The future of direct payments

My previous post highlighted the somewhat muted commitment in the Commission’s 2017 Work Programme to “take forward work and consult widely on simplification and modernisation of the Common Agricultural Policy to maximise its contribution to the Commission’s ten priorities and to the Sustainable Development Goals. This will focus on specific policy priorities for the future….”.

Member States as well as the European Parliament are also beginning to prepare their positions on what may or may not become the next CAP reform. Next week, on November 8th in Brussels, the European Parliament’s COMAGRI and Policy Department B are organising a workshop on Reflections on the agricultural challenges post 2020 in the EU: preparing the next CAP reform. To prepare for this workshop, three background notes were prepared for COMAGRI covering the future of direct payments, the future of market measures and risk management schemes and the future of rural development. I have contributed the note on the future of direct payments.

I reproduce below the Executive Summary of my note.

This note responds to a request to provide policy recommendations to AGRI Committee Members on possible improvements of the current direct payments mechanisms in the light of future challenges for EU agriculture. The future of direct payments is central to the debate on a future CAP because of their importance both in the total support that farmers receive and in the CAP budget. Budget transfers are the single largest element of support to EU farm incomes. Direct payments accounted for around 72% of the CAP budget and for just less than 30% of the entire EU budget in the 2013-2015 period.
The note is a work of structuring and synthesis, attempting to assist AGRI Committee Members by systematically setting out the choices available to MEPs if they wish to consider further reforms of the CAP.

Chapter 2 describes the structure of direct payments following the 2013 CAP reform. Decoupled payments, in the form of the Basic Payment Scheme and the Single Area Payments Scheme, remain the single most important layer, but other layers have been added, including a greening payment and young farmer payment which are compulsory for Member States, as well as schemes for coupled support, small farmers and areas of natural constraints which are optional for Member States. The 2013 reform greatly increased the flexibility given to Member States with respect to how they could implement the direct payments regime.

The ‘external convergence’ formula brought about a limited but unprecedented redistribution of CAP Pillar 1 resources between Member States. However, it did not alter the relative ranking of countries, and there are still significant differences in payment levels per hectare particularly among the old Member States and between old and new Member States.

Twelve of the 18 countries applying the BPS will still use the partial convergence model in 2020. The area of eligible land has likely increased following the 2013 reform. The most popular of the voluntary measures chosen by Member States has been coupled support, which has been introduced by all except Germany. Fifteen Member States opted for the Small Farmers Scheme, covering 41% of the EU’s farmers and 5% of its agricultural land.

Member States have also made wide use of the flexibility granted to attach varying conditions to the greening payment.

Chapter 3 asks whether the new direct payments regime is achieving its objectives and whether it is fit for purpose. Farm incomes remain hugely dependent on these payments. Based on FADN data over the period 2004-2013, the contribution of direct payments to farm net income was 47%, other public transfers 15% and market income 38%. The average share of direct payments was as low as 7% on horticultural farms and as high as 101% on ‘other grazing livestock’ farms over this period.

The 2013 reform introduced various measures to try to even out the distribution of direct payments across farms. However, degressivity/capping has made hardly any impact on the distribution of payments between farms, although the redistributive payment can play a more important if still limited role. The great majority of direct payments in the current programming period will continue to flow to farms whose income from farming is above the median farm income.

Capitalisation effects reduce the benefits of direct payments for existing farmers and raise the costs of entry and growth for younger and expanding farmers. Direct payments have slowed the exit of some farmers from agriculture and the reallocation of land towards more efficient farms. Direct payments contribute to stabilising farm income. However, they are not well targeted because they are not specifically focused on those farms facing the highest levels of income variability. Direct payments generally have a negative relationship with farm productivity, although the move to decoupled payments has reduced the efficiency losses associated with the previous partially-coupled payments.

The available data cannot yet tell us anything directly about the environmental benefits from the greening practices. The fact that the maintenance of permanent grassland requirement and the crop diversification obligation have led to minimal changes in land use, and the fact that the great majority of the land enrolled in EFAs is used for productive options, are pointers that the additional environmental benefits, relative to the pre-greening baseline, in return for the expenditure of €12 billion annually are likely to be low. The greening choices made by Member States and farmers do not suggest that the opportunities to deliver significant environmental value have been taken in most cases.

There are no specific challenges and no specific public goods for which the appropriate policy response is a uniform, fixed, decoupled payment per hectare. There is a need to restructure direct payments to a set of targeted payments focused on well-specified objectives.

Three different models are proposed to help to identify key decisions for AGRI Members regarding the future of direct payments.

• Model 1 assumes that decision-makers prolong the current structure of direct payment into the next programming period but wish to make technical adjustments to the legislation to improve its effectiveness and to simplify its administration.
• Model 2 follows the US example in which decoupled direct payments are eliminated and the savings used either to introduce counter-cyclical payments or a set of income stabilisation tools. No merit is seen in counter-cyclical payments. There is a case to shift resources to income stabilisation tools but these should be managed principally at the Member State level.
• Model 3 revisits the greening payment and considers four different options to replace it. These include reverting the greening obligations to cross-compliance; replacing the greening obligations 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 agriculture-environment-climate measure (AECM) in Pillar 2; and transferring the greening payment for voluntary AECMs in Pillar 2.

The current system of direct payments is neither sustainable in the long run nor designed to address the challenges facing farmers and land managers in Europe today and in the future. Chapter 5 puts forward a recommended structure for the future of direct payments, based on the following set of principles.

• Payments should be targeted on specific objectives with a clear results orientation.
• Payments should be restructured within a one-pillar, programmed, multi-annual CAP.
• National co-financing should be required for all CAP expenditure.
• Decoupled direct payments should be gradually phased out over a pre-announced transition period.
• Savings should be redirected to more spending on risk management, improving competitiveness, climate action and environmental public goods.
• Payment entitlements should be replaced by a contractual framework between farmers and public authorities.
• Cross-compliance and the greening payment should be replaced with ‘conditional greening’ whereby the receipt of public support would be conditional on enrolling in a basic (shallow) environmental scheme devised by the Member State.
• The allocation of budget resources should be incentive-based so that budgets are allocated to Member States based on performance as well as needs.

An indicative CAP budget in 2025 is prepared to illustrate the effects of these various choices. All of the elements in the recommended structure for future direct payments to farmers are familiar in the current CAP. What is proposed is to redesign these payments so that they are more effective in achieving their objectives, more understandable to farmers, give greater flexibility to national authorities, and provide greater value-for-money to the taxpayer. Policy-makers can decide the pace at which the transition can take place. What is important is that individual reforms to any element of the direct payments regime are consistent with the proposed long-term direction of travel.

However, the gains from shifting to a more targeted approach are sufficiently compelling that it would be a pity to delay.

This post was written by Alan Matthews.

Photo credit: Ole Boysen, used with permission.

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