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The legislative timeline for CAP reform

The publication of the Commission’s legislative package for CAP reform is merely the starting gun for the EU’s legislative procedure to debate the regulations before they can take effect. The regulations now enter the co-decision procedure involving the Council of Ministers and the European Parliament (EP).

In an article this week in the Irish farming press, Mairead McGuinness set out the timeline as seen from the Parliament’s perspective. Mairead McGuiness is the EPP Group shadow rapporteur for the direct payments report contained within the legislative package, and thus centrally involved in formulating the EP’s position.

According to McGuinness, the current timeline envisages that draft reports will be prepared for consideration by the Agriculture Committee by April next, with a vote in Committee taking place in September on the changes proposed by MEPs.

However, she warns that given the complexity of the reforms proposed this timetable is by no means certain and that divergent views may delay the work programme.

In parallel with the work in the Parliament, the 27 EU agriculture ministers will also be working towards a common position on each of the dossiers. Technically, the legislative procedure allows the institutions, with the assistance of the Commission, three attempts (first reading, second reading and third reading or conciliation) to get agreement on the proposals. McGuinness states that at this early stage the objective is to get agreement at first reading stage, to ensure that the reforms can come into effect by 1 January 2014.

The hard bargaining between the Council and the Parliament would need to begin in autumn 2012 to meet this deadline. She notes:

Already, there are rumblings that the timetable is too tight and that if agreement is not reached at first reading, then the current regime may need to be rolled over for 2014.

The process involved is known as trilogue (trialogue in French). According to the European Commission’s glossary on co-decision, trilogue are informal tripartite meetings attended by representatives of the Parliament, the Council and the Commission. As a general rule, they involve the rapporteur (accompanied where necessary by shadow rapporteurs from other political groups), the chairperson of COREPER I or the relevant Council working party assisted by the General Secretariat of the Council and representatives of the Commission (usually the expert in charge of the dossier and his or her direct superior assisted by the Commission’s Secretariat-General and Legal Service).

The purpose of these contacts is to get agreement on a package of amendments acceptable to the Council and the Parliament. Any agreement in trilogues is informal and “ad referendum” and will have to be approved by the formal procedures applicable within each of the three institutions.

If agreement between the Parliament and Council is not reached in the first round of negotiations, dossiers go to a second reading (following a vote in the Parliament on the reports). Unlike the first reading, second reading is subject to strict time limits. Within three months (or four if an extension has been agreed) of the announcement of the Council’s common position, the Parliament must approve, reject or amend it at second reading.

Approval of the common position without amendment requires the support of a simple majority of the MEPs voting. However, amendments or rejection of the common position require the support of an absolute majority (i.e., at least 369 votes in favour out of a possible 736).

If the Commission is opposed to any amendment tabled by the Parliament, the Council would have to act unanimously to accept the amendment.

Because of the short time frames involved in the second and third readings, McGuinness’ view is that all efforts will be made to avoid moving to the second stage. The logic is simple. By keeping the ball in the air during the first stage, the time schedule is open-ended and both parties have the freedom of manoeuvre to engage in consultations, consider alternatives and try to seek agreement.

But once the Council’s common position is announced, then the clock starts ticking and agreement must be reached within strict time limits, which would put enormous pressure on the slow-moving institutions. In the absence of agreement, then the Commission proposals to alter the regulations would fall.

The next steps are a special meeting in Strasbourg next week between members of the Ciolos cabinet and the EP’s agriculture committee and then, in November, the 27 farm ministers will attend the Parliament for an exchange of views with the Agriculture Committee.

Amy timeline is of course dependent on the parallel negotiations underway on the EU’s multi-annual financial framework. Any delay in agreeing the EU’s budget over the 2014-2020 period would mean a corresponding delay in agreeing the CAP regulations, as it is hard to envisage agreement on the CAP if countries are not clear on the overall budget envelopes for Pillar 1 and Pillar 2.

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Updated analysis of Commission legislative proposals

The International Centre for Trade and Sustainable Development has now published the final updated version of my paper looking at the trade and development implications of the Commission’s legislative proposals for the CAP post 2013. Apart from making some corrections to the preliminary version, it takes account of the main changes in the Commission’s proposals on October 12th last compared to what was in the heavily-leaked drafts as well as the full impact assessments released at the same time.

The main changes include:
– The replacement of the firm commitment to have a uniform payment per hectare across all land and member states by 2029 in the regulation itself, to an aspirational commitment in the preambular material that member states will work towards this goal in the next financial perspectives period.
– The possibility for Member States to modulate up to 10%, rather than 5%, of their Pillar 1 envelope to enhance their Pillar 2 funds.
– The decision to let the sugar quota regime end in 2015 and not provide a further year extension as initially foreseen.
– Despite the abolition of axes in Pillar 2 rural development programming, member states will be required to use at least 25% of their envelope for issues relating to land management and fighting climate change.
– The inclusion of net ceilings as well as national ceilings for each member state, thus indicating the relative importance of the amounts modulated to Pillar 2 through capping (overall, just 0.4% of the €42 billion in direct payments will be affected).
– The need for a beneficiary of the new allocation of entitlements in 2014 to have owned at least one entitlement in 2011 (a specific provision intended to try to prevent speculation in land in Ireland).

The negativity in the reactions to the Commission’s proposals has been quite striking, even given the issues at stake. It was clear that this CAP reform would always be a conservative one, and would thus fall short of the recommendations of more radical critics of the CAP. But Euractiv’s reporting noted that “absolutely no one, except for the European Sugar Users association (CIUS), seems happy with the Commission’s legal proposal to reform the CAP, presented on 12 October.”

Now these reactions may all be just negotiating tactics, but they must be a disappointment to the Commission all the same. Given the huge effort that went into the consultation process, both before the release of the Commission’s Communication in November 2010 and in the course of the impact assessment, and given the various leaks of the proposals which would have made it easy for member states and others to influence the process at an early stage, one wonders if the Commission has seriously misjudged the mood of decision-makers? What happens to the proposals now in the Parliament and in the Council of Ministers will decide.

The first thoughts of the Ministers in reaction to the proposals can be viewed in the videocasting of yesterday’s meeting of the Council of Agricultural Ministers (Commissioner Ciolos takes the floor to introduce the debate 15 mins into the video, the language can be chosen from the bar underneath the video).

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Analysis of the Commission's legislative proposals due tomorrow Wednesday 12 October

Tomorrow the Commission will unveil its legislative proposals for the future CAP regulations after 2013. As readers of this blog will be aware, the proposals have been widely flagged in various leaked draft versions. But it will be fascinating to see to what extent, if at all, the the final version will take account of the intense lobbying of the Commission by member states in recent weeks.
The International Centre for Sustainable Trade and Development (ICSTD) has just published a draft paper that I have written which attempts to summarise the likely changes to be announced tomorrow and to assess their implications for trade and development. This version is obviously preliminary, and it will be revised in the light of the actual legislative proposals. I hope to provide my own assessment of any significant changes from the leaked draft versions on this blog over the next couple of days.

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Analysis of the Commission’s legislative proposals due tomorrow Wednesday 12 October

Tomorrow the Commission will unveil its legislative proposals for the future CAP regulations after 2013. As readers of this blog will be aware, the proposals have been widely flagged in various leaked draft versions. But it will be fascinating to see to what extent, if at all, the the final version will take account of the intense lobbying of the Commission by member states in recent weeks.

The International Centre for Sustainable Trade and Development (ICSTD) has just published a draft paper that I have written which attempts to summarise the likely changes to be announced tomorrow and to assess their implications for trade and development. This version is obviously preliminary, and it will be revised in the light of the actual legislative proposals. I hope to provide my own assessment of any significant changes from the leaked draft versions on this blog over the next couple of days.

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The future role for the European Innovation Partnership for agricultural productivity and sustainability

One of the new initiatives to be announced by the Commission when it publishes its legislative proposals for the CAP post 2013 on Wednesday 12 October next will be the European Innovation Partnership (EIP) for agricultural productivity and sustainability. The Commission attaches great importance to this instrument to address lagging productivity growth in agriculture and to contribute to increased innovation.

To date, there is relatively little information on how this new instrument would work and what it will mean. The Commission is still in the process of internal reflection to define the objectives and governance of the EIP. However, some light is thrown on the Commission’s thinking in the evidence of Commissioners Ciolos and Geoghegan-Quinn to a recent UK House of Lords inquiry into Innovation in EU agriculture.

The emphasis in the new tool is very much on overcoming perceived bottlenecks to getting research results adopted on the ground. According to the Commission’s analysis, the main problem is the insufficient information flow and missing links between different actors (farmers, advisers, enterprises, and researchers). As Mr Georg Häusler, Commissioner Ciolos’ chef de cabinet, colourfully put it in his evidence to the committee:

The basic difficulty seems to be that scientists are doing science somewhere in the corner and farmers are asking for something, but the scientists do not know what the farmers want and the farmers to not know what science does. This is why we launched the European Innovation Partnership.

European Innovation Partnerships – a new EU instrument

But first, some background. European Innovation Partnerships as a new approach to innovation were first proposed in the Europe 2020 strategy and further elaborated in the Commissions’ Communication on an Innovation Union in 2010. The idea was to speed up the development and deployment of the technologies needed to meet the various challenges for Europe identified in those documents. The Partnerships themselves focus on improved governance arrangements to help speed up the adoption of research findings and to overcome the fragmentation of research activity in Europe. Through Innovation Partnerships, the EU aims at rebuilding broken links in the chain between research and bringing innovation to the market.

Innovation Partnerships are a novel concept, so the Commission wanted to test the concept through a pilot partnership to help validate the added value of the concept, gauge the interest and commitment of all key stakeholders, provide insights into how best to develop work packages and assure effective governance. The pilot chosen was an EIP on active and healthy ageing. The ageing EIP was launched this summer following a public consultation and formation of a steering group to assist with the preparatory work. The Commission will later present an assessment of the experiences in this pilot, and preparatory work for the agricultural sustainability and productivity EIP is underway.

Objectives and functioning of the agricultural EIP

According to the Commissioners in their evidence to the House of Lords committee:

The main role of the future EIP ‘Agricultural Productivity and Sustainability’ would be to look at the whole innovation cycle from R&D all the way to products or services on the market and enhance the effectiveness and the integration of innovation instruments. In this respect it will rely mainly on existing instruments, rather than creating new ones. It will look at actions provided by the Rural Development Policy and the Research Framework. These may include cooperation, pilot-projects, knowledge transfer, advisory services, and dissemination. It is anticipated that the creation of a functioning network will fill the current gap between farmers, rural enterprises, and advisors, on the one hand, and science on the other to allow the sector to take full advantage of innovation to produce more with less. It will improve co-ordination between actors and facilitate the use of opportunities provided by the different policy fields (Common Agricultural Policy (CAP), EU Research Policy). will bring together all relevant actors at EU, national and regional levels in order to: (i) step up research and development efforts; (ii) coordinate investments in demonstration and pilots; (iii) anticipate and fast-track any necessary regulation and standards; and (iv) mobilise ‘demand’ in particular through better coordinated public procurement to ensure that any breakthroughs are quickly brought to market.

The partnership would mobilise and bring together all actors around a common target—from those conducting basic and applied research, all the way to the final user like farmers and businesses, including every step in between. This would require overcoming barriers resulting from a traditional ‘division of labour’, be it across geographical borders or areas of competence.

The partnership should provide these actors with a forum, in which they can identify, develop and test innovative solutions and ensure the smoothest possible transition from conception to implementation. In addition to these stakeholders, it will involve Programming Authorities, the SCAR, and the Commission.

To this point, the EIP seems something rather rarefied and top-heavy with a lot of meetings potential, but it is hard to see the direct connection with improvements in agricultural sustainability and productivity. Three tools within the EIP may give it more bite.

Funding

The first is the promise, in the Commission’s proposed multi-annual financial framework for 2014-2020, to increase funding in the next EU research programme (to be called HORIZON 2020) from less than €2 billion now to €4.5 billion. Most public agricultural research spending comes from member state budgets, but nonetheless this is a welcome increase.

Operational groups

The second tool is support for operational groups in the EAFRD Pillar 2 rural development budget. Here, the draft of the proposed rural development regulation (which may be revised next Wednesday), reads as follows:

The EIP for agricultural productivity and sustainability shall:

  • promote a resource efficient, productive and low emission agricultural sector, working in harmony with the essential natural resources on which farming depends;
  • help deliver a steady supply of food, feed and biomaterials, both existing and new ones;
  • improve processes to preserve the environment, adapt to climate change and mitigate it;
  • build bridges between cutting-edge research knowledge and technology and farmers, businesses and advisory services.

    • The EIP for agricultural productivity and sustainability shall seek to achieve its aims by:

  • creating added value by better linking research and farming practice and encouraging the wider use of available innovation measures;
  • promoting the faster and wider transposition of innovative solutions into practice; and
  • informing the scientific community about the research needs of farming practice.

    • EIP Operational groups shall form part of the EIP for agricultural productivity and sustainability. They shall be set up by interested actors such as farmers, researchers, advisors and businesses involved in the agriculture and food sector.

    Beyond this, there is little information on how these operational groups will function in practice.

    Farm Advisory Service

    The third, more speculative, tool is some revamping of the farm advisory services. Mr Häusler discussed this in his evidence to the House of Lords committee

    There is another difficulty with advisory systems to farms. We have FAS—farm advisory systems—which work in some countries but not as well in others. This is for various reasons. Sometimes administration has turned it into a system that farmers do not trust or use. What we are trying to do this time is emphasise the role of the farm advisory systems, give them a clear job description of what they are supposed to do, and also open up the system to private business consultants.

    Despite this suggestion of a change in direction, there does not appear to be anything new proposed in the draft regulation. Farmers can continue to be reimbursed for payments for the use of advice (provided the advisors also give guidance on cross-compliance regulations and the practices required for the new green payment), and funding will be made available (on a degressive basis over 5 years) to set up a farm advisory service

    Next steps

    There is nothing wrong with the idea of getting the various actors in the ‘innovation complex’ together to address potential bottlenecks to the diffusion of new ideas and to ensure that innovative ideas are put into practice. But it is hard to feel enthusiastic that the EIP instrument, as just described, is going to have a major impact in reversing the slowing growth of agricultural productivity in the Union. I may well be wrong when further details emerge of the role of operational groups. But I am sceptical of the idea that improving the spread of existing knowledge alone is the key to unlocking productivity growth, in the absence of significant new resources for agricultural research.

    The Commission intends to bring the Standing Committee on Agricultural Research (SCAR), farm organisations, environmental NGOs and Member States into its reflections during the coming months before finalising the EIP implementation plan. The official launch of the agricultural EIP will be followed by the establishment of a High Level Steering Group which will be tasked with identifying, prioritising and selecting the areas that will most benefit from a partnership approach, and deliver productive, sustainable agriculture through innovation. This will be followed by a presentation of the EIP to the Parliament and the Council. So there is still some way to go before this much-heralded instrument becomes a reality and we can really assess its potential.

    Front-page image from EU Commission, A Decade of EU-funded GMO research (2001-2010), Brussels

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    Eurobarometer on CAP reform

    A new Eurobarometer public opinion poll shows widespread support among European citizens for the Commission’s main CAP reform proposals. The poll, conducted by TNS Opinion and Social, interviewed 26,713 adults, enough for a representative sample in each member state.

    The first question, concerning setting a cap on the amount of aid to the largest farms found that 47% of respondents favour a limit while 28% opposed a limit. 15 per cent didn’t know. Support for capping was strongest in Cyprus (+54%), Denmark (+36%), Finland (+33%) and Sweden (29%). Malta was the only country where more people thought a limit was a bad thing (-20%). In the agriculture council the strongest opponents of capping have traditionally been the UK, Germany, Czech Republic and Slovakia. However, in each of these countries, a clear plurality of citizens favoured capping subsidies to larger farms.

    A second question asked about strengthening the link between direct payments and the protection of the environment. The Commission was attempting to get at the question of whether environmental aspects of the CAP should be applied across the entire EU territory or concentrated in areas of particular ecological importance. The Commission’s proposals for a ‘greening’ component of Pillar 1 to be accessible to all farms show that it favours an across-the-board approach. By a margin of 11 per cent, citizens supported the Commission’s proposal.

    Environmentalists, who have long campaigned for subsidies to be linked to ecological farming, have cause to be concerned that a spontaneous answer (i.e. an answer that was not offered as an option by the interviewer) that there should be no environmental conditionality at all, was volunteered by 10 per cent of respondents across the EU and by more than 15 per cent of respondents in Bulgaria, Greece, Italy, Hungary, Portugal, Romania, Spain, and the UK.

    A third question asks about locally-produced food and local food markets. There was strong support for local food and local food labelling but respondents were even split on the question of how easy or difficult it is to identify whether a food product comes from a local farm or not.

    A fourth question on transparency in CAP beneficiaries found that across the EU some 62 per cent of respondents favoured publication of the names of beneficiaries of CAP payments and the amounts they receive, while 22 per cent opposed the idea. Support for transparency was strongest Slovakia (+78%), Czech Republic (+60%), Greece (+56%) and the UK (+54%). In all countries more people favoured transparency than opposed it though the minority in favour of non-disclosure was largest in the Netherlands, Denmark, Latvia and Austria.

    Eurobarometer polls must always be taken with a grain or two of salt. The Commission pays for them and has a strong input into the design of the survey. Eurobarometer rarely puts questions that might give awkward answers for the EU and rarely asks respondents to confront the trade-offs inherent in policy choices. Worse, the surveys are prone to ask loaded questions that appear almost guaranteed to produce the answers the Commission wants. Nevertheless there are very few other surveys on EU affairs nor of the scale of Eurobarometer in terms of sample size. Looking into differences between respondents in different member states can be very informative, as can looking at the answers broken down by socio-demographic divisions.

    The full report is available for download (PDF).

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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.

    But there is widespread agreement that even decoupled direct payments do have an effect on production, even if there is less agreement on how strong this effect is in practice. There are now a number of studies which attempt to quantify these effects.

    These include the yet-to-be-released Commission draft impact assessment of changes to the direct payments regime, as well as studies using the CAPRI and AGMEMOD models. The general message from these studies is that the production (and thus trade) effects are likely to be small, but that the distributional effects across and within countries could be significant.

    Commission AIDS7K model

    One approach is illustrated by the Commission’s farm income impact modelling using its AIDS7K model based on FADN data. Because this is a static model with no behavioural structure, it cannot directly calculate possible changes in the structure of production.

    However, the Commission reports possible income changes by farm type. If the assumption is made that higher incomes on some farm types will be associated with increased production, and vice versa, then some inferences can be made on the likely direction of production changes.

    As a general rule, a uniform flat rate would reduce support in more productive regions and sectors in favour of more marginal regions. In any move towards a flat-rate payment either between or within Member States, grazing livestock (beef and sheep) farms are the main beneficiaries (along with wine and horticultural farms). According to the Commission, moving to a uniform flat rate per hectare of potentially eligible area (PEA) across the EU as a whole (note that in the scenario it models farmers in several Member States continue to receive a limited amount of coupled direct payments (suckler cows, sheep and goat, cotton, Article 68, Posei)) would see farm net value added per Agricultural Work Unit increase by 10% on beef and sheep farms. Farm net value added would fall marginally on milk and arable farms.

    (If account were taken of the greening component in Pillar 1, which means farmers must incur additional costs to become eligible for the payment, then the income gain to grazing livestock is reduced and the income losses on milk and arable farms but also pig and poultry farms are exacerbated).

    AGMEMOD study

    These production effects are more formally modelled in two well-known sector models AGMEMOD and CAPRI. In each case the results are, in part, determined by the modellers’ assumptions about how direct payments impact on production as well as by the policy scenarios that they assume.

    The AGMEMOD 2020 combined model is an econometric, dynamic and partial equilibrium model representing each of the 27 Member States. Direct payments are incorporated as add-ons to the relevant producer price to form a reaction price (livestock, livestock products) or expected gross returns (crops).

    Coefficients are applied to these add-ons to determine their production effect. For example, a coefficient of 1 would imply that farmers perceive direct payments as equivalent to a similar price increase, while a coefficient of 0 would imply that they treat them as totally decoupled.

    The coefficients used in AGMEMOD vary across countries and commodities, for example, to reflect differences between the historic and regional SPS systems. For historical payments the coefficients vary between 0.3 and 0.6 and for regional payments between 0.1 and 0.5. The coefficients for coupled payments lie between 0.5 and 1.0.

    Results of moving to a uniform flat-rate payment across the EU as a whole are reported in a recently-published AGMEMOD simulation [access to ScienceDirect required] for wheat, barley, maize, beef, pork and milk. Unfortunately, the consequences of moving to a uniform EU flat-rate payment are conflated with an overall reduction in the CAP budget for direct payments (by around 54% in the final year of implementation). Another important difference with the Commission analysis is that coupled payments are assumed to be decoupled in this analysis, which has particular consequences for the beef results. Despite these more severe assumptions, the production effects are estimated to be very marginal (ranging from 0% to -0.8% of commodity production in 2020) apart from beef where production is estimated to fall by -3.3%.

    The AGMEMOD study does not report the expected commodity market price changes although these are presumably correspondingly small. AGMEMOD assumes exogenous world prices which are not affected by the EU net trade balance. To the extent that world prices respond to a reduction in EU production, then the AGMEMOD results, small as they are, also represent upper-bound estimates.

    CAPRI study

    A second study published by the EU’s Joint Research Centre uses the partial equilibrium CAPRI model together with a specially tailored farm group component called CAPRI farm type (CAPRI FT) to analyse the impact of a flat rate for direct payments at NUTS 1, MS and EU levels (with the level of redistribution and potential impacts increasing in moving to an EU flat rate). The farm models are behavioural programming models in which production and land use (but not farm structure) change in response to changes in relative profitability of different enterprises.

    In the CAPRI model direct payments have an impact on production through their partial capitalisation in the returns to land. As direct payments change, so does the cost of land. Thus a reduction in direct payments will favour land-intensive production and vice versa. Land has an elastic supply curve in the model and, at the margin, is in competition with non-agricultural uses such as forest, recreation or nature reserve. So if direct payments fall sufficiently, land moves out of agricultural production and overall production will fall.

    The study assumes that if land moves out of production the equivalent direct payment is lost and so overall expenditure on direct payments falls slightly in the scenarios modelled. The scenarios also assume that payments which are coupled in the baseline are decoupled in the scenarios, which will particularly affect beef and sheep as noted earlier.

    This study also shows relatively small production and price impacts. In the EU flat rate scenario, which represents the most radical redistribution of direct payments, production generally falls (by -1.3% and -1.9% for cereals, by -1.7% and -0.8% for oilseeds, and by -0.6% and -0.2% for meat in the EU-15 and EU-10 respectively). The maximum price increase was for cereals of 1.5% for the EU-15 and 2.9% for the EU-10, while for meats prices are projected to increase by 1.1% in the EU-15 and 1.2% in the EU-10. The small magnitude of the impacts is due in part to the role of entitlements in limiting land use expansion while allowing for some substitution between grassland and arable land.

    Given the small price and production changes, income effects are mainly driven by the redistribution of decoupled payments and to a lesser extent by land use changes. As regards farm types, large and medium size farms and dairies, mixed crops and livestock, general field and mixed cropping, olives, cereals and oilseeds and permanent crops are particularly negatively affected. Small farms tend to be less affected. On the other hand, the most extensive production systems, such as sheep, goats and grazing, the residual farm category and mixed livestock farms, realized higher premiums and incomes. These income changes correspond closely to those projected in the Commission’s AIDS47 model. They are aggregate changes, and there can also be redistribution within farm type groups with some farms gaining income and others losing. These distributional effects are analysed in detail in the study.

    Conclusion

    The Commission’s 2013 legislative proposals to be released next month will contain a number of measures likely to affect the level of EU domestic production and thus the impact of EU agricultural policy on third countries. The most significant will be the market measures confirming the elimination of milk and sugar quotas. But changes in the design of direct payments, including the overall budget for these payments, redistribution across farmers and member states, the introduction of the greening component, and the extent to which payments can be coupled or not, can also potentially have market effects.

    Redistribution of direct payments (moving from the historic payment for entitlement payments to a regional flat-rate system in the EU-15 Member States plus Malta and Slovenia, and moving to greater convergence in the value of payment entitlements across Member States) will tend to shift payments from more productive to less productive Member States, and from more intensive to less intensive farms within Member States.

    Redistribution of payments on its own would thus be expected to have a negative effect on EU production. Recent studies support this intuition but suggest that the effects will be very marginal, in most cases less than 1-2%. The effects are somewhat larger for cereals than for livestock but still rather small. Overall, therefore, the studies support the view that the EU’s direct payments are rather decoupled in practice.

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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). It is alleged that, in an attempt to build up their claim to entitlements in 2014, farmers are taking back land which is currently leased out, thus creating massive disruption in the land rental market and discriminating against those farmers who are actively farming the land.

    It might seem hard to understand why a farmer who had decided to rent out land and thus exit farming himself would now wish to re-enter farming (given that to retain the entitlement the landowner must continue farming in the future). One reason might be that land rents failed to fully reflect the value of the single farm payment, at least in Ireland.

    For example, in the Irish Examiner story quoted above, the farmer leasing land was paying on average €100 per acre or €240 per hectare. Because the value of entitlements is based on historic payments in Ireland, the exact value of the single payment on those leased hectares cannot be known with certainty. However, on average the value of an entitlement in Ireland is around €270 per hectare of eligible area. So this suggests that existing land rents might not fully capture the value of the entitlement payment, although it must also be remembered that the entitlement holder also must bear the cross-compliance costs. In the case of the farmer in the Irish Examiner story, it seems that he was outbid by another farmer prepared to offer a higher rent.

    Whether driven by rational considerations or simply fuelled by uncertainty about how the new system might work in practice, there is at least anecdotal evidence that the choice of 2014 as the new base year is proving disruptive. The Irish Minister for Agriculture Simon Coveney is quoted as calling it “nonsensical” and there is a high-powered lobbying effort underway to link the entitlements in some way to 2011 when the Commission’s proposals are published on 12 October next.

    One potential solution floated in the Irish farming press this week was a proposal that, to qualify for payments in 2014, an applicant must have received some payment in 2011. This might mitigate but it would not eliminate pressures to get hold of land before 2014. More significantly, it would retain the link to the historic basis of payments which it is the Commission’s intention to remove.

    The Irish Minister claims support from other countries in his lobbying efforts, but it would be interesting to know if these fears of a ‘land grab’ between now and 2014 are shared in other Member States.

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    Problems viewing graphs in posts using Internet Explorer

    Apologies that there appears to be a problem in viewing in-post images in previous posts using Internet Explorer, which means that often the browser does not display the associated graphs. At the moment I don’t understand the reason for this, but if you want to see the graphics, then please use an alternative browser such as Firefox, Chrome or Opera.

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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).

    This version was completed before June 2011 and the favoured proposal in the draft regulation now differs somewhat from the version examined in June. In particular, the obligation to maintain a green cover during winter has been dropped, but on the other hand the area to be setaside under the ecological focus requirement has been increased from 5% to 7% (see this post for a summary of the draft direct payments regulation).

    The effect on farm income in 2020 of greening direct payments is determined by two factors. First, the implementation of the green measures increases the costs of farming either directly or in the form of loss in income. Second, various of the green measures (the requirement to maintain the 2014 level of permanent pasture, the requirement for crop diversification and, particularly, the ecological set-aside) will have an impact on supply and thus market prices. Thus, the greening leads to an increase of agricultural prices which tends to counterbalance the impact of the measures on cost.

    The study concludes that the cost of greening will amount to €33/ha of potentially eligible area (PEA) in 2020. Just half of this figure is the cost of maintaining permanent grassland (€17/ha PEA). I have not been able to find any IACS figures on the size of the EU eligible area (if anyone knows where these can be found, please let me know). But the Commission estimates that the average direct payment will be €267 per ha PEA and, assuming a budget for direct payments of around €40 billion, this works out at a PEA of 151 million ha in 2020 (this compares to a utilised agricultural area of 178 million ha in EU-27 today). Using this figure, the cost of greening would amount to approximately €5 billion. This compares to the value of the green payment (30% of €40 bn) of around €12 billion.

    Costs for the maintenance of permanent grassland and the ecological set-aside are in general the highest. For instance, among regions, the cost of maintaining permanent grassland in areas where an alternative use of land exists varies between €5 and €620/ha, with an EU average of €216/ha of grassland. With 5% of set-aside, the average cost per ha of land to be set-aside is €260/ha, but in some regions the costs per ha are more than €1,000. When the cost of greening is brought back to the total PEA, the amounts are lower. It is estimated that 29% of farms would have a cost between €15 and €30/ha of PEA, 4% would have a cost higher than € 200/ha of PEA, and about 21% of farms would not experience any cost.

    In general, the costs are estimated to be highest in the Member States where maintaining large areas of permanent grassland is economically challenging due to pressure to substitute grassland by fodder crops (the Netherlands, Slovenia and Belgium).

    It is interesting to speculate what is the value of the environmental benefit to be gained from incurring this cost? The Commission study cannot answer this question because of a lack of data on the environmental impact of the green measures. Instead, it quotes some figures on the land area likely to be affected by these measures.

    Overall, for the EU-27, it estimates that 25% of the PEA will be affected. The risk of ploughing permanent grassland is reduced on about 13 million ha. On about 1.7 million ha of land, farmers receive incentives to cultivate alternative crops, mitigating the negative effects of monoculture, while about 3.6 million ha of arable land are set aside for ecological purposes. [It also estimated that an additional 20 million ha of arable land green cover is applied during winter time but, as noted above, this measure seems to have been dropped from the draft regulation].

    But, in themselves, these figures do not give any insight into the size of the environmental benefits to be gained on these areas. Given this, it will be hard to answer the question posed at the beginning of this post whether incurring a €5 billion cost in this way is the most effective way of increasing the production of environmental public goods by farming.

    Commission methodology

    At a technical level, the credibility of the Commission estimates can be assessed by examining the methodology used. The Commission methodology is sophisticated and appears well suited to the task. My main criticism would be with the estimate of the cost of maintaining permanent pasture, which seems to me to be over-estimated. This is because the Commission methodology seems to assume that all permanent pasture that could be converted into arable cropland would be by 2020 in the status quo scenario. Its model does not have the capacity to estimate the proportion of permanent grassland that would actually be under threat in 2020, given the configuration of relative profitability (gross margins) between grazing livestock and other enterprises at that time.

    The Commission’s analysis is carried out with FADN data at farm level using the AIDS7K model which covers 81,000 farms in 27 Member States. Expected prices and yield estimates in the scenario year 2020 are based on results taken from the Commission’s AGLINK-COSIMO model. Additionally, the labour input has been adjusted according to observed trends. The following steps are involved.

    Crop diversification: This measure requires farms to cultivate at least 3 different crops, with no crop allowed to cover more than a 70% of the total arable land. It is assumed that the profitability of the additional crops corresponds to the average regional gross margin of field crop farms with diversified arable crops. Therefore, the costs are assumed to be equal to the difference between the farm’s individual gross margin of arable land and this average regional gross margin. In the cases where the farm individual gross margin is lower than this regional average it is assumed that there are no additional costs.

    Ecological set aside: 5% of arable land has to be taken out of production. Costs for the implementation of the measure arise if the amount of fallow land on the farm is lower than the area to be set-aside. For each hectare to be additionally set aside it is assumed that the costs equal 2/3 of the farm individual gross margin of arable land. The idea is that farmers will set aside the less productive areas first (with the assumption that their gross margin is 2/3 of the farm average).

    Preservation of grassland: Farmers have to maintain their permanent grassland. The cost of the implementation of this measure would be an opportunity cost. To estimate this cost, it was necessary to assess on each farm whether there is an opportunity to convert grassland to arable land or not and to quantify the magnitude of the opportunity cost.

    There will be little or no opportunity to convert grassland in farms with poor soil quality. For the simulation it is assumed that this is the case on farms with a low share of arable land (less than 5%) and on farms where sheep and goats represent more than 70% of grazing livestock units. Furthermore, it is assumed that rough grazing and 10% of the remaining permanent pastures cannot be converted.

    For the remaining permanent pasture it is assumed that the opportunity costs are 2/3 of the difference in gross margins between permanent grassland based dairy and beef production systems and alternative systems at regional level. Only a fraction of the difference is kept in order to take into account that the newly converted grassland would probably not have the same level of productivity as land already in fodder crops (the most productive areas have been converted into arable crops before).

    For the calculation of the difference in gross margins at regional level, it is considered that there are no opportunity costs in regions where permanent grassland is not relevant or where there is no alternative identified (no cattle production). Otherwise, in regions where grass-based and forage crops based feeding systems co-exist in specialised farms, it is assumed that the first alternative to cattle production based on grass is to intensify production adapting the feeding system by ploughing the grassland to produce forage crops. Finally, in the remaining regions, where cattle production takes place in mixed cropping-livestock farms, the farm gross margins per hectare of utilised agricultural area in mixed and specialised cropping farms are used.

    Green cover: I include this because it is included in the draft Commission study even if it appears to have been dropped from the draft legislative proposal. During winter, farms have to apply green cover on 70% of their arable land and the area covered by permanent crops, excluding the area of ecological set-aside The costs of the implementation of green cover are estimated based on assumptions on the affected area and the costs per ha. As there is no information on green cover available at farm level several assumptions had to be made: first, it was assumed that a large part of the area covered by cereals is covered during the winter, as in most cases a large share of the cereals are winter crops. As in the FADN it is not differentiated between winter and summer crops it was assumed that on each farm the share is equal to the national shares of winter and summer varieties published by EUROSTAT. Furthermore, it was assumed that 30% of the area of permanent crops is already covered. The costs per ha of land to be additionally covered in order to meet the requirement are assumed to be equal to 50€.

    Market effects: These gross costs of implementing the green measures are the appropriate measure to compare with the value of the environmental benefits to be achieved. However, in terms of the impact on farm income, these gross costs will be offset by a transfer from consumers through higher commodity prices. These are reported in the Commission study by farm type rather than by commodity. The income effect over all farms is reported to be an increase of +0.6%, with more positive effects on crop farms (2.6%) and grazing drystock farms (+1.2%), while enterprises using grain as a feed are worse off (income on milk farms would fall -0.2% and on pig/poultry farms by -8.4%).

    Overall, farm income falls by -2.8% on average in the Integration scenario (which includes the greening option, but also includes the effect of capping, where the money saved by capping and diverted to rural development is assumed lost to farmers). It seems that the positive impact of the market effects from reduced supply do not compensate farmers for the increased cost of implementing green measures in Pillar 1.

    Overall, these results are probably quite a good guide to the likely outcomes of the proposals in the draft legislative proposal because, although the green cover requirement is removed (thus reducing costs), the ecological focus area requirement is increased from 5% to 7% (thus raising costs).

    Photo downloaded from http://www.flickr.com/photos/13847552@N03/3906560447/ under Creative Commons licence