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The future of direct payments: a Scottish view

The Commission’s November 2010 communication on the future of the CAP post-2013 envisaged that Pillar 1 direct payments might, in future, consist of three elements: a basic income support payment; a green payment; and a natural handicap payment. Another theme of the communication is that greater flexibility should be given to Member States in how they distribute their Pillar 1 envelope. The Scottish Government recently released the Pack Report of an inquiry into future support for agriculture in Scotland. Although it appeared before the Commission communication did, some of its ideas reflect what is in the communication while other ideas suggest ways in which Member States might make use of any flexibility they were given.

The Pack Report (named after its chairman Brian Pack) decided that it first needed to decide what objectives direct payments were supposed to achieve and then to design a system of payments to achieve those objectives. Scotland adopted the historic basis for the Single Farm Payment in 2005 as an interim measure. This means that payments per hectare are much higher in the more favoured farming areas and much smaller in the more marginal and highland areas. A flat rate area system would redistribute payments away from areas with commercial agriculture towards areas where farming is associated with valued public goods. It is thus a proposal strongly rejected by the farm lobby but equally strongly supported by the environmental lobby.

Production vs public good rationale for direct payments?

The Pack Report took its cue from Scotland’s overall objective to increase sustainable economic growth and decided that the agricultural support regime should have agricultural production at its heart. It therefore recommended that the most productive farms should get the highest payments.

It justified this distribution on two grounds. First, it took the view that direct payments are designed, in part, to compensate producers for the added costs of operating in a highly regulated common market with high standards of food safety, animal welfare and environmental protection. It also noted that direct payments provide a financial cushion against market price and production uncertainty by maintaining farm incomes and thus sustaining the wider benefits that are derived from farmed land.

It then made the further assertion that the more productive farms, having high output, incur higher costs from operating in a highly regulated common market and run higher risks from price and yield variability. It therefore concluded that the most active (by which the report means, productive) farms should receive the most direct aid.

Second, it argued that direct payments are also designed, in part, to incentivise farmers to address some of the global challenges facing society (including food security, climate change, energy supply, water use and biodiversity). Again, it made the assertion that it is the more active and productive farmers who have the greatest potential to contribute to meeting these global challenges. It therefore concluded that for this reason also the more productive farms should receive the most direct aid.

Proposed design of direct payments

The Report recommended a three-element design for the future direct payments post 2013.

The first element would be a basic income support paid on an area basis to eligible land. However, it was insistent that eligible land could not be taken as a fixed constant and that the future EU regime should recognise that eligibility criteria are required to assess land qualifying for direct payments. It proposed a minimum stocking rate to decide if non-arable land is eligible for payment. Currently, an eligible hectare is “any agricultural area of a holding … that is used for an agricultural activity…” (Article 34 of Council Regulation No 73/2009). In the marginal (LFA) farming areas, this area-based basic income payment would be kept very low, but in the commercial (non-LFA) farming areas it would be the predominant element (two-thirds) of the direct payment an individual farmer would receive.

The second element would be a Top Up fund used to encourage farms to deliver against the global challenges. “The Top Up Funds would be paid in return for a business committing to embark on a programme to improve its sustainability and thereby deliver food production whilst helping to satisfy the global challenges.” It recognised that more work needed to be done to define the eligibility requirements for the Top Up Funds.

However, for the marginal (LFA) farming areas it recommended that these Funds should be distributed on the basis of Standard Labour Requirements rather than area (again, reflecting the specific Scottish characteristics of huge areas of highlands with very limited agricultural activity, so that an area-based payment would be hard to justify, while a payment based on labour input could be defended as reflecting the activity that the farm commits to undertake in contributing to the global challenges). Outside the LFAs, in the more commercial farming areas, the Top Up Funds would be distributed on an area basis.

Finally, and again only in the LFA areas, coupled livestock payments would continue to stablise cow and ewe numbers on marginal land thereby securing the basis for delivering public goods.

Reflections on the Scottish proposal

The Pack Report is an interesting case study of how a Member State (or, in this case, a region) might make use of any flexibility granted for the allocation of direct payments in the post-2013 CAP regime.

First, the report wants to maintain differentiation of payments to favour active farmers. The Commission’s November communication also talks of confining direct payments to active farmers, but its emphasis is on restricting payments to non-farmers meaning large corporations or entities for which farming is clearly not their major business. In the Scottish report, active farmers are defined as the more productive farmers.

Second, its preference that the most productive farmers should receive the most aid follows from its analysis of the desired objectives of direct payments which echo exactly those set out in the Commission communication. However, the assertions made in the Pack Report to reach this conclusion that the more productive farmers have greater need of direct payments because they face higher costs in complying with standards, are more exposed to income volatility and are better able to address the global challenges, will be controversial.

Third, it tries to avoid running into criticisms under WTO rules that it is proposing a recoupling of support in giving more support to the more productive farmers by coming up with a differentiated payment design in which playing with the design ensures the de facto outcome that it wants. In commercial farming areas, it proposes an area-based payment, but in the LFAs it proposes a labour unit-based payment linked to delivering public benefits. It recognises that this criterion “is new to the EU” but asserts that “The European Commission and Parliament and the WTO need to fully understand and accept their rationale and purpose”.

It is clear that if payments are linked to labour units they certainly cannot be classified as decoupled income supports under WTO rules. It might be possible to justify these payments as green box payments if they could be classified as payments under environmental programmes. The requirement would be that these payments would have to be determined as part of a government conservation or environment programme, would have to depend on meeting specific conditions including related to production methods or inputs, and the amount of payment would have to be limited to the extra costs or loss of income involved in complying with the programme.

Scotland’s Pack Report makes clear how parts of the EU would like to make use of the flexibility that is likely to be offered to Member States under the proposed CAP post-2013 reforms. Other Member States, including Ireland for example, would share similar concerns. It raises issues that the Commission’s legal proposals next year will have to grapple with, including the definition of active farmers, whether direct payments can be made other than on an area basis, and how to ensure the WTO Green Box compatibility of schemes implemented by the Member States under any flexibility that they are allowed.

Acknowledgement: Image of Scotland near Loch Lomond downloaded from http://www.flickr.com/photos/13847552@N03/3906560447/ under a Creative Commons licence.

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