agrienvironmental schemes, and what we’re trying to say is that the EU should at least have an ambition to have as much land as possible covered by these type of schemes.

Q318 George Eustice: So that would come out of pillar two agri-environment.

George Lyon: That would come out of pillar two, yes.

Q319 George Eustice: Would you be able to find the money in the current budget to do that?

George Lyon: Well, if we can do the UK with one of the smallest pots of Rural Development money of any country in Europe, I don’t know why the rest of them can’t do it. As you well know, we have £17 per hectare against an average of £54 per hectare for the old Member states and I think it’s over £110 for the new member states. So, if we can manage to achieve quite high inclusion rates of agrienvironmental schemes here in England, and in Scotland there’s quite a high rate as well, then I don’t see why on earth these other Member states can’t do it. It’s political will that’s needed to make sure it actually happens.

Q320 George Eustice: The European Commission’s talked a lot about greening pillar one, having additional requirements. The European Parliament seems to favour a similar but slightly different system, with a top up payment targeting carbon, or farmers’ ability to reduce carbon. Why do you think the approach that you’re taking is better than that which the European Commission’s taking?

George Lyon: I think I’m just concerned that you get a blurring of objectives. I mean sustainability, which I think is probably the single biggest issue that we confront as a society for the future, because of its importance and its panEuropean nature-therefore, that’s where it belongs-and if you’re going to green the pillar, that’s the right model to use. It also plays into building a more efficient and competitive agriculture, because environmental efficiency and economic efficiency are two sides of the same coin. So that’s why I have concerns about the Commission’s proposals just now, which are not very clear at all, and we need to bottom that out. In fact, some of the comments I’ve already made on it have raised the question of what this does for European farmers’ competitiveness. The last thing we want is to end up making this uncompetitive.

Q321 George Eustice: So it’s a sort of solution to the green-taping criticism that comes from some farmers?

George Lyon: Yes.

Q322 Neil Parish: Another nice one for you George is the capping of payments. What position will the European Parliament take on the Commissioner’s proposal to cap payments for larger farmers?

George Lyon: I’m not convinced, at the moment, they’re going to support them. I think for two fundamental reasons. One is a practical one: any of the capping measures or measures that attempted to try and prescribe or prevent businesses from claiming the range of support were always circumvented by laws and accountants in the past. I think one of the ways to solve this is about the targeting of direct payments, where you’re actually getting something for society in return, and obviously you’re starting to target those farmers who most need it. So I think that’s a cleverer way of trying to solve some of the Prince Charles issues, or Duke of Westminster issues. I don’t believe that, in practical terms, you can design a system that will prevent what has happened in the past reoccurring; whether it was milk farmers trying to claim the suckler cow premiums, there was always a way and a device found by a lawyer and an accountant to get around it. I don’t understand how you stop that, I really don’t, so that’s why I’m not necessarily convinced about it.

Q323 Neil Parish: No, but I agree with you, especially if payments are land based, it’s about how you run that agriculture and production, and that’s why you should get a payment. How are you going to turn around public opinion? Because a lot does go on, as you quite rightly say, about the Duke of Westminster, the Queen and Prince Charles claiming all these payments. How do you propose turning around that negative publicity?

George Lyon: By targeting the payments at particular public goods, such as sustainability and saying that in return for getting that, that’s what they’ve got to deliver. So you actually answer the question of what it delivers for society. So you take it away from the idea that it’s all about income support. I think you can reduce that argument down to a relatively small amount of the payment and increase the public goods and the top-ups to those areas that most need it. So in some ways you answer that question by being able to say that it’s not only about direct support and income support, because-while other countries may believe that’s what it’s about-I think that’s not sustainable in the longer term.

Q324 Neil Parish: Do you think the Parliament’s finely balanced on the issue?

George Lyon: Yes.

Q325 Neil Parish: So I expect some things don’t change.

George Lyon: Well, the forces of conservatism, as you well know, are quite powerful.

Q326 Chair : Could I just ask one thing finally? You’ve mentioned a lot about targeting. The Commission statement says very clearly that one of the ambitions is to maintain a fair standard of living and an income stream for farmers. Are you saying that most of the support should be based on farm income? Particularly looking at livestock farmers, which obviously, representing quite an upland area, would be of interest to me. How much of it, in your view, should be spent on maintaining a farm income and how much should be spent on sustainability or the greening issues?

George Lyon: Well I would take the view that the sustainability agenda should be at least a third of the payment. Then you would top slice some more for the LFA, which is about income support as well. Then you’ve got the basic direct support with the crosscompliance, which is about delivering the base level public goods that everyone expects: higher welfare standards and higher environmental standards that go hand in hand with that.

Chair : Thank you very much indeed for being with us. I hope we can keep the conversation and the dialogue going but we’re very grateful for you being here in person this afternoon. We’re going to have a pause while screens appear so we can continue to take evidence from Mr Pack through videolink. We stand adjourned for 15 minutes.

Examination of Witness

Witness: Brian Pack OBE, Chair of the Inquiry into Future Support for Agriculture in Scotland, gave evidence.

Chair: As you probably know, Brian, we’re meeting in public here and, obviously, the evidence you’re giving us will be on the record. We’re most grateful to you for joining us. Just for the record, would you like to just say who you are and your official title?

Brian Pack: Brian Pack, Chairman of the inquiry into Future Support for Agriculture in Scotland.

Q327 Chair: Excellent. Just as a lead-off, Brian, how closely involved have you been with DEFRA in the negotiating process and how closely involved do you think the Scottish Government have been with the negotiating process?

Brian Pack: Well, clearly, I haven’t been involved in the negotiating process. I’ve been involved in collecting evidence, which DEFRA has been helpful in. I had two separate meetings with them to actually gather evidence. As part of that process, I was in Europe twice also, and then analysing records and the state of the industry in Scotland. So, that’s been the involvement with DEFRA, so it’s discussing with them the current scheme and what the issues for Scotland are.

Q328 Chair: Excellent. In your inquiry, Brian, you say that you’re unashamedly pro-farming. Would you say that the Commission proposals are equally pro-farming?

Brian Pack: I would say yes, definitely. I got a lot of comfort when the Commission document came out in November that they recognised that food production was the primary purpose of agriculture, and that’s a view that I very much share.

Q329 Chair: Excellent. And in terms of the Commissioner speaking of legitimising the CAP in order to defend the budget that is spent on the CAP, do you agree with the Commission that that’s necessary to do so?

Brian Pack: I missed the first bit of your question.

Q330 Chair: Do you think that the Commission needs to legitimise the Common Agricultural Policy to justify the amount it’s spending on the CAP?

Brian Pack: Yes. I have to say I got to the same conclusion as the inquiry progressed that I think, clearly, there’s a need to support agriculture in its role as food production, but equally society needs more in return from agriculture, and I think that we have a win-win situation because there are things that agriculture can deliver for wider society, but agriculture itself needs support to be viable. Therefore, if you can move for more outcomes from that support, then you can actually have a win-win. I think my concern is that, particularly in Scotland, agriculture is not viable without public support, and that’s demonstrated by our income figures, where, in most years, agricultural support is greater than the total income from farming, so the industry needs the support but, in return, society needs agriculture to deliver more. I think, in common with the Commission, the challenge has been: how do you look for more outcomes from direct payments? That was the challenge I found. That’s where the top-up fund-it’s in the report-fits in, which, in some way, corresponds with the Commission’s greening of direct payments.

Q331 Mrs Glindon: Could I ask: which of the Commission’s three options do you think is the most appropriate and politically achievable?

Brian Pack: I think the most appropriate is the second option. I think the first option doesn’t take us anywhere, and the third option, I think, would be a disaster for Europe and particularly Scotland. So, I think option two is the one where the energy has to go, because that takes us forward, whilst, at the same time, ensuring that we maintain agricultural production.

Q332 George Eustice: DEFRA has said that the single farm payment makes farms less competitive, and Caroline Spelman has recently stated this again at the Oxford Farming Conference. Do you agree with that? That, actually, in the long term, while you continue to make these farm payments, you’re not going to get improvements in competitiveness while that support remains?

Brian Pack: I believe we have to be very careful with the word "competitive", because we can mean such a wide range. What do we actually mean? Do we mean competitive on the world stage? If you’re in that environment, then natural advantage plays an enormous role. With our situation, particularly in Scotland, with 85% of Scotland being Less Favoured Area, it’s impossible to believe that that could be competitive with some of the really productive parts of the world, which also have other advantages.

In terms of our own market, then clearly there’s competition within Europe, and that’s why a Common Agricultural Policy is so important, so that we’re actually competing on a level playing field. And obviously, coming back to Britain, there’s clear competition between farmers in Britain, but once again we have to bear in mind the particularly disadvantaged areas that, in a strict sense, will never actually be competitive food producers with the best in the world. So, if we actually believe that unfettered competition is the solution, I believe that Europe will have a major issue in food security in the coming decades.

Q333 George Eustice: You’re obviously a clear supporter of maintaining direct payments-that was clear from your report as well-but what do you think would be a sensible thing to replace the single farm payment, if anything? Because obviously there’s this problem that the only thing we base that on is the historical reference point of the subsidies those farms used to receive. Should we replace that with something different; a different set of criteria?

Brian Pack: I think that the current situation, particularly in Scotland, becomes less dependable by the day, because we’re now working out 10 years back for a dynamic industry that has moved a long way in that 10 years. So, I think the historic base payment from a 10-years-ago reference period is not dependable and, therefore, we have to look at what else we can do, and that was obviously part of the work I did, was to try to recommend a future system.

What became very clear is a simple area-based payment does not work for the poorer areas of Scotland. When you move into the less favoured areas in particular, they’re rough grazing. Some 65% of Scotland is rough grazing. When you actually think you might convert that to an area-based payment, you have enormous variations in the production from that land, so a simple area-based payment would, I believe, be unproductive in terms of what outcome it could achieve. So, I looked at Scotland and divided it into two areas: one with the non-LFAs, which is comparable with the majority of England, where choice is available to producers, where the market should drive the outcome, and that one does. And equally to your situation in England, area payments would be right for that area. But I felt the area payments should also have a slightly more outcome-focused element to them, and that is what I call the top-up fund, which would actually be designed to produce a more sustainable agriculture. I think, moving forward, it’s not just production, but it’s sustainable production we need to achieve if we are to have a future in terms of food security, and also for Scottish agriculture. So, that would be the non-LFA.

In terms of the LFA, I saw that being divided into three parts, which, in some way, were very similar to what the Commission are suggesting in their second option. The first is a very low basic payment, which would be an area payment; the second element of it would actually be coupled support, with a calf and a lamb scheme, to ensure that we don’t get abandoned lambs, which is already starting in Scotland. We’ve lost large numbers of suckler cows and ewes, and that’s led to parts of the West Highlands in particular being abandoned, which is clearly not what anybody would want. And the third element-quite a substantial element-is a top-up fund based on standard labour requirements. Standard labour requirements, I believe, are a much better guide to what these businesses can contribute to a more sustainable agriculture. Area, for the reasons given, because of the variety of production in the range, would not be a good guide to what a business could contribute, but I believe standard labour requirements would be.

Q334 George Eustice: Just picking up on that, with hindsight do you think it was a mistake to fully decouple subsidies from production?

Brian Pack: I do. I think it went too far. Because we introduced a historic-based payment, then we almost protected the industry, but since that time we’ve seen quite a change. I believe that, particularly for Scotland and parts of England, I would guess, ruminants are very important. The only way we can convert 65% of our landmass into food is via ruminants, and I think we’re all aware of the difficulties of running profitable suckler cows in particular. Ewes have changed in the last couple of years, but we had a massive reduction in ewe numbers in Scotland, due to the lack of profitability. I think one of my, I guess, concerns is that, if you have totally decoupled payments, and suckler cows actually need support to be there, then they will disappear, and I think that would be quite wrong for Scotland in particular, and right across Europe. The same pattern is being repeated in various areas of Europe, so I think it will be really important to find an ability to have a level of coupled payments in the future.

Q335 Neil Parish: Your inquiry set out a future system of support for Scotland in particular, and how confident are you that Scotland’s voice will be heard among the 27 Member states? Because you have to take in your regional objectives, and you’ve been talking about coupled payments: are you confident you can carry on enough coupled payments for the sheep and suckler cow sector?

Brian Pack: Well, I would like to hope, in particular, that the UK identifies the issues for some of the devolved regions of the UK, where it’s, I would suggest, much more important. I’m clearly no expert on the English situation and wouldn’t try to portray to be, but I understand the different pressures in the different areas. But I felt that, since I first went to Brussels back in the autumn of 2009, to spring of 2010, and now the production of the Commission’s report, I would say coupled payments are receiving a much more favourable treatment, and I think there’s a realisation across Europe that coupled payments will be important.

Q336 Neil Parish: One of the arguments against coupled payments is that, if you’ve got coupled payments in one Member state and not another, you distort the market. What is your view on that?

Brian Pack: I think that, as long as the opportunity is there for a Member state to use coupled payments, if they see that as important to their industry and their economy, then that to me must be the basis for a decision. In our situation the suggestion is that we have coupled payments with our LFA. As outlined before, our LFA production could never be competitive with some of the better areas, and particularly the length of our winter. So, our proposal is that we need coupled payments to balance the playing field.

Q337 Neil Parish: Can I ask you: at the moment, what percentage of your payments in total is made to suckler cow producers and sheep producers? What percentage of your overall CAP payments is actually coupled, then?

Brian Pack: Just over 4% of the Scottish ceiling is coupled payments. It’s very small at the moment.

Q338 Neil Parish: And you’d be looking to try to increase that, would you?

Brian Pack: Indeed. I think, to be effective, there needs to be more than that. The proposal in the report is more than double; about treble the existing payments. So, under the current rules, but of course we’ve all the new regulation to come, we would require Europe to either up the bar or we would be dependent on the UK ceiling to allow Scotland to have their level of coupled payments where the report believes it’s necessary.

Q339 Neil Parish: While I agree with you that some coupled payments-I have a West Country constituency, so Exmoor, Dartmoor and Bodmin moor would probably help with some direct coupled payments-I think one of the arguments about coupling it completely is that, sometimes, in the previous policies, we had too much production and over-stocking.

Brian Pack: Yes. Clearly, it’s a danger, and I think, mentally, we are all attuned to the fact that that’s exactly what happened previously, where we had very high levels of suckler cow premiums in Scotland, and very high ewe payments, and neither actually had to be productive, which gave us the first problem. But my proposal’s that you would not keep a suckler cow for €140 a year; you wouldn’t keep an extra cow because you got €140. We must remember, when we distorted the numbers, the payments were well over €400 a cow, so I think it’s all about the amount of money, and we must never get back to the fact that an animal is kept for the subsidy.

I was at pains to point out in the report: the important bit about coupled payments is to help the enterprise to be profitable, but you must still have the drive within the enterprise to be as profitable as possible, and actually produce the animal. The recommendation is it’s only paid for the calf or the lamb, so an abandoned cow or abandoned ewe would not collect money, and I think that is vital. Also, it’s a fixed pot of money, so the number of calves born gets divided into the pot, rather than, if we do see an increase, then the budget just keeps going up, which is where we were before, and I think that that was quite wrong.

Q340 George Eustice: I wanted to pick up on another area of your report, which related to paying more to more active farmers, which has had some criticism from some of the environmental groups, who say that you’re in danger of rewarding old-style, more intensive agriculture. Do you think there’s a tension there between what you suggested and what the Commission say, which is that subsidies and direct payments should be more about income support rather than encouraging intensive agriculture?

Brian Pack: When I say that we should encourage active agriculture, the area of Scotland that will produce the most food is obviously a non-LFA, and the recommendation there is for an area payment, so I see no reason why that would lead to more intensive agriculture. Where I see much more a link to activity is in our LFAs, where we have massive challenges, but again I’ve suggested that we need a minimum level of activity, but the minimum level recommended is 0.12 livestock units per hectare, which equates to about one ewe per hectare. If you’re only at half a unit per hectare, then it actually halves the area rather than the situation being that you fall out, so I don’t see that as being an incentive for more intensive agriculture.

And I also believe that approved environmental schemes must qualify for the payments. We must ensure that we don’t destroy the habitats and better areas-non-productive areas-that were generated for environmental reasons, and I believe they must still receive payment. I’m sure that there’s nothing in the recommendations I made that would actually generate a much more intensive agriculture. If you doubled your stocking rate, you wouldn’t get more money.

Q341 George Eustice: Okay. And you said that these more active farmers face the greatest challenges in delivering sustainable growth. Could you explain what you mean? Are you saying that because they’re in less favoured areas and, therefore, they have lower incomes? Is that the point you were making?

Brian Pack: Sorry, could I hear that again?

George Eustice: I think you said that more active farmers face the greatest challenges in delivering sustainable growth. Why do you think that they face a greater challenge than other farmers?

Brian Pack: I think they’re clearly the ones who use more inputs and, therefore, immediately the whole water and energy challenge is there. The climate-change challenge is also there, because I was at pains, I guess, in the report to define what I meant by more sustainable agriculture, so, if you’ll forgive me, I’ll read this particular bit, and that is: "It’s an agricultural sector that is innovative and competitive, and has food production as its primary purpose, but also delivers a range of other benefits, which help to meet the global challenges of food security, climate change, water, energy supply and biodiversity." So, to me, businesses producing the most food face the larger challenges in meeting the global challenges, and they need that. If they move from where they are down the path of being more sustainable, then they deliver much more to society and, therefore, the additional payments are justified.

Q342 George Eustice: I think, in your report, you say that the direct payments are almost a form of compensation for the fact that we’ve got higher standards of animal welfare and higher food-production standards in Europe. Some would say that the correct way to compensate for that is through trade tariffs, which already exist against those third-world countries that have lower standards. What would you say to those critics?

Brian Pack: I think, in the interests of wider society, it’s right that Europe has these high standards but, as I suggest, they incur higher operating costs for our producers, who need compensation for that. If we shut ourselves off from supplies of food in the world, I think that could be a very short-term policy. I think we’re all well aware and concerned about food security, feeding our own folk over the next decade or two, and I think it would be very risky to shut ourselves off from sources of food.

Q343 Dan Rogerson: Having heard what you’ve said about the balances of where the money should go and what that should incentivise, both you and the Commission have said that you think there should be money shifted towards the provision of public goods, particularly environmental protection. Where do you agree with what the Commission has had to say, and where do you disagree with what they’ve said?

Brian Pack: Well, I think, in principle clearly we agree. I think it’s how you actually achieve direct payments that deliver more public benefits. The Commissioner has suggested greener, non-contractual and annual environmental actions that. I query-I’m really interested in this-when they will take that work forward and how they actually believe that it will deliver outcomes. My largest challenge in trying to come up with recommendations was that, clearly, it needed to be more outcome-focused. The direct payment had to be more outcome-focused, and I think that is what the Commission are saying, but then how do you make it more outcome-focused, because you’ve also got the challenge that they wish to simplify the scheme?

I’ve admitted in my report that I’ve compromised the simplification angle to actually ensure we deliver outcomes, and I believe that’s what we’ve got, and at the moment I think the Commission have not actually addressed that. It’s work in progress, and they’re going to tell us in future. We could look also at the work of the European Parliament and their report, and they suggest that an element of the direct payment could be paid for climate change, for carbon and for mitigating carbon emissions, but again they’re totally devoid of any detail of how that might work. And I spent a lot of energy-one of the committee was a particular expert on the carbon area, and we find it difficult at the moment to actually recommend how that can be achieved. But what’s happened in Scotland is that a group is being established to see how the top-up fund could actually be delivered in a manageable, minimally bureaucratic way.

I think, while I’m on that particular subject, it will be really important that Europe changes its attitude to auditing, to actually have a Common Agricultural Policy that’s meaningful. The way it’s designed at the moment, I would say, is very unhelpful to actually delivering outcomes. We have the crazy situation where farmers who do nothing run much less risk of their payment than those who are busy. And equally, for Member states, and I think England have the scars, the way they actually audit and disallow money, I believe, is particularly unhelpful to actually folk trying to deliver an outcome. So, if a Member state is bent on actually using the money sensibly, the worry is that Europe’s auditing policy will make that a dangerous road to go, and I think we need to see that solved this time round.

Q344 Dan Rogerson: Thank you. The Commission has proposed some measures, coming back to this issue of public good and environmental-protection issues. They’ve talked about crop rotation and set-aside; you’ve been less specific in what you’ve had to say. Would you like to say anything about that? Is that something you’re still considering?

Brian Pack: Well, I think, where the report is, it’s much more ambitious than where the Commission has put it. In the three examples given, I struggle at the moment to see how that will deliver a more sustainable industry. I’d be fascinated to see the detail but, at the moment, I don’t see that, if we introduced that in Scotland, we would actually achieve this move to a more sustainable industry. I would repeat again: I think that the big opportunity for all is that we can actually use the reformed CAP to move our industry to being more sustainable.

Q345 Dan Rogerson: Thank you for that. In our previous evidence session with George Lyon MEP, we were talking about this balance between sustainability and competitiveness, and he was saying that he thinks that the two can be tied together and there aren’t such contradictory pulls there. How much of your proposed top-up would go for measures to enhance competitiveness, and how much would be targeted at sustainability and enhancing sustainability?

Brian Pack: At the moment, that’s not spelled out. The report’s position was that they recommended that an expert group be formed to look at how it could actually work. So, I think it’s very much work in progress. It’s a principle established, but I would agree with George; I don’t think competitiveness and sustainability are antagonistic, but I think the future definition of being competitive will be being sustainable also.

Q346 Neil Parish: The Commission has suggested that payments be made to active farmers only, meaning only farmers that produce agricultural goods. Would you agree with excluding land being managed solely for environmental purposes?

Brian Pack: Yes, I think land that’s actively managed for environmental purposes should qualify. I think there’s a concern that everybody has about this whole question of activity. I think the Commission has been very clear that only those conducting active farming should receive payments, but it could be the farmer or the business that they’re referring to rather than the land. I think, under the health check regulations, under article 28, they introduced the opportunity to exclude businesses from receiving single farm payment if their main activity was not agriculture. I think that would be a particularly unhelpful situation to go to. It would obviously create, firstly, a lot of work for lawyers where businesses are restructured.

It would give us, for instance, if you think of our crofting situation, then a crofter with a substantial off-farm income is a very important person to what’s achieved in that area. There are lots of other situations. A number of our farmers have invested in wind generators. You could almost argue that, where that farm business has a substantial wind generator, its primary purpose is not agriculture, and that would clearly be silly. So, I think there we must concentrate: the land must be actively managed, and I think, if that’s for environmental purposes, as long as it’s approved, then it should receive payment.

Q347 Neil Parish: Yes, because it could be argued on Scottish hillsides where there are no sheep; where they’ve come off and it’s not being farmed. Do you actually believe that they should still be able to carry on claiming a payment on such land?

Brian Pack: No, clearly, and that’s where the minimum stocking rate would come in. As a crofter, I have a minimum stocking rate, and it’s a very low figure that’s recommended, at 0.12. Some of Scotland can only achieve 0.04, but in that case it would get a part of the payment, because you’d take up part of the area to get the payment. But I think, where land has no active human intervention, then it should not receive a payment. We have a situation in Scotland where our utilisable agricultural area that was identified is 6 million hectares. Currently, we have 4.36 million hectares of entitlement, so it suggests there were at least 1.6 million hectares unproductive in the original reference period. Our work suggests that the figure that should receive the money is about 4.6 million hectares, and I think that’s quite important right across the board. If we divide the 4.6 million rather than 6 million, we have more chance of having a meaningful figure. And I think just paying for land that sits there, with no human intervention, is quite wrong.

Q348 Richard Drax: Mr Pack, how does the Commission deal with increasing price volatility in the future, and is more market regulation the answer?

Brian Pack: I think it’s one of the enormous challenges that our agricultural industry faces, and society in general. We’ve seen now two grain-price spikes and what that means. I think there’s no effective market support or control now in Europe and, in many ways, that’s correct, because we don’t want to go back to the situation of producing stock just to store it, but I do believe that we certainly need an effective safety-net pricing system, so that, if we have catastrophically low prices, it’s a way of supporting the industry. So, I think effective safety-net intervention would do that.

I think we also need to look more widely at market-risk instruments, where folk can maybe hedge or take a forward position and try to minimise their risk, but I also believe that part of the reason for the direct payments is to provide financial cushion to a business against those. Since we have no effective market support, then the business needs a financial cushion, and I think, under normal ups and downs of the market, then that cushion should enable the businesses to continue, but where we have a real catastrophic collapse, we need a special mechanism. Europe is suggesting that we maybe develop a WTO-acceptable income support mechanism, almost a disaster income for situations in which income is a disaster, and I think I agree with that. But I do think there’s scope to look more at products with a mechanism for managing risk we can develop. It’s not particularly widespread in agriculture and, as you move across Europe, there are clearly quite massive challenges to introduce it smaller businesses-and in our own situation-that cannot expect to get involved in these complex instruments, so we need to find a way of actually helping. And again, I think it’s drawn the issue of producer organisations, that we should provide a way of giving them more power in the market, so that we have more balance in the supply chain.

Chair: Can we keep the answers just a little bit shorter, Mr Pack, I’m sorry, just to get them on the record? Just slightly shorter answers, if you could.

Brian Pack: Okay.

Chair: Do you want to just conclude that answer, Mr Pack? I didn’t mean to cut you off?

Brian Pack: No. I think there is a challenge, as you rightly suggest. I could likely go on for the next two hours on the matter.

Q349 Chair: Well, we have the benefit of your views. Could I just revert to an answer you gave to Mr Eustice? You said it’s important that we compete on a level playing field. Do you think we’ll ever be in a position to compete on a level playing field across Europe?

Brian Pack: Well, I think it is a massive challenge. I think, clearly, there are issues about pillar one, and particularly the new member states, and I might add in that Scotland has the fourth lowest payment per hectare on pillar one direct payments. We would like to believe that there will be some more equity across the UK, but clearly there has to be equity achieved across Europe. The difficulty is defining what that word "equity" means, because various considerations will be needed to actually pitch the level of payments. Until the equity issue is addressed, then there won’t be a level playing field, and I think my great fear is that, if rely more on pillar two, which is co-financed, then there’ll be even less equity across Europe, because-and we’ve seen that already-new member states cannot afford their share of the finance; therefore, they can’t draw down the European money. And I think making pillar two dominant would ensure that we’d have a very uncommon market.

Q350 Chair: You have touched on flexibility and equity between the regions, and in particular between Scotland and England. Do you believe that the Commission is proposing sufficient flexibility at the moment?

Brian Pack: Well, at the moment, what we’ve got would suggest that there could be enough flexibility. I think that would be a very important part of the negotiations. He’s very sensitive to different territories and very different needs, and wanting to see that they can all function and deliver local food, so I’d like to think that the sentiment’s there, and it will be quite interesting to see how it translates into more detailed regulation.

Q351 Neil Parish: There are two ways of talking about having a level playing field, and I don’t blame Scotland for the system that they brought in, but England brought a system in where, certainly, the livestock sector lost out significantly, the sheep and the intensive beef sector, because of the spreading of the payments, so isn’t there a danger, if you have too much flexibility, even in the UK, that you don’t even have a level playing field across the UK?

Brian Pack: Well, I think you’ve identified: if Scotland ended up with that outcome, it would be disastrous, not just for agriculture but for the Scottish economy. Whatever needs to be done needs to be done to ensure that’s not the outcome in Scotland. And I’d like to think that, with the benefit of hindsight and the knowledge you’ve now gained, this will give you an opportunity in England to correct some of that balance, and that would then allow us, I think, all to move forward.

Q352 Chair: Mr Pack, I think that’s a very good note on which to end. On behalf of all my colleagues here, can I thank you very much indeed for being with us this afternoon through the link, and I hope we can continue to explore the dialogue between us in the context of this report. Thank you very much.

Brian Pack: Thank you.

Chair: And God bless.

Brian Pack: Thank you very much indeed.

Chair: Thank you very much indeed, Mr Pack.