Leaked draft of the Commission Communication on Future of the CAP

Brussels has been buzzing in the past week since copies of the draft Commission Communication on the Future of the CAP which is set to be launched on 29 November next were leaked – you can read it and download a copy from the ARC2020 website. The status of this document is not clear – my guess is that this is the version that has been prepared by DG AGRI for the Inter-Service Consultation process which normally takes two to three weeks. This is where DG AGRI would get the formal opinion of the other DGs on its proposal, which it would then take into account in its final Communication. So there is still the possibility that the final Communication could differ from the leaked version, although one assumes that DG AGRI have been in close touch with their colleagues in the process of drafting, so I would not expect substantial changes at this stage.

Keeping this caveat in mind, it is worth examining the leaked document for the latest insight into the Commission’s thinking. This is a high-level document, sketching out the future direction for the CAP in broad brush-strokes and in less than 18 pages. It will be followed in the spring by a more detailed impact assessment which will feed into legislative proposals in the second half of next year. In this post, I summarise my reactions under three headings: the good, the bad and the unknown. This evaluation only addresses the broad themes, leaving some of the detailed proposals on specific measures to another day.

The Good

The Commission has avoided the most regressive proposals. Although we conventionally describe the various revisions of CAP legislation as reforms, this implies a forward movement towards a better policy which is not necessarily guaranteed. The position of this blog is that there has been significant reform of the CAP during recent decades in the movement towards greater market orientation and the replacement of market price support by largely decoupled area-based direct payments. The next step should be to move from decoupled area-based direct payments to targeted payments focused on encouraging innovation, quality production, the production of public goods and other specific goals.

However, there are those who would like to reverse some of this recent progress and move the CAP backwards. While one can debate whether some of the specific proposals in the draft Communication (which would build on the recent changes to the basic CAP legislation agreed in the Omnibus Regulation) represent a sensible use of taxpayers’ money (on risk management and generational renewal, to take two examples), the paper does not advocate a return to higher intervention prices, more use of coupled payments, or the introduction of counter-cyclical payments. So far, so good.

Higher priority for environmental and climate measures. The paper argues that the CAP needs to evolve to “sharpen its responses to the challenges and opportunities” and that “..a modernised CAP… must reflect a higher level of environmental and climate ambition.” This recognition that the CAP needs to do more to address the deterioration in environmental indicators should be welcomed. However, this is not put into the context of a more general move towards a more sustainable agriculture.

Greater subsidiarity in the delivery of the policy. The ‘big idea’ in the paper is the need for a new delivery model which is justified on the grounds that it will lead to a simpler CAP. It advocates a move away from top-down and one-size-fits-all approaches (best exemplified by the greening payment introduced in the 2013 CAP reform). The Union would set basic policy parameters while Member States would have more responsibility as to how to achieve agreed EU objectives. This would happen in the context of a CAP strategic plan which would cover interventions in both Pillar 1 and Pillar 2. It would mean that prescriptive compliance elements such as measures’ details and eligibility rules in EU legislation will be removed. Member States would be accountable for providing credible performance reporting. “The future delivery system would be more result-driven, boost subsidiarity by giving Member States a much greater role in rolling out CAP schemes, pursue realistic targets and help reducing the EU-related administrative burden for beneficiaries“.

This more devolved approach is particularly relevant to land management measures where the evidence suggests that good agri-environment-climate interventions need to be place-based and context specific. The approach is defended on the grounds that it will “significantly decrease bureaucracy and the administrative burden”. I argue below that this is unlikely to be the outcome, but the approach should still be welcomed because it could lead to more effective measures on the ground.

The Bad

The framework for direct payments remains confused. The draft Communication supports the continuation of direct payments to provide income support to farmers, but in a nod to criticism, it proposes that they should be “simplified and better targeted”. The stated aims include a proposal to further cap payments (with a limit of €60,000 to €100,000 per farm mentioned, adjusted for labour intensity), an intent to give greater support to smaller farms by making more use of the redistributive payment, and focusing payments on those who “depend on farming for their living”. The latter has been interpreted as an implicit threat to reduce payments to part-time farmers who take up off-farm employment as a way to supplement their farming income. As such pluriactivity is extensively practiced, particularly on smaller farms, this proposal seems to be inconsistent with the earlier one that direct payments support should be targeted on smaller farms.

Unfortunately, the criticism of direct payments has been misunderstood. The focus is on improving the ‘fairness’ of the payments, rather than their lack of targeting, their damaging impact on structural change and generational renewal, and the waste of money through the leakage of the payments to non-farmer beneficiaries through higher land rents and prices, payments for entitlements and so on. In particular, the attempt to justify the need for income support using a diagram which purports to compare the average income in farming with the average non-farm wage is grossly misleading.

Making farm-nonfarm income comparisons is notoriously tricky. If we want to target payments as a form of income support (and the question to be answered is why use agricultural policy rather than social policy for this purpose), then we need a measure of the ‘need’ of farm households which must take into account all sources of income to the household. Looking only at the farm income of farm households includes those for whom their farming activity is very marginal, and who may not have any need for income support.

The Commission can make the case that statistics on the total income of farm households are not collected on a comparable basis across the EU. The paper makes a classification of farms into three groups – small farms, professional farms and large farms. But this insight is not followed through by confining the income comparison to professional and large farms where it might make more sense.

The proposal for tighter capping is fine as far as it goes, but it fails to address the question of who gets the payments and why. What annoys farmers who are attempting to farm to a high standard is to see how their neighbour who may have no particular interest in farming is holding on to the land because it gives them a steady income without demanding anything in return. This problem would disappear if the payments were linked to specific outcomes. Farmers (either big or small) would then be supported for providing these outcomes and the whole basis for payments would be transparent. It is hard to see how the continuation of area-based payments can be fitted into a results-based framework in the context of a CAP strategic plan.

National co-responsibility for direct payments ruled out. The draft Communication says that direct payments “should continue to be financed at EU level”, thus ruling out the option floated in the Commission’s Reflections Paper on the Future of the EU Finances to introduce national co-financing for Pillar 1 direct payments. This is a missed opportunity to improve the incentive for Member States to make better use of EU monies.

A system of national co-financing should be graduated according to both the degree of EU value added and the ability of Member States to pay (as currently is the case with co-financing rates under Pillar 2). One could envisage measures implemented by Member States with a high degree of EU value added (say, habitat protection for a species of European interest) being financed up to 90%, or even 100%, by the EU with 0-10% being contributed by the Member State, while measures of more local value would require a higher degree of national co-financing. Without co-financing, Member States lose interest in spending the money well. By maintaining the status quo, the Commission is guilty of perpetuating a situation where the EU is providing 100% financing to measures such as voluntary coupled support, which has no European value added. Indeed, during the recent milk crisis, when Member States were subsidising every second dairy cow in the Union at a time when the Commission was trying to limit production, arguably this expenditure had a negative EU value added. This is no longer defensible.

The urgency of climate action is not communicated. Yes, there are references to climate and the need to reduce agricultural emissions scattered throughout the document. It is pointed out that agricultural emissions have fallen since 1990 but not that they have flat-lined recently. The CAP is given credit for these emissions reductions when in fact it had little to do with them – they were mainly driven by reductions in livestock numbers, itself largely a by-product of the milk quota regime, and by reductions in fertiliser use driven mainly by the Nitrates and Water Framework Directives which are environmental measures. The urgency and magnitude of the challenge for EU agriculture, to significantly further reduce emissions if the EU is to meet its decarbonisation objective by 2050, and if Member States are to give climate action the priority it needs in their CAP strategic plans, needs to be set up in flashing lights. This is not done in the document.

The Unknowns

How will Member States be incentivised to be ambitious? The big danger in leaving it up to Member States to come up with targets to show how they would meet the Union level objectives is that they will opt to do the minimum possible. There are two reasons why this will happen. The first is that it is easier to hit easy targets than more ambitious ones. Why would a Member State put itself out in front and risk not meeting its targets (with possible funding disallowances as a result)?

The other reason has to do with the incentives built into the EU budget structure. CAP funds under both Pillar 1 and Pillar 2 are pre-allocated. They are agreed at the all-night European Council meetings at the beginning of an MFF period and each Member State knows that they will get these funds provided they meet the minimum requirements. Again, there is no mechanism here to encourage Member States to be ambitious in their targets.

The draft Communication proposes that the CAP strategic plans will require Commission approval, although it promises that the approval process will be simpler as compared to the current RDP planning process. The Commission can prod and push Member States but, unless the incentive structure is revised, this will always be an uphill struggle.

One mechanism to think about (although this would be a matter for the MFF discussions rather than the CAP Communication and legislative proposals) would be to move away from pre-allocated Member State CAP amounts towards a more competitive model. In this model, Member States with more ambitious plans could be rewarded through a larger allocation of CAP funds. A possible example might be the way CAP funds for promotion campaigns for agricultural products are awarded at present. Member States submit proposals for funding and these are evaluated against a set of pre-defined award criteria by a committee of experts. Research funds under Horizon 2020 are allocated in a similar way. Competitive funding is not without its problems, but it could be worthwhile reserving some proportion of the CAP budget in the next MFF (10%, 20%?) for performance-based payments of this kind.

How will the governance framework work? Member States may submit ambitious plans to gain Commission approval, but these are worth little if there is no sanction for failure to deliver on these plans. The document notes that “Another crucial function of the Commission would of course consist in supervising the delivery on results and the respect of basic EU rules in the framework of a well-designed audit and assurance system. To this end the assurance process would need to be adapted to the requirements of a result-driven policy design including the development and application of solid and measurable indicators and of a credible performance reporting.” All this makes perfect sense, but at this stage there are no ideas regarding how this would be made to work.

In some ways, the model proposed is similar to the governance model for the Energy and Climate Framework (ECF). Here the Commission sets high level targets (these are the emissions reduction targets for the overall ETS and for the non-ETS sectors in each Member State, as well as EU-level targets for the share of renewable energy and energy efficiency improvements). Member States are required to produce plans showing how they intend to contribute to these targets, and these plans must be approved by the Commission. In the ECF proposal (which is still being debated), Member States can be penalised for failing to meet their targets in one period by adding the gap to the subsequent period. But whether this would be feasible in the case of biodiversity, soil, air quality or water quality targets under the CAP is a moot point. Without a clearer idea on how compliance with CAP plan targets would be enforced, the CAP plans could turn out to be little more than another bucket of greenwash.

Simplification. This draft Communication, like all other CAP reform proposals before it, promises to reduce bureaucracy and the administrative burden. This is unlikely to happen, as can be seen by examining the trajectory of the CAP.

In the old CAP, where farmers were supported through market management, the authorities did not need to know anything about the farmer to provide this support; it happened automatically whenever a farmer sold produce on the market. The MacSharry reform introduced partially-coupled direct payments linked to area and animal numbers. Now the Commission/MS needed to know the areas planted by a farmer and his or her livestock numbers, but this additional requirement was not unduly burdensome.

The Fischler reform introduced decoupled payments and, with them, the idea of cross-compliance. Cross-compliance involved the monitoring of farmer behaviour, and this was further added to by the greening requirements in the 2013 reform. Similarly, farmers enrolled in voluntary agri-environment schemes in Pillar 2 are also required to comply with increasingly specific requirements regarding farm practices and behaviour.

Because payments to farmers will be increasingly linked to demonstrating changes in farm practices in future, this need for close monitoring will continue. Indeed, a greater emphasis on result-based schemes would be likely to further increase transactions costs. This is not an argument for not pursuing these schemes, as the evidence suggests that this greater complexity is more than offset by the greater effectiveness of these schemes. But it does suggest that the work of Member State administrations and of farmers in monitoring and compliance will not be reduced.

The draft Communication has three proposals to get around this problem. The first is the implicit assumption that the rules and measures which Member States will draw up as part of their CAP strategic plans will be better tailored to local conditions and thus be better received by farmers. There is an argument that what farmers object to is not complexity as such, but rather being asked to do things which simply do not make sense to them on their farms. If indeed plans drawn up by Member States, through more local consultation and stakeholder involvement, are better able to take into account “the facts on the ground”, this could help to minimise at least farmers’ objections to the burden of compliance.

The second proposal is to make the audit and control process less concerned with penalising mistakes and more focused on catching system failures or deliberate fraud. More use of risk assessment to identify audit strategies, and making better use of data that farmers are already generating, could help to improve farmer acceptance of future controls.

The third proposal is to make greater use of new digital technologies to simplify the process of collecting, inputting and analysing information. While this makes good sense in principle, it will take an enormous effort to scale up the few pilot examples which currently exist. There will also be major implications for advisory and training services to avoid the emergence of a ‘digital divide’ between farmers with access to these new technologies and those without. Hopefully, the impact assessment to be completed next spring will take a closer look at some of these issues.

The impact assessment. There is indeed a question mark over what we can expect from the impact assessment. In the inception impact assessment published by the Commission, this envisaged the assessment of a very wide-ranging set of scenarios for the future CAP. But in this draft Communication, the Commission has narrowed down this set of future scenarios to just one. This puts a question mark over the relevance of the impact assessment as originally envisaged.

As noted above, what is really needed in the coming months is much more detailed work on translating the Commission vision into implementable legislation which can really drive agricultural policy forward in the desired direction. Whether the impact assessment can make this change in course at this late stage remains to be seen.

The political context. The draft Communication brings new thinking to the design of the future CAP. Despite the limitations that I have highlighted, it should be welcomed when it appears. As noted, a huge amount of detailed work will need to be done if the promise of reform is to be realised in practice. The draft Communication is thus a document with promise, but too much remains to be filled in to be able to predict what it will mean on the ground. The way in which these missing gaps will be filled in over the next nine months will be crucial.

Another, and possibly greater, danger is that the Commission’s vision will get lost in the legislative bargaining between the Council and Parliament. Under the trilogue system, the Commission has lost much of its previous power to shape the course of legislation. As we saw in both the 2013 reform and the Omnibus Regulation, both the Council and the Parliament will bring forward their own amendments which can change the Commission’s proposal out of all recognition.

In this context, it is fair to observe that the Commissioner is working against a headwind. There is no pro-reform majority in either the Council or the current Parliament. The timetable for the legislative proposals which will appear in the second half of next year means that it will be the next Parliament which will get to have the final say. Given the political trends in recent European elections, the prospect that the next elections will improve the prospects for reform seems distant.

A structural change in decision-making, such as giving joint responsibility to both the agricultural and environmental bodies in both the Council and Parliament, may be necessary if the ideas in the Commission’s draft Communication are ever to be implemented in an ambitious way.

This post was written by Alan Matthews

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2 Responses to “Leaked draft of the Commission Communication on Future of the CAP”

  1. Alan Swinbank
    October 27, 2017 at 00:42 #

    Alan, thank you for drawing this document to our attention, and for your helpful comments.

    I would, however, add that it appears to have been drafted with an internal, rather than international, audience in mind. For example:

    p. 3: “EU agriculture … guarantees food security for over 500 million European citizens”. No mention here of the role imports can play.

    p. 11: “Introducing a degree of national co-financing for direct payments, especially if made optional, would endanger the currently smooth functioning of the internal market for agricultural and food products …” Does this mean that direct payments do impact on production, and hence trade, and if so why does the EU declare them to be ‘green box’ payments in the WTO?

    p. 19: “Thanks to the CAP the EU is the world largest agri-food exporter.” Yes, its international critics might counter, because of the high level of tax-payer support received by the sector.

    p. 20: “The Commission is … committed to enhancing strategic policy cooperation and dialogue with the Africa Union on issues related to agriculture and rural development so as to help the region develop its agri-food economy.” Does this commitment extend to a further opening of EU markets to accept more agri-food products from North African states?

    It is reassuring to read (p. 19) that: “Maintaining the market-orientation of the EU agri-food sector will also allow the EU to retain its leading role in international bodies such as the World Trade Organisation (WTO), promoting open trade and advocating strict disciplines on trade-distorting forms of support.” However, this positive message is somewhat negated in the next paragraph: “At the same time, it cannot be ignored that specific agricultural sectors cannot withstand full trade liberalisation and unfettered competition with imports.”

    Can we hope the EU will exercise its “leading role” at the WTO Ministerial in Bueno Aires in December?

    Alan Swinbank

  2. Emil Erjavec
    October 27, 2017 at 14:52 #

    Thanks, Alan (Matthews),
    I can signed the most of your observations. The leaked document is bringing a paradigmatic change, for sure. I understand the text as a move from Commission: “OK guys, you are criticizing us, now you (member states) should take over the responsibility for the CAP (like you are doing for the most of things in EU)”. It is smart, and not the worst proposal.

    However, we can expect that majority of conservative countries will try to conserve the existing (bad) solutions under the new strategic frame common for both pillars. The majority of countries would like still to have the “enemy” in Brussels which is dictating the measures and the frame of policy which they do not like, but they have to implement. The programming quality deficiencies and not even seriously emerged policy cycle logic of the main member states can not allow serious changes which are necessary.

    But at least (for majority stakeholders), the CAP will be saved, “viva la CAP”…

    In any case, congratulation to the text authors. The change is here, the future is not boring.. and maybe move us in more promising direction.