Select Committee on European Union Tenth Report


The Common Agricultural Policy

9.  The Common Agricultural Policy (CAP) was introduced in 1962 to respond to a strategic need for food security in Europe. The key objectives of the CAP, as enshrined in Article 33 of the EC Treaty, are to:

·  increase agricultural productivity and thus ensure a fair standard of living for agricultural producers;

·  stabilise markets;

·  assure availability of supplies; and

·  ensure reasonable prices to consumers.

10.  The original CAP's main mechanisms to achieve this were market intervention to remove surpluses and protection for the domestic market through import taxes and export subsidies. These led to a deliberate increase in domestic food production and, in consequence, to a reduced dependence on imports. But as production responded, surpluses grew and required increasingly heavy expenditure. This led to friction with other suppliers to the world market who were not so reliant on subsidy.

11.  In response to escalating production and expenditure a number of reforms have been introduced over the years. These have included:

·  artificial constraint of production via mechanisms such as milk quotas and compulsory set-aside for arable crops;

·  cuts in support prices, although they remain for the most part above world levels and producers have normally been given direct payments in compensation; this has allowed export subsidies to be reduced and should also allow import barriers to be reduced, although there is little evidence of any reduction in effective EU import tariffs since 1992;

·  payments have been introduced for environmentally beneficial forms of farming while support for environmentally damaging investments has been reduced; and

·  greater emphasis on rural development and encouraging farmers to look to markets and diversified forms of income to reduce their dependence on subsidy.

12.  These changes were facilitated by the MacSharry reforms of 1992-93. That reform programme established a radically new approach to agricultural policy by switching the emphasis of support from markets to farmers. While retaining the "traditional" intervention in major commodity markets as a safety net, its influence for crop products, and to a lesser extent for beef, was replaced by direct subsidisation of the farmer. So-called "compensatory payments", based on historical yields and cultivated areas, replaced a net 34 per cent reduction in cereal intervention prices, thus allowing a pro rata reduction in export subsidies. Some €6 billion in market intervention costs and export subsidisation, in for example, the cereal sector, was replaced with €13+ billion in direct subsidies. This change was regarded by the European Commission as establishing the basis for the eventual scaling down of support, increasing competitiveness and targeting state subvention on income support for the less favoured sector of rural populations. Its efforts to move the policy in this direction have unfortunately, been continuously frustrated by the EU's Council of Ministers—most notably in 1999.

13.  The most recent reform package, known as Agenda 2000, was agreed at the Berlin European Council in March 1999.[2] This brought cereal, milk and beef prices closer to world levels, and established the Rural Development Regulation, which enabled the formulation of an integrated EU rural development policy underpinning what has become known as the "second pillar" of the CAP.

14.  The original Agenda 2000 proposals were watered down, largely as a result of French opposition at the Berlin summit of March 1999. The would-be reformers—the UK the Netherlands, Germany and the Scandinavian countries—did however extract from the negotiations a commitment to a review of the operation of the CAP (particularly in relation to the operation of the cereals, dairy and beef markets) mid-way through the "term" of the Agenda 2000 programme 2000-2006.

15.  The United Kingdom has consistently argued for major reform of the CAP. The principal reasons for this have largely been domestic and economic: that is, that the CAP distorts markets, encourages overproduction in the pursuit of subsidy rather than the demands of the real market, does not offer a sustainable framework within which EU producers can operate, and causes environmental damage. While recent reforms have moderated the domestic market burden of the CAP on consumers, they have not decreased, but rather increased the burden of the CAP on taxpayers. Since import tariffs have not effectively been reduced, the consumer's additional costs resulting from import barriers have diminished little since 1992.[3] But there are increasingly strong international reasons why urgent reform of the CAP is important. The forthcoming enlargement of the European Union, the EU commitments to substantial agricultural reform made under the Doha Development Agenda of the current World Trade Organisation (WTO) trade round, and the commitments entered into at the World Summit on Sustainable Development (Johannesburg, 2002) have created a markedly different international climate from that in which Agenda 2000 was agreed. It is therefore necessary to re-examine the CAP in a fresh light.
Box 1

The language of the CAP

It is commonly agreed—even among those with professional interests in "playing the system"—that the illogicality of the CAP is matched only by the impenetrability of its jargon. We have therefore tried to minimise the use of technical terms in this Report. An abbreviated glossary of acronyms and technical terms is on the inside front cover, with cross-references to fuller explanations in the text.

Proposals for reform of the Common Agricultural Policy

16.  The Commission's proposals of July 2002[4] for the mid-term review of the CAP took the opportunity (to some observers' surprise) to propose a much more ambitious programme of changes than was originally envisaged in the original undertaking to conduct a mid-term review. Pressure from consumers for change, in the wake of the BSE, dioxin and foot and mouth episodes stimulated the Commission into proposing much more comprehensive changes which, if accepted by the Council, would have resulted in a radical change in the style and operation of European agricultural and rural policy.

The Inquiry

17.  This inquiry, by Sub­Committee D (Environment, Agriculture, Public Health and Consumer Protection)[5], with specialist advice from Mr Brian Gardner[6], has focused in particular on the external aspects of CAP reform—i.e. the implications for EU enlargement, international trade and relations with developing countries. The aim has been to test the validity of the statement, in paragraph 3.2 of the Commission's Communication (under the heading "External effects"), that although the adjustments to the CAP have been proposed "to meet internal needs and expectations, they will also help the EU to adapt to external challenges" (emphasis added).

The Committee's call for evidence

18.  In calling for evidence at the end of July 2002, the Committee invited witnesses[7] to address the following questions in particular:

·  What impact would the proposed reforms have on the current state of negotiations on EU enlargement? Was Commissioner Fischler justified in saying "they will make enlargement easier"?[8]

·  How far could the proposals be considered compatible with WTO requirements, e.g. the objectives of the Doha Round? Would they, as Commissioner Fischler has suggested, strengthen the EU's hand in the WTO negotiations?

·  Would the Commission's proposals assist with the pursuit of global sustainable development goals?

·  What are the implications for the EU's relations with Less Developed Countries?

Parallel work in the House of Commons

19.  Whilst focusing on aspects of the mid-term review which are important in their own right, the Committee also wished its inquiry to complement, rather than duplicate, related inquiries by the House of Commons Environment, Food and Rural Affairs Committee. From the Commons Committee's many conclusions and recommendations, contained in two reports published in November 2002 and January 2003[9], the following are particularly relevant and indicate a general meeting of minds on the main issues before this inquiry:

·  Internationally, the mid-term review of the Common Agricultural Policy, the process of European Union enlargement, and the WTO Doha Round may lead to significant changes in European agricultural policy, with obvious implications for the United Kingdom, where both the farming industry and policy-making are in flux.

·  The primary role of farming should be to produce food that consumers want to buy, in an open and competitive marketplace. Future interventions in the marketplace should not be made without proper assessment of their justification (whether as short-term or longer term structural measures), timescale, consistency with international obligations, and impact on the wider rural economy.

·  The measures proposed by the Commission for the mid-term review are the minimum reforms required; unfortunately they probably go far beyond what the European Council will agree.

·  However important the international dimension and however likely it is that WTO negotiations will ultimately prove to be the main drivers for reform of the CAP, it is important to frame reforms in terms of Europe's own needs and farmers' desire for certainty.

·  The proposal to decouple the vast majority of direct support payments from production is welcomed.

·  The Commission's failure to present more than options on the reform of the dairy sector, rather than detailed and clearly time-tabled proposals to bring to an end the current system of milk quotas, was regrettable.[10]

·  The proposals for decoupling and dynamic modulation[11] would make the transition to the full CAP easier for the new Member States.

·  A far-reaching mid-term review that ensures European agriculture is able to offer meaningful progress on trade liberalisation talks and ensure its own budgetary stability would be far better for farmers across the European Union than a continuing cycle of repeated minor reforms of the CAP.

20.  The Commission's package of legislative proposals (see paragraph 25 below) was published as we were finishing work on this inquiry and after the House of Commons Committee's report on the mid-term review had gone to press.

Developments since the Commission's Communication of July 2002

21.  Subsequent consideration and development of the Commission's proposals was significantly affected by decisions of the Council of Ministers in October and November 2002. EU Foreign Ministers meeting in Brussels on 18 November 2002 agreed that the candidate countries would join the Union from May 2004. This followed the European Council of October 24-25 agreement of terms for the application of the CAP to the ten new Member States and, importantly, the parameters within which the agricultural support budget (section 1a) will operate over the next ten years. The EU leaders agreed that the existing CAP, most importantly the direct payment system, should be applied in the new Member States in the gradual manner recommended by the European Commission.

22.  The agricultural budget for the enlarged EU ("EU25") is to be frozen at the 2006 estimated level of €45.3 billion (1a, Guarantee) plus an annual adjustment for inflation of 1 per cent p.a to 2013. These limits are to apply only to EU25; if Bulgaria and Romania join the Union in 2007 as planned, new financing arrangements will have to be made to deal with the not inconsiderable cost of applying the CAP to these two highly agricultural countries. It was agreed that the CAP, reformed or not, would be applied on a gradual basis with most importantly direct payments being made at the level of 25 per cent of the EU15 level in 2004, at 30 per cent in 2005, 35 per cent in 2006 and 40 per cent in 2007. The remaining 60 per cent would be applied in equal tranches in the remaining six years to 2013.

23.  Extrapolation of the budget agreement suggests a limit of €48.6 billion by 2013 compared with current CAP spending of approximately €41 billion. This would suggest a margin of about €7 billion for the cost of applying the CAP fully to the new member states by 2012-13. Even without the additional cost of Bulgaria and Romanian accession to the agricultural common market, it would appear unlikely that the cost of the CAP for EU25 will be met within these budget limits—unless substantial progress is made within the current mid-term review of the CAP with both modulation—the reduction of total subsidy payments—and subsidy capping.

24.  There is uncertainty on what was agreed on the issue of the possible reform of the CAP at the end of October summit. It is maintained by a majority of observers and commentators that in return for the agreement to impose relatively tight ceilings on agricultural subsidy and market support spending, the French Government was able to secure a commitment to delay CAP reform until after 2006. This is definitely not the view of the European Commission or the Governments of Denmark, Sweden, the Netherlands and the United Kingdom. There is however still considerable doubt on this issue. The official communiqué makes no mention of any undertaking to delay any reforms until after the end of the current budgetary period in 2006. On the contrary, the communiqué re-affirms the Union's commitment to continuing the mid-term review and its role in the Doha round of agricultural trade negotiations. The communiqué states that the Council "agreed specifically that the limit on agricultural spending would be without prejudice either to the European Commission's mid-term review of agriculture based on part 22 of the Berlin Conclusions or to the Doha round."[12]

25.  In the light of the Council decisions and continuing negotiations, the Commission modified its original proposals and published them, in the form of draft Regulations, on 22 January 2003.[13] We have taken these latest proposals into account in drawing up our conclusions on the mid-term review. The six main elements of the proposals as they now stand are described in Box 2. Compared with the original reform plan, they reflect the decision to keep options open by setting aside financial resources for a continuation of the "traditional" CAP, which under the plan was intended to be effectively eliminated by 2012.
Box 2

The Commission's mid-term review proposals (22 January 2003)


Existing direct payments to producers will be compounded into a single income payment based on direct subsidy payments for all products in the years 2000 to 2002 (dairy payments would be calculated on the basis of what the subsidy would have been had they applied in those years). Subsidy entitlement will be divided into units by dividing the total farm payment by its hectarage; these entitlements will be transferable in whole or in part.


Direct payments will only be fully paid if recipients conform with EU environment, food safety, animal health and welfare standards. Non-compliance to be penalised by 10 to 100 per cent reduction in subsidy payments.

Strengthening of Pillar 2[16] policies

New subsidy schemes to improve quality, provide consumer information, to aid compliance with EU environmental health, public health, plant and animal health regulations, farm advisory services and improvement in animal welfare.

Modulation[17] (degressive)

The application of modulation (originally to take effect from 2004) has been delayed until 2007 and will apply only to farms drawing more than €5,000 a year in subsidies. The amount received by the farms in this category will "degress"—they will be reduced by a larger amount each year and the reduction will be greater the larger the subsidy payment. The largest beneficiaries, drawing more than €50,000 in subsidy a year, will lose only 1 per cent in 2007, but by 2013 their payment will be cut by 19 per cent compared with the original proposal for a maximum of 20 per cent. Whereas in the July proposals all of the money thus saved, €3-4 billion, would have been transferred to Pillar 2, in the January 2003 version only approximately a third of the saving, 6 per cent of total direct payments, €1.48 billion, will be transferred to Pillar 2. The other two thirds will be put back into Pillar 1 to cover possible shortfalls created by the October 2002 budget limitation agreement.

Farm Advisory Scheme

The Farm Advisory scheme, in the July 2002 proposals known as the Farm Audit, will be compulsory only for farms drawing more than €15,000 a year, rather than €5000 as in the original proposals. It is essential to the operation of the cross-compliance conditions.

Dairy policy changes

Present quota regime to remain in place until 2014, combined with the bringing forward of price adjustments from those previously scheduled 2005 to 2004. An effective 28 per cent cut in the milk target price by the end of the 2004-09 period through progressive cuts in the butter and skim milk powder prices, to be compensated for by direct subsidies. The global milk delivery quota to be increased by 2 per cent—1 per cent in each of the years 2007 and 2008 (resulting in a total increase of 3.5 per cent when the 1.5 per cent increase already scheduled for the post 2005 period under Agenda 2000 is included).

2   House of Lords European Communities Committee, 18th Report 1997-98, CAP reform in Agenda 2000-The transition to competition: measures for rural development and the rural environment, HL 84 (March 1998); 8th Report 1998-99, A reformed CAP? The outcome of Agenda 2000, HL 61 (May 1999). Back

3   The total average annual budgetary cost of the CAP is currently €40-42 billion (compared with €32 billion in 1991), of which direct subsidies to producers amount to approximately €28 billion. In addition, the consumer loss resulting from import tariffs, other barriers and market price manipulation amounts to a further €53+ billion, according to OECD calculations. The total annual producer subsidy equivalent (PSE)-the total of budgetary and consumer loss-for the EU is therefore put by the OECD at €93-95 billion a year. Back

4   COM (2002) 394 (10 July 2002): Communication from the Commission to the Council and the European Parliament on the mid-term review of the common agricultural policy. Back

5   See Appendix 1 for membership. Back

6   Editor of Food Policy International and European agriculture policy analyst.  Back

7   A list of witnesses and others who helped with the inquiry is at Appendix 2. Back

8   Presentation by Commissioner Franz Fischler to the European Parliament Agriculture Committee, Brussels, 10 July 2002 (Speech/02/330). Back

9   House of Commons Environment, Food and Rural Affairs Committee, 9th Report, 2001-02, The Future of UK Agriculture in a Changing World, HC 550-I; 3rd Report, 2002-03, The Mid-term Review of the Common Agricultural Policy, HC 151. Back

10   The position is now even more regrettable. In the Commission's modified reform package of January 2003 (see paragraph 25) radical reform of the dairy sector is clearly a long way off, with the proposal to continue the competition-restricting milk delivery quota system for another eleven years. Back

11   See Box 2 and footnotes. Back

12   Presidency Conclusions, Brussels European Council, 24-25 October 2002, SN 300/02. Back

13   See footnote 1 for references. Back

14   The separation of subsidies to supplement farm incomes from subsidies to support production, so that levels of production are no longer artificially maintained or stimulated. Back

15   Making subsidies conditional on compliance with environmental and other conditions not related to production. Back

16   Pillar 1 of the CAP subsidises production, while Pillar 2 supports rural development, environmental protection and other structural measures. Back

17   Movement of funds from Pillar 1 to Pillar 2, or (in the case of the latest mid-term review proposals) for other purposes, through reductions in direct production subsidies. "Dynamic modulation" is the gradual application of modulation-in the original mid-term review proposals 3 per cent a year to achieve an eventual switch of 20 per cent. Back

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