Greening the Common Agricultural Policy

Written evidence submitted by Dairy UK (GCAP 22)

Summary

- To be competitive UK farmers need to be treated on the same basis as their EU counterparts in the treatment of direct payments

- Greater emphasis needs to be given by the CAP to food security

- Many aspects of the Commission’s proposal are unclear

- The greening proposals:

o may create perverse incentives,

o will negatively impact on productive efficiency,

o will be complex to administer.

- Greening must be made compatible with agri-environment schemes

- Farmer participation in greening measures should be voluntary

- The Commission must continue to play a role in managing extremes of price volatility

- There should be an adequate transition period to areas based payments to give farmers time to adapt

Introduction

1. Dairy UK represents the interests of dairy farmers, producer co-operatives, manufacturers of dairy products, and processors and distributors of liquid milk throughout the United Kingdom. Between them Dairy UK's members collect and process about 85% of UK milk production.

2. Dairy UK welcomes the inquiry by the Committee into the greening of the CAP. The Commission’s proposals could have far reaching implications for the dairy sector.

3. The dairy industry takes its environmental responsibilities seriously. The UK dairy industry leads the world with the Dairy Roadmap which sets out challenging targets to improve its environmental performance. The dairy industry also aspires to be globally competitive and operate without public support. However, the industry operates within the context of the European single market and CAP direct payments play a significant role in determining the supply/demand balance for agricultural commodities within the EU. The function of direct payments in providing income support to farmers is explicitly acknowledged by the Commission. Therefore to be competitive UK dairy farmers need to be treated on the same basis as their European counterparts in the distribution of direct payments.

4. UK dairy farmers have the opportunity to contribute to EU and global food security. It is therefore important that the reform of the CAP does not unnecessarily impair the productive efficiency and competitiveness of UK dairy farming. The emphasis of the Commission’s proposals is largely directed towards environmental issues and the political legitimization of CAP expenditure. There is little in the package that actually assists the UK dairy industry in meeting the challenge of maintaining and improving its competitiveness in an increasingly globalised market place. The CAP is evolving away from market management; as a result industry exposure to world market price trends is increasing. This is creating a more volatile and challenging commercial environment for the dairy industry. The CAP should not impair the ability of the dairy industry to respond to this challenge and should do more to assist improvements in long term competitiveness.

5. Several major elements of the Commission’s proposals are unclear. In the time available it has not been possible to fully evaluate their potential impact.

Question 1: Whether the proposal to green direct payments will generate significant environmental benefits.

6. The Commission has not presented any significant body of evidence on the exact environmental benefits that will flow from greening.

7. It is possible that the Commission’s proposals will generate perverse incentives that could lead to farmers operating in exactly the opposite way intended, e.g.;

- Maintenance of permanent grassland: by measuring the requirement to maintain permanent grassland against a specific base year, farmers may be incentivised to plough up grassland now in order to avoid being bound by this restriction.

- Crop rotation: dairy farmers that only plant a small quantity of maize, and for which planting three separate crop types would be wholly impractical, may give up the practice with a consequential impact on biodiversity.

8. The greater the impacts on competitiveness and farm profitability the less able farmers are to afford voluntary actions or activities that provide environmental benefits. Consequently there is a risk that any erosion of profitability would put farmers under a stronger commercial incentive to intensify farming practices, which may create negative environmental consequences.

Question 2: The impact of additional greening requirements on food production and the competitiveness of the agricultural industry

9. The proposals will negatively impact on food production and the competitiveness of the UK dairy industry.

10. Farming practices are driven by the market and the consequential need to achieve productive efficiency. Greening will compel farmers to undertake actions they otherwise would not choose to do in normal circumstances;

a. A requirement for ecological focus areas will reduce the land area under cultivation.

b. Requiring a minimum of three crops puts restraints on specialisation in the crops most appropriate for a specific area.

c. Maintenance of permanent grassland will prevent farmers from exploiting commercial opportunities in the arable sector.

11. The negative impact on food production and competitiveness is confirmed by the Commission’s staff working paper on the impact of greening which shows that:

a. Compared to the rest of the EU, farms in England will be disproportionately affected by the cost of maintaining permanent pasture

b. UK farm income will fall by -4.8%

c. EU dairy farm income per worker will fall by -5.3%

12. This broadly negative analysis is confirmed by a paper from the AHDB on the impacts of greening on the UK agricultural sector.

13. The impact of maintaining permanent grassland on the productive capacity of dairy farms depends on the details of any obligations finally agreed. To be productive grassland needs renewing. The productive capacity of grassland is usually exhausted after a certain time period, ranging from less than five years to up to seven to eight years (depending on soil type) after which re-seeding is required. To prepare the land for re-seeding farmers can either use pesticides, or ploughing, followed by a break crop, after which the land is re-seeded. It is important that any final regulation recognises the diversity of practices used by farmers and the circumstances in which they operate.

14. The impact on production and competitiveness would be reduced if farmers could decide on an annual basis whether or not they wished to implement greening measures and forgo some or all of the 30% of the single farm payment.

15. It is not clear whether this would be possible under the Commission’s proposal. The wording implies that greening criteria are mandatory on all farmers if they wish to receive direct payments. If this is the case then the assignment of 30% of direct payments to greening measures is entirely superficial.

16. If, however, the 30% is linked to greening, then farmers must be given a choice of whether or not to participate. In addition, the 30% should be broken down to specific elements of the greening proposal, so farmers could choose from a menu of options. This would allow the farmers the ability to respond to market developments.

Question 3: Consistency of the greening proposals with the CAP simplification agenda

17. The Commission’s proposals are wholly incompatible with the simplification of the CAP. The greening proposals imply the maintenance of complex farm records that would have to detail the crops sown in every field and the area covered along with appropriate supporting documentation. This would have to be accompanied by an inspection and verification regime.

Question 4: How greening pillar 1 can be made coherent with agri-environment schemes

18. Another potentially perverse incentive may flow from the way in which greening requirements are reconciled with the operation of agri-environment schemes. If greening requirements for ecological focus areas are removed from existing agri-environment schemes, then it may no longer be attractive or viable for dairy farmers to participate in these schemes. The extent of any impact would depend very much on the details governing the final implementation of the CAP reform package. This adds to the difficulty of evaluating the Commission’s proposals now.

Question 5: Recommendations for improving the greening proposals

19. The generalised approach through pillar I being advocated by the Commission; attached as it is to the threat to farmers of losing part or all of their direct payments; which does not take account of specific needs of EU regions; or the existing achievements by Member States, may not be the best approach to achieving environmental improvements. On the other hand, agri-environment schemes based on compensation for income forgone have shown themselves to be effective instruments for achieving targeted environmental objectives whilst winning farming engagement.

Question 6: Other elements of the CAP proposals

20. Dairy UK welcomes the Commission’s proposals to maintain a minimum number of market management instruments to provide a safety net against extreme downward price movements. Price volatility is inherent in de-regulated agricultural commodity markets. It can be unnecessarily destructive of productive potential and economically de-stabilising. We welcome the Commission’s acknowledgement that the CAP still has a role to play in this area.

21. Dairy UK is concerned over the funding for safety net measures. The proposal implies that funds can only be accessed through the process of co-decision with the Council and Parliament. This may not provide the rapidity of intervention required to stabilise markets.

22. The package requires the reallocation of pillar I and pillar II funds between Member States. As yet there are no proposals on the allocation of pillar II funds. It is important that the UK argues for a fairer distribution of rural development funds to the UK on an objective basis.

23. Dairy UK is strongly opposed to the capping of direct payments to large farms. Whilst this measure is unlikely to affect a significant population of dairy farmers, it is nevertheless sends the wrong signal about the future desired development of EU agriculture.

24. The Commission is committed to abolishing the historic allocation of direct payments. The transition period of five years is too abrupt. The wording of the proposal implies that 40% of payments would have be calculated on a flat rate basis in the first year. However, this ignores the 30% that would be accounted for by greening measures, which implies a more rapid rate of adjustment. Dairy farmers will suffer disproportionately from the move to area based payments. It is important that there is an adequate transition period to give them time to adapt.

25. Dairy UK welcomes the Commission’s effort to define an active farmer, but it is important that this does not lead to bureaucratic complexity and perverse incentives.

16 November 2011