Select Committee on European Union Seventh Report


CHAPTER 3: PILLAR I AFTER THE HEALTH CHECK

76.  In its Communication on the Health Check published on 20 November 2007, the Commission set out the areas in which it would like to see further reform of the CAP.[24] Legislative proposals are expected to follow in May 2008. In the sections that follow, we examine the Commission's main proposals.

Basis for Single Farm Payments

77.  One of the central features of the 2003 reform of the CAP was the pooling of subsidy entitlements previously linked to individual commodity regimes into a single payment. In implementing this so-called Single Payment Scheme, Member States could choose to allocate payments on a historic basis (linked to production during a reference period) or on a regional/area basis (linked to the number of eligible hectares farmed), or a mix of the two. In the UK, England has implemented an area-based payments system, while Scotland, Wales and Northern Ireland have opted to allocate payments on an historic basis.[25]

COMMISSION PROPOSALS

78.  In its Communication, the Commission has indicated that it would like to see Member States adjusting their chosen model "towards a flatter rate during the period from 2009 to 2013."[26] Commissioner Fischer Boel explained that "the Single Payment Scheme has been implemented in many different ways in many different Member States and personally I think we should work towards a more flat rate system, a less complicated system, where you have a payment of the same value, or entitlements of the same value, linked to the area". The reason for making this adjustment, she suggested, was that "from a psychological point of view, I think we will face difficulties in 2013 or 2018, just to mention a year, explaining why two neighbouring farmers get different payments with the same conditions for production because the former owner had dairy production in 2002. That is going to be difficult to explain to taxpayers" (Q 685).

WITNESSES' VIEWS

79.  Many of our witnesses accepted the logic of this argument. Martin Haworth told us that the NFU also envisaged that the next step would be "the whole of Europe going to some sort of area payment", and agreed that "you cannot justify a historic allocation for very long" (Q 119). Walter Duebner of the German Permanent Representation to the EU told us that Germany, which currently operates a hybrid system, intends to move to an area-based payment during the period 2010-2013 (Q 404). Beniamin Gawlik told us that the Polish government sees the possibility of moving towards flat-rate payments across the EU as a "positive signal", since it indicates a recognition on the part of the Commission that the simplified flat-rate system employed by Poland and other Member States that joined the EU in 2004 and 2007 is quite efficient (Q 781). The system known as the Single Area Payments Scheme (SAPS) is "appreciated by farmers" and "quite easy to manage for the administration", Mr Gawlik added.

80.  Other witnesses were more cautious. In Spain, the 2003 reforms were only implemented in 2006. The Spanish government consequently feels it needs more time and more debate before any moves towards a "more or less compulsory" regional system (Q 538). Andy Robertson of the NFU Scotland accepted that "the further we get away from 2000-2004 [the reference period for the historical payments system] the more difficult it is to justify saying somebody is getting a payment because of what they did ten years ago." But he insisted that "a single area payment which simply said we are going to pay X amount per hectare regardless of where the farm is, what type of farm it is and what it would be producing" would not be valid either (Q 336). His views were echoed by the NFU Cymru and the Farmers' Union of Wales (Q 336). Richard Lochhead, Scottish Cabinet Secretary for Rural Affairs, noted that the Commission's proposal causes anxiety in Scotland, but recognized the logic of the argument and that it would therefore perhaps not be sensible to keep allocating payments on an historic basis (Appendix 4, Para. 2). He stressed however, that the transition would be important, and would take time, not least because Scotland's geography and topography are sufficiently diverse as to render a flat-rate payment unpopular and difficult to justify.

CONCLUSIONS

81.  The logic of the Commission's argument for moving away from historic payment models is compelling, and we therefore support its proposal to encourage Member States to move towards a "flatter" and, in our view, more rational and transparent payments system. We note that the language used by the Commission is permissive, and that it intends to allow Member States to decide "whether to move to flatter rates, at which scale (Member State-wide, regional …) and to which extent."[27] We believe that this very substantial degree of flexibility should go some way towards meeting the concerns raised.

82.  In the longer term, however, we are not convinced of the justification for maintaining direct payments under Pillar I, as the market and environmental objectives that we regard as the appropriate long-term aims of the CAP can in our view be pursued adequately with the instruments available under Pillar II. We therefore recommend that a progressive flattening of payments systems in the aftermath of the Health Check should in due course be accompanied by a phased reduction in direct payments over the course of the next financial perspective.

Upper and Lower Limits for Direct Payments

83.  In the EU-27, around 80 per cent of direct payments under Pillar I of the CAP are awarded to just 20 per cent of beneficiaries.[28] This is because direct payments are linked to past production and/or the area farmed, meaning that the most productive businesses—often large in scale—receive the highest subsidies. The distribution of Single Farm Payments consequently continues to evoke controversy.

COMMISSION PROPOSALS

84.  In its Health Check Communication, the Commission argues that the distribution of payments has become more visible since the introduction of Single Farm Payments and a recent transparency initiative whereby the names of beneficiaries and the sums awarded to them are published.[29] This has led to calls for the level of support received by a small number of large farmers to be capped. At the same time, it became clear during the implementation of the Single Payment Scheme that there are a large number of beneficiaries who receive payments that are so small that they are outweighed by the costs of administration, and that some recipients of small awards are not farmers at all.

85.  The Commission therefore proposes to look into the possibility of progressively reducing subsidies above certain thresholds, while maintaining some level of subsidy even where awards are very large. With respect to the smallest payments, it proposes to consider whether a minimum level of annual payments can be introduced and/or whether the minimum area requirement can be set at a higher level. These minimum limits should be determined at Member State level, the Commission suggests, with any resulting savings being retained by the national authorities and potentially diverted to uses sanctioned by Article 69 of the 2003 CAP regulation.

WITNESSES' VIEWS

86.  The UK and Germany have the greatest number of large beneficiaries from the CAP. Their governments object to the Commission's proposal to cap subsidies at the top end. Walter Duebner of the German Permanent Representation to the EU told us that "the rates of reduction discussed would cost the larger holdings in Eastern Germany approximately €300 million in income", meaning that "they would have to bear almost half of the cuts in the whole of the EU" (Q 408). The German government therefore considers the idea of capping payments based on farm size to be "unacceptable". Meanwhile the UK Government is "very opposed to upper limits", arguing that it will only lead to people spending "money on lawyers, dividing up their businesses" (Lord Rooker, Q 919). The Food and Drink Federation drew attention to the tension between capping and market-orientation (Q 817).

87.  Commissioner Fischer Boel defended the proposal by insisting that "it is not a capping", but instead a "progressive reduction", meaning that "even if you are very big you will only be reduced by 45 per cent, so you will continue to get payments until the very end" (Q 701). She went on to argue that the partial loss of subsidies would be offset by the economies of scale that larger farms can take advantage of, so that incentives need not be distorted.[30]

88.  There was more support among our witnesses for the proposal to introduce minimum thresholds for Single Farm Payments. Poland, which like many of the new Member States has a large number of small holdings, was satisfied that the flexibility given to Member States to define what they would consider to be a farm meant that it would have "no problem" with a lower limit (Q 787). Commissioner Fischer Boel warned, however, that the proposal was "controversial in some new Member States, Romania among others, where they have not yet been through the changes in their agriculture sector" (Q 702).

CONCLUSIONS

89.  While we understand the Commission's desire to bring about a fairer distribution of subsidies by tapering off subsidies at the top end, this approach rests on an implicit assumption about what the purpose of the CAP should be that we do not share. If the Common Agricultural Policy is to target social goals—and among them, a fair income for farmers—it might indeed make sense to set up a fair, and possibly even means-tested, system of allocating subsidies. But if as we have argued, the CAP should aim to promote a competitive, market-oriented agriculture industry, then it does not make sense to introduce a measure that will penalize those who undertake the restructuring that efficiency may require. We therefore do not support the introduction of thresholds above which subsidies are progressively reduced.

90.  By contrast, we do support the introduction of minimum thresholds for payments, as we are persuaded by the Commission's argument that it makes no sense to create subsidy entitlements that cost more to administer than the amounts being awarded. If Member States are given the flexibility to set their own minimum thresholds in the context of the structure of their farming industry, the new Member States will not be penalized.

Cross Compliance

91.  Farmers' eligibility for Single Farm Payments and other types of support is linked to their compliance with Statutory Management Requirements (SMR) and whether they meet the obligation to keep their land in Good Agricultural and Environmental Condition (GAEC)—the two facets of cross-compliance. Statutory Management requirements derive from 19 existing EU directives and regulations which all farmers have to comply with irrespective of whether they claim Single Farm Payments.

COMMISSION PROPOSALS

92.  In its Health Check Communication, the Commission announced its intention to review the scope of cross compliance. [31] It proposes to qualify the Statutory Management Requirements by excluding provisions which are not directly relevant to the stated objectives of cross-compliance. It also plans to examine, and where appropriate amend, the current list of SMR and GAEC. The Commission explicitly acknowledges the need to strike the right balance between the costs and benefits of particular requirements.

WITNESSES' VIEWS

93.  Most of our witnesses accepted that the introduction of cross compliance had helped to raise awareness of environmental issues on farms.[32] The Environment Agency welcomed the fact that cross compliance "sets that environmental baseline that we have been calling for for such a long time" (Q 177).[33] DEFRA referred to evidence demonstrating that cross compliance has delivered environmental benefits (Memorandum, Para. 28).

94.  Producer groups felt that these improvements had been achieved at the expense of a considerable administrative burden. The Scottish NFU expressed concern that cross compliance had added to the regulatory burden faced by farming businesses without delivering proportionate benefits (Memorandum, Para. 10). COPA-COGECA's Secretary-General, Pekka Pesonen, told us that farmers did not think that the cross-compliance rules themselves were too tough, but did perceive the associated administration to be "overwhelming" (Q 575). He suggested that "there are a lot of things that we could simplify in administration in order to motivate the farmers to fulfil the legal requirements." Mr Pesonen also warned that adding new items to the cross compliance conditions could at some point tip the scales, prompting farmers to decide that "this does not add up, I will just get out of the business", at which point society would "lose the aspects that they are looking for" altogether (Q 574).

95.  Also of concern to producer groups were the penalties associated with breach of the cross compliance conditions, which they regard as disproportionate. The Farmers' Union of Wales argued that "many cross compliance rules are subjective, and open to a wide range of interpretations, therefore causing disproportionate penalties to be imposed for practices that are not clearly recognisable as breaches" (Memorandum, Para.8). Some farmers, it claimed, had "lost 60 to 100 per cent of their Single Payments due to simple misunderstandings of what are subjective rules" (Memorandum, Para. 2).

96.  The Environment Agency, which is the competent control authority for cross compliance in the UK, recognized that there was room for improvement in administrative arrangements (Aileen Kirmond, Q 180). With respect to penalties, Ms Kirmond proposed that "we need to retain proportionate penalties where there is serious damage but, where there is a minor breach of something, look at how we could scale that back."

97.  Commissioner Fischer Boel pointed out that "Member States need to help to simplify things" too, as "there are some Member States that are over-implementing, which means adding national things on top of what was the intention" (QQ 725, 726). The evidence we received suggests that the UK is among the culprits in this regard. Hannah Bartram of the Environment Agency explained that "when you look at SMRs, the standards tend to reflect the status of implementation of the relevant directive in each Member State" (Q 177). When it comes to GAEC, by contrast, "the details are much more at the Member States' discretion. Some have implemented a relatively large number of standards, and standards that go beyond what is in GAEC." This means that the level of environmental protection afforded by cross compliance varies according to the number and scope of standards adopted by each Member State, leading to "inconsistency", Ms Bartram noted. She also acknowledged that England is considered to be one of the most demanding regions of the EU when it comes to cross compliance (Q 179). With this in mind, Duncan Sinclair of Waitrose warned that "we have got to make sure that from a competitive point of view we do not saddle our industry with an extra burden of cost relative to our European counterparts" (Q 870).

98.  A number of our witnesses called into question whether the SMR element of cross compliance really adds value. The Farmers' Union of Wales argued that "much of the environmental protection that is afforded by cross compliance is provided by the Statutory Management Requirements that predate Cross Compliance but have nevertheless been incorporated into Cross Compliance rules. Thus, a significant portion of cross compliance has simply sustained existing levels of environmental protection" (Memorandum, Para. 8). The Scottish NFU also took the view that "cross compliance duplicates some regulatory requirements and in fact adds to the burden of regulation, while at the same time introducing an element of double jeopardy" (Memorandum, Para. 16).

99.  Natural England came to a similar conclusion, albeit for different reasons. Referring to Single Farm Payments, Helen Phillips questioned why "we allow some of that incentive money, which really needs to be earmarked very carefully for buying those things that nothing else can buy, to support and subsidise regulation" (Q 157). She went on to argue that CAP funds should not be used to reward farmers for meeting basic regulatory requirements, not least because this meant inflicting additional, undue regulation on them (Q 149). Tom Oliver also told us that while the Campaign to Protect Rural England approves of cross-compliance, it takes the view that "it is very difficult to justify paying very large sums of money per hectare to farmers to do what amount to quite meagre environmental actions" (Q 263). The Environment Agency, however, was more cautious on this front, warning that "we do not want to throw the baby out with the bathwater" (Q 177). Indeed we were told that the Agency was considering whether another SMR could be introduced under cross compliance in order to embed some aspects of the Water Framework Directive in farming practices, and that there was potentially room to expand the scope of SMRs with respect to soil management (Q 180).

100.  The Farmers' Union of Wales considered that some aspects of the cross compliance regime "provide negligible or no environmental protection, and serve only to restrict farming practices unnecessarily" (Memorandum, Para. 8). It suggested that this was "particularly the case on extensive farming systems, where rules that are clearly based upon perceived problems that occur on intensive arable farms can result in significant and disproportionate penalties, despite there being no valid scientific reason for such rules to be applied."

CONCLUSIONS

101.  We welcome the Commission's intention to review the scope of cross-compliance by examining and amending the list of SMR and GAEC requirements. The evidence we have received suggests that while cross compliance has helped to deliver environmental benefits, and has been valuable in raising awareness of environmental issues among land managers, the administrative obligations associated with the regime are in some instances out of proportion to the benefits delivered. We therefore recommend that the Commission should focus on withdrawing elements from the current list of cross compliance conditions, rather than adding to it.

102.  This is not a task for the Commission alone: Member States too need to consider whether they are trying to pack too much into cross compliance, as this is not only likely to reduce the effectiveness of the tool and sap morale among land managers, but may also lead to competitive distortions. However, we recognise that while Pillar I continues to absorb such a significant proportion of CAP spending, the environmental benefits delivered by cross compliance are an important part of the justification for public expenditure on direct payments.

103.  In the medium term, we believe that it would be appropriate to consider whether the SMR element of cross compliance needs to be included at all. We were persuaded in this respect by Natural England's contention that financial incentives should be guarded closely, and offered only in return for environmental practices that go over and beyond what is required by law—a criterion that Statutory Management Requirements fall foul of. The lever that cross compliance offers might therefore be used more sparingly, but to better effect.

Decoupling

104.  Under the 2003 reform of the CAP, subsidies were allowed to remain partially coupled to production where it was deemed important to retain a critical mass of product supply for processing industries, or where it was judged that there was a risk of production abandonment in the absence of coupled support.

COMMISSION PROPOSALS

105.  The Commission has made clear that it views partially coupled support as "less and less relevant", particularly in the arable crop sector, and that it therefore wishes to encourage further moves towards full decoupling, which it argues will leave producers "at least as well off as before, and most likely better off."[34] It nevertheless recognizes that partially coupled support "may retain some relevance, at least for the time being" in regions where overall levels of production are small, but important economically or environmentally. It therefore proposes that a case-by-case analysis should be undertaken at the regional level to identify whether, to what extent, and for how long support should remain partially coupled.

WITNESSES' VIEWS

106.  The NFU is strongly in favour of further decoupling, because it considers that remaining coupled payments have led to competitive distortions within the EU (Q 111, Q 118).[35] This view is shared by the German government, which is in favour of decoupling "all the premiums, because we need equal terms of competition for all Member States, especially in the animal sector where a lot of premiums are still coupled in other Member States" (Q 411). The Danish government too is in favour of further decoupling, even though it has maintained some partially coupled payments, because it considers that "the effects would not be very hard at this point in time because prices are what they are" (Q 445). Meanwhile Commissioner Mandelson was emphatic that production-linked subsidies must be left behind (Q 755).

107.  Other witnesses were less enthusiastic about the Commission's proposals. COPA-COGECA's Secretary-General told us that his organisation had identified a number of sectors where production was expected to "more or less totally disappear because of the relatively high costs of production" if support was fully decoupled (Q 573). Echoing Commissioner Fischer Boel's views on the desirability of a diversified European agriculture industry, he argued that in order to maintain this, "we should have some sort of guarantee that we have the possibility to continue with particular products." The Scottish Cabinet Secretary for Rural Affairs was more conciliatory, recognising that legacy schemes should end, but stressing that some kind of flexibility for coupling would continue to be necessary (Appendix 4, Para. 18). He emphasised the need to protect at least part of the livestock sector—and notably the Scottish beef sector—if that sector, and the associated processing industry, were not to disappear. Mr Lochhead went on to suggest that national envelopes under Article 69 of the 2003 Regulation could offer a way of securing this aim.[36]

108.  The Scottish NFU suggested that where there are strong reasons for retaining production—such as where cattle grazing preserves a landscape—"simple and effective measures" to achieve this aim should be introduced under Pillar 2 (Memorandum, Para. 4). The Scottish Executive and the French government, however, insisted that Pillar I was the most appropriate tool for maintaining agricultural activities in Less Favoured Areas (Appendix 4, Para. 19 and Q 506, respectively). The Commission warned that "we cannot introduce coupled payments into Pillar II because we would destroy the green value of Pillar II" in the WTO context , and that another solution must therefore be sought where the aim is to preserve livestock in a particular region (Q 694).

CONCLUSIONS

109.  We strongly support the Commission's proposal to eliminate partial coupling wherever possible. Coupled payments result in the misallocation of resources and distort both trade and competition. For those reasons, we consider that full decoupling in all sectors should be the ultimate objective of policy in this area. However, we recognise that progress towards this objective will require considerable adjustment in some sectors. Article 69 funds could temporarily be used to facilitate such adjustment.

110.  While we accept that for social or environmental reasons, it may be considered desirable to sustain particular types of farming activity in fragile rural areas, we believe that such support should not be channelled exclusively through agriculture, but should instead be part of a broader rural development strategy delivered through Pillar II. Due to the need to preserve the WTO credentials of Pillar II, this implies that support for vulnerable rural areas should not be linked to particular types of production, but should instead directly target the desired environmental or economic externalities. An additional reason to avoid links to particular products is that as the effects of climate change set in, it may become increasingly expensive or altogether impossible to sustain traditional patterns of production.

Set-Aside

111.  The obligation on farmers to leave a certain proportion of arable land fallow or use it for non-agricultural purposes was introduced in order to reduce cereal production at a time when there were persistent surpluses. Market conditions have now changed dramatically, with rising demand pushing cereal prices up and creating a strong incentive to mobilise the land that has been kept out of production through the compulsory set-aside scheme.

COMMISSION PROPOSALS

112.  The Commission consequently points out that "the need to limit supply seems to constrain the arable sector in the EU from the potential benefits of increased world market prices", and proposes to abolish compulsory set-aside.[37] As the compulsory rate of set-aside has already been set to zero, the practical effect of this proposal is to rule out the re-introduction of such controls in future sowing seasons.

113.  The Commission does, however, caution that "the permanent abolition of set aside will require steps to preserve the environmental benefits accrued from the present scheme."[38] One possibility would be to "replace it by locally targeted rural development measures", it suggests.

WITNESSES' VIEWS

114.  Most of our witnesses were in favour of the abolition of set-aside, on the principle that this supply management tool has outlived its purpose and prevents farmers from responding to market signals—the very principle behind the 2003 reform package (DEFRA, Q 37; NFU Q 122; Scottish Executive, Appendix 4, Para. 21; RSPB, Q 100). A representative response was that of Scottish NFU President Andy Robertson, who explained that "set-aside to us seems to be an anachronism now. In a decoupled era there should not really need to be some kind of artificial restraint on the extent to which people can grow crops" (Q 353).

115.  Other witnesses were more cautious, but for different reasons. Although COPA-COGECA supported and indeed pressed for the zero set-aside rate, we were told that it would not wish to see the system abolished altogether, "because it is one of the very few remaining market management tools" (Q 576). Environmental groups, by contrast, were concerned that the environmental benefits that had accidentally flowed from set-aside should not be lost. Natural England told us that they had "real concerns" about the environmental degradation that will flow from the decision to set the compulsory set-aside rate to zero (Q 142). Baroness Young told us that the Environment Agency too was "deeply worried" by the prospect (Q 187). The Agency anticipated that it would have "a huge environmental impact" (Q 200), and suggested that the Health Check should attend to the introduction of measures to replace the impact of set-aside (Q 204).

116.  On behalf of DEFRA, Sonia Phippard assured us that while "there is a lot of anxiety around the removal of set-aside", its evidence suggests that in fact farmers "are taking some sensible decisions about productive and fallow land and leaving unproductive land fallow above and beyond compulsory set-aside, and by and large they choose as set-aside areas their least productive land" (Q 37). Anxieties that "instantly all those set-aside areas will be in full production" were therefore misplaced. DEFRA's assessment, she added, was that "there is not a major catastrophe about to happen."

117.  Commissioner Fischer Boel identified a need to "make an attractive agri-environmental scheme that can take over the environmental benefits there have been from set-aside" (Q 719)—a view shared by NFU President Peter Kendall (Q 122). Tom Oliver of the Campaign to Protect Rural England also saw the need to "bring set-aside—whether rotational or permanent—which is of environmental value into environmental stewardship", and suggested that this would require more funds for such schemes, because set-aside would no longer be doing that job for us "by accident, as it were" (Q 265).

CONCLUSIONS

118.  Like many of our witnesses, we take the view that compulsory set-aside has no place in the market-driven framework of the reformed CAP. We consequently support the Commission's proposal to abolish compulsory set-aside for good.

119.  We recognise that this could lead to the loss of the environmental benefits associated with set-aside—although we also note that both the scale of such benefits, and the likelihood that they will be lost, varies across farms. As with partial coupling, however, we believe that the environmental benefits that have now become set-aside's raison d'être should be targeted directly via Pillar II.

Market Intervention

120.  The CAP still harbours a number of market intervention instruments—such as quotas, intervention storage, price support and export refunds—that were originally designed to manage the supply of agricultural produce in light of prevailing demand.

COMMISSION PROPOSALS

121.  In its Health Check Communication, the Commission suggests that a "reflection" on the future of these remaining "old CAP" instruments is needed, notably in light of the medium-term outlook for agricultural commodity markets, which is especially favourable for cereals and dairy products. As part of this exercise, the Commission proposes to examine "whether the existing supply management tools serve any valid purpose now, or whether they simply slow down the ability of EU agriculture to respond to market signals."[39]

122.  A full review of the cereals intervention system is already underway, while the maize and rye intervention systems have already been reformed. The Commission proposes to extend the reforms applied to the maize sector to other cereals, with the single exception of bread wheat. This would allow most cereals to find their natural price level, while continuing to provide safety-net support for bread wheat.[40] Commissioner Fischer Boel explained that the proposed exemption for bread wheat was the result of "anxieties in the public that bread is a fundamental product in agriculture or is a daily need for consumers" (Q 709).

123.  With respect to milk quotas, the Commission proposes to prepare the ground for the expiry of the milk quota system in 2015 by gradually increasing quotas to create a "soft landing".[41] It argues that if nothing were done until the quota regime ends, efficient farmers would be prevented from meeting market demand, while inefficient farmers would face an abrupt loss of income in 2015. It anticipates that certain regions—especially but not exclusively mountainous ones—will face particular difficulties in maintaining production once prices fall. It proposes that support measures could be introduced under a revised Article 69 of the 2003 CAP regulation and/or through rural development measures.

WITNESSES' VIEWS

124.  The demise of the cereals intervention system was warmly welcomed by the UK government, which is pressing for the "abolition of the intervention price system and all the associated policy instruments, including production quotas and storage aids" (DEFRA Memorandum, Para. 15). The NFU was also supportive of the Commission's proposals in this respect (Memorandum, Para. 18). Further down the food chain, the Food and Drink Federation told us that its members were looking for "market orientation which allows farmers to respond to market signals from the food industry and obviously ultimately from consumers" (Ruth Rawling, Q 817). Ms Rawling pointed out that "there are already market-based types of systems which help farmers cope with price volatility" and that in any case "quite a lot of the management of price is done through long-term contracts", which provide a certain amount of stability for farmers (Q 818). Heather Jenkins of Waitrose also drew our attention to the role that contracts could play in stabilising markets (Q 864).

125.  Other witnesses urged varying degrees of caution. NFU Scotland proposed that options for weakening cereal intervention, without removing the system altogether, should be considered (Memorandum, Para.12). NFU Cymru saw a continued need for private storage aid "to provide short-term relief in exceptional circumstances" (Memorandum, Para. 13). Meanwhile the French government has made clear that in its view, the CAP should continue to stabilise markets in agricultural goods (Q 513). Yves Madre of the French Permanent Representation to the EU explained that the aim would not be "to avoid the variations but to be sure that tomorrow farmers will be able to deal with the variations and able to avoid very, very high prices or very, very low prices because that is not good for the industry or for farmers." Crisis management measures should, however, "be used in a very exceptional way" (Q 515).

126.  The Scottish Rural Property and Business Association also saw a continued role for "emergency intervention", notably in the case of flooding or disease (John Don, Q 213). In those circumstances, Mr Don argued, "Europe and our own government should protect us to keep us in business for the long term". The Country Land and Business Association conceded that "we cannot expect to be bailed out without doing our own bit ourselves", but stressed that "there are some things which go beyond what we can do however good businessmen we are" (David Fursdon, Q 215). Referring to the US and Canada's intervention systems, his colleague Alan Buckwell suggested that "nobody has the right answers", but insisted that "sweeping it under the carpet will not work because volatility is increasing" and will continue to "increase with market liberalisation, not diminish."

127.  In general, the Commission's intention to increase milk quotas gradually provoked less resistance. The NFU and NFU Scotland were both in favour of the gradual elimination of milk quotas (Memorandum Para. 19 and Memorandum Para. 12, respectively). The French government, we were told, was also "very open-minded" and intending to consider the Commission's proposal (Q 518). NFU Cymru and the FUW expressed concern about the way in which the transition would be managed (Memorandum, Para. 12 and Memorandum Para. 4, respectively). The Polish government was also more cautious, welcoming the proposed increase in milk quotas, but warning that the current favourable market context "is not the best time to make a final decision about the abolition and dismantling of the quota system" (Q 795).

CONCLUSIONS

128.  The principle that market forces should be allowed to determine production decisions is inconsistent with all types of market intervention and supply management. We consequently support the Commission's intention to reform the cereals intervention system and would urge that the same approach be extended to other sectors and for that matter, to bread wheat. Exceptions will in our view only serve to exacerbate distortions, by creating an incentive for producers to gravitate towards those commodities for which a safety-net remains in place.

129.  For the same reasons, we welcome the Commission's intention gradually to increase milk quotas with a view to their eventual elimination. We agree that the areas worst affected by the removal of quotas may need targeted support, but are concerned that wherever possible, such support should not be linked to the production of specific commodities. During a transitional period, compensatory measures funded through Article 69 may be necessary. In the medium term, however, we favour the rural development route over the Article 69 route for such compensatory action.

130.  We recognize the distinctive risks to which the agriculture industry is exposed, and share the Commission's assessment that risk management deserves further attention in the Health Check. We return to this issue in the next Chapter.

Export Subsidies & Import Tariffs

131.  Any reforms to market intervention instruments undertaken as part of the Health Check exercise will have implications for both the internal (EU) and external (world) markets for agricultural products. Import tariffs currently insulate the internal market in agricultural goods, regulating third country exporters' access to the EU market. Prices are thereby kept artificially high, as competition is restricted. The average agricultural tariff is currently around 20 per cent, with sensitive products incurring tariffs of 70 per cent or more.[42] Meanwhile one of the ways in which excess production in the internal market is cleared is by subsidising the export of those surpluses. This has the effect of depressing world prices for agricultural products, to the detriment of third-country producers.

COMMISSION PROPOSALS

132.  In its Health Check Communication, the Commission has made clear that if some form of intervention system remains, it should not rely on subsidised sales—whether these are external (via export subsidies) or internal.[43]

133.  As part of the Doha round of trade negotiations, the EU has committed itself to phasing out all export subsidies by 2013. If successful, the Doha round should also lead to reductions in import tariffs on agricultural products. These commitments, which would result in further liberalisation of trade in agricultural products, affect many of our witnesses' attitudes to the reforms that might flow from the Health Check.

WITNESSES' VIEWS

134.  Although most of our witnesses had come to accept that export subsidies will be withdrawn and a number—notably the UK government—strongly support that commitment, some witnesses did express their unease at the prospect. Andy Robertson of the Scottish NFU warned of the impact of eliminating export subsidies on domestic markets, noting that EU producers who no longer receive export subsidies might instead sell into the internal market, including the UK, and "pull down the market" (Q 351). The Food and Drink Federation drew attention to the issue of sequencing, insisting that export refunds for Non-Annex 1 products[44] "should not be phased out until we have a level playing field" in terms of import tariffs—which result in EU food and drink manufacturers paying higher prices for raw materials than their competitors elsewhere in the world (Ruth Rawling, Q 824). "Once we are able to buy raw materials at the same price as everybody else then we do not need them", Ms Rawling suggested (Q 828). Her colleague Tim Innocent, who is also Head of Purchasing at Nestlé, explained that sugar is one of the company's key raw materials, and that even after the recent reform of the sugar regime, the price of sugar in the EU is not expected to arrive at the world level, resulting in a discrepancy. He consequently argued that "to make us competitive with our confectionery products to export to the free market, to the world market, we do need to continue to see some form of export refund for processed products" (Q 825).

135.  The Food and Drink Federation was broadly supportive of the EU's commitment to reduce import tariffs, explaining that "what we are supporting really is alignment of prices" (Q 827). Ms Rawling pointed to the recent decision to suspend import duties on grain temporarily in light of soaring demand, and suggested that this might "help people see that in fact there is no need to be quite so scared of some of this reduction of tariffs" (Q 827). Meanwhile Commissioner Mandelson told us that import tariffs needed to fall due to internal demand, as well as external pressure: "our demand for agricultural produce and food is outgrowing our ability and the capacity of the shrinking farm sector to provide for that. We need to import more because demand is growing", he insisted (Q 754).

136.  Even among the FDF's own ranks, however, some members were uneasy at the prospect of cuts in import tariffs. Sugar producers—who are facing a cut of approximately 70 per cent in the import tariff applied to third-country sugar imports—viewed this as "extremely damaging for the remaining European producers" and are therefore pressing for sugar to be treated as a sensitive product, we were told (Q 832). The President of the Scottish NFU warned that "the real danger is on import tariffs" (Q 351). Taking the example of Brazilian beef, he argued that if tariffs were substantially reduced, "then obviously Brazilian beef becomes much cheaper and it will drag the market price down in this country very substantially and it will do severe harm to an industry which already is being paid a price which is well below what is needed to meet their costs of production." He insisted that "we run the risk of tariffs being dismantled and product coming in which is inferior and undercutting us."

137.  The issue of perceived inferiority—in terms of production standards—of agricultural imports from outside the EU was raised by a number of witnesses.[45] The French government was most insistent in this regard. Yves Madre argued that "it is a question of us being fair and if we want very strict rules on our farmers on what they produce in the European Union I have some difficulty understanding why we should allow anything to be imported within the European Union" (Q 531). He argued that this was also a question of food safety: "we need to be sure that what is imported and what will be imported is safe", adding that "if it is safe and everybody has the same rules there are no problems." For these reasons, Andy Robertson of the Scottish NFU argued that it would be "irresponsible not to include production standards in WTO negotiations" (Q 352). Some Council delegations have also emphasised "the need to promote health and animal welfare standards at international level that are as exacting as Community standards."[46]

BOX 6
SPS Standards Explained

Article 20 of the General Agreement on Tariffs and Trade (GATT) allows governments to place restrictions on trade in order to protect human, animal or plant life or health, provided they do not use such restrictions as disguised protectionism. A separate agreement on food safety and animal and plant health standards (the Sanitary and Phytosanitary Measures Agreement or SPS) sets out the basic rules.

It allows countries to set their own standards, but stipulates that such standards must be based on science, and should be applied only to the extent necessary to protect human, animal or plant life or health.

WTO members are encouraged to use international standards and guidelines where they exist. They may set SPS rules that result in higher standards and more trade restrictions, but only if there is scientific justification for doing so. The SPS Agreement also clarifies which factors should be taken into account in carrying out risk assessments.

The WTO itself does not set SPS standards and has made clear that it does not intend to.


138.  Duncan Sinclair, Agriculture Manager at Waitrose, warned that production standards would be a "very difficult issue" on which to try and reach agreement, pointing to previous experience in the Uruguay Round of trade negotiations (Q 873). Baroness Young of Old Scone, Chief Executive of the Environment Agency, told us that "the business of consistent global standards is quite a difficult one", and that at least with regard to environmental standards, these were "only a small part" of what determines competitiveness (Q 195). Labour market costs, by contrast, "are probably the biggest single factor in terms of a level playing field", she suggested.

139.  Commissioner Mandelson insisted that the obligations placed on EU producers "are designed to make them competitive", and are "going where the market is heading in any case" (Q 756). He anticipated that "we are going to produce quality products which people can absolutely rely on in health and other terms which will correspond to the sorts of high standards that European consumers, and people like European consumers, want to pay for." He suggested that the EU was "at that end of the market" and that in that sense, agriculture is no different from any other production sector in Europe. Commissioner Mandelson also dismissed concerns about the safety of imported agricultural produce, pointing out that "as tariffs go down and our markets open then other goods will come towards our markets, that is absolutely true, but they do not just pass freely into our markets because they have to get over the hurdle of our SPS[47] agreement" (Q 766). He also emphasized that third countries needed to know that if they were producing safely and supplying products that meet EU standards there would be no penalisation of their produce, "no artificially high SPS standards which will be a bar which is impossible for them to get over" (Q 759).

140.  Some of our witnesses, however, were sceptical of the route EU producers were being asked go down. Dai Davies of the NFU Cymru explained that while Welsh farmers have been trying to produce a branded product in an attempt to add value, "at the end of the day, the vast majority of products sold abroad are sold on a price basis", meaning that ultimately "it is only a small section of our production that we can sell in that way" (Q 352). On behalf of the Spanish government, Valentin Almansa de Lara also called for reflection "on this so-called quality European standard", suggesting that "consumers are not prepared to pay for it" (Q 551). Duncan Sinclair of Waitrose explained that "many consumers expect imported product to reach the exact same standards as we would have within the European Union and in a whole range of different sectors that is not the case" (Q 873). He suggested that the EU might therefore need to consider whether it should try to differentiate EU produce in the marketplace, for example through welfare labelling.

141.  Professor Alan Buckwell of the Country Land and Business Association drew attention to the environmental consequences of agricultural trade liberalisation: "If Europe insists on having higher and higher environmental standards, as it is and as we support, and wants to liberalise trade and implicitly reduce its production, who does it think these additional imports are going to come from and with what environmental impacts?" (Q 208). On behalf of the New Zealand government, however, Murray Sherwin pointed out that "if you can take a product unsubsidised and deliver it into the market at a competitive price, you are unlikely to be embodying a lot more energy than the price that you are competing against; you simply cannot afford that" (Q 313). He consequently emphasised the need to ensure that these issues are considered not just in terms of food miles, but as part of "a broader greenhouse gas footprinting approach, which is much more on the full life cycle." Duncan Sinclair of Waitrose concurred on the need to look at the entire picture, "including inputs and production system" (Q 868).

CONCLUSIONS

142.  We commend the European Union's decision to commit itself to the removal of export subsidies, and strongly support the Commission's intention to ensure that subsidised sales do not form part of the CAP in future. We recognise the logic of the argument put to us by the Food and Drink Federation in respect of export subsidies for Non-Annex 1 products, but view it as a reason to cut import tariffs rather than keep export refunds.

143.  The plight of manufacturers who use agricultural raw materials serves to highlight the broader redistributive impact of import tariffs, which protect producers of agricultural goods at the expense of consumers of those goods—be they households or large multinationals. In our view, this aspect of the CAP is without justification, and we therefore support further reductions in tariffs on all types of agricultural goods, including sensitive products. Current market conditions and the medium-term outlook for agricultural commodities[48] could, moreover, help to provide a soft landing for most sectors in the event of tariff reductions.

144.  With respect to the production standards imposed on agricultural producers in the EU, we recognise the frustration felt by farmers who resent being exposed to competition while forced to observe rules that they regard as a competitive handicap. In our view, the demands placed on farmers are partly a consequence of the need to find a justification for the maintenance of direct subsidies. If direct payments are withdrawn and import tariffs reduced—as the UK Government advocates—then the production standards that EU producers of agricultural goods are obliged to respect should be re-examined. EU farmers might in future be asked to produce to SPS standards, with targeted financial incentives on offer through Pillar II for the provision of specific public benefits (e.g. high standards of animal welfare) that are not delivered by these production processes.

145.  While supporting efforts to encourage other countries to adhere to production standards similar to those currently in force in the EU, we would not welcome attempts to impose such standards on other countries, nor the prospect of their being used as non-tariff barriers on imports. Agricultural products that meet the SPS standards stipulated by the EU should be allowed to enter. Consumers should then be allowed to choose among products produced to different standards above that basic threshold. Labelling will take on great importance if consumers are to make informed choices. Labelling should, however, be based on a comprehensive assessment of environmental impact and welfare standards, rather than relying on crude indicators such as whether a product has been air-freighted.


24   COM (2007) 722. Back

25   England technically operates a dynamic hybrid system, meaning that it will gradually move to flat-rate payments. Denmark, Germany and Finland also operate dynamic hybrid systems. Luxembourg and Sweden operate static hybrid systems, meaning that they intend to maintain mixed systems. Of the other Member States who use the Single Payment Scheme, nine use historical models, and two (Slovenia and Malta) use area-based models. The remaining new Member States use the Single Area Payment Scheme (SAPS) rather than the SPS. Back

26   COM (2007) 722, Para. 2.1. Back

27   Commission Memo 07/476, 20 November 2007. Back

28   Commission Memo 07/476, p.4. Back

29   Commission Communication (2007) 722, p.5. Back

30   Note, however, that a reduction in subsidies above a certain threshold would mean that those expanding their businesses above that threshold would not reap the full return from economies of scale, as some of those returns would instead offset the reduction in subsidies. Incentives would therefore be distorted to that extent. Back

31   COM (2007) 722, Para. 2.2. Back

32   Duncan Sinclair, Waitrose, Q 870; National Farmers' Union Memorandum Para. 33; Farmers' Union of Wales Memorandum Para.22; Hannah Bartram, Environment Agency, Q 173. Back

33   Q 177. Back

34   COM (2007) 722, Para. 2.3 and MEMO/07/476, p.3. Back

35   NFU Cymru and NFU Scotland also support full decoupling. Back

36   See also Para. 9 of this report. Back

37   Commission MEMO/07/476, p.5. Back

38   Commission Communication (2007) 722, Pa. 3.3. Back

39   Commission Communication on the Health Check, Para. 3.1. Back

40   Op. cit. Para. 3.2.  Back

41   Op. cit. Para. 3.4. Back

42   HM Treasury/DEFRA 'A Vision for the Common Agricultural Policy', Para. 1.18, December 2005. Back

43   Commission Communication on the Health Check, Para.3.1. Back

44   Value-added products produced with CAP agricultural raw materials that were not included in the list of agricultural products annexed to the Treaty of Rome and subsequent EU treaties. Back

45   See for example Q 807. Back

46   Press Release 15333/07 on the Agriculture and Fisheries Council Meeting held in Brussels on 26-27 November 2007, p. 9. Back

47   Sanitary and phytosanitary standards that cover food safety and animal and plant health. Back

48   See for example the Food and Agriculture Organization of the United Nations' "Food Outlook", November 2007 and agribusiness consultants Bidwells' report on "The 'Bull Run' in Soft Commodities", October 2007. Back


 
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