1. A TRANSITION WITHOUT END. The SPS is the direct descendent of the compensatory payments introduced in the 1990s while the EU was reducing the high price guarantees that had led to overproduction and the notorious butter mountains and wine lakes. The compensatory payments were meant to help farmers adapt to the realities of market prices. But almost two decades later, they’re still with us, and by 2012 the cost will have risen to 40 billion euros a year. Worse, recent rises in global food prices mean that for some commodities market prices are now higher than the prices guaranteed under the old CAP. Yet farmers continue to receive their transitionary compensation payments. It’s heads farmers win, tails taxpayers lose.

2. TO THOSE THAT HAVE, SO SHALL IT BE GIVEN: 85 per cent of the SPS goes to the biggest 17 per cent of recipients – the richest farmers with biggest farms and the best land. The Queen of England receives more than half a million pounds, Prince Hans Adam II of Liechtenstein gets close to a million euros – and he’s not even an EU citizen. Small farmers barely get a look-in and the EU is now eliminating entitlements of less than 250 euros while doing little to reduce payments at the top of the scale. One of the objectives of the CAP is to maintain farm incomes, but it it a perverse policy that focuses resources on maintaining the incomes of the richest, not the poorest farmers.

3. ENRICHES LANDOWNERS, NOT WORKING FARMERS: It is becoming increasingly common for non-farming landowners to scoop up the benefits of the SPS, not the working farmer. This can be done in two ways: by renting out land while retaining the SPS payments or by incorporating the value of SPS payments into the rent charged to a tenant farmer. Around half of EU land is tenanted and land ownership is concentrated in the hands of a relatively small number of large landowners.

4. UNEQUAL TREATMENT. As well as discriminating in favour of the largest farms on the most productive land, the SPS discriminates against certain types of farm. Poultry and pig farmers and horticulture growers never received farm subsidies and don’t qualify for the SPS. Yet there are plenty of cases of non-farmers receiving SPS: railways, water utilities, golf clubs and pony clubs, according to farmsubsidy.org which pushes for more transparency in the system.

5. MONEY FOR NOTHING: The SPS is sometimes justified as payment for the ‘environmental services’ provided by farmers as land managers. But there is only a tenuous connection between how much subsidy a farmer receives and the value of the environmental services provided. The farmers that the get the biggest subsidy per hectare are sometimes the ones providing the least in the way of environmental services, since the most heavily subsidised farms are often the most intensively managed farms, with greater application of fertilizers and pesticides. In a report on ‘cross compliance’ (the requirement farmers must meet to qualify for SPS) the European Court of Auditors concluded that

“the objectives of this policy have not been defined in a specific, measurable, relevant, and realistic way, and that at farm level many obligations are still only for form’s sake and therefore have little chance of leading to the expected changes, whether reducing the size of payments or modifying farming practices.”

Check back tomorrow for five more reasons why the SPS is not politically sustainable.

The European Parliament doesn’t have any powers in agriculture policy but the Commission and the Council go through the motions of consulting the elected chamber and today the Parliament is debating its response to the Commission’s health check proposals. As Roger Waite explained earlier in the week, the idea of trimming payments to very large farms. It’s worth quoting the Commission’s reasoning in full:

(8) The distribution of direct income support among farmers is characterised by the allocation of a large share of payments to a rather limited number of large beneficiaries. It is clear that larger beneficiaries do not require the same level of unitary support for the objective of income support to be efficiently attained. Moreover, the potential to adapt makes it easier to larger beneficiaries to operate with lower levels of unitary support. It therefore seems equitable to expect farmers with high amounts of support to make a particular contribution to the financing of rural development measures addressing new challenges. Therefore, it appears appropriate to establish a mechanism providing for an increased reduction of the highest payments the proceeds of which should also be used to deal with new challenges in the framework of rural development. To ensure the proportionality of this mechanism the additional reductions should increase progressively according to the amounts of the payments concerned.

The European Parliament hasn’t taken kindly to the idea that Europe should ’spread the wealth around’ little more when it comes to farm subsidies, to quote the memorable phrase used by US President-elect Barack Obama it in his tête-à-tête with Joe the Plumber. Having twice failed to get agreement on a hard ceiling of 300,000 euros above which no subsidy is paid, the Commission took a rather more subtle approach this time, proposing a series of subsidy bands: the higher the band, the greater the reduction. Make no mistake, the reductions are not all that great, although they do ramp up over time. And also remember that the money saved by the cuts will not be returned to taxpayers, or spent on schools or hospitals. It will be spent on farm subsidies, but just a different kind of farm subsidies called ‘rural development’ – and that each euro cut from direct payments has to be matched with a new euro from member state treasuries.

The table below summarises the Commission plan and the Parllament’s proposed amendment:

It is important to remember that these proposals leave 80 per cent of farms unaffected as they receieve less than 5,000 euros. Around 18 per cent of farms receive between 5,000 and 99,999 euros, one per cent receive between 100,000 and 199,999 euros and fewer than 0.3 per cent receive more than 200,000 euros. But though they are small in number, this CAP elite receives upwards of 80 per cent of all subsidies.

Am I alone in finding it odd that the only directly-elected EU institution is fighting to ensure the CAP remains at its core a 50 billion euro a year slush-fund for Europe’s large landowners and big agribusiness?

I’ll come back later in the day with more on the Parliament’s deliberations.

I have calculated the average direct payment per hectare of land, based on budget ceilings for 2008 and corrected to 2014 levels, which is the point at which the new member states that joined the EU in 2004 achieve parity with the old EU-15. The results are presented in the chart below.

It is clear that the variation is enormous, from an average of almost €600 per hectare in Greece, to a mere €80 per hectare in Latvia. In general the older member states do much better than the new member states. Payments per hectare fluctuate widely across farms in the EU, and within countries. The Times reported on a plot of land in the UK for which the owner was claiming €40,000 per hectare. Direct payment entitlements are strongly positively correlated with the productivity of farmland as they depend on (past) crop yields and livestock herd stocking densities. Farmers who farm the most fertile lands are getting the highest payments per hectare. A distribution of state support which favours farmers in advantaged areas over those in disadvantaged areas is hard to justify from an equity standpoint.

So what should be done? Anyone who has been reading the runes of the current debate on the future of the CAP will be well aware that an EU-wide flat rate payment is firmly on the agenda. Senior officials close to Agriculture Commissioner Mariann Fischer Boel are thought to favour it. Allan Buckwell, one of the most interesting thinkers on European agriculture policy, has suggested it. Writing this month in Agra Europe, Neil Parish MEP, outgoing chairman of the Parliament’s committee on Agriculture and Rural Development made a similar point:

“by 2013, some new member states will be receiving less than half of what the old states will be getting, in terms of aid per hectare. They will therefore push for a per hectare payment that is equal across the EU, thus reducing the payments in the old member states. My view is that if we are to have a reasonably fair EU, there has to be some equality in payments”.

Taking the entire direct payment budget and dividing it equally across all EU farm land would end up with a flat rate payment of €229 per hectare, by my calculations. For some farmers this would represent a sizeable boost to their subsidy income, for others a big cut. The graph below shows average increases or decreases, by member state.

It is evident that there are more countries (and larger countries) that lose, suggesting that any move of this kind would have to overcome considerable political opposition. It is possible that the loser countries would be partially compensated by increases in their entitlement to rural development funds. These funds also vary wildly on a per hectare basis. The chart below shows per hectare EU budget contributions to member state rural development policies, based on calculations of annual RD spending in the period 2007-13 by the Institute for European Environment Policy.

Malta is omitted from the graph because it is an extreme outlier with €1100 per hectare.

It is clear that the countries which do very well out of direct payments do less well from rural development policies, so there could be some equalisation here, although it is hard to see where the money will come from. It is also worth remembering that the political constituency for direct payments is very powerful and well mobilised while there is barely any political constituency for increased funding for rural development policies, aside from a handful of environmental NGOs such as Birdlife International. Under current CAP financing rules, cofinancing is required for all EU budget contributions to rural development policies, which means that national governments have to pay something into the pot. By contrast, direct payments are ‘free money from Brussels’.

If a flat rate payment across the EU is too radical, then how about introducing a limit on payments per hectare across the EU? This could be set at around €350 or thereabouts. Such a limit would deal with some of the most extreme cases in which the CAP serves only to make the rich richer, following very much the principle set out in the Gospel According to St Matthew (13:12):

“For whosoever hath, to him shall be given, and he shall have abundance: but whosoever hath not, from him shall be taken away even that which he hath.”

A per hectare payment limit should be in addition to overall payment limits by individual, which I believe should be based upon some measure of household income, not on the absolute size of payments, as is currently proposed. Over the next six months, member states will be required to publish details of individualr recipients of direct payments. Transparency is only going to highlight further the glaring inequalities of the CAP.

According to the Commission’s impact assessment, the introduction of the single farm payment and the enlargement of the EU into central and eastern Europe has dramatically increased the number of very small farms claiming subsidy from the CAP. As things stand, 31 per cent of single farm payment recipients receive less than €250. The Commission argues that:

The very large number of small beneficiaries of CAP direct payments reflects more general structural aspects of EU agriculture. For many of these small beneficiaries, agriculture may be only one of several economic activities. These activities may be related more or less directly to agriculture. Consequently, any change in the payment rules would be unlikely to have significant agricultural employment impacts but could remove an alternative income source in rural areas with many small and part-time farmers.

The implication is that it is just part-time or hobby farmers who have entitlements of less than €250 per year, the favoured example being the stockbroker with a pony paddock. There is no doubt that such cases exist, but it is also worth remembering that some parts of Europe have a large number of subsistence or near-subsistence farmers. They are concentrated in the new member states and in particular in Bulgaria, Romania and Poland. The Commission does conced that “lower limits could be criticised in some member states as an unfair treatment of small farmers.”

Despite what farm ministers and agriculture commissioners would have us believe, the CAP is neither targeted at helping poor farmers nor at supporting sustainable and high nature value farming practices. If it were, it follows that low-intensity upland grazing in remote mountainous regions where there are high levels of poverty, low levels of literacy and very few other employment options ought to qualify as a high priority area. The irony is that for shepherds in places like the Fagaras mountains in Romania (pictured) the CAP is inaccesible and irrelevant. EU food safety regulations restrict how they can sell their traditional, hand-made cheeses but they get precious little from the EU’s subsidy system. €250 might be crumbs to a cereals farmer in the Paris Basin, but to a Romanian shepherd, it’s a sizeable sum. Introducing lower limits on payments risks further penalising a very hard-pressed and marginal group. There must be ways of addressing the relatively high transaction costs of paying out very small sums of money. Perhaps entitlements could be claimed every other year, so a recipient gets two year’s payments in one go?

The table below shows estimates of the number of subsistence and near-subsistence farms by member state, defined as less than 1 ESU (European Size Unit)*

The Standard Gross Margin may be different from actual margin on a farm because of the wide variation between farms with the same physical composition. A European Size Unit (ESU) is a measure of the economic size of a farm business based on the gross margin imputed from standard coefficients for each commodity on the farm. In concrete terms, 1 ESU is roughly corresponds to:

– either 1.3 hectares of cereals
– or 1 dairy cow
– or 25 ewes

or equivalent combinations of these.

* A European Size Unit (ESU) is a measure of the economic size of a farm business based on the gross margin imputed from standard coefficients for each commodity on the farm. The application of these standard coefficients results in the Standard Gross Margin (SGM) for a farm or group of farms. 1 ESU = 1200 SGM.

The working paper prefaces its own proposals with some observations about the CAP and the reform process. Mr Capoulos Santos is critical of the lack of ambition in the Commission’s proposals:

“The boundary which the commission wished to place around the debate on the ‘health check’ (leaving out in particular topics such as the legitimacy of aid and the setting of parameters for as common a model as possible of decoupled payments, the degree of management flexibility which should be granted to the Member States, modulation vs co-financing, the possibility of a ‘single pillar’ and the role of market regulation within the new CAP) will complicate the debate and the decisions concerning the 2013 reform, discussions on which will have to begin in 2010/2011.”

Capoulos Santos’s inference is that the CAP, even after the health check, will be ill-prepared for 2009, with the heady mix of the EU budget review, the revision of the Kyoto Protocol and the conclusion of the WTO Doha Round.

The working paper proposes more modest rates of progressive modulation which would cut the money available under the Commission’s proposals for farm-based land conservation and farm-based rural development policies (known collectively as the ’second pillar’ of the CAP). Capoulos Santos recognises this shortfall and suggests that an expanded Article 68 be used on a voluntary basis by member states who wish to direct funds towards these new policy priorities.

It is important to remember that with the Irish ‘no’ vote on the Lisbon Treaty putting in doubt the prospect of introducing co-decision by the European Parliament on agricultural policy, the Parliament merely acts in an advisory role and has no legislative powers.