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Health Check 'explainer' by Roger Waite

Roger Waite, editor of Agra Facts and long-time Brussels CAP watcher, has written a superb ‘health check explainer’ for farmpolicy.com, the US-based farm policy news source. The briefing covers what the health check is in terms of policy, process and politics. Highly recommended reading and reproduced in full below, with permission.
What is the Health Check?
In the June 2003 and April 2004 CAP reforms, it was agreed that the various policy changes agreed for CAP direct payments would have to be reviewed 2 years after the last [Old] EU Member State had implemented its model of the Single Farm Payment. The EU budget for agriculture has been fixed until 2013, but it was still felt necessary to review the policy for the period until then. Nine Member States introduced their version of the Single Farm Payment in 2005, but the remaining six waited until 2006. Hence the need for the review to happen this year.
Why “Health Check”?
The 2003 “Fischler” reforms were originally billed as the “Mid-Term Review” and intended as a basic review of the 1999 policy reforms. However, with the impending accession of 10-12 New Member States – and an early political agreement by EU leaders on the levels of CAP spending for 2007-2013 – it turned out to be a much more radical reform. The forthcoming exercise is basically the same thing that was originally intended for 2003. However, because of the radical connotation of the phrase “Mid-Term Review”, the Commission decided that there had to be a different name for this exercise and came up with “Health Check” in order to underline that it was a necessary examination, but not a further reform (in order to reassure farmers).
Process & Timing
The decision-making process in the EU requires the European Commission to come forward with legislative proposals for changing existing CAP rules. These are published today. The proposals then pass to the Council and the European Parliament, and the political intention is that everything can be agreed in November, with almost all sides absolutely adamant that the ink will be dry before the end of the year. The changes would then start to apply from 2009/10. Because the EU budget has only been agreed until 2013, the policy cannot make any [budgetary] commitments for what will happen thereafter.
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A reminder of the EU Institutions
The European Commission is the EU’s main administration here in Brussels and the “Guardian of the Treaty” – i.e. the motor behind EU legislation. The institution is divided into a number of different Directorate-Generals (DGs) are headed by a College of 27 Commissioners, with former Portuguese prime minister José Barroso the President of the College for the current 5-year term (2004-2009). The Commissioner in charge of Agriculture & Rural Development is the former Danish Minister of Agriculture Mariann Fischer Boel. It is Fischer Boel (& her Cabinet of advisers) and the officials in DG AGRI – or the Directorate General for Agriculture & Rural Development, to give it its formal title – who have drafted the legislative proposals for the CAP Health Check. However, because the proposals need to be agreed by the whole of the Commission, Fischer Boel has had to consult with other DGs within the Commission, such as those responsible for Trade, for Environment, Budget, and Health (inc. Animal & Plant health, food safety, & animal welfare), Development, Energy, etc. Just to highlight that this process can be highly political, one late change has been to propose 5 annual 1% increase in the dairy quota, rather than just 4 as originally intended by DG AGRI.
The Council is the key EU institution because this is the forum where the 27 EU Member States get together and finally agree the changes. The Agriculture Council, i.e. the Farm Ministers from all 27 Member States, get together once a month (except August) to give the negotiations political impetus, but the main progress will be made in preparatory meetings, notably what’s called the Special Committee on Agriculture (SCA), comprising senior experts from each of the respective Ministries of Agriculture and the European Commission’s DG AGRI. Highly influential in the speed of debate, the order of discussion, and the end-game negotiation is the Presidency of the Council, which changes every 6 months. At present, the Presidency is held by Slovenia – the first time a New Member State has had the privilege. But as from July, it’s France that takes over!
In order to reach agreement on new agricultural legislation, there needs to be a qualified majority of Member States in favour of a text – using the EU’s complex weighted voting system which sees Germany, France, & Italy with 29 votes, Poland & Spain with 27, Romania with 14, etc, all the way down to Malta with 3. A qualified majority is 255 votes in favour out of the total 345. (The journalistic yardstick is that a text will be blocked if 3 “big” Member States or 2 “big” and 3-4 “medium-sized” Member States are against.) In practice, what will happen is that in the run-up to November the Commissioner will give hints as to what changes she can accept, and where she will remain inflexible. Her appearances in the European Parliament are a useful stage for these concessions. The lesser issues will probably be agreed in October or within the Special Committee on Agriculture, so that the end-game negotiations will be at the November Council, starting on November 24. Based on past experience, the meeting will start with a Presidency compromise text, taking on board many of the key complaints. In the course of 2-3 days, Ministers will probably be kept in the building during the day while the Presidency (usually with the Commission) work away on fine-tuning the compromise to make it acceptable. The aim will be to reach consensus – but there will always be domestic political reasons why certain Ministers will have to be seen to be voting against certain aspects of the proposals.
The European Parliament (EP) – comprising 785 directly elected MEPs – is also required to study the proposals and vote through amendments. Under current rules, however, the Parliament only has the right of “consultation”. This means that the Council cannot finalise the reforms until after the EP has voted through its opinion on the draft proposals – but Ministers are not obliged to incorporate any EP amendments into the final deal. If all goes according to plan, however, and the new Lisbon Treaty is ratified by all Member States in the course of this year, then new rules will apply from the start of next year. Although there remains a certain ambiguity about rules on farm quotas and prices, the change will basically mean a new system of “co-decision” will apply for CAP rules (as already applies for most other elements of EU legislation). In brief, this means that the EP will have to give a 1st Reading before the Council gives its 1st Reading (or “Common Position”), and then both institutions pass to a 2nd Reading, where the Council has to take on board EP amendments. If there is not agreement between both Council and Parliament on the 2nd Reading, the negotiations pass into “conciliation” – the equivalent of 3rd Reading. Even if both sides manage to reach a 1st Reading agreement – as sometimes happens with less controversial (non-agricultural) legislation – it still takes roughly 12 months from Commission proposals to Council adoption. If new rules require a 2nd Reading – as happens with most EU legislation – then the normal time-frame is 18-24 months. A 3rd Reading obviously takes even longer. In short, in case it wasn’t already difficult finding agreement among 27 Member States, it will be even more difficult – and much longer from next year. Hence the consensus on the need to finalise the Health Check this year.
EU Farm Bill
One thought on this change in decision-making procedure from the start of next year. With the additional complications and delays, it is relatively clear that the next EU Agriculture Commissioner, and his/her successors, will only be able to put forward one package of farm reforms in the course of his/her 5-year term of office. Although the next budget period is likely to be 6 years (2013-2019), the farm policy package will ultimately run concurrently with the EU Budget. In short, the Health Check is the last CAP reform before the EU embarks on a path of 5/6-year Farm Bills! If the policy framework does get closer to the US concept, at least in Europe we won’t have the threat every 5 years of reverting to 1938 or 1949 policies!
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What is in the Health Check?
The pressures for change
As already mentioned, this will be the last CAP reform before there is co-decision with the European Parliament. It is also Mariann Fischer Boel’s last opportunity to leave a lasting impact on the CAP before she leaves office at the end of next year. Thirdly, and perhaps most importantly, it will also be the last chance for reforming the CAP before a wider political debate gets underway (next year) about the overall EU budget after 2013. Earlier discussions have seen that there are strong political doubts in some countries (UK, Sweden, & to some extent Germany and Netherlands) about the share of the EU budget dedicated to the CAP. It is now down to roughly one third of the budget (depending on how your definitions) relative to roughly 60% a decade ago, but there is a head of steam among EU Finance Minister that already suggests that the EU budget for the CAP will be reduced after 2013 (especially for the so-called 1st Pillar measures which cover direct payments, export refunds & other “market” issues – as opposed to the 2nd Pillar Rural Development budget). This 1st Pillar is seen as “old CAP”, and a number of EU leaders have made clear that they would rather channel tax-payers money towards issues such as Research & Development and promoting jobs & growth (also known as the Lisbon Strategy) than into “old CAP” issues. There is not the same reluctance to fund Rural Development policy because it is seen as better targeted and aimed at things more acceptable to the taxpayer, such as helping farmers in Less-Favoured Areas, paying farmers for specific environmental or land management benefits, for investment (e.g. conversion to organic farming), or diversification in rural areas (e.g. agri-tourism, but also spreading funds beyond farming). In short, this is the last chance to tweak the policy to make it more justifiable for the period after 2013. Next time, Farm Minister will either share the negotiating table with Finance Ministers or – in the worst case scenario – will have been given a budget and told to adjust the policy to match the funding.
Whereas the pressure from an imminent WTO deal was a major influence in the 1992 Mac Sharry reform and the 2003/4 Fischler reforms, it is not a big factor now – mainly because the 2003/4 reforms have made sufficient changes for the EU to achieve the Domestic Support requirements currently under discussion in Geneva, and because export refunds will be phased out anyway, i.e. by 2013 because it is seen as an unacceptable way of spending taxpayers money.
More market orientation
In line with the 1999 and 2003/4 reforms, the Commission is seeking to improve the market orientation of farm policy – by proposing the removal of most of the remaining production control mechanisms. Compulsory set-aside (10% for all arable farmers) will be abolished immediately, potato starch quotas will be removed after a 2-year transition, and in order to allow a “soft landing” for the end to dairy quotas in 2015, the Commission is proposing a 1% increase in quotas for each of the next 5 years (on top of a 2% increase already agreed this year). Similarly, there is a move to suspend public intervention buying for barley, durum wheat and sorghum (as already done for maize), so that bread-making wheat is the only cereal that will still be eligible. The Commission also wants to remove the energy crop premium (45 € per hectare), arguing that the binding EU target (10% of fuel consumption by 2020) is sufficient incentive to encourage biofuels production.
Targeted payments (Article 69 – to become Article 68)
While encouraging greater market orientation, the proposals also acknowledge that there are political sensitivities on certain issues, above all that agriculture needs to continue in certain vulnerable zones where it might not be able to continue without subsidies. Similarly there is pressure to maintain some form of publicly-funded input into safety net instruments. In this context, the proposals look to reinforce a concept for Member States to have flexibility to reallocate up to 10% of their CAP direct payment envelope as targeted support. As well as using this rechannelled money for promoting environmental, quality & marketing, the Commission is looking to add further options of an annual payment for disadvantaged livestock regions and supporting farmers in areas subject to restructuring & development programmes. After pressure from France, the Commission has also proposed that these funds might be used as a contribution to crop insurance premiums and/or mutual funds for animal & plant disease compensation. The EU-funded part should not be more than 40% of the publicly-funded element, which should itself be no more than 60% of the farmer’s payment – 70% in special circumstances – according to the proposal.
Whereas until now Article 69 could only use beef aid for providing additional support to the beef sector, the new text would allow a Member State to shift funding from one sector into another – a move that could open a number of cans of worms for internal conflicts (horn vs corn) in different Member States.
This concept was previously defined under Article 69 of the EU regulation, but the proposals look as if it will now become Article 68. The first draft of the proposals suggested that it should become Article 58, but that was obviously too radical a change for some – who maybe lobbied for it to be closer to the original 69. A number of us here in Brussels have discussed starting a sweepstake to bet on the number that this Article will have in the final deal!
Decoupling & further adapting the Single Farm Payment
The concept of making sure that direct payments are not linked to production was one of the priorities of the 2003/4 reforms, and the Health Check is intended to remove various ”partially coupled” payment options left open to Member States. These categories include arable aid (maximum 25% “coupled”), durum wheat (“40”), male beef premium (“75%”), rice, and others, including a whole host of minor products such as potato starch, hops, and dried fodder. The concept of decoupling gives more flexibility to farmers in their planting decisions but also reduces the administrative burden of “coupled” payments, where farmers still have to prove that they have in fact produced what they have said. The Commission does acknowledge, however, that there is scope for maintaining some form of coupled payment for suckler cows and sheep in vulnerable zones.
Another move is to allow Member States to adapt their model of the Single Farm Payment that they introduced after the 2003 reform – encouraging a move away from paying farmers on the basis of historical production (2000-2002) towards a more even distribution per region, the so-called “regional” model which includes a flat-rate payment per hectare. With an eye to the debate for funding after 2013, the Commission is aware of the problem of seeking to justify a payment to a farmer based on what he did – or the farm’s previous owner did – more than 10 years earlier.
Shifting more funds to Rural Development (compulsory modulation)
The other major element of the proposals is to further enhance the amount of funding for Rural Development under the so-called 2nd pillar of the CAP, rather than the 1st Pillar (the Single Farm Payment & market measures). EU Farm Commissioner Mariann Fischer Boel is adamant that the Health Check must set a clear trend in terms of the budget in order to strengthen CAP arguments for the post-2013 budget. Rural Development measures are seen by most economists as a much clearer payment to farmers for the public good that they provide to society – rather than the direct aid payment based on historical production. A further advantage for Finance Ministers is that these are co-funded payments, i.e. the Member States have to help finance these schemes – which limits the net contribution that countries such as the UK & Germany make to funding them. In other words, the net contributing countries are much keener to see RD funding than 1st Pillar funding the period after 2013.
The 2003 reforms agreed a compulsory modulation concept that 5% of direct payments should be shifted from the 1st Pillar to the 2nd Pillar. The Commission is now proposing that a further 2% a year should be shifted across, i.e. 7% of a farmer’s Single Farm Payment should be shifted to Rural Development in 2010, 9% in 2011, 11% in 2012 and 13% in 2013. The first €5000 is exempted from any such “modulation” – a figure which exempts more than 75% of all EU farmers from any change. (The New Member States are also exempted from any modulation because they are having their Single Farm Payment phased in over 10 years.)
In order to address taxpayer concerns about CAP funding going to large, rich farms, the Commission is also proposing a higher rate of modulation for Single Farm Payment amounts above €100 000. For amounts between €100 000 and €200 000 a further 3% would be modulated (from 2010), a further 6% should be applied for amounts between €200 000 and €300 000, and amounts above €300 000 would face an additional 9% of modulation. In other words, by 2013 a farm theoretically receiving €400 000 in Single Farm Payment would see €69 350 shaved off its payment and shifted to Rural Development. To please my old maths teacher, let me just explain that this is 13% of the amount between €5000-100 000, i.e. (€12 350), 16% of the amount from €100 000-€200 000 (€16 000), 19% from €200 000-€300 000 (€19 000) and 22% for the amount above €300 000 (€22 000). For political reasons, the Commission has wisely said that all of these new “modulated” funds will stay in the original Member State. In total, this is likely to shift an extra €2 billion from the 1st Pillar to the 2nd Pillar, meaning that RD spending by 2013 will be is roughly a quarter of the overall CAP budget (of close to €60bn).
New Challenges for Rural Development
As a further move to justify post-2013 funding, the Commission has identified 4 “new challenges” that should be addressed under Rural Development – using the new modulated funds. These are mitigating climate change, renewable energies, water management and halting the loss of biodiversity. While these elements will almost certainly help the public perception of CAP spending, the proposals are relatively short of suggestions as to what concrete measures might be allowed in order to pursue these goals. These will probably emerge in the course of the negotiations.

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