Select Committee on European Communities Eighteenth Report


Creating a competitive EC agriculture

  63.    As we write this report, we are aware of the acute crisis faced by many farmers in the United Kingdom. A primary cause of this is the strength of sterling. For cattle farmers this has compounded serious problems linked with BSE, namely the export ban on beef and measures to eliminate the disease. Farming here, as elsewhere in the Community, is a diverse industry and the ability to weather such difficult periods varies greatly among farmers. For small farmers, for those who have borrowed heavily and for those operating in adverse natural conditions, survival may well be threatened. Agenda 2000 on the other hand is concerned with the longer-term development of the European Union including its agricultural sector. As such, it does not address the current situation in British agriculture. The current situation, however, illustrates the acute problems which arise when economic circumstances force precipitate change on agriculture. If the long-term prospect of adjustment to globally competitive agriculture is not to cause great and prolonged hardship, it is critical that the reorientation of the industry to a position where it can compete successfully is commenced as soon as possible. If not, change may be thrust upon the industry at an unnecessarily painful pace.

  64.    We are disappointed that the Agenda 2000 Communication does not go anywhere near far enough to prepare the Community's agriculture for competition in world markets without continued protection. It offers no clear, timetabled strategy for the removal of price support, quotas or compensation payments related to production. This Committee and indeed successive Governments have long argued for such a move. Only in this context can the scale and direction of adjustment needed within the industry be made plain. It is only in relation to a competitive agricultural industry that durable judgments can be made about the need for policies specifically designed to attain environmental goals or to create a vibrant and economically self-sustaining rural economy. The failure of the Agenda 2000 Communication to make proposals which set in train the process of creating a competitive agriculture creates uncertainty, misdirection of investment, false expectations about the future viability of some agricultural activities and conceals the likely scale of change. It is all the more alarming that even these inadequate measures will be weakened further in the long process of negotiation in the Council of Ministers.

Compensation payments

  65.    The Committee recognises that the transition to a competitive agriculture will involve substantial changes in the current pattern of farming within Europe. The difficulty of making these changes will be minimised if they are spread over a period of years and developed as soon as possible. In order to make changes in a socially acceptable manner there is justification for compensation to assist the process. It is essential that such compensation should be for a finite period and closely linked to the process of change. It must relate to the progressive removal of price support as the Community's agriculture equips itself to compete in the world market, and the introduction of rural environmental and development policies, suggested in Agenda 2000 and discussed below.

  66.    Agenda 2000 proposes reductions in some support prices but an increase in compensation payments of about four billion ecu per annum for the Community as a whole. Critically, it makes no mention of a time limit. As a result, farmers will continue to produce and invest on the basis of their total expected revenues from both the market and from compensation. Adjustment to the market will be frustrated. This arrangement weakens the position of the Community in relation both to its international negotiating position and to the prospects of enlargement. Compensation linked to continued production is unlikely to be acceptable in the forthcoming WTO negotiations. The Commission's declared unwillingness to extend compensation to any new Member States, on the reasonable ground that on entering the Community they will experience no price cut, will become increasingly discriminatory within a single market should those farmers who happen to be in the existing Community continue to receive compensation related to production. The Committee believes that it is essential that, in developing its Agenda 2000 proposals, the Commission should propose that compensation payments for price cuts should be clearly stated to be degressive and time limited.


  67.    It is in the context of the need to move to a competitive agriculture that Agenda 2000's suggestion that compensation payments should be modulated are most unsatisfactory. Modulation, or the capping of payments to farmers, introduces an artificial restraint on farm amalgamation and offends against the spirit of the reform proposals, which are based on the necessity to introduce greater competitiveness into European agriculture. We would strongly object to any proposals to introduce, as a cost-saving device or for any other reason, the capping of payments to farmers, whether applied on an individual farm basis throughout the Community or left to the discretion of Member States after the allocation of national quotas. Not only would this discriminate against United Kingdom farms, which on average are larger than elsewhere in the Community, but it would obstruct precisely those structural changes needed to create a modern, competitive agricultural industry.

Wider economic context of reform

  68.    Agenda 2000 says little about the wider economic context. Adjustment to a competitive market is not simply a question of what happens within the farm fence. Increasingly, the ability of the sector as a whole to compete depends on the operation of the entire food-chain from input supplier to the ultimate retailer. The need to develop highly productive and environmentally acceptable technologies; the importance of capturing the benefits of information technology to assist supply decisions; and the need for increased vigilance to avoid the establishment of monopoly positions anywhere in the chain are all relevant to the success of the Community's agriculture and food sector. In a Communication which looks towards the future of Europe and its agriculture in the next century it is disappointing that Agenda 2000 has nothing to say on this wider economic context of reform.


Why have an environmental policy

  69.    Agriculture, like all other industries, has to work within a regulatory framework designed to protect the public interest, for example, measures to prevent the pollution of water or air. As technologies change and new pressures are placed on natural resources, the regulatory framework has to be adapted to ensure that the public interest is adequately secured. Such a framework forms a common basis upon which all farms must operate. Within a single market, such as the European Community, it needs to be applied uniformly if competition is not to be distorted. Regulations, however, can only provide a starting point. To be effective they must be workable and enforceable. In an industry including many small businesses, geographically dispersed throughout a large area, it is essential that the regulatory framework concentrates on the basic minimum of rules needed to safeguard national interests. These rules should be as simple and as enforceable as possible.

  70.    The interests of the Community in the impact of agriculture on the environment goes much further than can be expressed through regulation. Agriculture produces a plurality of products, including environmental services. A move to a competitive agriculture will affect not only those products which are subject to the CAP but the delivery of environmental services which currently arrive (if at all) as a by-product. Some of the changes brought about by competition might benefit the environment, for example, lower stocking densities in areas where over grazing is a problem, or by reduced inputs on land moved from arable to extensive grassland management. Other changes could be damaging as, under pressure of financial stringency, farmers neglected maintenance of non-productive assets (such as hedges, walls or water courses) or were driven to more intensive farming systems to maintain their level of income. There will thus be a need for rural environment policies which respond to the environmental costs and benefits of changes in farming practice. Public payments to secure environmental goods will be more effective as production incentives are reduced. Still more, reductions in commodity related payments will free financial resources currently used to maintain returns to farmers. Some of the funds so released could fund an expanded environmental policy which would secure more valuable environmental products than can be delivered under present arrangements. An environmental policy, including, for example, stewardship schemes, funded in this way would not be implemented solely by farmers but by all those who could deliver the environmental benefits most effectively and at least cost.

The need to build on existing arrangements

  71.    Agenda 2000 proposes to build on the start made in the "accompanying measures" which formed part of the MacSharry package of 1992. In England this has been put into effect through the Environmentally Sensitive Areas and the Countryside Stewardship scheme. Under the ESA scheme, which is geographically targeted, there are now 22 designated areas, covering over a million hectares of land, some ten per cent of agricultural land. The Government have no plans to make further designations. Outside the ESAs the Government intend to develop Countryside Stewardship, a horizontal as distinct from a geographically designated scheme, as their main incentive scheme. So far this scheme covers less than one per cent of agricultural land. There is much scope for the expansion of measures in this country and similar situations exist in other Member States. We consider the horizontal rather than area specific approach to be appropriate so that all agriculture has environmental measures available to it. An horizontal approach does not imply a single level of approach to the environment. There needs to be a priority of objectives which relates to the environmental benefits available. The test for support would be not that a project fell in a particular area but that it was of greatest value to those providing funding. As existing ESA agreements come to an end, the projects they funded would continue to qualify for support provided that they fell within a sufficiently high priority.

The need to simplify

  72.    Agenda 2000 recognises that environmental schemes have to be applied locally and must reflect the diverse environmental situation and values which exist within the Union. However, there is a danger that this may lead to complexity and potential confusion at the point at which decisions are made by farmers and the possibility that such schemes may be used by national or regional governments to prop up non-competitive farm businesses rather than to meet identifiable environmental criteria. At the farm level this suggests that simplification must be an important goal of a renewed environmental policy. In place of the bewildering array of schemes offering funding from different sources on different terms for different but sometimes overlapping purposes, the Committee supports the Commission's intention to establish a single menu accessed through one source and covering the whole range of environmental objectives for which Community funding might be made available. An approach along these lines appears to have been adopted in the Countryside Commission for Wales' successful experiment in the Welsh uplands, Tir Cymen. This has proved popular with farmers and we commend it as a model for the development of Community environmental policies.

The importance of decoupling

  73.    In the United Kingdom, environmental schemes have either been linked to specific sites or applied on so modest a scale that only a minority of farmers has been involved. Elsewhere in the Community, notably in Germany, funds have been allocated on "environmental" grounds to a very high proportion of farmers with very modest requirements in terms of changed farming practices. This raises the spectre that environmental policy may be perceived as a disguised form of support for production, and so fall foul of the Community's commitments under the WTO. The Committee welcomes the intention expressed in Agenda 2000 to extend the environmental programme. It believes that this should be available to farmers generally, not just focused on a small number of special cases. We emphasise the need, however, in drawing up a menu of acceptable schemes, to ensure that schemes are fully decoupled from production and do not form covert production subsidies. This ensures both their environmental authenticity and their long-term acceptability. Schemes which fail this test may well come to be discredited and seen as attempts to legitimise continued protection for non-competitive farming businesses.

Less Favoured Areas

  74.    Agenda 2000 points to the considerable overlap between areas of high nature value and Less Favoured Areas. Member States have always pressed to increase the number of LFAs within their territory and as a result more than half of the Community's utilised agricultural area is now classified in this way. Farmers within these regions receive additional compensatory allowances to offset natural handicaps, of which the headage payments under the United Kingdom's Hill Livestock Compensatory Allowances are an example. This approach has, for example, encouraged farmers vastly to increase the level of sheep stocking in order to qualify for the higher rewards offered (which has been maintained despite the introduction of a quota system). Such intensification damages the natural environment and, although provision exists for Member States to impose environmental conditions on such payments, very little use has been made of it. This situation provides an example of the current contradictions between production and environment policies.

  75.    The Commission now seeks to develop support for farming in LFAs based on the positive contribution they may make to environmental goals. This would require the introduction of specific environmental objectives. In this way, such support can be regarded as decoupled and so defensible in terms of the next WTO round. The Committee recognises that there is a genuine public demand to maintain a living countryside in these regions, to which policy must respond. While Community funds may have a role to play, such priorities should however be decided and primarily funded by Member States or their regions.

Funding principles

  76.    In principle, environmental policy should enable those who benefit from a policy to choose to pay for it, or those who impose environmental costs on others to foot the bill for doing so. Whilst it is impossible to legislate precisely for such an outcome the principle is relevant. Within the Community there are some environmental costs and benefits which apply to the whole Community. Many are much more local, reflecting both differences in the natural environment and differences in the way in which it is valued. This suggests that, within a programme approved by the Community, there should be a diversity of funding sources and a plurality of decision centres related to the specific environmental goals of the policies concerned. Each funding decision has to be justified in its own right to those who are contributing the resources. The fact that savings may emerge from changes in other policies, for example commodity regimes under the CAP, is not in itself a justification for spending more on environmental policy. That must depend on the outcome of political decisions at each level within the Community. The agri-environmental policy should itself ensure that environmental considerations form part of such resource allocation decisions and that where environmental benefits are seen to be of general benefit to the Community they are adequately funded.

  77.    The application of these principles raises a number of practical questions in relation to the existing pattern of funding upon which the Agenda 2000 paper proposes to build. In future, we consider that capital as well as recurrent schemes should qualify for Community co-financing. In the United Kingdom the failure to fund capital items has limited the Community contribution to the Countryside Stewardship scheme to some ten per cent. Secondly, whilst there is a clear case for Community involvement in funding some parts of the environmental programme, this is not and should not be the same for all activities in a particular region. This is in contrast with the co-financing practices discussed below. Thirdly, environmental goods should be bought from the most efficient provider. Although in many cases this may be the farmer, it is by no means necessary that this should be the case and the opportunity to access such funds should be open to all potential providers.


  78.    Past funding procedures have relied on a measure of co-financing from the Community and the Member State. Generally, the proportion of support from the Community budget has been highest in those regions which are poorest, for example Community 75 per cent to Member State 25 per cent funding in Ireland as opposed to 50 : 50 in the United Kingdom. Agenda 2000 does not propose to change this but the logic of such an approach should be questioned. We argue that Community funding for rural environmental policy should relate to Community benefit. The gains to the Community may be very high for some schemes which operate in all Member States, including those which are affluent, and very low for some schemes thought appropriate for some sparsely-populated low-income regions. Current policy confuses the case for cohesion funding with that for environmental policy. A more effective environmental policy would result if this confusion was ended.

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