The Impact of Common Agricultural Policy Reform on UK Agriculture

Written evidence submitted by the

Department for Environment Food and Rural Affairs (Defra)

(CAP 11)

Introduction

1. The Committee’s inquiry into the impact of Common Agriculture Policy (CAP) reform on UK Agriculture is timely given the European Commission’s publication of its Communication "The CAP towards 2020" on 18 November. The Government is still considering the implications of the Commission’s proposals; some of the responses set out in this response are therefore provisional. The Communication itself is vague on a number of points; the precise nature of what the Commission is proposing may not become clear until it publishes legislative texts next year. Finally, this response presents the Government’s thoughts and does not necessarily reflect the views of the Devolved Administrations, who will, however, continue to play an active role in the development of the UK’s negotiating position.

Reforming the CAP

2. Reforms to the CAP and to other areas of the EU Budget are considered in tandem every 7 years. Whilst previous reforms have helped to correct some of the more significant weaknesses of the CAP, more needs to be done in preparing Europe’s farmers for the challenges to their competitiveness and sustainability which the coming decades will inevitably hold. CAP is the largest single element of the EU’s budget, accounting for 43% of spending in the financial period 2007-2013. Spending on the CAP will need to reduce very materially during the next Financial Perspective: the future CAP must be affordable, and EU spending on agriculture must deliver real value for money for EU citizens.

3. Defra wants to see agricultural policy encouraging farmers to improve their businesses to the point where they are viable and sustainable without subsidies. In future, farmers should be adequately rewarded for their provision of public goods, and should not receive permanent income subsidy.

4. The fundamentals of the global markets for agricultural produce are increasingly favourable to such an approach, with increased demand for the sort of high quality, sustainable and ethically sound produce European farmers are skilled at producing. Yet the CAP in its present form risks jeopardising efforts to open those new markets. The CAP is often cited as an obstacle to greater market orientation and the liberalisation of trade. The UK and the rest of Europe need to move towards more competitive, sustainable, market orientated farming by reducing barriers to trade and incentivising producers to take their own future in a competitive world market, and for providing public goods, addressing climate change and enhancing global food security.

The Commission’s Communication

5. The Communication offers three options for CAP Reform which can be summarised as follows:

i. Enhanced status quo – incremental change, with greater equity for direct payments, risk management tools and streamlined market measures

ii. Restructuring pillars and embedding sustainable support - greening of Pillar 1, providing minimum level of income support with support for specific natural constraints, capped payments and small farm schemes, new risk management toolkit, some improvements to Pillar 2 (including allocation), with retention of the LFA payment in Pillar 2.

iii. Ambitious reform – removal of direct payments and market management tools. Payments for public goods only which are environment and climate change specific.

6. The bulk of the Communication focuses on option ii which seems to be the Commission’s preference, but there is overall a lack of detail on how many of these proposals would or could be put into effect.

7. On Pillar 1, the proposals include: direct payments comprising of a basic income payment (subject to a simplified but not watered down cross compliance regime, and capped for large farms), a compulsory supplementary green payment (requiring simple, annual actions like ecological set-aside), an option for Member States to voluntarily to offer limited payments coupled to production, promoting sustainable agricultural development in areas of specific natural constraint (Less Favoured Areas or LFAs), and an option for introducing a support scheme for small farmers. It specifies that direct support should target "active" farmers only. Other proposals include a new risk management toolkit and streamlining and simplifying market instruments only to be used as a safety net.

8. The Communication proposes maintaining Pillar 2 objectives of competitiveness, management of natural resources, balanced territorial development. It suggests strengthening the tools to implement rural development (including capacity building and support for LFAs) and points to the guiding themes of environment, climate change and innovation.

9. Defra welcomes the Commission’s emphasis on further market orientation of CAP, measures to enhance competitiveness, innovation, the sustainable management of natural resources and climate action. However we are concerned the Communication is overall a missed opportunity, with little convincing clarity on the policy tools necessary to encourage increased competitiveness of EU farming whilst maintaining and improving its sustainability. The EU agriculture sector’s economic future – in line with the Commission’s own EU 2020 economic strategy – depends on European farmers increasing their ability to provide goods the market wants, at the right prices, and in sustainable ways.

10. The Communication does not mention the size of the CAP Budget. It mentions the current fiscal and economic challenges but its proposals do not always appear to factor these in. As we face increasing constraints on public expenditure, we will need to ensure that EU spending on agriculture is reduced, and focuses on the right areas, delivering clear, visible and measurable outputs that offer real value for money for EU citizens and deliver societal benefits that the market place cannot provide.

11. Defra is also concerned that the proposals could make the CAP more complicated: we will want to ensure that they do not entail greater administrative burdens for producers and Member States’ delivery bodies, but instead deliver a real simplification. In July this year Jim Paice MP, the Minister for Agriculture and Food, set up a task force to look at ways to reduce the regulatory burden on farmers and food processors through a review of relevant regulations and their implementation; we will aim to use the emerging lessons from the Macdonald review to help ensure that the Commission’s proposals make a real contribution to a simpler and more manageable system. Our initial view is that the proposal that direct payments should in future consist not just of an area payment (which will be the case in England by 2012) but also up to two separate top-up payments for environmental performance and for being situated in a Less Favoured Area quite clearly runs counter to the simplification agenda and raises severe risks for implementation.

12. Overall, the Commission’s proposals fall short of proposing the transformational reforms which we believe are necessary to deliver a thriving, sustainable and internationally competitive EU farming sector, and fail to set out a clear vision for the future of CAP expenditure within a reformed EU budget.

13. The draft CAP legislative proposals are due in summer 2011 with negotiations starting shortly after. There is a public consultation on the Communication proposals running from 23 November 2010 to 25 January 2011 and we will encourage all UK stakeholders and interested parties to respond directly. It is important that we give the Commission good evidence of the effect that proposals would have to help inform our discussions moving forward.

14. The committee has asked a number of specific questions, answers to which are set out below.

How will the Commission’s proposals affect the ability of UK agriculture to be competitive in a global market?

15. There has been a long period of decline in the productivity of EU farming compared to its international competitors, for example research shows that the UK has been losing ground against the US in productivity terms by 0.5% per year since 1973 [1] . The CAP is partly responsible for this, by first guaranteeing prices and then, through compensatory and then decoupled payments, guaranteeing a large slice of farmers’ income and ossifying existing farm structures; this has dampened incentives for investment in greater farm competitiveness.

16. Although the Communication makes references to the enhancement of competitiveness, it suggests no new ideas for how this can be achieved. However, it does make reference to the Commission’s Quality Products Package proposal which aims to "strengthen and simplify quality and promotion policies in order to enhance the competitiveness of the agriculture sector". The Communication also suggests improving the value added by the farm sector to the food supply chain by addressing the imbalance of bargaining power across the chain to allow farmers to have a greater share. Within this it also talks about improving the level of competitiveness at each stage of the chain, which are measures that could be best addressed through Pillar 2 initiatives.

17. The Communication fails to articulate the ambition needed to promote EU agricultural competitiveness and risks missing an opportunity to put in place reforms to make the progress required by 2020. The Government wants to see a more innovative, self-reliant, profitable and competitive UK and EU farming industry with the ability to mitigate or withstand shocks and to recover quickly from them. Increasing the underlying competitiveness of a farm business is the best safety net. It will be important to develop credible ideas on improving farm competitiveness in order to strengthen the Commission’s approach in this area. However, several of the measures proposed by the Commission would act against increased competitiveness. We are, for example, sceptical about the proposal to cap farm payments, which could simply encourage farmers to divide up their holdings into smaller units.

Do the proposals ensure fair competition for British agricultural products within the European Union?

18. It is important that any common agriculture policy helps open up trade to allow fair global competition. Defra is concerned the Commission’s proposals do not tackle the remaining distortions in the single market. In particular, by mentioning voluntary coupled support under Pillar 1 "to take account of specific problems in certain regions", the Commission indicates no plans to complete the decoupling begun in 2003. The indication that Member States would still be able to pay out up to 3.5% of their allocation as headage payments therefore needs careful scrutiny (although the Communication does state this has to be within clearly defined limits). 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.

19. British farming might also potentially suffer from the Commission’s proposal (mentioned above) to cap payments to large farms, and from the idea of a special scheme of support for small farms, if this leads to changes in the way funding is allocated between Member States. No details have been supplied of how the Commission proposes to help smaller farms, but any distortion of subsidy in their favour could lead to economic inefficiency and perverse incentives.

Will the proposals achieve the correct balance between productivity and sustainability?

20. Farmers are responsible for managing over 70% of EU land. Against the backdrop of climate change, there is an important role for a future CAP rewarding farmers for delivering environmental benefits by managing the land effectively to promote long term resilience.

21. The Communication mentions the important themes of the environment, climate change and innovation. However, there are few proposals within it which look at how Pillar 2 will be improved in the next financial perspective. We would like to see a greater emphasis on the effectiveness of providing public benefits through Pillar 2: this is where CAP expenditure provides its clearest added-value at EU level. It ensures that public money is being used to provide the benefits valued by the public, particularly for the environment such as biodiversity and responding to the challenges of climate change. Farming will not be productive in the long-term, if environmental sustainability isn’t prioritised now..

22. Agri-environment schemes have a central role to play in providing these types of benefits. In England approximately £3bn will be spent over the current Programme on these schemes. They have been shown to make a successful contribution to tackling the decline in key farmland bird populations; and a recent Defra commissioned report [2] calculated that current schemes in England would provide around £820m of wildlife and landscape benefits per year by 2013 (assuming original uptake targets are fulfilled). The report did not include other important benefits such as resource protection, or the positive impact of agri-environment schemes on public health. The recently launched ELS Training and Information Programme aims to help farmers maximise the environmental benefits of their individual schemes.

23. The best way for farmers to improve their earning power is to improve their competitiveness and productivity. Well-managed farms are best placed to manage the land sustainably, and provide valued public benefits, for which they should receive compensation from the tax payer through Pillar 2 of the CAP. We must ensure that improving productivity and sustainability are tackled together, including, but not limited to, activities that provide a "win-win" outcome for both. We will work with the Commission on ideas for achieving this, which the Communication currently lacks.

Do the proposals place the UK in a good position to help meet future food supply challenges?

24. The Commission’s Communication notes the importance of food security: "Given that [food] demand worldwide will continue rising in the future...it is essential that EU agriculture maintains its production capacity and improves it". However, Defra does not consider that the EU’s contribution to global food security is best served by using subsidy to maintain agricultural productions in all areas of Europe, no matter how unfavourable the agricultural conditions facing them may be. While there can be a justification for support in terms of the environmental public goods delivered in areas where agriculture has an important role but is unprofitable in purely market terms, particularly where those areas have high nature value, a range of national and EU instruments exist for this purpose.

25. The argument that future food shortages justify blanket subsidies is weak. Food security does not require self-sufficiency; EU and global food security is best served by rebalancing the environmental and economic objectives of agriculture policies need to be rebalanced and help to deliver broader and deeper international trade.

Will the proposals redress the imbalance in support to different sectors created by the historic basis of payments?

26. The Commission appears to be proposing a complete end to the historic basis of direct payments, and thus an end to the situation in which different types of farms have received widely different amounts of support as a result of historic entitlements during the reference period. However, it is not clear just what the Commission’s proposed new area payment would look like.

27. The Commission’s Communication states that a flat rate system would be "infeasible", without explaining why, but goes on to describe the proposed payment as "uniform". The Commission’s proposals for a compulsory supplementary green and a top up for areas of natural constraint have the potential to introduce new distortions in favour of particular types of farmer, although it will not be clear to what extent this is an issue until we see more details.

What aspects of the proposals should be made a common policy, and which are best left to Member States?

28. The recent EU Budget Review White paper stated the EU budget could best add value to Members States through being "used to finance EU public goods, where Members States and regions cannot finance themselves, or where it can secure better results". The Commission does not appear to have subjected its CAP proposals rigorously to this test.

29. It is important that policies are targeted appropriately at the right level through the principle of subsidiarity. Pillar 2 payments are able to respond to regional specificities while delivering environmental and economic objectives which are of wider European interest; and therefore add the best value. It will, however, be important to ensure that approaches to Pillar 1 and Pillar 2, and wider agricultural legislation, including the ideas trailed by the Commission on rebalancing market power, do not introduce competitive distortions between Member States.

Can the proposals be implemented simply and cost-effectively, within a short time-scale?

30. Whilst Defra strongly supports the Commission’s objective to continue simplification of the CAP, we are not convinced that the proposals outlined in the Communication achieve this aim. The Communication makes a number of references to simplifying the CAP, in order to make more efficient use of limited resources (at government level) and to reduce the administrative burdens on farmers. However, in framing their specific proposals, and in particular Option ii, the Commission makes no mention of simplification in the supporting analysis. The Commission has offered no comparison of the three options in terms of how each would impact on the administrative burdens imposed on farmers and national administrations. On the face of it, Option 2 in particular would represent a much more complex system of direct payment support than the current arrangements, and it is therefore hard to see how this option at least could be implemented simply or cost-effectively. It seems highly likely it would impose more administrative burdens on farmers, not fewer.

31. In addition, the Communication says nothing about those aspects of the control system that will remain necessary whatever policies are included in the CAP, in particular the mechanisms by which financial audits are conducted and financial penalties imposed. This is an area where there is considerable scope for simplification and streamlining and it is disappointing that the Commission’s Communication does not acknowledge the opportunities presented by this process to significantly reduce the associated costs and burdens. In this regard, we have specific concerns about the disproportionate nature of some penalties applied at Member State level when audits reveal compliance problems, exemplified by the frequent use of flat-rate penalties, rather than penalties that aim to reflect the actual risk to the fund. The Commission’s approach to audit is unwieldy and outdated and imposes unnecessary costs on all Member States - the cost in England alone for responding to EU audits of the CAP is over £1.6m per year [3] . Issues such as this also translate into burdensome inspection and control systems at the farm level and policies such as cross-compliance need to developed alongside a clear analysis of the benefits of rigid and demanding control systems. The design of the CAP post-2013 needs to embody better regulation and simplification as fundamental principles, and not as incidental considerations.

December 2010