Brakes removed from voluntary coupled support

I have previously written about the provisions for voluntary coupled support (VCS) in the 2013 CAP reform package in this blog post in 2015 entitled “Two steps forward, one step back: coupled payments in the CAP”. That post gives a historical overview of the gradual phasing out of coupled payments during the 2000s and the reversal of this process in the 2013 reform. In the recently-agreed Omnibus Agricultural Provisions Regulation (EU) 2017/2393, a significant relaxation of the conditions that Member States must meet in gaining approval for their VCS schemes was introduced. The negotiating history of this amendment is particularly opaque and sheds an interesting light on the secrecy and non-transparency of the trilogue process in which the Council and European Parliament, as co-legislators, try to reach agreement on legislative proposals. In this post, I describe the changes introduced and assess their significance.

VCS in the 2013 CAP reform

To recap, the rules governing VCS following the last CAP reform were set down in the Direct Payments Regulation (EU) 1307/2103. Article 52 of that Regulation lays down the general rules. Member States can provide coupled support to a wide range of sectors covering virtually all agricultural production (but notably excluding tobacco) (Article 52(2)). However, the ability to provide coupled support was restricted in Article 52(3) to those sectors or to those regions of a Member State where specific types of farming or specific agricultural sectors that are particularly important for economic, social or environmental reasons undergo certain difficulties. The Commission Delegated Regulation (EU) No 639/2014 defines that certain types of farming or specific agricultural sectors shall be considered as being in ‘difficulties’ if there is a risk of abandonment or of decline of production due to, inter alia, the weak profitability of the activity carried out which negatively affects the economic, social or environmental balance in the region or sector concerned.

Article 52(5) sets out that coupled support may only be granted to the extent necessary to create an incentive to maintain current levels of production in the sectors or regions concerned. Article 52(6) provides that coupled support shall take the form of an annual payment and shall be granted within defined quantitative limits and be based on fixed areas and yields or on a fixed number of animals. The Commission Delegated Regulation requires that the limits should not be greater than the maximum yields, area cultivated or number of animals reached in the targeted region or sector in at least one year in the period of five years preceding the year of the decision. The annual payment should result from the ratio between the amount fixed for the financing of the measure and either the area or the number of animals eligible for the support in the year in question, or the area or the number of animals fixed at the maximum limits as defined above.

Article 53 sets out the financial provisions. A Member State can use up to 8% of its direct payments envelope on VCS schemes, but this was increased to 13% for those Member States which were still using coupled payments under earlier CAP rules or were implementing the SAPS system of direct payments. In certain circumstances Member States could exceed the 13% limit with the approval of the Commission. These percentages could be increased by up to two percentage points for those Member States which decide to use at least 2% of their annual national ceiling to support the production of protein crops. By way of derogation from these percentages, Member States could choose to use up to €3 million per year for financing coupled support (a provision of specific benefit to Malta). Member States were required to make their decisions on VCS by 1 August 2014 but had the opportunity before 1 August 2016 to review these decisions and introduce changes with effect from 2017,

Article 54 sets out the notification requirements for Member States. They must include information on the regions targeted, the selected types of farming or sectors, and the level of support to be granted. Where Member States want to go beyond the 8% ceiling, they have to include a detailed description of the particular situation in the region targeted and of the particular characteristics of the types of farming or specific agricultural sectors, which make the 8% ceiling insufficient to address the difficulties and which justify an increased level of support.

In summary, VCS after the 2013 CAP reform may only be granted to those sectors or to those regions of a Member State where specific types of farming or specific agricultural sectors undergo certain difficulties and are particularly important for economic and/or social and/or environmental reasons. Furthermore, VCS may only be granted to the extent necessary to create an incentive to maintain current levels of production in the regions or sectors concerned. It should take the form of an annual payment and should be granted within defined quantitative limits and based on fixed areas and yields or on a fixed number of animals.

The Agriculture Stratégie website has a nice graphical summary of VCS schemes (based on Commission data reflecting the 2014 decisions) which highlights well the sectors and countries with the most coupled support.

The 2016 ‘review’

We can now bring the story up to 2018 in the light of two recent documents/decisions. The first is the Commission’s summary of the decisions taken by Member States in August 2016 and implemented in 2017, which was the first opportunity they had to review and revise the decisions they took on VCS in August 2014.

The summary shows that, although many Member States changed their decisions on VCS schemes, the overall effect as compared to the 2014 outcome was rather limited. All Member States except Germany continued to implement at least one VCS scheme. The amount allocated to VCS schemes, at €4.2 billion, or around 10% of the total direct payments envelope, also remained more or less unchanged after the 2016 review. As many Member States were already using the maximum available envelope for VCS schemes in any case, this relative stability may not be a surprise.

The Omnibus Agricultural Provisions Regulation

More significant are the amendments to the VCS scheme which were introduced in the Omnibus Agricultural Provisions Regulation which came into effect on 1 January 2018. The recitals to the Regulation explain the changes that were made.

(42) In order to enhance clarity with regard to the responsibilities of Member States as far as the production limiting character of voluntary coupled support is concerned, it is appropriate to reformulate Article 52(5) and (6) of Regulation (EU) No 1307/2013. As the reformulation reflects the current practice since 1 January 2015 with regard to the provisions concerned, it is appropriate that it should apply from claim year 2015.

(43) In order to ensure the greatest possible consistency between Union schemes targeting sectors that, in certain years, are marked by structural market imbalances, the Commission should be empowered to adopt delegated acts allowing Member States to decide that voluntary coupled support can continue to be paid until 2020 on the basis of the production units for which such support was granted in a past reference period.

(44) In order to enhance the flexibility with regard to voluntary coupled support, annual review by the Member States of their support decisions should be allowed with effect from claim year 2019.

The most important change was to remove the constraint in Article 52(5) of the Direct Payments Regulation that coupled support may only be granted to the extent necessary to create an incentive to maintain current levels of production in the sectors or regions concerned. This paragraph was deleted, while the following paragraph (Article 52(6)) was amended to read:

6. Coupled support is a production-limiting scheme that shall take the form of an annual payment based on fixed areas and yields or on a fixed number of animals and shall respect financial ceilings to be determined by Member States for each measure and notified to the Commission.

In other words, the limitation that coupled payments should be granted within defined quantitative limits (in turn, set at the maximum yields, area or number of animals reached in one of the previous five years) has also been removed. The consequence of these changes is that coupled support can now legitimately be given even where it leads to an increase in production beyond historical levels.

The justification for coupled support, that it provides a way of supporting sectors or regions in ‘difficulties’, which is set out in Article 52(3), has been retained in principle but abandoned in practice. Recall that the Commission Delegated Regulation defines regions and sectors as being in ‘difficulties’ where there is a risk of abandonment or a decline in production. Member States are now at liberty to use coupled support to promote increased production, subject only to the financial ceiling for VCS measures as a whole.

What is interesting in the recital (42) is the admission that this reformulation “reflects current practice” and thus should be made retroactive back to 2015 to legitimise what were presumably illegal state aids at the time.

The other VCS amendments included in the Omnibus Regulation are less far-reaching but nonetheless important. The Regulation adds the following paragraph to the Direct Payments Regulation.

10. The Commission is empowered to adopt delegated acts […] as regards measures in order to avoid beneficiaries of voluntary coupled support suffering from structural market imbalances in a sector. Those delegated acts may allow Member States to decide that such support may continue to be paid until 2020 on the basis of the production units for which voluntary coupled support was granted in a past reference period.

This amendment authorising the Commission to suspend the obligation on farmers to cultivate the area or maintain the animals for which VCS is paid institutionalises what happened during the milk crisis in 2017. In July 2017 the Commission presented a further package of measures worth €500 million from EU funds to support farmers in the face of ongoing market difficulties, particularly on the dairy market. This included granting flexibility to Member States to derogate from the obligation to maintain the size of the dairy herd in 2017 for farmers in receipt of VCS. It attempts to mitigate the insanity that one arm of DG AGRI is paying money to farmers to reduce production to try to mitigate a market crisis, while another arm of DG AGRI is paying money to farmers to maintain production (and now, after the Omnibus Regulation has come into force, even to increase production).

Finally, the Omnibus Regulation gives Member States the flexibility to change their VCS decisions on an annual basis. In practice, because decisions should be notified to the Commission by the 1 August for the following year, this flexibility will take effect from 2019 onwards.

The negotiating history on the VCS amendments

What is interesting about the provisions in the Omnibus Regulation to remove the constraint that coupled support can only be used to maintain previous levels of production for sectors and regions in difficulties is that it was not part of the original mandates of either the Council Presidency or the European Parliament rapporteurs when entering the trilogue process which lasted from June to October 2017. This provision emerged, without any warning or discussion, from the trilogue itself, and highlights the way in which this secretive and non-transparent legislative process can be used by strong-willed rapporteurs to set their personal stamp on legislation.

The Council position. There had been some warning signs that the VCS rules were proving an irritant to some Member States. A non-paper seeking greater flexibility for VCS schemes had been circulated by the Bulgarian, Croatian, Cyprus, Czech, Finnish, French, Greek, Italian, Latvian, Polish, Romanian and Slovenian delegations at the AGRIFISH Council on 6 March 2017. In this document, these Member States drew attention to the wide use of VCS measures since the 2013 CAP reform (254 measures implemented in total in 2015 and 264 measures notified for 2017) and the significant percentages of Member States’ financial ceilings for direct payments allocated to the scheme.

They went on to complain, however, that the implementation of the VCS and the Member States’ decisions are strongly questioned by the Commission.

The eligibility conditions, in relation to the quantitative limits and the targeting of the sectors, are a challenging area regarding MS’ compliance with the VCS rules. Additionally, the respect of each measure financial ceiling or quantitative limit (including the way in which these are pursued), the justification of the difficulties that specific types of farming or sectors undergo, e.g. the risk of decline or of the abandonment of production (not subject to predefined common rules), the estimated per unit support and the statistics are strictly monitored and cross examined by the Commission, disregarding a wider EU context. Issues concerning the unit rate and its justification for not over-compensating the farmers should also be underlined. Moreover, the fact that the measures are ex post monitored, whereas MS’ were not supported by specific provisions in Commissions implementing/delegated act (nor the working guidelines), cause additional difficulties.

These Member States expressed deep concern “with all the additional information and justification required by the Commission for the above mentioned points, placing at risk the VCS effective implementation. In addition, a visible risk of financial corrections arises, affecting the direct payments and the farmers’ income. Needless to mention the excess burden and cost resulting for the national administrations.” They concluded by calling for “a more flexible VCS scheme, allowing Member States to target sectors in need according to their national strategy”, stating that this “would serve effectively the objectives of the VCS and also the CAP”.

However, these concerns were not shared by all Member States. The Estonian Presidency circulated a compromise proposal on the Omnibus Regulation to the AGRIFISH Council on 29 March 2017. This contained the amendments permitting the Commission to suspend the obligation of farmers to maintain production in the case of structural market imbalances (Article 52) and granting Member States the flexibility to review their VCS decision on an annual basis (Article 53). But it had nothing to say on relaxing the quantitative limits on support.

In a document accompanying the Estonian Presidency’s compromise proposal, the Presidency outlined the state-of-play of these discussions. Here, the Presidency noted that issues around voluntary coupled support (Articles 52 and 53) remained high on the list of outstanding issues to be resolved in the Direct Payments Regulation.

All delegations can accept the compromise text suggested by the Presidency for Article 52. Most delegations can accept the compromise wording for Article 53, which would enable Member States to review their national decisions every year. However, some delegations and the Commission representative consider the amendment a step too far that would not constitute simplification.

In addition, there are several delegations who argue for additional amendments regarding voluntary coupled support as regards: (i) the products for which coupled support may be granted; (ii) additional support for protein crops; and (iii) the methodology for dealing with any overshooting of the quantitative limits set for coupled payments. However, several other delegations and the Commission representative oppose the addition of any such amendment to the compromise package, citing in particular WTO implications.

This Presidency document enumerated some of the areas of disagreement around VCS, but again issues around the quantitative ceilings limiting the support that could be given were not mentioned. In the Council’s general position, which was agreed on 21 April 2017, the VCS changes were unchanged from those in the Presidency document of 29 March 2017.

In order to avoid that the levels of production are to be maintained where this is not appropriate due to structural market imbalances, the Commission should be empowered to adopt delegated acts allowing that voluntary coupled support can continue to be paid until 2020 on the basis of the production units for which such support was granted in a past reference period. In the context of the current crisis this temporary derogation aims at attaining in the long term the objective of voluntary coupled support of maintaining the level of production in the areas concerned. In addition, Member States should be able to review their decisions concerning voluntary coupled support annually.

Poland entered two reservations with respect to the Council’s general position on VCS. However, these related to two very specific technical issues (one to do with the application of reduction coefficients in cases of overshooting the quantitative limits for VCS for a given sector, and the other requesting greater flexibility to adjust support for protein crops). They did not refer to the quantitative limits on the extent of VCS.

The COMAGRI position. The COMAGRI position evolved from the initial draft Opinion (in the name of the rapporteur Paolo de Castro) in February 2017 to its final Opinion adopted on 3 May 2017 (in the name of the rapporteur Albert Dess). The initial draft Opinion proposed three amendments to Articles 52 and 53. The draft Opinion suggested amending Article 52(5) by exempting protein crops from the requirement in that Article that “coupled support may only be granted to the extent necessary to create an incentive to maintain current levels of production in the sectors or regions concerned”. It also added a proposal requiring the Commission to publish a ‘protein plan’ by 31 December 2018 aiming to increase own-grown vegetable protein production in the Union. The draft Opinion also proposed to amend Article 53 to allow Member States flexibility to revise their VCS decisions on an annual basis. These amendments were carried over unchanged into the final Opinion adopted by the Committee on 3 May 2017 and included in the report to Parliament to be adopted at first reading on 8 June 2017. Note that the COMAGRI position explicitly wanted to remove protein crops from the restriction that coupled support could not be used to increase production, but left the restriction in place for all other products.

On 16 May 2017 the Estonian Presidency circulated a document which presented a detailed analysis comparing the proposed COMAGRI amendments with the agreed Council position. On the VCS amendments, the document noted “The amendment to Article 53(6) is identical to the Council text. The amendments to Article 52 concern protein crops, an issue discussed but not retained within the Council.

Trilogue outcome. Despite this relatively limited mandate to the negotiators for VCS changes on behalf of the Council and the Parliament, the outcome as documented earlier was markedly different. As noted by the European Parliament’s press service when the trilogue negotiations concluded on 12 October 2017, the draft legislation would “allow member states to grant coupled support to their ailing sectors, which are particularly important for economic, social and environmental reasons, regardless of whether or not they experienced a drop in their outputs. Coupled support is currently limited to sectors struggling with maintaining previous levels of production.” These extended amendments were retained in the COMAGRI Report to the Parliament plenary on 28 November 2017 and approved by the plenary on 12 December 2017 with 503 votes in favour and 87 against, with 13 abstentions.

Assessment of changes in VCS rules

We focus here on the amendments removing the restriction that VCS should only be granted to maintain current levels of production and be subject to quantitative limits set at the maximum levels of production achieved in the previous five years. These amendments will require in turn, further amendments to the Commission Delegated Regulation setting out how the provisions of the basic regulation should be interpreted. Specifically, the Commission must come up with a new definition of when regions and sectors are in ‘difficulties’. These rule changes will presumably be carried over into the CAP post 2020.

It means that the only limit on Member States’ ability to provide coupled support are the financial ceilings in the Direct Payments Regulation. It would be no surprise to hear calls for these ceilings to be further relaxed when the debate on the CAP post 2020 gets underway. For example, the statement circulated by the Visegrad countries and Croatia at the AGRIFISH Council meeting today (19 February) on the Commission Communication explicitly regretted that the Communication makes no reference to VCS and underlines “that these payments should be maintained even with a wider scope and more ambitious financial resources” (bolding added).

But it should be clear that there is limited if any European value added in permitting individual Member States to provide coupled support. Without entering into the argument about the merits or otherwise of a ‘protein strategy’, if the EU desires to reduce its dependency on imported vegetable proteins one can argue that there is a European value added in using coupled support to incentivise an increase in vegetable protein production. But for most other commodities, support for increased production in one Member State is at the expense of farmers and production in all other Member States.

This emerges clearly from the first serious academic exploration of the consequences of coupled support by researchers at Wageningen University Research. These researchers investigated the impact of coupled support on the cultivation of sugar beet. Ten countries originally provided coupled support for sugar beet production, and this has increased to eleven after the 2016 review. The VCS provides an effective price subsidy ranging from approximately 5 to 50% of the price paid by the sugar industry concerned. This support leads to a higher supply of sugar beet in the EU and therefore a lower price for sugar beet.

VCS is intended to stimulate the cultivation of sugar beet in regions in which it is likely to disappear, with negative consequences for farmers and the local economy. However, the coupled support is now applied in a country-wide manner and mainly offers support to farmers who would have grown sugar beet even without the support. The VCS payments essentially mean these farmers grow even more sugar beet. This further disrupts a market that has been shaken by the impact of the abolition of the sugar quota on 30 September 2017, such as a large production volume and price effects. On balance, VCS increases the production of sugar beet in the EU by 1.3%, while the sugar beet price decreases by 4.5% compared to a scenario without VCS. Based on the results of the study, it is recommended to limit the award of VCS to areas in countries in which this is truly necessary. This will prevent unfair competition and uphold the good relationships between EU countries.

Unfortunately, it seems taking account of such evidence is not how decision-making takes place in the European Union. As we see in this example, important legislative changes are made without any impact assessment being provided, without any possibility for stakeholders to provide an input into the decision, or even without stakeholders being made aware that such a decision is under discussion. Not surprisingly, as a result, bad decisions are made.

This post was written by Alan Matthews

Update 19 Feb 2018: Added the link and reference to the Joint Declaration by the Visegrad countries and Croatia on the CAP Communication.
Update 20 Feb 2018: Link to the Agriculture Stratégie corrected.

Photo credit: Mark Robinson via Flickr, used under Creative Commons licence

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