More on the future of direct payments

Yesterday, I had the privilege of presenting my report on the future of direct payments to a workshop on the future of the CAP after 2020 organised by the AGRI Committee in the European Parliament and its Policy Department (AGRI Research). I reproduce below my statement to the workshop which attempted to convey the flavour of my report.

It is an honour to be invited to address you today on the background note that I have prepared on the future of direct payments. Direct payments accounted for around 72% of the CAP budget and for just less than 30% of the EU budget in recent years. They are also an important source of income on many farms. They are therefore central to the debate on the future of the CAP.

Direct payments came about largely in response to successive reforms of the CAP. In the most recent reform, an important innovation was to convert a 30% share of direct payments into a greening payment to farmers respecting certain agricultural practices beneficial for the climate and the environment.

However, it seems few stakeholders are satisfied with the outcome of that reform. As discussions on the modernisation and simplification of the CAP after 2020 get underway, AGRI Committee members have the choice between making incremental changes to the current structure of the CAP, or rethinking more fundamentally the relationship between the objectives of agricultural policy and the way that these are pursued.

There is no need to remind this Committee of the background to this discussion and the challenges faced by European agriculture: supporting innovation and competitiveness in the production of food and biomass, encouraging generational renewal, improving the sustainability of agricultural practices, enhancing the protection of ecosystem services, increasing resilience to climate change while contributing to the mitigation and sequestration of greenhouse gas emissions, preparing farmers to better manage risk and market price variability, promoting agricultural diversity and agriculture’s role in rural regions.

In my note, I first identify issues that the Committee is likely to face if it opts for an incremental approach to the next CAP reform. I then outline the elements of a bolder approach to reform. I recognise that the choices made by the Committee are likely to be influenced by the budget envelope for the CAP which will be agreed for the post 2020 Multi-annual financial framework. If CAP funding is reduced in the coming period, it becomes even more important to focus spending on those areas which give the greatest value in return.

The incremental options

To structure the discussion on incremental changes, I identify three models or directions though these are not mutually exclusive. I have called the first model one of making technical adjustments to the last reform. Here, the Committee would confine itself to revisiting many of the contentious issues that were widely discussed in that reform.

• Should there be a further move to equalise payments per hectare across Member States?
• Should Member States be required to finally move to uniform regionalised basic payments?
• Despite the flexibilities around the active farmer definition introduced in the recent Omnibus Regulation proposed by the Commission, it is likely the debate on defining an ‘active farmer’ would continue.
• The Committee could discuss reducing the capping thresholds and/or increasing the use of the redistributive payment.
• It could also discuss altering the greening payment rules either to grant more or less flexibility to Member States in the way these rules are applied.

In my note I provide some commentary on each of these issues.

The second model I call farm-focused reforms. This is motivated by the direction taken by US farm policy in extending its farm safety net in the 2014 Farm Bill and the suggestions made by some commentators that the CAP should follow in that direction. I discuss specifically proposals to convert some or all of direct payments into either counter-cyclical payments or support for risk management instruments such as insurance. I see no merit in moving from the current system of decoupled payments to a system of counter-cyclical payments under EU conditions. There is obviously some interest in exploring the role of greater support for risk management instruments, I am cautious about this, but I leave the discussion of this to the second contribution this afternoon.

The third model I call revisiting greening. It assumes the Committee accepts the current structure of the CAP but wishes to improve the effectiveness of interventions to improve environmental and climate outcomes (as opposed to making changes to the greening payment which is addressed under Model 1). Again, the Committee would find itself going over familiar ground. I examine four alternatives to the current greening payment:

• Reverting the greening practices to cross-compliance
• Replacing the greening practices by a menu approach at the Member State/regional level
• Adopting ‘conditional greening’ whereby entitlement to the basic payment would be conditional on enrolling in a basic agri-environmental-climate scheme in Pillar 2
• Transferring the greening payment to voluntary agri-environmental-climate schemes in Pillar 2

In each case, I review the pros and cons to provide some guidance to the Committee.

A bolder approach

In an important chapter in the note, I stand back and ask the broader question whether the present system of direct payments is fit for purpose. I focus on the contribution of direct payments to farm incomes and farm income stability, whether they provide support to improving productivity and competitiveness, and their success in contributing to environmental and climate objectives. I conclude that, while direct payments make some contribution to addressing the challenges outlined earlier, they can never be an efficient or satisfactory solution.

If Committee members were to design an agricultural policy afresh, I doubt there is anyone who would suggest that paying a uniform, decoupled payment on every hectare of agricultural land across the EU would be a sensible approach. I therefore also suggest a bolder strategy for reform which Committee members might wish to embrace.

I suggest, as a first principle, that we should listen to the recommendations of OECD Agricultural Ministers earlier this year when they stated that agricultural policy should:

“Be transparent (with explicit objectives and intended beneficiaries), targeted (to specific outcomes), tailored (proportionate to the desired outcome), flexible (reflecting diverse situations and priorities over time and space), consistent (with multilateral rules and obligations) and equitable (within and across countries), while ensuring value for money for scarce government resources.”

It follows that payments should be targeted on specific objectives with a clear results orientation.

I next suggest that the two pillar structure has outlived its usefulness. It did serve to give visibility and political prominence to rural development measures within the CAP. Already, in the last reform, we saw some blurring of the boundaries between the two pillars, in that the same measures could be financed from either pillar, and Member States could shift resources from one pillar to the other. Pillar 2 spending remains very farm-focused. Its key characteristic is that this spending is programmed based on a needs assessment, with specific objectives linked to measures, and with flexibility for Member States to choose from a menu of options. As this is the structure I propose for all future CAP spending, it would make sense to absorb all such spending into a single Pillar-2 type framework.

I also argue that all future CAP spending, and not only traditional Pillar 2 measures, should require co-financing by Member States. We need to think about how to incentivise Member States to make use of EU funds as ambitiously as possible and to ensure that value-for-money is given in return. Requiring national taxpayers to make a contribution is one way to ensure this. The co-financing rate can be adjusted to reflect the extent to which particular spending in a Member State has EU value added, and thus a low requirement for national co-financing, or is of more local interest, where the national co-financing requirement would be higher. A corollary of this, of course, is that there should be strong state aid guidelines to prevent undue distortions of competition including, for example disciplines on coupled aids. Member states already spend almost €8 billion a year on state aids to agriculture. The recent crisis aid packages also permitted, although they did not require, additional national expenditure, so this recommendation builds on already established precedents.

Over time, decoupled area-based direct aids should be gradually phased out. They were introduced to help farmers adjust to the reduction in administered support prices under the ‘old’ CAP. They are clearly an important element in farm income on many farms so this can only happen over time. There will be a need for transitional payments to smooth the impact of this decision. This will also allow time for the necessary adjustments in land rents and input costs which will play an important role in cushioning the impact on incomes. However, it is important to set the direction of travel so that young entrants and existing farmers making investment decisions have a clear idea of the future policy environment.

Of course, agricultural policy must continue to address various market failures which mean that free market outcomes are not optimal. Primary importance must go to ensuring that farmers are rewarded for practices that protect biodiversity and maintain ecosystem services and which go beyond good agricultural practice. We need to find ways to reward farmers and land managers who sequester soil carbon and thus contribute to mitigating climate change. The appropriate level of support for risk management and the design of risk management instruments should be evaluated, and you will hear more about this in the next contribution. Support for farming in areas of natural constraints will remain an important objective where there are concerns about the adverse effects of land abandonment. Support can be provided for quality production, including organic farming, agroecological practices and high animal welfare norms. Support for innovation and improved competitiveness, for strengthening producers’ role in the food chain, for young farmers, can all be justified. Agricultural policy should focus on these issues directly rather than use these as rhetorical arguments to defend an outmoded system of uniform decoupled direct payments paid on every hectare of agricultural land.

Linked to this shift to targeting payments would be an important paradigm shift, away from the notion of payments as entitlements to one where payments are made to farmers in return for specific and identifiable outputs on a contractual basis. Where payments are seen as entitlements, then any conditions attached are perceived as irksome regulations and bureaucratic interference which must be minimised. When farmers are paid for providing a service or a public good or for farm practices which go beyond what is statutorily required, it is natural that the customer, in this case the public and the taxpayer, will want to verify that the service or public good is delivered. Farmers will be at liberty to opt into such schemes if they find them attractive, or otherwise not.

An important question concerns the role of cross-compliance and the greening payment if direct payments are phased out. Cross-compliance obligations currently apply to all Pillar 1 payments, certain payments to wine producers under the CMO Regulations, and to recipients of annual payments under rural development programmes (although with the important exception of areas of natural constraint payments). Because we want farmers to observe the good agricultural and environmental practices embodied in cross-compliance, my proposal would be that all farmers who benefit from any CAP payment should be obliged to observe cross-compliance standards.

At present, these standards consist of both statutory and non-statutory standards. The argument is that the additional costs of complying with the non-statutory standards is met by the Basic Payment, while the cost of complying with the greening practices is met by the greening payment although, in practice, there is no relationship between these payments and the costs that farmers incur.

While we might debate what should be the statutory requirements that farmers should meet as a condition of doing business, it is right that farmers should be rewarded for practices which go beyond the statutory requirements. How to do this if the Basic and greening payment are phased out? My proposal is that cross-compliance and greening would be replaced by a requirement to enrol in a shallow agri-environment scheme co-funded by the CAP – this is the proposal for ‘conditional greening’ that was briefly considered by the previous AGRI Committee. The merit of this proposal is that it reunites non-statutory cross-compliance standards and greening practices in a single scheme, it would have wide coverage of agricultural land because of its link to other payments that farmers might receive, and it gives flexibility to Member States to design schemes which are appropriate for their local circumstances.

Some Members might be concerned that giving flexibility to Member States risks a low level of ambition. Member States have an interest in minimising the scope of agri-environment schemes in order to facilitate the quick disbursement of EU money. Requiring co-financing of all CAP payments is one way to encourage Member States to think hard about the design of their schemes. Another, more ambitious, way would be move away from fixed Member State entitlements in the CAP budget – that word again!- to allocating at least a proportion of CAP funds on performance-related criteria.

Mr Chairman, Members of the Committee, in your role as legislators you have a responsibility to taxpayers as well as farmers. It would be possible to continue with the current structure of the CAP, making some incremental adjustments in the coming MFF period. But I put it to you that the current system of direct payments is neither effective, nor efficient, nor equitable and that it is a very poor use of taxpayers’ money. For this reason, I hope you will think boldly about possible alternatives to modernise the CAP post 2020.

Thank you for your attention.

There were also presentations at the meeting by the authors of two companion reports on the future of risk management and the future of rural development. There was a vigorous discussion, and I will plan to return to some of the issues raised by AGRI Committee members in a future post.

This post was written by Alan Matthews

Update 9 Nov 2016. The European Parliament Audiovisual Service has now posted a video link to the entire session which can be viewed by clicking on this link.

Photo credit: Research_for_AGRI @pol_dep_AGRI via Twitter

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One Response to “More on the future of direct payments”

  1. Sebastian Lakner
    November 9, 2016 at 23:00 #

    Thank you, Allan, I guess that is again a very interesting and inspiring post! Interestingly, this week we have presented a Agricultural New Model for the German NGO Naturschutzbund (Nabu, https://www.nabu.de/news/2016/11/21460.html), which we will present in Brussels next week (16.November 2016) and which interestingly includes some of the elements, you are proposing. Things like incentivizing the member states to do ambitious II.pillar programs or also finishing with the idea, that every single farmer within the EU should receive some direct payments by force (because we want them to fulfill the Cross Compliance…). So in total many good ideas, but I fear, just little of that will be applied soon. However, we should continue challenge policy maker in Brussels with good ideas, how to improve the CAP.