Select Committee on European Union Seventh Report


The Purpose of the CAP post-2013


211.  We share our witnesses' view that the "commonality" of the CAP should be its central feature. The regulation of the Single Market in agricultural commodities within the EU should therefore continue to be the primary role of a Common Agricultural Policy. However, we also note that there is a difficult balancing act to be struck between preserving the "commonality" of the CAP and responding to calls for greater flexibility in the way common goals are delivered in different Member States and indeed in different regions within each Member State (see Para. 37).

212.  We believe that the drive towards a more market-oriented agriculture should continue. In the long term, the CAP should aim to foster a farming sector that is capable of standing on its own feet, competing in open international markets without subsidy or special protection. We acknowledge the likelihood of greater demand for agricultural commodities in future, and believe that this presents an opportunity for the European farming industry. The distorting effect of subsidies will in our view hinder the EU agriculture sector's ability to respond to, and profit from, the expected increase in global demand for agricultural products. The CAP should instead aim to steer the industry towards a position from which it can take full advantage of a future boom in commodities prices. In our view, this means moving away from the distortions that a managed and protected internal market for agricultural commodities creates and sustains (see Para. 48).

213.  We were not persuaded by the argument that the risk of future food shortages should be hedged against by freezing current production patterns. In our judgement, food scarcity is likely to be a function of income rather than of production capacity. If the supply shortages anticipated by some witnesses do materialise, those most at risk are consumers on low incomes in the developing world (see Para. 49).


214.  We recognize that many Member States are currently relying on CAP funds—and particularly on direct payments under Pillar I—to secure social policy goals. However, we believe that many of the problems being addressed—such as the lack of employment opportunities in remote rural areas, or the fragility of rural communities—deserve to be tackled in their own right. Direct payments to farmers and landowners are an indirect, and in our view poorly-focused, instrument with which to address these challenges. Agricultural interests should not be equated with rural interests: channelling financial support through the agriculture sector may not be the most efficient and effective way of sustaining rural communities (see Para. 58).

215.  The needs of rural communities are likely to be very different across different Member States and across different regions within each country. Agriculture may or may not have a role to play in meeting those needs, and different Member States will wish to give varying levels of prominence to the agriculture sector in their overall rural development strategy. For this reason too, we consider that uniform direct payments to farmers under Pillar I of the CAP are not the appropriate vehicle for the implementation of a diverse set of national rural policies (see Para. 59).

216.  We believe that some of these goals—such as the diversification of the rural economy—would be better pursued through Pillar II of the CAP (and indeed provision is already made for such actions under the EAFRD), while others—such as the structural problems in the rural areas of the new Member States—would be better tackled through other EU programmes (e.g. Structural and Cohesion Funds). Social and cultural objectives, however, are in our view too numerous and too diverse to be pursued exclusively through EU-level programmes. They should be addressed primarily at a national, or even sub-national level, at domestic taxpayers' expense (see Para. 60).


217.  We recognize that certain types of farming activity can generate environmental benefits that are valued by society at large but whose value is not reflected in market prices for agricultural products. It does not automatically follow, however, that farmers should receive financial rewards for the environmental public goods that their activity helps to provide (see Para. 65).

218.  We believe that the CAP should continue to promote farming methods and practices that will result in environmental benefits. In light of limited public resources, we see merit in drawing a distinction between environmental outcomes that can be secured through regulation—such as the control of emissions and pollution—and those that are unlikely to be delivered without financial incentives—such as the positive management of a wildlife habitat (see Para. 71).

219.  We recognise the inherent difficulty in determining which environmental goods and services should be paid for from the public purse, and in putting a price on their value to society. We expect that these valuations may change over time, notably in the event of food price inflation. We consequently recommend that these decisions should be taken at a national level wherever possible, albeit on the basis of a menu of admissible uses for CAP funds defined at the EU level (see Para.73).

220.  Climate change considerations will clearly have to figure prominently among the future environmental objectives of the CAP. The EU's agriculture sector will need to improve its impact on the environment, but climate change also presents a business opportunity for the industry, which it must be encouraged to seize. In the long run, the best way to secure progress towards both goals may be to integrate agriculture in an EU-wide greenhouse gas emissions trading scheme. We consequently recommend that this possibility be given further consideration as a matter of urgency (see Para. 75).

Pillar I after the Health Check


221.  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." We believe that this very substantial degree of flexibility should go some way towards meeting the concerns raised (see Para. 81).

222.  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 (see Para. 82).


223.  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 (see Para. 89).

224.  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 (see Para. 90).


225.  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 (see Para. 101).

226.  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 (see Para. 102).

227.  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 (see Para. 103).


228.  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 (see Para. 109).

229.  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 2. Due to the need to preserve the WTO credentials of Pillar 2, 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 (see Para. 110).


230.  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 (see Para. 118).

231.  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 (see Para. 119).


232.  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 bread wheat and to other sectors. 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 (see Para. 128).

233.  For the same reasons, we welcome the Commission's intention to gradually 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 (see Para. 129).


234.  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 (see Para. 142).

235.  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 could, moreover, help to provide a soft landing for most sectors in the event of tariff reductions (see Para. 143).

236.  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 (see Para. 144).

237.  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 (see Para. 145).

Pillar II after the Health Check


238.  We support the Commission's plans to increase compulsory modulation, on the basis that funds invested in Pillar II of the CAP offer better value for the taxpayer than funds allocated to Pillar I. We share the view articulated by some of our witnesses that the high level of voluntary modulation applied by the UK can be traced back to its low share of rural development funds overall. If a historic allocation system for Single Farm Payments is considered indefensible—as the Commission has indicated, and as we believe—then a similar system for allocating rural development funds, based on a reference period even further in the past, cannot be justified. We therefore recommend that the distribution key for rural development funding be reviewed at the earliest opportunity (see Para. 154).

239.  In the meantime, we support the Commission's intention to secure like for like reductions in voluntary modulation in return for increases in compulsory modulation. We recognise that environmental groups in the UK rely heavily on funds from voluntary modulation to support their activities. In our view, however, the preservation of a level playing field across the Single Market in agricultural goods must be the overriding purpose of the CAP. We therefore share the farmers' unions' concern that the high levels of voluntary modulation being applied in the UK may result in competitive distortions (see Para. 155).


240.  We share the UK Government's view that risk management is a normal feature of any commercial activity, and should therefore take place within the industry to the maximum degree possible. However, we recognise that state intervention through the CAP over the years has impeded the development of industry-based solutions, and that private sector insurance and hedging instruments are not available in all sectors, nor necessarily adapted to the distinctive risks faced by farmers. As the agriculture sector becomes more market-oriented, and farmers are increasingly exposed to market risks, we therefore do see a role for the CAP in promoting the development of non-trade distorting, industry-based risk management methods. This may involve providing information (for example on the expected impact of climate change in a particular region), facilitating structural change (for example where risk is pooled through cooperatives, or through vertical integration in the supply chain), or co-financing insurance premiums as the Commission envisages—although the latter measure should in our view be time-limited rather than permanent. The ultimate aim would be to shift a greater share of market risk onto the agriculture industry. However, we recognise that the state is unlikely to be able to withdraw from this area altogether, notably where a private insurance market is unlikely to emerge—as may be the case with respect to risks posed by animal diseases or climate change, for example (see Para. 161).


241.  We support the Commission's intention to review whether the strategic guidelines for rural development in the period 2007-2013 offer appropriate incentives for farmers and land managers to address the challenges and exploit the opportunities posed by climate change, including research and development, sustainable water management and the protection of biodiversity. We note, however, that because rural development programmes are drawn up by the Member States themselves, the onus is also on them to review whether their rural development and climate change agendas are suitably aligned. The Commission's review should therefore be complemented by equivalent reviews at the national level. Particular attention should be given to whether the right measure of flexibility is available to support measures that cut across the EAFRD axes, notably where there is both a business development and an environmental aspect to a particular project (see Para. 177).

242.  We would not support moves to incorporate climate change and water management objectives in cross-compliance. This would in our view add to the administrative burden faced by farmers, while duplicating policy objectives that are already addressed in Pillar II and in the Water Framework Directive (see Para. 178).

243.  We concur with the Agriculture Commissioner's verdict that market developments have removed the justification for subsidising biofuel production. Production-linked subsidies run counter to the principle behind the 2003 CAP reform—support schemes for energy crops should be no exception (see Para. 179).

244.  We support the Commission's call for funds to be transferred from Pillar I to Pillar II so that adequate resources are available to implement the climate change agenda for agriculture. We note, however, the risk that the climate change agenda may be seized upon to resist calls for cuts to the overall CAP budget—a position that may be implicit in the evidence given to us by the Agriculture Commissioner (see Para. 180).

Looking Ahead


245.  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 Pillar II instruments. We are therefore not convinced of the justification for maintaining direct payments under Pillar I in the long term. We would instead advocate a phased reduction in direct payments over the course of the next financial perspective. Periodic impact assessments should be used to determine the pace at which subsidies are withdrawn (see Para. 190).

246.  A significant proportion of the funds released by the progressive reduction in direct payments should in our view be transferred to Pillar II of the CAP for the duration of the next financial perspective, thus allowing for an orderly transition. While this course of action may not result in significant savings in the overall CAP budget, we consider it to be the only viable way of re-orienting the CAP, as it would avoid the upheaval involved in attempting to transfer budget lines and responsibilities away from the European Commission's DG Agriculture and national agriculture ministries (see Para. 191).


247.  Like the UK Government, we believe that the future of the CAP lies in the present Pillar II. A recast Pillar II could in our view form the basis for an EU-level framework for rural policy. For the reasons outlined by the NFU, the framework we envisage would not be a "common" rural policy in the sense of prescribing common solutions to common problems. Instead, the framework should specify a menu of actions that Pillar II funds can legitimately be used for. The main role for the EU would lie in defining the contents of that menu, ruling out measures that might lead to market distortions. Expenditure on R&D for example, might qualify for support, while countercyclical income safety nets would not. Each Member State would then be able to channel funds as it saw fit, in accordance with national priorities for rural development. We envisage that this system would differ from the existing policy framework in three main respects (see Para. 206).

248.  First, the types of admissible actions—currently organised around the three axes of the EAFRD—should in our view be recast more broadly to include more non-agricultural measures. Funds might thus be used to improve communications, infrastructure, and amenities in rural areas so as to ensure that rural communities are not disadvantaged by their rurality. The ultimate aim would be to ensure that non-agricultural economic activities are genuinely available and viable as the agriculture sector adapts and restructures in response to market signals. However, investment designed to improve the competitiveness of farming businesses should continue, and will become even more critical if agricultural trade is liberalised further (see Para. 207).

249.  Second, there should be no prescriptions for fixed percentages of Pillar II funding to be spent on different types of actions. Regulation at the EU-level should be limited to identifying the types of actions that are admissible, based on whether they might interfere with the operation of the Single Market (see Para. 208).

250.  Lastly, the distribution key for Pillar II funds should in our view be reassessed. We have already recommended that the current historical allocation system should be reviewed at the earliest opportunity. We believe that an element of co-financing should be preserved, as it provides Member States with incentives to ensure that funds are spent efficiently. Co-financing requirements should, however, be determined on a needs basis, so that a smaller proportion of co-financing is required from poorer Member States. This will become particularly important if Pillar I funds are progressively transferred to Pillar II. Co-financing should nevertheless continue to be compulsory, in order to prevent distortions of competition (see Para. 209).

251.  A recast Pillar II such as we have described could in our view be used to tackle the relative deprivation of rural areas compared to urban areas even in relatively rich Member States, and to target pockets of deprivation in otherwise wealthy rural areas—needs that are overlooked by other EU policies that allocate funds on the basis of absolute and average measures of deprivation. In practice, this would mean that all Member States would continue to benefit from access to CAP funds. Rather than duplicating what is being carried out through other EU programmes and funds—notably Structural and Cohesion Funds—the framework we have outlined should therefore close a gap exposed by these existing programmes (see Para. 210).

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