Common Agricultural Policy Reform: final outcome of Luxembourg Council meeting

I would like to make a statement about  reform of the Common Agricultural Policy (CAP).

The CAP was originally framed in the decades after the Second World War when the goal was to increase domestic food production to avoid food shortages. But globalisation of world trade and earlier attempts to reform the CAP have left EU farmers more exposed to global competition, dependant on subsidies for their income, isolated from consumers and hide bound by red tape and bureaucracy.

In November 2001 we launched the Welsh Assembly’s strategy document, “Farming for the Future” . One of the key objectives was to influence the UK Government and the EU to secure a trading and subsidy framework which delivers a sustainable agricultural industry for Wales.  The CAP reforms agreed last week in Luxembourg meet that objective and will benefit the industry and rural communities in Wales.

The centrepiece of the new package is “decoupling” subsidies from production based payments.  From January 2005 Member States, and regions of Member States such as Wales, will have the opportunity to break the link between farm subsidies and production. The plethora of existing CAP direct subsidy schemes  - including  the arable, cattle and  sheep schemes -  will be replaced by a Single Farm Payment.  Whereas  farmers currently have to maintain a particular level of production - such as number of animals or areas under crop  and comply with rules and regulations on retention periods, quotas and the like, decoupling means that farmers will no longer have to do this.   They will be free to focus on what consumers and the market want. Farmers will no longer be caught in the trap of having to chase subsidies to secure an income.   Instead they will be able to concentrate on further improving the quality of their produce and the environment.

The Single Farm Payment will be based on historic CAP claims in the 3 year period 2000 to 2002.  A 3% national reserve  will be established to cover payments  for farmers who otherwise might not be able to demonstrate an entitlement relating to this period.

The new payment will be subject to farmers meeting minimum standards -referred to as “cross compliance” - in key areas, like the environment and animal health and welfare.  In addition farmers will have to keep the land in “good agricultural and environmental condition”.        

There is also a  provision relating to  a national envelope. This enables Member States or regions such as Wales, to retain up to 10% of payments to develop targeted schemes to promote sustainable and environmentally friendly farming.  For example, this could be used to  encourage retention of suckler cows in the Less Favoured Areas of Wales.


It will also be open to Member States to choose, at national or regional level,  to maintain payments coupled to production  for: 

•  up to 25% of arable payments
  
  
• up to 50% of Sheep Annual Premium and the Less Favoured Area supplement;
  
  
• or beef up to either:

a) 100% of the suckler cow premium and 40% of the slaughter premium; or
b) 100% of the slaughter premium; or
c) 75% of the Beef Special Premium.


On milk, it has been agreed to retain milk quotas until 2014, while  there is a commitment to review future milk quota allocation in 2008.  Some market support price cuts were agreed but at a lower rate than  expected.

The Dairy Premium Scheme, due to commence in 2004, will remain as a production linked payment until the dairy reforms are fully implemented in 2008.  However, if Member States opt for the Single Farm Payment to be implemented on a regional basis, the Dairy Premium could be decoupled  before 2008.  


There will also be EU wide compulsory modulation commencing in 2005, switching some support away from production based subsidies towards support for environmental and rural development measures across the EU.

Another key change is the introduction of a new financial discipline which will trigger action to reduce subsidies if CAP expenditure looks in danger of exceeding the agreed ceiling.
 
Some additional optional measures have been included in the Rural Development Regulation, such as providing income support to farmers facing new legislative requirements.  What is particularly welcome is the Commission’s commitment to simplify administration of that Regulation.  

Overall, the package is a complex one which we will need to digest in detail.
For example, to avoid land abandonment the Luxembourg Agreement  includes provision for regional implementation of coupled payments to support the sectors previously outlined. I am keen to hear the views of key stakeholders on the various options and will be consulting widely over the coming months before any decisions are taken. My objective is to achieve  the best possible outcome  for Welsh farmers.

We now have a framework for the long term sustainability of the farming industry  in Wales as the reform package will run through to 2013. But  much of the detail fleshing out this framework will not be available until the Autumn or even later, when  we receive the implementing regulations from the European Commission. Secondary legislation will follow on from that to underpin the new regime in Wales.  

We will make information available to the industry as soon as possible since I know that farmers need to be able to plan ahead.  The key point to remember is that there will be NO change to direct subsidy schemes in 2004 – it’s business as usual next year.

I will be briefing the Environment, Planning and Countryside Committee on
16 July and I will be seeking a further opportunity  in Plenary for a full debate on the reforms at the appropriate time.


I look forward to working with the Committee, the industry and countryside interests to implement this new Common Agricultural Policy in Wales. It provides  a real opportunity for simplification and for farmers to run their businesses based on market needs rather than chasing subsidies as they have had to for so long..


SUMMARY OF CAP REFORM MEASURES AGREED ON 26 JUNE 2003

The key elements of the new, reformed CAP are as follows:

• a single farm payment for EU farmers, independent from production and simplifying CAP; limited coupled elements may be maintained in specific circumstances to avoid abandonment of land,
• the single farm payment will be linked to complying with environmental, food safety, animal and plant health and animal welfare standards. In addition farmers will have to keep all farmland in good agricultural and environmental condition ("cross-compliance"),
• a strengthened rural development policy with new measures to promote the environment, food quality and animal welfare and to help farmers to meet EU production standards starting in 2005,
• compulsory EU wide "modulation" to support environmental and rural development objectives,
• a mechanism for financial discipline to ensure that the farm budget fixed until 2013 is not overshot,
• revisions to the market support policy of the CAP:
• differential market support price cuts in the milk sector: The intervention price for butter will be reduced by 25% over four years, for skimmed milk powder a 15% reduction over three years, as agreed in Agenda 2000,
• 50% reduction in the monthly increments in the cereals sector. No changes to intervention price,  
• reforms in the rice, durum wheat, nuts, starch potatoes and dried fodder sectors.

The reform in detail

A single farm payment to promote a more market orientated, sustainable agriculture

A single farm payment will replace most of the premia under the CAP regime (See Annexes A and B). Consequently, the majority of the EU direct payments will no longer be linked to production. Farmers will receive this single farm payment based on a reference amount in a 3 year reference period of 2000 to 2002, with special provision for farmers who took up occupation of land during this period or up to 31 May 2003.  The new single farm payment system will come into force in 2005. There is provision for the introduction of the single farm payment to be delayed to 2007 in specific circumstances.

A national reserve of single payment entitlements will operate under rules (to be set later by a new Commission Management Committee).  The national reserve will be generated by a levy of up to 3% of entitlements and certain other sources.

Payments will be based on land use, but transferable by sale separate from the land. Farmers who have no land, e.g. intensive beef feed lots, are covered by special rules.  These will be mostly in other Member States. Member States may also adopt a different approach in regions, allowing the total subsidy paid to be averaged over all of the agricultural land in a region.  

Those Member States who consider it necessary to minimise the risks of land abandonment may, at national or regional level, maintain: up to 25% of the current per hectare payments in the arable sector linked to production.

For the beef sector, Member States may decide to

• retain up to 100% of the present Suckler Cow Premium and 40% of the Slaughter Premium
  or
• retain either up to 100% of the Slaughter Premium or
  
• alternatively up to 75% of the Beef Special Premium

A maximum of 50% of the sheep and goat premia including the less favoured areas supplement can remain linked to production.


Dairy sector :

Milk quotas will continue until 2014/15. The general increases in quota decided under Agenda 2000 have been postponed until 2006, with a commitment to a review in 2008.

In order to bring EU market prices closer to world prices there are cuts in market support for Butter (25% over 4 years from 2004) and for skimmed milk powder (15% over 3 years from 2004).

Compensation for these cuts, a Dairy Premium payment, based on amounts of quota held, will be introduced in 2004. Member States that exercise the option to introduce the single farm payment scheme on a regional basis could include the Dairy Premium; otherwise the premium remains coupled until 2008. Payment would be based on quota held on a given reference date.  


National Envelopes

Member States or regions will also have the option to retain 10% of payments to establish a national envelope to address particular issues associated with   simplification or to improve marketing or encourage specific types of farming.  

Set aside land and land use
Land covered by the simplified payments must be farmed in accordance with the cross compliance rules and must not be used for permanent crops, except for energy crops (e.g. short rotation coppice), nor for growing fresh fruit and vegetables (including potatoes).  

Set-aside is maintained.  It will be based on the amount of land a farmer had in compulsory set-aside in the simplified payment reference period.  This land is covered by the same payment system, but payment is made only if the land is kept in set-aside. Rotation is allowed.

The rules for set-aside have been relaxed to provide more flexibility in ways which help deliver environmental objectives (e.g. in relation to strip widths for conservation headlands - strips around the edges of a fields).

Protein Crops
The existing tonnage-based supplement payable for peas and beans will be converted to an area based supplement of €55.75/ha, subject to a maximum area in the EU of 1.4 million hectares.  The aid will be coupled to production.

Energy crops

An aid of 45 Euro per hectare for land used to produce energy crops except set aside land has been agreed. Energy crops include crops for the production of biofuels and electrical and thermal energy from biomass. A maximum guaranteed area of 1.5 million hectares is fixed for the EU and aid will be reduced if production exceeds that area. By December 2006 the Commission will report on the implementation of the scheme, taking into account progress with the EU biofuels initiative.

Cereals
The compromise halves the monthly increments resulting in a small reduction in total support. Market intervention for rye is abolished.  Set-aside continues, but with much greater flexibility which will help maximise its environmental benefits, (rotational options, non-food/energy crop use, narrower strip widths).

Reinforcing environmental, food safety, animal health and welfare standards (“Cross Compliance”)

The single farm payment and other direct payments will be linked to  compliance with a certain number of statutory environmental, food safety, animal and plant health as well as animal welfare standards. There will be an annual sample - based inspection regime to ensure those standards are met. If cross-compliance requirements are not adhered to, direct payments will be reduced in proportion to the risk or damage concerned.

A new "Farm Advisory System"

The farm advisory system will be voluntary for Member States until 2006. From 2007 Member States have to offer advisory systems to their farmers to help them meet their cross compliance obligations. Their participation will be voluntary. Following a review of the system by the Commission, the Council may in 2010 decide that the advisory system should become compulsory for farmers.

Strengthening rural development

The scope of EU rural development support will be widened by new measures available from 2005. It will be for Member States and regions to decide if they wish to take these up within their rural development programmes.

The measures cover food safety and quality, help for farmers to adapt to the introduction of demanding standards based on EU legislation, and promoting high standards of animal welfare.

Modulation

There will be compulsory modulation of payments to farmers across the EU from 2005, earlier than originally proposed (2006) and at a higher rate for the earlier years.  

The new rates are:

as agreed January proposal
2005                    3%
2006                    4% 1%
2007                   5% 2%
2008                   5% 3%
2009                   5% 4%
2010                   5% 5%
2011 and thereafter   5% 6%

The first €5,000 of direct payments for each farmer will be returned to the farmer (so, in effect, no cut is applied to that element of the subsidy.)

Part of the receipts from modulation will be redistributed on the basis of criteria related to the relative shares of agricultural land, agricultural employment, and GDP per capita. However, the first 1% of the modulation rate each year will be allocated to the Member State from which it was collected; and every Member State is guaranteed to get back at least 80% of what it pays in.  



Financial Discipline

A new financial discipline mechanism has been agreed to keep overall expenditure with agreed limits.  The arrangements will be introduced from 2007 and only when the Commission judge that expenditure on CAP is within €300 million of the budget ceiling.

                                                                       
                                                                                 Annex A

In principle, the following schemes will be incorporated into the single payment scheme:

Arable Area Aid*
Beef Special Premium*
Suckler Cow Premium*
Slaughter Premium*
Beef National Envelopes
Extensification Payments
Deseasonalisation Premium (N.I)
Sheep Annual Premium*
Sheep Annual Premium LFA supplement*
Sheep National Envelopes

* Member States or regions have the option of retaining all or part of these schemes.



                                                                                                     Annex B
Impact of CAP reform

These reforms free up farmers to farm the land instead of subsidies – and will help protect our environment and give a better deal to taxpayers and consumers.  

Take for example a farm running a flock of 1,000 ewes and 30 suckler cows   which may attract roughly £17,800 in Sheep Annual Premium and £5040 in Suckler Cow Premium and Extensification Premium – a total of £22,840.

To get this money the business has to be managed within the terms of the relevant subsidy schemes – regardless of costs, the commercial impact or what it means for the local environment.  The business isn’t free to respond to market signals.  There is a requirement to keep at least 1,000 ewes on the  holding between February and May, and at least 30 suckler cows and heifers for six months during the year.  What is often the largest part of the business income for such a farm, the subsidy, would be lost if the requirements are not met.  

Under the reformed, de-coupled system, the farmer would continue to receive money through the CAP as a single income payment.  There is no requirement to keep a particular number of cattle or sheep for specific periods to get it.  The land must be kept in good agricultural and environmental condition and cross compliance obligations must be met – other than this business decisions will inform how an individual farms.  For example, reductions in cattle and sheep numbers could be made and emphasis could be moved to improving the quality of beef and lamb.  As reducing stock numbers will cut costs, income may increase.