Examination of Witnesses (Questions 1
- 19)
WEDNESDAY 7 FEBRUARY 2007
MR JEREMY COWPER, MR ROBIN MANNING AND MS SIMONE
PFUDERER
Q1 Chairman:
Welcome, good morning and thank you for coming to help us with
the beginnings of our inquiry—we are just at the very start
of this. Our view is that, although in the United Kingdom at the
moment we do not have a big stake in a domestic wine industry,
clearly it is of significance, at the very least, because of the
amount of resource it takes up in the European Union, and that
is why we decided to do this inquiry. At the beginning of these
sessions I always have to start with a long rigmarole, which is
that you will be aware that this is being recorded and maybe broadcast
or webcast. Also, you will get a copy of the uncorrected transcript
and you can respond to that as you wish. Would you like to introduce
yourselves and then we can get on with the questions?
Mr Cowper: Yes, thank you very much indeed
for giving us the opportunity to come here today to give evidence.
I am Jeremy Cowper, and can I introduce my colleagues? Robin Manning
is the Head of our Cereals and Wine Branch and knows a lot about
CAP regimes. Simone Pfuderer is the Economic Adviser on CAP crops
regimes and also some livestock regimes. Since the beginning of
this year I have been the Head of our Crops, Plants and Produce
Division, which embraces the wine regime, so I am quite new to
this. In fact, we are all relatively new on the wine sector, but
we hope certainly to make a contribution to your inquiry and to
learn from it, certainly from what you think and from the other
evidence that is given. Would it be all right, Lord Sewel, if
I make some opening remarks?
Q2 Chairman:
Yes, please do.
Mr Cowper: I hope you have received the written
evidence that we gave, which was very useful for us in sorting
out our thoughts, as indeed this whole exercise has been in making
us look at a number of aspects of the regime and the possibility
of the reform. Defra is the lead department for the Common Agricultural
Policy and so we are responsible in this context for the Common
Market Organisation in wine—the CMO, as we call it. It is
one of 20 or more commodities for which a CMO exists and the aim
of the CMO is to stabilise markets, to ensure a fair standard
of living for agricultural communities and to ensure fair competition
within the single market. To achieve this the CMO includes many
of the classic instruments found in Community regimes, including
measures aimed at supporting and protecting the internal market
and provision to assist exports. This CMO is slightly unusual
because it includes a complex set of rules on wine making practices
and labelling, which are designed to ensure the maintenance of
standards and protection of consumers. Wine is a significantly
important commodity in many Member States. As you have observed,
we have a small sector ourselves but in France, Italy and Austria
it is around 10% of agricultural production, and also in Portugal;
and in total it is about 5.4% of total EU agricultural output,
and I think it is about 15% of employed labour in agriculture.
Our domestic industry in England and Wales is small but growing
quickly, producing high quality products that are very much sought
after in the market in their own niche, and command a premium,
and I believe that some are winning prestigious international
awards. Because of its size the domestic production sector is
largely operating outside the CMO. We have not reached the 25,000
hectolitre rolling average over five years.
Q3 Chairman:
Are we getting quite close to that threshold now?
Mr Cowper: Yes, I think so; we are up to 18,
19.
Mr Manning: Yes, and the maximum is probably
around 18,000 or 19,000 hectolitres, and an issue for the industry
is the fact that they are moving towards this 25,000 hectolitres
limit and we will be talking a little more about this in our evidence
later on.
Mr Cowper: But at the moment they get no direct
support from the regime. Of course, the corollary is that they
are able to expand production up to that limit in response to
market signals in a way that the larger countries that are already
part of the CMO are not currently able to do. Our own industry
is bound by EU rules on wine making practices and on the labelling
rules. At Defra we share a responsibility for the wine CMO here
with the Food Standards Agency, our colleagues in the FSA, who
have the Wine Standards Board—which used to be part of Defra's
family but is now part of the FSA—who enforce the labelling
rules at industry and trade level, maintain the register of UK
vineyards and who check the volumes of wine produced. The enforcement
of wine labelling and so at the retail level falls to local authorities,
the Environmental Health Officers and Trading Standards Officers.
Defra leads on policy and we have to bear in mind our various
stakeholder groups—five stakeholder groups—and in
particular, first of all of course, taxpayers. As you have observed,
the wine CMO is expensive, it costs around one and a half billion
euros, about £1 billion a year, just under. It is one of
the most expensive CMOs and clearly the issue of whether it is
delivering value for money is a very important one and how we
can make it less expensive and better value. As we mentioned,
the English and Welsh wine industry is small but growing quickly.
It is a good example of a sector, that is responding to the market,
that is market orientated, as far as we can see, and we want to
facilitate the continuation of that growth. Clearly UK consumers
get through quite a lot of wine and they need assurances that
wine will be produced to certain standards, and the FSA oversees
that health and safety are protected and that labelling is clear
and contains certain basic information. We also have a stakeholder,
the environment. Clearly a certain basic framework needs to be
in place to ensure that wine production is environmentally sound.
Defra—the Government—has an aim that in fact agricultural
(viticultural) practice should, if possible, make a net positive
contribution to the environment, and that is clearly moving up
the agenda and increasing emphasis. Then in trade the UK is a
centre of the world's wine trade and we need to ensure that discussions
in Brussels and reform discussions provide a balance between production
issues and trade issues. So those are the sort of stakeholder
bases that we want to be sensitive to and responsive to. We have
a fairly small new team in Defra on wine; three in full time equivalents;
there are about five or six of us who get involved from time to
time. We aim to contribute fully to the discussions in Brussels
on the management of the Common Market Organisation, so we attend
management committees and so on, and we will be playing, we hope,
an active role in the negotiation of the revised CMO when the
proposals are received later this year. Clearly we hope that this
Committee's work will help us to advise Ministers in their response
to the proposals when they come out.
Chairman: Thank you very much indeed.
Q4 Lord Palmer:
My Lord Chairman, could I ask one question? I am not sure whether
I picked it up correctly, you talked about 15% of the workforce.
Is that the European Union which is involved in the wine sector?
Mr Cowper: If I have the figure right, it is
that about 15% of employee input into agriculture is in connection
with wine production.
Q5 Lord Palmer:
15% of the agriculture workforce is involved in wine?
Mr Manning: I think there are 1.5 million whole
units—is that what they call it?—whole work units,
which is the full time equivalents involved in viticulture and
wine production. But, of course, that covers many more people
because not everybody is doing it all the time, obviously, with
the grape growing, and it is a family business as well. But that
is their estimate. Yes, 15% of agricultural work is what the Commission
say; they describe that as the input of 1.5 million annual working
units.
Lord Palmer: Thank you very much.
Q6 Lord Plumb:
My Lord Chairman, just to follow up on that, does that include
the whole process, the bottling and labelling and all the things
that go with it? The reason I raise that is that, if you make
a comparison between food production and wine production, we hear
it regularly said that there is only two% of the people involved
in producing food, but it is 10% if you add in the rest I am wondering
how that compares, because it could be a bit misleading if you
are using that figure for wine and a totally different one for
food.
Mr Cowper: We think that is the agricultural
bit rather than the labelling and bottling.
Q7 Lord Plumb:
Really?
Mr Manning: I was going to say that these figures
are taken from the Commission's impact assessment and in it they
say that the wine sector is composed of 1.5 million holdings,
utilising a vine area of 3.4 million hectares, which is two% of
the total agricultural area, which we referred to just now. But
it employs 1.5 million annual working units, which is about 15%
of agricultural work, so I think all of those figures we have
given you relate to the actual cultivation of the vines, the production
of the grapes—it does not cover the downstream end of that.
Q8 Viscount Brookeborough:
But the two% in food production would be two% of all the working
population.
Mr Manning: Yes.
Q9 Chairman:
Can I again follow up something that you said? You mentioned that
you have three full time equivalents in Defra working on wine.
Mr Cowper: Yes.
Q10 Chairman:
How influential do you think that we are going to be in the revision
of the regime when some countries have the big battalions working
for them?
Mr Cowper: I think our influence will, to some
extent, depend on how well prepared we are and the weight of the
points that we make. Clearly in some sense we have other countries—France,
Italy, Spain, Portugal, the very big producers—who will
have a much greater interest and therefore will carry a lot of
weight. They have the detailed concerns about many, many people;
in certain regions, of course, viticulture, wine production, is
a very important part of the socio-economic fabric, but I do not
think we could make those sorts of arguments. None the less, I
think we are an important part of the wine trade—we have
some production experience—and we would hope, certainly
as a contributor to the Common Agricultural Policy in terms of
money, that we would be able to play a proper part in those discussions.
Q11 Chairman:
The "It is our money" argument comes to the fore.
Mr Cowper: Clearly the wine producing countries
obviously have differences between the north and the south,—the
southern Mediterranean countries. I think some people may hope
that the UK, with some of the other northern Europeans, may be
able to—not necessarily group together but perhaps form
some kind of coherent view more about the trading aspects and
the less producer—orientated aspects of the regime, so that
we ought to be able to be influential.
Mr Manning: I was going to add one further point,
and that is that the key player is really the Commission in all
of this. Having looked at the work that the Commission did in
June in terms of the Options Paper and the Communication, it is
quite clear that they are going to be very near to what we want
to see as the end result of this, and we are very pleased with
the way that the Commission has entered into this process. We
think that they have done an excellent piece of work in working
out the impact and working out the course that we need to go.
From that point of view, whilst we are small in terms of production
and small in terms of the number of people who are working in
Defra on it, it will be an important dossier for us and we will
obviously seek to use our influence both with the Commission,
who I think we are very close with already, but also, as Jeremy
says, in terms of building alliances with other northern Member
States, who we are likely to have a large degree in common with,
not only non-producers like the Netherlands and Denmark, but countries
like Germany, who have a substantive wine industry themselves
but who share many of the same views and criticisms that we do
in this.
Q12 Chairman:
That leads nicely on to the first question. You say that the Commission
has made it fairly clear that they are up for a degree of radical
form and that there is an urgent need for profound reform because
of the present structural weaknesses in the regime. Your evidence
does again indicate that the Government shares this view. Can
you briefly sketch out for us what you think the Government's
perceptions are of the strengths, if any, of the present regime,
and the weaknesses; and where you would like to see the major
reforms coming?
Mr Manning: I will start off on that question.
In terms of the strengths of the EU wine industry, firstly there
is history and heritage—wine production started in the European
Union. We have some of the strongest brands, some of the strongest
heritage and a very strong performance in terms of quality. Good
EU wine has enjoyed a wide reputation for quality. We have some
of the strongest Geographical Indications—if you think of
champagne and if you think of port, world-renowned types of wine.
The Community is a very big exporter of wine—in 2005 something
like 13 million hectolitres. Then there are all the softer things
associated with wine production in the Community, such as landscape,
tourists being attracted to wine growing areas, wine growing providing
some environmental benefits in terms of the activity taking place
in areas which may not be that suitable for other types of production.
So very shortly they are what would seem to be the strengths.
However, some of the strengths are also weaknesses because, when
we have a system which is established to the extent that the wine
system in the EU has been on such a long degree of history and
heritage, unfortunately there is some inertia there in terms of
making changes and moving and adapting to the modern world. It
is quite clear that there is a loss of competitiveness in the
industry and one measure of that would be the overall trade balance.
Imports have now grown at something like 10% a year, around 12
million hectolitres in 2005; and, as I said, exports are around
13 million hectolitres. Exports are relatively flat, imports are
growing by something like 10% a year, so we are soon going to
be in the position where the trade is balanced. Then pretty soon,
if the current trends continue, we will go the other way and we
will be a net importer of wine into the Community. Falling consumption
is an issue. The Commission in their impact assessment estimate
that consumption is falling by around 0.65% annually. But I think
that that disguises a big difference between the traditional wine
growing countries, where wine consumption is decreasing more quickly
than that, (by about two% per year), and countries, such as the
UK, where wine consumption is increasing. The rise in imports
I have mentioned already. High taxpayer costs—we have mentioned
that already—the wine regime is about €1.4, €1.5
billion a year, about £1 billion a year. One of the things
which is preventing the wine industry developing is the current
restrictions which exist on the planting of new vines, and this
means effectively that the most efficient, the most innovative,
the most entrepreneurial producers in the Community are not able
to expand their production, whereas the less efficient, the less
market-orientated are just continuing to produce wine, and that
is clearly an unsustainable situation. I think it is fair to say
that there is significant over-regulation in the sector in terms
of what producers can put on their labels in terms of the information
that they can make available to consumers. It is quite clear to
us that these are issues which the New World wines have identified
in terms of marketing and labelling, which really show the direction
in which we ought to be thinking about going in the future. In
terms of the changes that Defra would like to see, the first thing
we would like to say is that we fully support the Commission's
analysis of the problems facing the sector and we support their
objectives for the reform of the regime, and these are around
increasing competitiveness, about having simpler and clearer rules
and preserving the best traditions of wine production. So taking
those, if you like, as headline themes, what Defra would like
to see is, firstly, measures introduced to stabilise production,
and so we think what must happen is that there needs to be a very
radical move towards greater market orientation and that can only
really be achieved, we believe, by removing the market management
instruments as quickly as possible. We also think that the industry
needs to be able to grow in areas where it can grow, where there
are efficient and entrepreneurial producers, as indeed we have
in England and Wales; they need to have no impediment placed upon
them to allow them to grow and develop markets, and so we want
to see an end to the planting ban—or at least the planting
ban to continue no longer than its envisaged life scale, which
is 31 July 2010. We want wine making practices to be modernised
and to be able to respond much more to the market and a greater
correlation between the rules that are set up on an international
basis through the OIV and what the Community implements. Most
importantly, we think it is vitally important that the EU re-establishes
itself on the domestic market and starts to increase its exports
overseas as well. So we think all of those things are important
in order to move the wine sector on to a more sustainable basis.
Q13 Chairman:
Having said that, the Commission identified four options, did
they not. The fourth option seems to be nearer to what you are
saying than anything else, but it is fairly unlikely they are
supporting that, is it not?
Mr Manning: I think that is a fair point. The
Commission has identified four options. Option 1 is essentially
the status quo, and everybody agrees that this current situation
is unsustainable, so that was dropped at a fairly early stage.
Options 3 and 4 are more radical options. Option 3 is about reorientation
of the current support arrangements on the basis of the single
Payment Scheme. Option 4 is just saving money and having a complete
liberalisation, and I think in time that is clearly the direction
of travel where we would like to end up as that is consistent
with our vision for the CAP that we published last year. But I
think we also have to recognise that we are where we are and that
we have a regime that has been in operation for 40 years; that
we have an industry in Europe which is used to the kinds of support
that it has at the moment; and we need also to understand that
there is tremendous social and environmental significance to wine
production in the countries concerned, and so we would expect
to have to do this incrementally. So whilst our overall ambition,
as you say, is Options 3 or 4, we think it is quite likely that,
when the Commission presents its proposals, they will be based
around Option 2 because that was where the gravity of opinion
rested in the discussion on the Consultation Paper that took place
during the course of the autumn period. To be clear, that is not
where we would like to end up: we would like to go further than
that. But at least it is a move in the right direction and Option
2 does contain a number of measures which we believe will be very
useful in terms of stabilising the market, which we think is the
most important thing.
Chairman: Lord Bach.
Q14 Lord Bach:
Thank you, my Lord Chairman. It is very good to see you again,
if I may say so. I want to continue the line about which the Lord
Chairman was asking you. We all know the resistance that will
be met to de-regulation, and I hope we know that Defra's view
is that de-regulation is the preferred choice.
Mr Cowper: Yes.
Q15 Lord Bach:
Indeed, the example of the sugar reform that took place not many
years ago was based on a very strong line from the UK government,
which in the end was one that was very largely successful. My
comment is this, really—and then the question. If you go
in, as it were, at too low a level in regard to what we want to
see as a result of these discussions and negotiations, then we
should not be surprised if we do not end up with anywhere near
what we want. And this is the question: surely we need to go in
arguing for Option 4, for complete de-regulation of this industry,
which is absolutely in line with the policy that Defra, I think
rightly, has put forward for a number of years. Explain to the
Committee, if you will, why it is that we do not go in with all
guns blazing as far as that option is concerned?
Mr Manning: Just to reassure you, in the discussions
that have taken place so far on the Communication, we have been
one of a very small number of Member States who have been pushing
for the most radical option in terms of the reform. But it was
quite clear within those discussions that there is a wide range
of views amongst Member States, particularly with the producer
side. There was a lot of resistance to even moving to Option 2.
So at the end of the day there will be a balance, and the Commission
will make a judgment. And we need to bear in mind that there are
no proposals at the moment—we are talking about a consultation
document effectively. I believe that, when the Commission comes
forward with its proposals, which is now likely to be May or June
they will centre more around Option 2 because that is where the
centre of debate has rested in the discussions which took place
in the autumn. But I can reassure you that, in terms of what the
UK wanted, we did make the point that we felt there needed to
be a much more radical reform of the regime. The danger in just
saying that we want complete liberalisation, however, would be
that we lose some credibility in terms of the discussion process
in Brussels. What we must do is make sure that we do not lose
sight of getting the most radical possible reform around Option
2, if that is where the proposals come out, because I can assure
you that there will be a lot of resistance even to proposals which
are emanating around Option 2. So I agree with you entirely; we
want to keep the debate to as near to the most extreme liberalisation
end of this in order to balance up the argumentation from the
producers. But we have not seen the proposals yet from the Commission—they
are due later on in the year.
Q16 Lord Bach:
Thank you very much. Can I ask you next about your written evidence?
You estimate that the budgetary cost this year, supporting the
present scheme, is about €1.5 billion, about £1 billion,
with a third going to "crisis" measures designed to
remove the surpluses that we have heard about. Can you give me
an estimate as to how much of that cost falls on British taxpayers?
And is it also the case that EU consumers of wine face an additional
cost on their purchases of wine as a result of this market intervention?
Mr Manning: I will pick that one up as well.
Yes, you are right, our evidence does refer to the high budgetary
costs of the regime. The budget for 2007 has now been adjusted
down to €1.4 billion. Actual expenditure varies from year
to year; it depends on the quality and quantity of the harvest
and what the overall prevailing market situation is. But I think
it is significant that the wine sector takes up anywhere between
two and a half and five and a half% of the annual CAP budget each
year, so it is very significant. Most of the measures go to supporting
the market in the main producing countries, so they are on things
such as storage of wine and grape must, paying for the distillation
of wine into alcohol. The distillation measures, as we said in
our evidence, do account for about one-third of the budget, but
that figure does not actually include extra money which is spent
from time to time on crisis measures. In fact there has been a
crisis in four of the last six years in the wine sector involving
additional expenditure on wine in order to prop up the market
in certain Member States. The UK as a recipient of the budget,
as we said earlier on, gets very little from it; we largely operate
outside of the CMO. We do get a small amount in terms of aid for
the grape must, which is about £300,000 a year, but out of
a budget of €1.5 billion you can see that in terms of value
for money in the UK it is not one of the top performers. It is
very difficult, Lord Bach, to actually attribute a national cost
to any of these measures because the UK contributes to the whole
of the EU budget rather than to specific components, and attempts
to calculate national costs into individual programmes would be
purely notional and almost certainly inaccurate so it is very
difficult to say what the UK contribution would be to any of these
particular measures. In terms of cost of the regime in terms of
the market price of wine, I think that is a very fair point. The
Commission's 2006 Communication, to which we have referred a couple
of times already this morning, states that crisis distillation
and private storage (a) have become structural rather than temporary
measures and (b) about 15% of annual wine production is removed
via distillation in order to limit price decreases. So this suggests
that the various forms of market intervention mean that EU wine
consumers pay, as a consequence, higher prices than they would
be otherwise. There is some work done by the OECD which estimates
that wine consumers in the Community subsidise producers by around
€200 million each year. That sounds a lot but actually this
estimate has fallen from a peak in 1992 of €1.3 billion,
so it is not a significant cost on consumers. I think it is also
relevant to point out that in terms of the wine imported from
Third Countries consumers are also paying in terms of the import
duty which is applied to those Third Country wines, so there is
a direct consequence to the market. The Commission's own impact
analysis suggests that with reform—and I am reading this
now—"Wine producers will have, in general, to face
a price drop as the stabilisation of the market situation will
require an important effort of structural adjustment", and
it estimates that prices could fall in the short term by around
20% or more with complete liberalisation. So I think this goes
to confirm what I said earlier on, that the current regime does
maintain prices at a higher level than they would be if the regime
was not there.
Q17 Lord Plumb:
My Lord Chairman, can I ask, on the other side of the tax equation,
there is a substantial tax on wine. The taxpayer is paying to
support the regime but what is the level of tax and how does it
compare with other countries? I am told, for instance, if I use
the example, that Three Choirs, which is quite a substantial UK
grower of wine, at the end of the day have two pence profit left
out of a bottle of wine. That is not very much, is it. And their
argument, of course, is the tax that has to be paid from them
for the privilege of growing it. It is out of one hand and into
the other, is it not?
Mr Manning: That is a very good question and
I am afraid we do not have the answer with us today, but what
I can say, in terms of the duty rates of wine is that the rates
vary according to the type of wine produced. For still wines,
with an alcohol content of 15% or under, then the tax is £172
per hectolitre of wine produced. For sparkling wines with an alcohol
content of between eight and a half and 15% the tax is £220
per hectolitre. In terms of what that means in terms of revenue
to the UK, as a result of the duty system, we do not have that
here, I am afraid, but we could of course let the Committee have
that information after the meeting, if you would like it.
Chairman: Thank you. Viscount Brookeborough.
Q18 Viscount Brookeborough:
You have given us a broad-brush indication of what other Member
States think of the current regime and you have also said that
some of them would be quite aligned to our point of view, although
we will not be able to fight quite that corner. Is the separation
of these points of view, or the difference, very obvious in that
it is those who produce wine and those who do not produce wine?
Mr Manning: It is difficult at the moment to
be too categorical on these things because we have not actually
seen the Commission's proposals. What we have had is a series
of meetings around an Options paper, and I think that in those
circumstances people take positions in order to try and influence
what the Commission produces in terms of their proposals. What
I would say is, based on my experience of attending the three
working groups that were held during the autumn, that there are
probably about three different groups forming within the Member
States. Firstly, you have what I would categorise as the key producers,
mainly the Mediterranean countries, and they are concerned about
the social and environmental impacts of change; they are concerned
about the Commission's proposal for a large scale grubbing up
scheme and what that will mean in terms of local communities.
They are very keen to maintain the planting ban beyond the 2010
date which is envisaged in the existing regime. They continue
to argue for a separate budget, a separate regime for wine, and
they have reservations about moving money from the wine regime
into rural development measures. They are very cautious about
making changes to labelling because they have developed their
own niches and their own Geographical Indications, and they want
to protect those as much as possible. But they do, of course,
support rules on the tightening of enrichment of wine, which is
something else that we refer to in our evidence. You then have
what I would call importers/consumers of wine, and I think we
probably have the UK in that category—we have a small wine
industry but I think we are essentially an importing country—who,
if you like, are the mirror image of the first group, and so these
countries support the abolition of market management instruments;
they support the early lifting of the planting ban; they want
greater market orientation of the sector; they certainly want
to maintain the current enrichment possibilities; they support
RDR and they want to see clearer labelling rules introduced so
that consumers are better informed about the wine they are buying.
Finally,there is a group in the middle who are, if you like, smaller
producers but also importers, and I would put countries such as
Germany, Austria and Hungary in this group, who have views which
are between those. So on the whole—and this is generalisation
at the moment—they would support the abolition of most market
management instruments; they are concerned that the current enrichment
possibilities are maintained. They also have reservations about
moving the money out of the wine budget into RDR, but they do
support changes to labelling as GIs. I hope that is not too simplistic;
I am not trying to put anyone into any particular box, but looking
at it from our perspective that is how it seems to be at the moment.
Q19 Viscount Brookeborough:
To what extent have the views of the new accession countries been
taken because you have these new countries—Romania or wherever—and
we have already seen with Hungary that, where they used to produce
mass production in cooperatives, their market was severely hit,
not only by joining our regime but by the fall off of their Russian
markets. Is this going to happen with such countries as Romania
and others? And are they not in line for, if you like, a double-whammy
if we bring in major reforms in this country?
Mr Manning: I think every country that is a
major wine producer will face some impact as a consequence of
the changes which we hope will be made. Romania and Bulgaria are
relatively big producers of wine.
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