When COMAGRI publish their compromise amendments to the Commission’s draft revised CAP regulations, one issue to look out for will be the proposed definition of active farmers. This has been a difficult area in the direct payments regulation dossier because the issue of how to define an active farmer goes to the heart of the decoupled nature of the SPS system.
The item is on the reform agenda because of repeated criticisms of the Court of Auditors, first in the context of its report on SPS implementation and more recently in its report on SAPS implementation in the new member states. The Court complains that many beneficiaries of CAP payments do not appear to be ‘farmers’ as conventionally understood.
There are at least four different themes in the discussion on defining ’active farmers’ in order to better target direct payments to the intended beneficiaries:
(a) To avoid the leakage of payments to beneficiaries whose principal business has nothing to do with farming (for example, golf courses, airports, municipalities);
(b) To avoid the leakage of payments to ‘sofa farmers’, by which is meant persons who own land and gain entitlements to a payment but where the land is not used for production. Investors renting areas of Scottish moorland to activate high-value entitlements are an example of this category.
(c) To address the leakage of payments from tenant farmers to landlords in the case of rented land. The capitalisation of payments into land rents occurs naturally as a result of market forces, but the division of payments between landlord and tenant is also regulated by law in many countries and a number of countries want more guidance on this in the basic law.
(d) A concern with the redistribution of payments from ‘active’ (for which read ‘productive’) farmers to more marginal (read ‘unproductive’ farmers) in moving from the historical to flat-rate payment system under the Commission’s proposal. Those representing farmers with high-value entitlements use the argument that entitlements should go to ‘active’ farmers in an attempt to maintain the historical system status quo.
The discussion in the Council and COMAGRI has been around issues (a) and (b) while issues (c) and (d) play out more at the national level. The discussions take place along two parallel but interlinked tracks: defining the land eligible for support, and defining the persons eligible for support.
Original definition of beneficiaries
The problem arose as an unintended consequence of the decoupling of direct payments in 2005. Payments could no longer be linked to either production or land, so how to define the beneficiaries?
The answer provided in the direct payments regulation was a two-stage test. A farmer was defined as someone carrying out an agricultural activity, and an agricultural activity, in turn, was defined as:
the production, rearing or growing of agricultural products including harvesting, milking, breeding animals and keeping animals for farming purposes, or maintaining the land in good agricultural and environmental condition
It is particularly the GAEC condition which does not require actual production which allows payments to be made to non-farm businesses and sofa farmers. The GAEC conditions in the 2003 Regulation focus on four issues, one of which is a minimum level of maintenance. Five standards were specified for this issue: minimum livestock stocking rates and/or appropriate regimes; protection of permanent pasture; retention of landscape features including where appropriate the grubbing up of olive trees; avoiding encroachment of unwanted vegetation on agricultural land; and, maintenance of olive groves in good vegetative condition. Member states did not have to specify all standards. And the Court of Auditors found that, even in countries which did have standards, in many cases these did not require production activity.
Health Check changes
In the Health Check, an attempt was made to establish obligatory minimum requirements for the receipt of direct payments and to give member states the possibility to exclude those who are not primarily involved in farming (Article 28(2) of Regulation (EC) No 73/2009). The provision (minimum requirements for receiving direct payments) reads:
From 2010, Member States may establish appropriate objective and non-discriminatory criteria to ensure that no direct payments are granted to a natural or legal person:
(a) whose agricultural activities form only an insignificant part of its overall economic activities: or
(b) whose principal business or company objects do not consist of exercising an agricultural activity.
However, no member state made use of this possibility to establish additional criteria, blaming the difficulties in defining criteria which would exclude only sofa farmers but not ‘genuine’ farmers and the difficulties and expense of controls. Update 19 Dec 2012: I have since learned that, in fact, the Netherlands has made use of this paragraph to prevent payments to entities of his kind.
In the Health Check, the minimum livestock stocking rate standard for GAEC was made optional for member states, except for member states which had already defined a minimum requirement on the basis of such a standard or where national rules which address such a standard are in place.
Commission October 2011 proposal
The Commission made another effort to tackle the definition of an ‘active farmer’ in its October 2011 proposal for a revised direct payments regulation. Recall that a farmer is someone who engages in agricultural activity. First, the definition of an ‘agricultural activity’ is fine-tuned. It is now defined (Article 4) as either:
rearing or growing of agricultural products including harvesting, milking, breeding animals and keeping animals for farming purposes,
maintaining the agricultural area in a state which makes it suitable for grazing or cultivation without any particular preparatory action going beyond traditional agricultural methods and machineries, or,
carrying out a minimum activity to be established by Member States on agricultural areas naturally kept in a state suitable for grazing or cultivation.
The Commission will establish through a delegated act the framework within which Member States shall define the minimum activities to be carried out on areas naturally kept in a state suitable for grazing or cultivation, as well as establishing the criteria to be met by farmers in order to be deemed to have respected the obligation of maintaining the agricultural area in a state suitable for grazing or cultivation.
The Council, by the end of the Danish Presidency, had accepted the tripartite definition but inserted that the criteria to be met by farmers in order to fulfil the obligation to maintain the agricultural area in a state suitable for grazing or cultivation as referred to in the third point would be defined by member states on the basis of a framework established by the Commission (where the Commission proposal had specified the criteria would be defined by the Commission) .
Thus, the Commission’s 2011 proposal introduces an optional requirement for minimum levels of activity on all land naturally kept in a state suitable for grazing or cultivation. This is one prong of its effort to confine payments to genuine beneficiaries.
Who is an ‘active farmer’?
The other prong is a completely new Article 9 which attempts to define an active farmer as follows:
No direct payments shall be granted…where one of the following applies:
a) the annual amount of direct payments is less than 5% of the total receipts obtained from non-agricultural activities in the most recent fiscal year; or
b) the agricultural areas are mainly areas naturally kept in a state suitable for grazing or cultivation and they do not carry out on those areas the minimum activity established by member states in accordance with article 4(1)c.
Note that the proposed rule attempts to hit two particular targets. The first is to deny access to support to those individuals for whom farming is just a small component of their wider economic interests (issue (a)). The second is to ensure that only land which is being actively farmed is entitled to be used to claim support (issue (b). To avoid discriminating against part-time farmers with significant off-farm income, the Commission proposed that the share of non-agricultural receipts test would not apply to those receiving less than €5,000 in direct payments per annum.
Commission Ciolos has emphasised in an answer in the European Parliament that the definition of an active farmer is proposed on the level of the EU, not of member states. Hence, the basic rule would be the same for all member states to avoid the risk of uneven application of direct aids. But member states will have the flexibility to define minimum activities to be carried out on agricultural areas which are naturally kept in a state suitable for grazing or cultivation.
Reactions to the Commission proposal
The minimum activity requirement appears to have been accepted by the Council and by the COMAGRI rapporteur Capoulas Santos although we have yet to see whether this will be challenged in any of the compromise amendments. Many member states have included it as an optional GAEC standard but it is the first time it is specified in the basic legislation.
There must be a risk that linking eligibility for the payment explicitly to agricultural production could undermine the green box status of the SPS in terms of WTO disciplines. The Commission may believe that the ‘minimum activity’ criterion is compatible with these disciplines for non-trade-distorting support but it is certainly inviting a challenge on these grounds.
On the other hand, the proposed approach to removing non-farm beneficiaries met with a hail of criticism. Much of the criticism related to the administrative difficulties, for example, for paying agencies to gain access to information on the non-agricultural receipts of landholders and whether receipts meant revenue or income of the beneficiary. Even if the test was feasible, it implied a huge increase in bureaucracy for the majority of active farmers to prove they were eligible in order to prevent payments to a handful of entities who were likely to be ineligible.
The Commission’s approach found no favour in the Council of Ministers for this reason. Instead, the Council has been working on a negative list approach. The Danish Presidency’s draft of the direct payments regulation in June 2012 included the following text:
4. Member States may decide that no direct payments shall be granted to public legal persons such as States, regional and local authorities, or to natural or legal persons, or to groups of natural or legal persons, by applying one of the following:
a) the persons concerned operate airports, railway companies, waterworks, real estate companies, sport and recreational grounds, hunting estates, fishing and aquaculture estates, camping sites, or any other like non-agricultural businesses or activities to be defined, where appropriate, by Member States on the basis of objective and non-discriminatory criteria, unless those persons can provide verifiable evidence, in accordance with prescriptions to be established by Member States, demonstrating that the annual amount of direct payments is at least 5 % of the total receipts they obtained from non-agricultural activities in the most recent fiscal year for which such evidence is available, or
b) the persons concerned satisfy objective and non-discriminatory criteria established by Member States which ensure that:
(i) their agricultural activities form only an insignificant part of his/its overall economic activities, or
(ii) their principal activity or company objects does not consist in exercising an agricultural activity.
4a. Member States may decide not to apply paragraph 4 to farmers who received up to
5 000 EUR of direct payments for the previous year.
Thus, the Presidency’s language would leave this as an optional provision similar to the current situation following the Health Check; a member state is not required to exclude these bodies. One wonders why member states would be any more eager in the future to legislate in this area given their evident reluctance in the past.
The Capoulas Santos COMAGRI rapporteur report also endorses the negative list approach but would make it mandatory for member states to exclude non-farmer beneficiaries. He also adds the requirement that the beneficiary was engaged in agricultural production activity in 2011. Thus, depending on the wording of the compromise amendments, there is quite a gap between the Council and COMAGRI on how to address this issue.
Defining the active farmer
As the Court of Auditors noted in its comment on this issue
The draft regulation makes receipt of direct payments by farmers dependent on their meeting two sets of interrelated qualifications (a) practising an agricultural activity and (b) being active farmers. Agricultural activity is defined in Article 4 (under Title I) while active farmers are defined in Article 9 (under Title II). Article 9 provisions complement the definition of agricultural activity as set out in Article 4 in the sense that in order to benefit from direct payments it is necessary to carry out an agricultural activity but all persons carrying out some form of agricultural activity are not, ipso facto, entitled to direct payments. These two sets of provisions must therefore be read together to understand their purpose.
The dilemma at the heart of decoupled direct payments is that if farming activity is no longer required for eligibility, how to ensure that payments go only to ‘farmers’ as conventionally understood? It is not only the EU that faces this dilemma. In the US the government accounting watchdog the General Accounting Office found that the US Department of Agriculture has doled out millions of dollars in subsidies to farms on which farming isn’t actually taking place. The GAO also complained that billions more have gone towards supporting farms that don’t grow the crops for which they’re being subsidized (although this is precisely the definition of a decoupled payment).
The difficulty is that it is impossible to rationalise giving farmers something for nothing. The Commission’s response to the similar criticism from the European Court of Auditors has been twofold. One is to prevent payments going to entities where agriculture is not their principal objective. This problem can be resolved, if not 100%, but at the cost of adding a further layer of complexity to the administration of direct payments.
The other is to reintroduce a link between payments and production. On 13 January 2011, Dacian Ciolos gave testimony to the UK Environment, Food and Rural Affairs Committee on CAP reform. When asked (Q. 182) whether he would “expect some agricultural goods to be produced for someone to be defined as an active farmer?”, Commissioner Ciolos responded ‘Yes. If not, we cannot talk about agriculture or the farmer.’
In the US, the GAO recommended an alternative approach: “In light of the need to identify potential savings in the federal budget and questions about the continued need for direct payments, Congress should consider eliminating or reducing [direct subsidy] payments.”
This was also the conclusion of my colleague Attila Jambor writing on the active farmer issue in an earlier post on this blog and which is worth repeating.
On the whole it seems we are faced with many problems in defining who an active farmer is. The entire issue is just on table because of what I call the ‘cosmetics’ of direct payments. The EC tries to save this ineffective policy instrument again and in doing so, it creates artificial problems as well as diverts attraction from more important questions. Let’s phase-out direct payments and we will solve a number of dilemmas, including this one.