More on capping direct payments

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Much initial reaction to the Commission’s leaked Health Check proposals has focused on its renewed attempt to introduce a cap on the Single Farm Payment amount which an individual farmer can receive. In fact, the proposal does not amount to a cap in the sense of an absolute ceiling, but takes of the form of a tapered payment Farmers receiving between €100,000 and €200,000 would face a 10% cut, those receiving between €200,000 and €300,000, a 25% cut and those receiving over €300,000, a 45% cut. Jack Thurston’s blog yesterday highlights the limited impact the measure will have.

It might be useful to put the Commission’s proposal in some historical perspective. Capping was part of the Commission’s initial reform proposals in each of the past three CAP reforms – the 1992 MacSharry reform, the 1999 Agenda 2000 reform and the 2003 Mid-Term Review. In this post I review the evolution of this concept and corroborate the implications of the Commission’s Health Check proposals.

It was the Commission’s 1991 reflections document The Development and Future of the CAP which first popularised the statistic that 80 percent of FEOGA support was directed to 20 per cent of farms and which proposed for the first time the modulation of payments to farmers on the basis of size. The Commission was already aware of the likely opposition to this proposal and took the unusual step of responding to expected criticisms in the reflections document itself.

These included the arguments that modulation of support as a function of the size of holding would be discriminatory and non-economic, to which the document responded that inequality already existed in the diversity of agricultural holdings throughout the Community such that all farmers are not on an equal footing, and that the logic of support through public funds should aim at correcting inequalities by supporting those who derive fewer advantages from the market organisations.

In translating this policy into specific proposals, the most controversial element was the proposal in the July 1991 Communication (the MacSharry proposals) to limit compensation for set-aside. Although all larger farmers would be required to set aside 15% of their area under cereals, oilseeds and protein crops, compensation would be limited to a maximum of 7.5 hectares of set-aside land. MacSharry also proposed to limit compensation to beef farmers to a maximum number of animals under both the special premium for male bovines and the suckler cow premium. The latter proposal was accepted by the Council and arguably represents the first example of tapered compensation in the CAP.

However, the proposal to limit payments to cereal growers was rejected, largely because of opposition from the UK. There were dark mutterings about MacSharry’s plans for the ‘Sligo-isation’ of European agriculture, a reference to the small farm area in the West of Ireland which MacSharry represented as a parliamentarian for many years.

In its Agenda 2000 proposals in 1997, the Commission again declared its intention to propose the introduction of an individual ceiling covering all direct income payments, with discretion to Member States to introduce differentiation criteria under commonly agreed rules. Specifically, its 1998 proposed regulation would have reduced payments over €100,000 but less than €200,000 by 20% of the amount over €100,000, and by 25% for amounts over €200,000.

In the event, any mandatory capping was rejected by the Member States. German opposition arising from its concern to protect the large farms in the former East Germany was now added to the UK. All that survived was Article 4 entitled ‘Modulation’ of Regulation 1259/1999 establishing common rules for direct support schemes under the CAP. This established a number of criteria which Member States could use on a voluntary basis to modulate funds from Pillar 1 to Pillar 2. These included circumstances related to part-time farming where the amount of labour used on a holding, expressed in annual work units, fell short of limits to be determined by the Member State; circumstances where the overall prosperity of a holding, expressed in the form of standard gross margin, exceeded limits to be decided by the Member State, as well as circumstances where the total amount of payments in a particular year exceeded limits to be decided by the Member State.

The reduction in payments resulting from these measures could not exceed 20% of the total amount which would otherwise be paid. It was also provided that money made available in this way would remain with the Member State and could be used for rural development schemes.

The use made of this voluntary modulation provision was limited. France made the most radical use of it for a period, reducing payments to farms with payments above €30,000 and transferring these funds to rural development programmes until it called a halt, in large measure because it found it could not spend monies already allocated for this purpose. The UK introduced flat-rate modulation under a rather creative interpretation of the third set of circumstances provided for in Article 4.

But otherwise, the main legacy of Article 4 seems to have been the redefinition of the term ‘modulation’. Whereas in the MacSharry reform proposal this clearly referred to the tapering or degressive capping of support to larger farms, in other words, the way the money was collected, it now referred to proposals to transfer funds from Pillar 1 to Pillar 2, in other words, the way the money was spent.

In its Mid-Term Review proposals the Commission took up the cudgels yet again, this time proposing an absolute ceiling of €300,000 for the amount of aid which any one farm could receive. Again, the funds saved by this cap would be ring-fenced for use in Pillar 2 by the Member States which lost them. This did not make the proposal any more palatable and it was dropped from the Commission’s proposed regulation and thus from the agreed reform.

The Commission also proposed in the Mid Term Review a differentiated application of modulation (in its more recent meaning) with a view to contributing ‘to the objective of correcting the allocation of funds, in addition to improving the balance of expenditure between markets and rural development’. This was retained in the simplified form of a single franchise of the first €5,000 per farm which was exempted from the modulation proposal. However, the maximum modulation rate was reduced from the Commission’s proposal of 20% to just 5%, considerably limiting the impact of this mechanism on the distribution of payments between farms.

As noted at the outset, the Commission’s Health Check proposals when announced are likely to contain a degressive capping mechanism. The magnitude of the distribution effect based on the illustrative thresholds in the leaked Commission draft can be assessed using the Commission’s figures on the distribution of direct payments across farms for 2005 (the latest year for which these figures are available). Less than 25,000 farms in the EU-25 would be affected, or less than 0.4% of all holdings (Table 1). Between them, these holdings receive around €4.7 billion of the €32.5 billion of direct payments, or over 14% of the total (Table 2). But because the degressive cap would be applied on a sliding scale, the savings would amount to only around €0.5 billion, or around 1.7% of total payments in that year.

Indeed, this would be a maximum figure, as it would be naïve to assume that the introduction of a cap on payments would not result in endogenous changes in behaviour by the affected farms, for example, through the creation of separate legal farm entities or the transfer of ownership into the names of family members. The effect of capping would be to discriminate against larger farms which, in the view of the UK and Germany as well as some other countries with the largest number of such farms, are precisely those that can reap economies of scale and which are thus likely to be more efficient on average.

Since 1991 the Commission has made very limited progress in persuading Member States to introduce a more equitable distribution of direct payments. Nonetheless, on this occasion, the Commission’s proposal on degressive capping stands a better chance of success. Not only has it been cleverer in the way the proposal is presented than in 2003, but the publicity given to the large amounts received by individual recipients in various Member States through websites such as farmsubsidy.org will force governments to concede the principle in this review. In terms of the amounts of money involved, however, degressive capping at the rates proposed by the Commission will have largely an optical effect

Table 1. Distribution of direct payments beneficiaries by payment class, EU-25, 2005

Payment
class (euro)
Number of beneficiaries % of total beneficiaries Cumulative number of
beneficiaries
Cumulative % of total
beneficaries
<1,250 4,361,930 62.80% 4,361,930 62.80%
>1,250 and <5,000 1,295,700 18.66% 5,657,630 81.46%
>5,000 and < 100,000 1,264,400 18.20% 6,922,030 99.66%
>100,000 and < 200,000 17,640 0.25% 6,939,670 99.92%
>200,000 and < 300,000 3,070 0.04% 6,942,740 99.96%
>300,000 2,790 0.04% 6,945,530 100.0%
         

Table 2. Distribution of direct payments by payment class, EU-25, 2005, €’000

Payment
class (euro)
Direct aids paid % of total direct aids Cumulative direct aids paid Cumulative % of total aids paid
<1,250 1,592,477 4.90% 1,592,477 4.9%
>1250and <5,000 3,405,494 10.48% 4,997,971 15.4%
>
5000 and < 100,000
22,842,503 70.28% 27,840,474 85.7%
>
100,000 and < 200,000
2,338,809 7.20% 30,179,283 92.9%
>
200,000 and < 300,000
733,157 2.26% 30,912,440 95.1%
>
300,000
1,589,653 4.89% 32,502,093 100.0%
         

Source: European Commission, 2007, Indicative Figures on the distribution of aid, by size-class of aid, received in the context of direct aid paid to the producers according to Council Regulation (EC) 1259/1999 and Council Regulation (EC) 1782/2003, Annex 1, Financial year 2005.

Update: Since posting this blog I have seen Jack Thurston’s excellent brief entitled Capping the CAP: The Effect of Payment Limits on EU Farm Subsidies published by farmsubsidy.org in 2006. This also reviews some of the history of the capping debate in the EU as well as contrasting modulation as an alternative to capping as a way of improving the distributional equity of EU farm payments.

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