Greening the Common Agricultural Policy

Written evidence submitted by the Tenant Farmers Association (TFA) (GCAP 03)

1. Introduction

1.1 The Tenant Farmers Association (TFA) welcomes the opportunity of providing evidence to the Select Committee as part of its Inquiry into the Common Agricultural Policy (CAP) Reform proposals tabled by the European Commission.

1.2 The TFA takes note of the terms of reference of the Inquiry which focus on the proposed measures to "green" Pillar 1 of the CAP - direct payments. However, it is also noted that the Committee would welcome views on other elements of the CAP proposals. The TFA therefore provides in this written evidence views on both the greening element of Pillar 1 and other aspects of the reform package.

1.3 The TFA is the representative organisation for tenant farmers in England and Wales. As such it is the only organisation dedicated to the tenanted sector in England and Wales and is concerned to ensure that all new and amended policy respects the fact that there are individuals within the farming community who do not own the land that they farm. The TFA therefore seeks to ensure that all new policy takes into account the unique impact it may have on the tenanted sector of agriculture.

1.4 In 2010 the TFA put together a report under the heading "2020 Vision for Agriculture" which looked ahead over the 10 year period from 2010 to 2020 to establish a vision for agriculture from the perspective of its tenanted sector. Part of that publication was dedicated to the CAP and the contents of that section are included as an Annex to this evidence. It is against the benchmarks of the principles set out in the TFA’s 2020 vision that the TFA judges the package of reforms announced by the European Commission.

2. Greening of Pillar One

2.1 The TFA notes the European Commission’s desire to extract further environmental benefits from Pillar 1 over and above what is already achieved through Cross-Compliance. However, with the growing consensus on the global challenges which face us in the years which lie ahead, the TFA argues that the European Commission's thinking is flawed.

2.2 With the world population already standing at 7 billion people and likely to rise to 9 billion people by the middle of the century, coupled with increasing average demand for calories, the biggest challenge for Europe and the world must be long term food security. This has to be achieved against a background of concerns about the sustainability of fossil fuels, challenges in relation to access to water and when global, agricultural input and output markets are characterised by strong volatility.

2.3 The European Union must play its part in meeting these challenges together with the rest of the global community. The operation of the Common Agricultural Policy provides the European Union with its most significant opportunity to influence the global response to the challenges which lie ahead by focusing on ensuring sustainable food production within outcome driven standards for environmental impact, animal welfare and food quality.

2.4 The TFA is concerned that the proposed elements of the greening package proposed for Pillar 1 represent an overly process driven approach in comparison to the outcome driven approach referred to above. The environmental and bio-diversity needs of individual Member States will vary enormously and the very prescriptive nature of what is required within the greening element of Pillar 1 will not do justice to this wide variation of concern. The Cross-Compliance regime, appropriately amended, provides the necessary basis of ensuring that all farms within the EU meet basic legislative, environmental and animal welfare standards. Whilst these standards are referred to as "basic" they are very often standards which are in excess of the requirements faced by producers in non-EU countries.

2.5 The correct setting for the issues of concern articulated by the intentions behind the proposals for greening Pillar 1 should be Pillar 2. Member States should have the flexibility to look at their individual needs for enhanced environmental management and to ensure that such management is promoted through a properly functioning programme delivered through Pillar 2. In view of this the TFA would argue that the greening proposals for Pillar 1 should be deleted from the legal texts and in their place Member States should be required to consider what they believe to be appropriate, enhanced environmental outcomes and the best means of achieving those outcomes in the circumstances which prevail in each Member State.

2.6 There is also a specific concern for tenant farmers. It is an obvious point that tenant farmers are required to pay a rent to their landlords for every acre of land which they hold within their tenancy agreements. Leaving land fallow in some form of ecological set-aside, as envisaged by the current proposals from the Commission, would mean that tenants could not profit from the land upon which they will be required to pay rent. This simply demonstrates the lack of clear thinking on this element of the reform package and underlines why it needs to be fundamentally re-addressed.

2.7 European producers should not be restricted in using their competitive advantage to best affect to meet the challenges which lie ahead. Of course it is important to ensure that environmental goals and objectives are met but these are properly the domain of Pillar 2 and not Pillar 1.

3. Entitlement Issues

3.1 The TFA agrees that there should continue to be a system for the delivery of direct payments which requires the occupier of land to hold sufficient entitlements to claim the payment by matching entitlements to land. The TFA does not believe it is appropriate to have a system which is based only on occupation as the benefits of such a system could be easily lost in terms of increases in land prices and more particularly land rents. Whilst there will still be an element of land price inflation under an entitlement based approach it will be much lower in comparison to the inflation that would occur with a land only system.

3.2 However, the TFA is concerned about the Commission’s proposal for the allocation for entitlements. Whilst it is noted that only those individuals who have made a valid claim on at least 1 hectare of land in 2011 will be eligible to make an application in 2014, to choose a forward date upon which the allocation of new entitlements will be based will be a recipe for disaster. Having experienced some land banking prior to the 2003 CAP reforms and more particularly between 2003 and the introduction of the Single Payment Scheme in 2005, we are fully expecting many private landowners to be reserving their positions with regard to the reforms planned for 2014. There will be many individuals who will have met the qualification criteria of having made a valid claim in 2011 who will be able to hold back land from the market place, which would otherwise have been let out, to ensure that they can maximise their claims for new entitlements in 2014.

3.3 To avoid such speculation the TFA would prefer a system which used the entitlement holdings of the existing arrangements to inform the entitlement holdings for the new arrangements. The TFA does not see the benefit of losing the current entitlement system completely. The TFA has proposed that the allocation of new entitlements should be based on the number of entitlements held by individuals in 2011 subject to a maximum of the number of hectares claimed in 2014, whichever is the smaller.

3.4 In order to deal with the period of time that will have elapsed between 2011 and 2014 consenting parties should have the flexibility to affirm specific and unequivocal agreements which stipulate clearly that the eligibility to claim entitlements in 2014 based on the 2011 application has been transferred between the parties for fair value. These provisions should allow individuals to transfer the eligibility for claiming entitlements as a whole or in smaller entitlement parcels. There will also need to be provisions to allow Member States to correct injustices which may have occurred prior to 2011 where individuals have been forced to relinquish entitlements for little or no consideration in comparison to their value. This may have occurred in arrangements involving tenants on short duration agreements which have been brought to a conclusion prior to 2011.

4. Active Farmers

4.1 The TFA commends the European Commission both in its desire to ensure that only active farmers are eligible to receive entitlements and associated direct payments and in attempting to reach a workable definition for active farmers. The TFA has been concerned about individuals who are not actively managing land themselves but who are still able to access Pillar 1 and Pillar 2 schemes even where they are allowing other individuals to actively use the land upon which they are making their claims. The TFA has been a vocal advocate for the inclusion of a viable definition for active farmers in the next round of reform.

4.2 However, the TFA does not believe that the European Commission has, as yet, produced a workable solution. It appears from the draft legal texts that the Commission is attempting to hit two particular targets. The first is to ensure that only land which is being actively farmed is entitled to be used for the claiming of support, and secondly to deny access to support to those individuals for whom farming is just a small component of their wider economic interests.

4.3 The TFA believes that it is right that the European Commission should define eligible agricultural activities in the way it has done within Article 4(c) of the draft regulations. However, rather than attempting to exclude individuals for whom agriculture represents a small part of their economic activity, the TFA believes that the Commission should instead be excluding those individuals who cannot demonstrate that it is they in particular who are carrying out the eligible activities on the land upon which they are basing their claims.

4.4 Instead, the TFA believes that an active farmer should be defined as the person in practical occupation of the land being used for making the claim, who is also in close management control of the activities on that land and bearing the entrepreneurial risk from those activities. All other individuals should be excluded and this should apply to schemes under both Pillar 1 and Pillar 2. The TFA believes that this goes to the heart of ensuring that the right people are getting the appropriate level of support.

4.5 In order to minimise the regulatory burden involved in applying this test, the TFA would see the active farmer test operating on a self-assessed (declaration) basis. Applicants would be required to ensure that they were able to meet the criteria for being defined as an active farmer and to sign a declaration to that effect when making their applications. Other than that, at the point of application, applicants would not have to submit documents to support their declaration of active farmer status. However, Member States should be then required to make compliance with the active farmer rules a point upon which applicants are inspected in the normal course of events. Only upon inspection would applicants be required to produce evidence which substantiated the declarations which they have made.

5. The Move to a Flat Rate Payment

5.1 The TFA recognises the desire of the European Commission to move all Member States towards Regional Average Payments where the regions are based on nationally selected, objective criteria.

5.2 The TFA does not oppose this move but would ask the European Commission to ensure that for those still using an historic basis (for example Wales) a reasonable length of transition is allowed. The TFA believes that to require 40% of the payment in year 1 to be based on the Regional Average Payment to be a step too far. The European Commission will be aware that England employed a seven-year transition to a Regional Average Payment. Although the scheme presented particular problems for implementation in England, the TFA would argue that regions who are still using the historic basis should be allowed at least a similar period over which to move towards a regional average basis as previously allowed in England.

5.3 The TFA notes the aspiration of the Commission to move towards a flat rate payment across the whole of the EU. However, the TFA would not endorse that approach. There remains considerable variation within each Member State to necessitate the continuance of the identification of specific regions at a sub-Member State level. The TFA does not therefore believe it is appropriate to have a standard rate across an individual Member State let alone across the whole of the European Union. Whilst the TFA accepts that the concept of a flat rate payment across the EU is only an aspiration at this stage, it is not seen as a reasonable, achievable or sustainable approach and reference to it should be removed from the proposals.

6. Payment Caps

6.1 The TFA is neither philosophically opposed to or in favour of payment caps. However, it is opposed to the cuurent proposals as tabled by the European Commission. The TFA’s opposition is based on three elements.

(a) Firstly, the level at which reductions in payments begin to take effect is much too low. At an initial threshold of €150,000 too many farm businesses within the United Kingdom could be hit with payment reductions in comparison with farm businesses in other Member States. If a payment cap is deemed to be necessary it should be set at a much higher level.

(b) Secondly, the steps whereby progressive reductions are made appear to be arbitrary. Again, if a cap is deemed to be necessary then it would be better to set a single rate at a reasonably high level.

(a) Thirdly, whilst the TFA welcomes the allowance for individuals to claim higher levels of payment before reduction through adding employment costs, there will be many farm businesses which will use labour in ways other than what would be a defined as straight employment (for example family labour, contract labour or volunteer labour) the value for which the applicant cannot include which seems unfair. Again, if a cap is deemed to be necessary and labour costs are to be taken into consideration then all labour should be included without exception. There are also some concerns about how this plays out in terms of extra complexity and the ability of payment agencies to cope with the level of scrutiny that would be required.

7. Young Farmers Scheme

7.1 The TFA welcomes the European Commission’s proposals to provide enhanced levels of payment to young farmers who have started their farming career within five years of 2014. However, the TFA would suggest that rather than limiting the scheme to young farmers it should be broadened to include all new entrants.

8. Small Farmers Scheme

8.1 The TFA supports the notion of a Small Farmers Scheme but considers that it would be appropriate to allow Member States to set their own limits to fit in with the very different farm structures that operate across the whole of the EU in different Member States. However, the TFA does not believe that those who are participating in the Small Farmers Scheme should be excluded from the active farmer eligibility tests. Bearing in mind the changes which the TFA has recommended to the active farmer tests as noted above, these should apply regardless of whether the applicant is taking part in the full scheme or the Small Farmer Scheme.

9. Specific Tenancy Issues

9.1 The operation of the Single Payment Scheme between 2005 and the present day has provided an important insight into the impact that policy can have on the landlord/tenant system. This experience should be used to inform the policy framework for the support arrangements in place from 2014 onwards. The TFA has been particularly concerned by tenancy agreements drawn up just prior to and over the period of the Single Payment Scheme which require tenant farmers to pass payment entitlement to landlords at the end of those tenancy agreements for little compensation in comparison to their value. The TFA believes that such practices should be outlawed in the new arrangements post 2014.

9.2 There have also been other arrangements where landlords have sought to capitalise on the value of entitlements by expressing rental formulas using the Single Payment Scheme as a basis for those formulas. Again, the TFA believes that such arrangements should be outlawed. Both these situations represent a direct challenge to the objective of ensuring that the CAP is providing a fair standard of living to primary producers and must therefore be specifically addressed. That is not to say that the operation of the direct payment scheme should not be considered as a relevant factor in the rent review process. The TFA would only seek to outlaw those practices which seek to use rental formulas specifically related to the tenant's ability to claim direct payments.


Annex

Section 7 of the TFA’s 2020 Vision for Agriculture from the Perspective of the Tenanted Sector of Agriculture

2020 Vision for the Common Agricultural Policy

By 2020 the Common Agricultural Policy should retain a focus for ensuring that it is supporting the livelihoods of working farmers whilst providing a framework for food and environmental security.

7.1 The TFA believes that the fundamental justification for any agricultural policy which supports primary producers should be to correct apparent market failures. In this respect the TFA does not believe that the debate on agricultural policy can be starkly defined on the basis of CAP or no CAP. The issues are far more complex than that. The TFA believes, with all its failings, that the CAP is essentially attempting to address market failures. The question ought to be how the CAP should change to adequately address those failures rather than taking the line that the CAP should be abolished because of its inefficiencies.

7.2 The TFA believes that there are five principal areas of market failure that any agricultural policy should seek to address:

· As economies grow and individuals become more prosperous, they will tend to spend a diminishing proportion of their disposable income on food. This means that those who are responsible for producing food (i.e. farmers) will see a decreasing proportion of national income spent on the products which they make. This is why farmers as a group find it difficult to reap the benefits of economic growth enjoyed by others in society. As incomes rise consumers are also noted to trade up to consume more processed, pre prepared and restaurant food where the value added goes to parties beyond the farm gate.

· The structure of food marketing, particularly in the UK, has become such that producers face an unfair and wholly unbalanced platform upon which to do business with processors and retailers. For example, in the sugar sector there is one, single, monopoly processor in the UK which has, in the past, used its monopoly position to the disadvantage of sugar growers throughout the whole of England. In the milk sector, there are only a handful of processors and a handful of large retailers purchasing milk from those processors. Evidence produced by the Dairy Co [1] shows that both processors and retailers have managed to maintain or increase their margins over recent years while producers have seen reductions in their margins. Across the whole range of agricultural products, producers face a very small number of large, retail outlets. This unbalanced structure leaves most producers in a very vulnerable position and even with the introduction of a food industry ombudsman these problems are likely to carry on for some time into the future.

· The market cannot deal effectively with issues of long-term food security. The UK is already in a position of only being able to satisfy 70% of its temperate food needs from domestic sources. There has never been any indication provided by previous Governments as to when we should begin to get worried about the level of food security nationally. The TFA is concerned that the current structure of food marketing takes too much of a short-term approach to this issue and feels that there needs to be a more adequate expression of the Government policy towards food security in the long term.

· It is inherently difficult for the market to factor in increased animal welfare and environmental benefits into the pricing structure for food. UK farmers, as noted above, are facing a large degree of regulation in these areas and they are unable to pass the costs of this up the food chain. Many farmers are working hard to meet environmental and animal welfare standards and yet they have to compete for retail space with producers from elsewhere on the globe who often do not have to meet the same standards.

· Connected with the fourth point above, there is a general lack of awareness amongst consumers about the differences in quality of the products which they are purchasing when comparing UK sourced and internationally sourced products. Whilst they might see beef from Ireland, Brazil or Argentina as beef with a different label, it is the case that products from those countries are not perfect substitutes because they have been grown under different conditions and different regulations. More effort needs to be put into making sure that consumers are aware of these differences when purchasing their food.

7.3 The TFA offers the following seven principles for future reform of the CAP.

· Direct payments through Pillar 1 must continue to form the principal basis of support through the CAP.

Direct payments through Pillar 1 continue to be essential to ensure that farmers receive a fair standard of living. It is clear that the marketplace is unable to deliver sufficient profit to the farming community in order to provide for sufficient drawings and reinvestment. Whilst the introduction of a food industry ombudsman in the UK and potentially across the EU will assist, it cannot be seen as a "silver bullet". Recent history has shown clearly that there is a built-in resistance to food price inflation to the extent that it is impossible to ever see a situation where prices in the market place will be sufficient to provide an adequate, sustainable return to primary producers.

The support available through Pillar 1 also recognizes the higher environmental and animal welfare standards to which food is produced within the EU in comparison to those countries outside the EU. These come at a cost to the farming industry. We cannot expect to have these standards maintained and at the same time withdraw the support available through Pillar 1. The extra costs faced by the domestic, farming industry are not recoverable from the market place and therefore must be recoverable through the public purse

· Measures must be put in place to ensure that support payments do not become capitalised into land values.

A major concern for the tenanted sector is the extent to which support payments available through Pillar 1 are becoming capitalised into land values through rent. It is also of concern that land owners, even where they have tenant farmers, are increasingly able to access funding through Pillar 1 by passing on scheme conditions through contracts of tenancy. We do not believe that this is in the spirit of the CAP nor is it in keeping with the principles of the CAP to provide support to working farmers.

The TFA believes that European rules should make it clear that support payments through Pillar 1 can only be paid to active farmers. Whilst these rules exist to some extent they are open to significant abuse particularly where large landowners actively farm a small proportion of their land holding in hand and rent the remainder out. In this way they are able to acquire and control entitlements over a larger area of land than they are actively farming. Support payments should not be available to individuals owning land which is being farmed by another individual either as a result of direct claims or through contractual clauses in tenancy agreements requiring tenants to forgo payments which are reserved and claimed by the landlord. Rules must also be put in place to prevent landlords from using clauses in tenancy agreements to claim ownership of single payment scheme (or equivalent) entitlements at the end of the tenant’s period of occupation.

· Rates of modulation should be uniform across the European Union.

The TFA is concerned that farmers in other Member States have a competitive advantage in comparison to farmers in the UK given that they face significantly lower levels of modulation. The TFA appreciates that this is as a result of the UK’s low budget share of funding for agri-environment/Pillar 2 schemes. However, it is unfair that there should be differing levels of modulation across the EU and they should be standardised at one rate so that there is no competitive distortion between Member States.

· All Member States should be required to have the same level of decoupling.

As with rates of modulation, it is unfair that some Member States of the European Union are allowed to continue to provide direct, production related support in certain sectors whereas in other Member States, like the UK, the support has been decoupled. This provides an unfair competitive advantage for producers in those Member States continuing to provide coupled support and must be brought to an end at the next reform.

· Domestic producers should be protected from imports from non-EU countries using lower environmental and animal welfare standards.

It is wrong that domestic producers should be required to farm to high animal welfare and environmental standards when imports from other countries are allowed access to the domestic market even though they are produced with lower standards. It is of significant concern that domestic producers are priced out of the market by lower quality products and as a result we simply move to overseas the environmental and animal welfare practices which would not be tolerated at home. We must be allowed to protect our high standards through the use of trade restrictions to block products produced using lower standards.

The EU should argue for globally recognised standards for production of food on the basis of health, welfare and environment. These should be the standards by which every country should be required to produce and those standards need to be audited at national level. Where countries are unable to reach those globally agreed standards, other nations should have the ability to restrict trade from those nations. Once those international standards have been achieved, if the EU or national governments wish to apply higher standards domestically, then producers should have access to direct funding from the state to help them meet those higher standards.

· Market management instruments should be introduced to assist the industry in managing volatility.

A consequence of the move away from coupled support has been a major increase in the volatility of returns to primary producers. The TFA is concerned that the considerable increase in volatility is having a negative impact on our long term food security. Despite its many shortcomings, the Common Agricultural Policy of the past did at least provide a degree of domestic stability to producers which we are now seeing reverse as the market protection the CAP afforded is removed. Whilst the volatility that is now being experienced is leading to the development of ideas for new hedge funds and futures markets, the TFA does not believe that this is a stable framework within which primary producers and their landlords can be expected to invest. The TFA believes that policy solutions need to be developed to minimise the impact of volatility on long term decision making.

The TFA believes that the CAP should create a risk management system which provides an element of insurance against both commodity and input price shocks to smooth out the peaks and troughs in both. We believe that this could be delivered through Pillar 1.

· Measures should be put in place to protect the access of tenant farmers into Pillar 2 schemes.

The TFA has become increasingly concerned about the extent to which land owners have been able to access agri-environment schemes even where they have tenant farmers farming their land. The rules on "management control" allow land owners to pass on scheme conditions through contracts of tenancy whilst taking the full benefit of the scheme themselves. As with access to Pillar 1 funding, we do not believe that this is in the spirit of the schemes created nor in keeping with the principles of the CAP which are aimed at providing compensatory payments to working farmers for the income foregone in participating in Pillar 2 schemes. These issues must be addressed in any future CAP reform through further European rules to protect the position of tenant farmers. The EU must ensure through an adequate audit trail that the intended beneficiaries of its policies are actually benefiting as opposed to the benefit being siphoned off by others.

November 2011


[1] Dairy Supply Chain Margins 2007, Dairy Co.

Prepared 30th November 2011