Here is the audio recording of Commissioner Fischer Boel’s press conference this afternoon:

[audio:health_check_20080520.mp3]

Here is the Commission press release in full:

“The European Commission today proposed to further modernise, simplify and streamline the Common Agricultural Policy and remove remaining restrictions on farmers to help them respond to growing demand for food. The so-called CAP Health Check will further break the link between direct payments and production and thus allow farmers to follow market signals to the greatest possible extent. Among a range of measures, the proposals call for the abolition of arable set-aside and a gradual increase in milk quotas before they are abolished in 2015, and a reduction in market intervention. These changes will free farmers from unnecessary restrictions and let them maximise their production potential. The Commission also proposes an increase in modulation, whereby direct payments to farmers are reduced and the money is transferred to the Rural Development Fund. This will allow a better response to the new challenges and opportunities faced by European agriculture, including climate change, the need for better water management, and the protection of biodiversity.

“The Health Check is all about freeing our farmers to meet growing demand and respond quickly to what the market is telling them,” said Mariann Fischer Boel, Commissioner for Agriculture and Rural Development. “It also aims to simplify, streamline and modernise the CAP and give our farmers the tools to handle the new challenges they face, such as climate change.”

Abolition of set-aside: The Commission proposes abolishing the requirement for arable farmers to leave 10 percent of their land fallow. This will allow them to maximise their production potential.

Phasing out milk quotas: Milk quotas will be phased out by April 2015. To ensure a ‘soft landing’, the Commission proposes five annual quota increases of one percent between 2009/10 and 2013/14.

Decoupling of support: The CAP reform “decoupled” direct aid to farmers i.e. payments were no longer linked to the production of a specific product. However, some Member States chose to maintain some “coupled” – i.e. production-linked – payments. The Commission now proposes to remove the remaining coupled payments and shift them to the Single Payment Scheme, with the exception of suckler cow, goat and sheep premia, where Member States may maintain current levels of coupled support.

Moving away from historical payments: Farmers in some Member States receive aid based on what they received in a reference period. In others, payments are on a regional, per hectare basis. As time moves on, the historical model becomes harder to justify, so the Commission is proposing to allow Member States to move to a flatter rate system.

Extending SAPS: Ten of the 12 newest EU members apply the simplified Single Area Payment Scheme. This is supposed to expire in 2010, but the Commission proposes extending it to 2013.

Cross Compliance: Aid to farmers is linked to the respect of environmental, animal welfare and food quality standards. Farmers who do not respect the rules face cuts in their support. This so-called Cross Compliance will be simplified, by withdrawing standards that are not relevant or linked to farmer responsibility. New requirements will be added to retain the environmental benefits of set-aside and improve water management.

Assistance to sectors with special problems: Currently, Member States may retain by sector 10 percent of their national budget ceilings for direct payments for environmental measures or improving quality and marketing of products in that sector. The Commission wants to make this tool more flexible. The money would no longer have to be used in the same sector; it could be used to help farmers producing milk, beef, goat and sheep meat in disadvantaged regions; it could be used to support risk management measures such as insurance schemes for natural disasters and mutual funds for animal diseases; and countries operating the SAPS system would become eligible for the scheme.

Shifting money from direct aid to Rural Development: Currently, all farmers receiving more than €5,000 in direct aid have their payments reduced by 5 percent and the money is transferred into the Rural Development budget. The Commission proposes to increase this rate to 13 percent by 2012. Additional cuts would be made for bigger farms (an extra 3 percent for farms receiving more than €100,000 a year, 6 percent for those receiving more than €200,000 and 9 percent for those receiving more than €300,000). The funding obtained this way could be used by Member States to reinforce programmes in the fields of climate change, renewable energy, water management and biodiversity.

Intervention mechanisms: Market supply measures should not slow farmers’ ability to respond to market signals. The Commission proposes to abolish intervention for durum wheat, rice and pig meat. For feed grains, intervention will be set at zero. For bread wheat, butter and skimmed milk powder, tendering will be introduced.

Payment limitations: Member States should apply a minimum payment per farm of €250, or for a minimum size of 1 hectare or both.

Other measures: A series of small support schemes will be decoupled and shifted to the SPS. For hemp, dried fodder, protein crops and nuts this would happen immediately. For rice, starch potatoes and long fibre flax, there would be a transitional period. The Commission is also proposing to abolish the energy crop premium.”

ENDS

And here (in French only for the time being) are the initial responses from the members of the European Parliament who spoke during Commissioner Fischer Boel’s presentation at the Parliament:

“Des traits d’union nous réunissent”, a commenté le rapporteur du Parlement européen, Luis Manuel Capoulas Santos (PSE, PT), “nous avons besoin de maintenir une politique agricole commune, de préserver l’agriculture en tant que politique économique et de garantir un auto-approvisionnement adéquat en produit agricole de l’UE”. Les propositions de la Commission européenne contiennent selon lui “certains aspects positifs”, notamment le nouvel article 68 qui “pourrait même être exploité davantage”, les nouveaux critères d’attribution des aides directes, la consécration du principe de modulation progressive qui permettra de concrétiser des mesures pour répondre aux nouveau défis de la PAC, et l’acceptation d’une possibilité de cofinancement communautaire pour la mise en place d’un système de gestion des risques et crises.

Toutefois, le rapporteur a aussi critiqué “la tendance beaucoup trop libérale” des propositions qui “pêchent par un manque de sensibilité sociale”, “éliminent les plus petits agriculteurs sans résoudre la question du plafond pour les grandes exploitations”. M. Capoulas Santos a aussi estimé que la modulation supplémentaire proposée par la Commission, avec le maintien intégral dans les Etats membres des montants retenus dans ce cadre, va à l’encontre de la solidarité au sein de l’Union.

Au nom du groupe PPE-DE, Lutz Goepel (DE), s’est dit satisfait que l’idée de modulation progressive avancée par le PE dans son rapport d’initiative ait été reprise tout en soulignant qu’un débat plus poussé sur les implications chiffrées de la proposition de la Commission à cet égard serait nécessaire. Il s’est dit aussi vigilant sur le “danger que peuvent représenter certains instruments du marché” et notamment le risque d’une poussée du chômage dans les campagnes.

Pour le groupe libéral, Niels Busk (ADLE, DK) a jugé les propositions de la Commission “intéressantes” tout en soulignant qu’il aurait souhaité une orientation vers le marché encore plus importante dans le secteur laitier. “Si nous continuons à limiter la production laitière, nous allons encore perdre des parts de marché alors que les producteurs ont beaucoup investi et que la demande mondiale augmente”, a-t-il souligné.

“Votre diagnostic est le bon, mais la thérapie ne suffit pas”, a déclaré Friedrich Wilhem Graefe zu Baringdorf (Verts/ALE, DE) à l’attention de la commissaire. ” Vous avez affaibli le texte au lieu de faire preuve de force en soutenant le Parlement”, a-t-il souligné, ajoutant que l’augmentation des quotas laitiers, qui fera selon lui baisser les prix payés aux producteurs, constitue “un atterrissage sur le ventre et pas un atterrissage en douceur”.

Diamanto Manolakou (EL), représentant le groupe GUE-NGL, a été encore plus critique, estimant que les propositions de la Commission européenne et le découplage total “sonnent le glas des petits agriculteurs”. “L’UE sera de plus en plus dépendante dans le secteur alimentaire, il faut prendre des mesures pour constituer des stocks stratégiques”, a-t-elle affirmé.

Enfin, Witold Tomczak (IND/DEM, PL) a souligné que “les grandes exploitations, qui ne sont d’ailleurs plus vraiment des exploitations agricoles à proprement parler, continueront à recevoir la plupart des paiements”, ce qui n’est “pas la bonne voie si l’on veut un véritable développement rural”.

Alan Matthews has astutely pointed out that in terms of curbing large payments to wealthy individuals and shifting money from Pillar 1 to Pillar 2, modulation is a far more potent instrument than payment ceilings:

Over 80% of EU farmers received less than €5,000 in direct payments in 2005, so would be unaffected by the increase in the modulation rate. Applying the additional compulsory rate of modulation of 8% to the remainder (on their payments above €5,000) would remove around €1.7 billion in Pillar 1 payments from the richest 20% of farmers. In contrast, the Commission’s tapering proposal would yield a more modest €0.5 billion.

Admittedly, the burden would shift from the really wealthy to the fairly wealthy, in that the Commission’s tapering proposal would target the top 0.4% of farm recipients while modulation will affect the top 20%. Nonetheless, it is important to keep the relative efficacy of the two instruments in engineering a shift from Pillar 1 to Pillar 2 in mind, and not to lose sight of the fact that an increase in compulsory modulation is the more important proposal of the two.

The Goepel plan for ‘progressive modulation’ involves four bands of payment cuts:

The first band between €10,000 and €100,000 would subject to a 1 per cent cut.

The second band between €100,000 and €200,000 would be subject to a 2 per cent cut.

The third band between €200,000 and €300,000 would subject to a 3 per cent cut.

The fourth band between €300,000 would be subject to a 4 per cent cut.

Here is a worked example. Imagine you are the Duke of Westminster (that’s him on the left). You have a net worth of around €5 billion. In 2004-05 you received €775,071 in farm subsidies for your Grosvenor Estate. Under the Goepel plan for progressive modulation, your subsidy would be reduced as follows:

The first €10,000 you receive is not subject to any cut at all.

€10,000 to €100,000 – this band is subject to a 1 per cent cut: €90,000 x 0.01 = €900 cut

€100,000 to €200,000 – this band is subject to a 2 per cent cut: €100,000 x 0.02 = €2,000 cut

€200,000 to €300,000 – this band is subject to a 3 per cent cut: €100,000 x 0.03 = €3,000 cut

€300,000 to €775,071 – this is subject to a 4 per cent cut: €475,071 x 0.04 = €19,003 cut

Total cut: €24,903 (3.2 per cent).

Under the Commission’s proposals made on 20 November 2007, the Duke of Westminster’s payments would be cut by €243,782, or around 31 per cent, a reductionten times more than what is being proposed by the European Parliament’s agriculture committee.

Based on the latest figures on distribution of payments by size in the financial year 2004-05, the Goepel proposals would lead to an overall shift of just €250 million from the direct payments budget into rural development, or around 0.8 per cent. This is ten times less than the estimated combined effect of the Commission’s proposals for modulation (yielding €1.7 billion) and tapered payment limits (yielding €0.5 billion). As with most formulas to reduce larger farm subsidy payments, the member states most affected would be Germany, Czech Republic, the Netherlands and the UK.

The Goepel plan for ‘progressive modulation’ is a heavily watered down version of the already modest proposals for modulation and payment limits put forward by the Commission. This is no surprise. The European Parliament’s agriculture committee is stuffed with farmers and farm-sponsored MEPs and can always be counted upon to come up with highly reactionary proposals which are usually ignored (thankfully) because the European Parliament does not have co-decision powers when it comes to agriculture.

Most MEPs who do not sit on the agriculture committee would prefer to ignore the CAP because of its complexity and the fact that it embodies the bureaucracy and waste that over the years has come to give the wider European project a bad name. With the EU Reform Treaty extending the EP’s co-decision powers to farm policy, now is the time for MEPs to pull their heads out of the sand and get stuck in alongside those who are pushing for a more rational farming and food policies. After all, we are talking about fifty per cent of the EU’s budget.

Double click on interactive chart below to view estimated impacts of the Fischer Boel health check plan, the Goepel plan and the Fischler plan that was rejected in 2003. Calculations are based on 2005 data on payment distribution. Note that these calculations do not take into account the future increases new member states’ subsidy entitlements. I will focus on this subject in a future post.

Muddled Thinking on the Purpose of Direct Payments

The document takes a conservative view of direct payments, stressing that these are required as an income guarantee to compensate farmers for loss of income arising from market failure and to compensate farmers for compliance with the EU’s environmental and animal protection standards. This is a problematic argument, because (a) the value of the direct payment does not correspond to the cost of meeting standards, (b) the use of the direct payment to reward farmers for meeting baseline statutory requirements is unjustifiable and (c), the payment is still made if a market failure does not occur. The paper highlights some confusion as to the purposes of Pillar I and Pillar II and the rationale for public intervention in both agriculture and sustainable land management, as demonstrated by the next point.

Pillar II Funds Earmarked for Income Risk Management

One of the most striking proposals is to use financial resources earmarked for Pillar II to fund private sector risk insurance schemes. This would seem out of synch with the current set of EU strategic guidelines for rural development which call for ‘dynamic entrepreneurship’ and do not currently provide for a system of risk management. The proposal, if followed through, would also result in a potential duplication of public funding, given that the paper also views Pillar I direct payments as providing an income guarantee. Instead, private insurance schemes could provide an income guarantee, suggesting that public expenditure in this regard is inappropriate. Also, given that Pillar II is the preserve of funding for the rural environment, expenditure on agri-environment schemes or on supporting more vulnerable high nature value farming systems is likely to provide greater, more highly valued public goods than spending on risk management. The Parliament needs to demonstrate the rationale for using the relatively limited funding available in Pillar II to fund risk management rather than to invest more substantially in measures that support the environment.

Lower Ambitions for Pillar II Funding
An alternative and substantially less ambitious proposal for compulsory modulation that fuses together an element of aid capping is proposed in the working document. Whilst the Commission recommended that compulsory modulation rises from the current five per cent rate to 13 per cent by 2013, the Parliament suggests a tapered cut in direct payments up to a maximum of four per cent for direct payments in excess of €300,000. This is a somewhat contradictory move, explained loosely in terms of the need to support the labour market and regional cohesion (and without any quantitative evidence that the proposal will provide for this if enacted), and at odds with calls in the same document to secure appropriate financing for Pillar II. The proposal would generate substantially less funding for Pillar II than the Commission’s suggestion.

Mixed Message for Cross Compliance

The document gives a confused message regarding the future of cross compliance. In the first instance it is argued that the framework for Good Agricultural and Environmental Condition could be adapted to include standards for both maintaining the environmental benefits that have been provided by set aside and tackling climate change. Elsewhere, it is stated that any broadening of the scope of cross compliance is rejected outright.

Some Positive Aspects

There are also a number of positive suggestions, albeit not concrete proposals, in the document. The role that Article 69 could play in safeguarding farming in areas threatened by declining agricultural activity is recognised. It is also suggested that the Commission produces a report explaining how livestock farming can be protected in the long term, through, for example, a premium for extensive grassland. The value of moving to an area based fully decoupled Single Payment is recognised, although this is contradicted by a request to maintain the possibility of coupling crop premiums. The Commission’s proposal to abolish the energy crop premium is supported, as is the abolition of the milk quota in 2015.

A Longer Term Vision that Isolates the Environment

In terms of a longer term vision for the CAP, it is requested that the Commission present a number of new formulations of the agricultural payments system for the post-2013 period. Crucially, the environment is excluded from this vision, with the paper stating:

‘any future system must focus more strongly on aspects of the territorial coherence/integrated development of rural areas, reinforcing key agricultural sectors, rewarding effort and compensating for extra burdens, and risk management; [the Parliament] considers that the relationship of the first to the second pillar must be entirely redefined for this purpose.’

If the European Parliament continues to advocate such a vision, the environmental lobby is likely to face a great challenge in pushing for a more sustainable CAP, especially if, as expected, the Reform Treaty is ratified and the Parliament assumes co-decision powers on agricultural matters.

The British position, in particular, appears to sacrifice long-term political credibility in pushing for CAP reform for the sake of short-run political expediency. Mythical farming entities are created, as when the UK spokesperson argued that many large farms are co-operatives set up to enable small farmers to benefit from economies of scale. I look forward to Jack Thurston identifying these mythical farming cooperatives from the UK rich list of farm subsidy recipients over at farmsubsidy.org.

The spokesperson also argued that larger farms may offer greater environmental benefits than smaller ones. Indeed they might, but then again they might not. This is because there is no linkage in the direct payment scheme between the level of payment received and the level of environmental services provided. This link is made, of course, in the agri-environment schemes in Pillar 2, and the UK government seems oblivious to the fact that the money taken from capping the very large payments in Pillar 1 would be recycled in their entirety to Pillar 2 expenditure in the UK under the Commission’s proposals.

The spokesperson also objected that it would be perverse to penalise the most efficient farms when the EU wants to wean the sector off subsidies in the longer run. Lets leave aside the implicit assumption that efficiency and viability are one and the same thing. Many smaller farms may be as efficient as larger ones but may not be viable as full-time farms if the absolute income being earned is not sufficient to offer a comparable living standard to occupations off the farm.

More important, the statement reveals a mindset in which the single payment is still seen as a payment to production agriculture rather than decoupled from production (if still tied to land and thus in part capitalised into land values). All farms now make their production decisions on the basis of prevailing market prices, and limiting the single payment to larger farms will not alter the relative returns they receive, nor their profit-maximising level of output, compared to smaller farms.

Of course, it may affect their liquidity and creditworthiness, and thus there could be production distortions through these indirect channels. However, the liquidity position of farms differs enormously anyway, depending on the asset position of the farm household, whether the farmer and/or spouse has off-farm income, and so on. It does seem perverse that ordinary taxpayers should contribute to an improvement in the liquidity position of the around 6,100 wealthiest farmers (in the UK) which the Commission’s proposal would affect.

The official finally went on to point out that if it is a payment for looking after land, then the more land you have the more you should get. This, of course, gets to the nub of the problem, because nowhere is there a clear explicit statement that this is indeed the justification for the Single Farm Payment. Indeed, nowhere in the Health Check document is there any statement of the objectives of the Single Farm Payment now or in the future. The document calls for making the Single Payment Scheme more effective, efficient and simple, but how can we determine how to make it more effective if its purpose is nowhere spelled out? And if compensation for looking after land is the objective, why do farmers in the more intensively farmed parts of Europe get more money for doing this than farmers in more fragile and vulnerable environments?

It is to be hoped that, over time, the British government will see the speciousness of their arguments and come round to support the Commission’s proposal. But that does not take away from the fact that the proposal, even if implemented, will have little more than an optical effect. In fact, the other Commission proposal in the document, to increase the rate of compulsory modulation from 5% to 13%, would actually be rather more effective in limiting Pillar 1 payments to wealthier farmers.

This is because of the operation of the franchise which exempts the first €5,000 payments from modulation. Over 80% of EU farmers received less than €5,000 in direct payments in 2005, so would be unaffected by the increase in the modulation rate. Applying the additional compulsory rate of modulation of 8% to the remainder (on their payments above €5,000) would remove around €1.7 billion in Pillar 1 payments from the richest 20% of farmers. In contrast, the Commission’s tapering proposal would yield a more modest €0.5 billion.

Admittedly, the burden would shift from the really wealthy to the fairly wealthy, in that the Commission’s tapering proposal would target the top 0.4% of farm recipients while modulation will affect the top 20%. Nonetheless, it is important to keep the relative efficacy of the two instruments in engineering a shift from Pillar 1 to Pillar 2 in mind, and not to lose sight of the fact that an increase in compulsory modulation is the more important proposal of the two.

Eight Member States currently make use of this option, although there is little information on the exact objectives surrounding implementation. A good example is Scotland, where Article 69 provides around £20m of funding per year for the Scottish Beef Calf Scheme. The option was considered by Defra in England, but dropped when the final decisions were taken on the implementation of the last CAP reform.

The resurgent interest in Article 69 is welcome for the environment, and offers a way to protect the most vulnerable production sectors, many of which play an important role in maintaining high nature value farmed landscapes. This is particularly true in an period of high cereal prices when feed for more marginal livestock producers, often located in the more remote areas of the EU, has become increasingly expensive. The option allows for a redistribution of funding to those sectors that genuinely need it.

So long as it is targeted at specific sectors and production systems, it should not be seen as another way to simply top up farmers’ incomes. Crucially, its implementation needs to be accompanied by some sort of environmental conditionality to ensure that the payment delivers real results for the environment. The cross compliance standards may be too imprecise to push for the required style of management. In this way, Article 69 offers an opportunity to further ‘green’ Pillar I of the CAP, and may free up funding within Pillar II for well designed and targeted agri-environment schemes, which could operate alongside Article 69 implementation.

The motion was carried by 599 votes to 64. The Parliament believes that such a high rate of voluntary modulation would jeopardise subsidies to farmers and would also repersent a further step towards renationalisation of the CAP with farmers in different member states receiving differing amounts of cash. The Commission itself would prefer a higher rate of compulsory modulation to a range of voluntary rates.

Because of the summit deal the EU will receive on average 30 per cent less funding for rural development between 2007-13 compared with the current funding period. The Commission asked for €88.75m but this was cut by more than 20 per cent to €69.76m. This will be partly offeset by compulsory modulation, but this was intended to provide additional funds for rural development, not offset cuts made in a budget deal.

Spending more money on rural development compared with traditional farm subsidies is seen as a way of building a more diversified, dynamic and yet environmentally friendly rural economy in Europe.