EU budget negotiations and farmers’ 2013 single farm payment

The value of SFP payment entitlements (and the SAPS payment in the new member states) that farmers will receive later this year will be based on current eligibility rules (as set out in Council Regulation (EC) 73/2009 agreed following the CAP Health Check) but on the budgetary amounts set aside for 2014 under the new Multiannual Financial Framework (MFF) regulation for the coming period 2014-2020. This is because the 2013 direct payments are paid out of the 2014 EU budget which runs from 1 October this year.
This means that, even without the new CAP regulations agreed in June 2013 coming into force (which are now delayed to 1 January 2015), what farmers will receive in direct payments in 2013 will differ from what they were paid in 2012 for two main reasons:
• The overall budget for direct payments agreed for 2014, taking into account the additional demands on this budget arising from the phasing in direct payments in the new member states plus the provision for the new crisis reserve, is lower than before.

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CAP reform implementation consultations begin

The most defining characteristic of the political agreement reached on CAP reform in June 2013 in hindsight may not be the greening of Pillar 1 payments or the move towards greater ‘fairness’ in the CAP as a result of external and internal convergence, but rather the re-nationalisation of some aspects of agricultural policy with the devolution of much greater flexibility to member states in how the new CAP can be implemented.
This flexibility may be seen as a consequence of trying to manage a single CAP in an increasingly heterogeneous agricultural landscape in Europe following successive enlargements to an EU of 28 member countries.

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CAP reform uncertainty and the market for entitlements

One little-emphasised feature of the current negotiations on CAP reform is that the rules for eligibility for payments under the new basic payment scheme (and thus also the other proposed layers of Pillar 1 direct payments such as the green payment, young farmer’s payment, area of natural constraints payment and redistributive payment where these are adopted) are in a state of flux. New amendments and modifications continue to be introduced at successive stages of the negotiation process. This uncertainty is reflected in the market for Single Farm Payment (SFP) entitlements and the prices farmers are willing to pay for entitlements where they become available.

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Production effects of moving to flatter structure of direct payments

What might be the production, consumption and trade effects of the Commission’s proposals to redistribute direct payments by moving to a flat(ter) structure of direct payments across the Member States, and to redistribute payments within Member States by moving from the historic basis of farm payments (in the majority of Member States which operate this system) to a regional flat rate system?

A silly question, some might respond, for are not the EU’s direct payments decoupled (leaving aside the continued existence of a share of coupled payments) and thus not meant to have an effect on farm production? If a direct payment is truly decoupled, then moving payments from one farm to another, or from one country to another, will affect relative incomes but not output.

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Updating the base period for SPS entitlements

One of the more significant changes proposed by the Commission in its draft legislative proposal on direct payments is to eliminate those existing entitlements to support which farmers have built up in the past. The basic payment scheme will replace the Single Payment Scheme and the Single Area Payment Scheme as from 2014. The new scheme will operate on the basis of payment entitlements allocated at national or regional level to all farmers according to their eligible hectares in the first year of application.

The proposal to allocate new entitlements on the basis of land farmed in 2014 has provoked a massive protest in Ireland (see, for example, this Irish Examiner story).

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What is the likely cost of greening Pillar 1?

The Commission’s proposals for the design of direct payments after 2013 include a greening component which, according to the draft legislative proposal (yet to be released on 12 October next and thus subject to change) will be mandatory for farmers in receipt of the basic income payment – thus becoming what I called in an earlier post a form of super-cross-conditionality.

In the impact assessment to be released with the legislative proposal the Commission has made some estimates of the cost of implementing these green measures. In this post, I examine these costs using information in the draft version of the impact assessment (Annex 12 Impact of Scenarios on the Distribution of Direct Payments and Farm Income).

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The worst case scenario examined

A new study from the University of Wageningen in the Netherlands has attempted to model the effects of the abolition of EU farm subsidies. The authors of the report state that their study is very much a ‘worst case assessment’ since,

“It does not take into account farmers’ behaviour, although the past has shown that farmers do adapt to changes in the Common Agricultural Policy. It also assumes a fixed cost structure and abstracts from changes in factor prices and structural change, all elements which would reduce the impact of reform on farm incomes.”

The report makes it clear that the effect of subsidies – and their removal – is not felt evenly across Europe.

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The future of direct payments

As Valentin’s blog post yesterday explains, the CAP is not only a European agriculture policy, it’s a European income redistribution policy. The centrepiece of the CAP is the €42 billion a year in ‘direct aids’ or income support to farmers, funded entirely from the pooled EU budget. Valentin points out that in an era of fiscal austerity, the idea of billions of euros moving from one country’s taxpayers to another country’s farmers is likely to be politically controversial. Particularly when the biggest payouts go to Europe’s wealthiest citizens and most profitable companies.

As national governments decide by how much they are going to pay of nurses and school teachers, how many university places they will cut and which taxes they are going to have to increase, the idea that aids to farmers are ringfenced from cuts will come as a surprise to many.

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Which member states pay for wasteful farm income support?

So, is examination of member states’ financial net contributions a shameful exercise: hiking up national egoism and ignoring the larger benefits of European integration? Not at all. If CAP funds were spent exclusively on European public goods, such as climate change mitigation or the protection of endangered species, national bottom lines would indeed not matter. The money should be allocated wherever greenhouse gas reductions can be achieved most cheaply or where the need for wildlife protection is the greatest.

But as things stand, CAP subsidies are mostly free handouts to member states and their farming communities – they do not create commensurate value for European citizens.

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DG Agri study: Don’t be afraid of liberalization

Farm interests routinely threaten that any reduction in support will provoke a slump in production, endangering EU food security, and threatening massive land abandonment to the detriment of rural life and biodiversity. The findings of the Scenar 2020-II – Update of scenario study on agriculture and the rural world, commissioned by DG Agri, strongly contradict such panicmongering about the looming end of EU agriculture.

The study looks at three scenarios. The reference case assumes a 20% (nominal) CAP budget reduction, reduced intervention stocks, full decoupling, a 30% direct payment reduction, a 105% increase for the second pillar, and a moderate Doha agreement (based on the Falconer paper, including the elimination of export subsidies).

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