Tag: cap reform

Posted on

COMAGRI rapporteur’s draft amendments to Omnibus Regulation

The COMAGRI rapporteur on the agricultural articles of the Omnibus Regulation Paolo de Castro (the other proposed co-rapporteur Albert Dess having at least temporarily dropped out of sight) has now circulated his Draft Opinion containing proposed amendments to the Committee to be debated later this month. The Omnibus Regulation (which is actually a proposal for a Regulation on the financial rules applicable to the general budget of the Union but as well amends a number of sectoral regulations) is the first opportunity to make changes to the CAP basic acts since the 2013 CAP reform was concluded.
In this previous post, I reported on the contributions made during the first debate on the Omnibus Regulation in COMAGRI in December last year. Here, the tone from the principal political group spokespersons was sober and measured, with speakers emphasising that the Committee should adopt a narrow interpretation of its powers to amend the proposal, keeping in mind that its purpose is to deliver simplification of the CAP both for managing authorities and for farmers. It was not intended to be a ‘reform of the reform’ but rather a ‘correction’. However, at the end of that post I wondered aloud how COMAGRI members would interpret the notion of a ‘correction’ of the reform.
There are in fact some quite significant amendments proposed in De Castro’s report. They cover greening, risk management, the active farmer rules, supply chain relations, market management and rural development. In this post, I provide a summary of the main issues which will be debated by the full COMAGRI later this month.
Proposed changes to the greening payment

The main changes proposed are designed to increase the exemptions for crop diversification and to expand flexibilities for what can be counted towards Ecological Focus Areas (EFAs).
Crop diversification. Amendment 43 proposes to increase the exemption for arable areas from 10 hectares to 15 hectares (that is, only when the arable land of the farmer covers between 15 and 30 hectares must at least two different crops be grown on that arable land). This amendment is justified as aligning the thresholds for the application of crop diversification with the existing thresholds for EFAs.
Ecological focus areas. Three significant amendments are proposed to EFAs.
– Amendment 48. The requirement that, for holdings with more than 15 ha of arable land, at least 5% of the arable land of the holding should be managed as an EFA would only apply to the arable area above 15 ha and not to all the arable area as at present.
– Amendments 49 and 50 would allow areas planted to miscanthus and Silphium perfoliatum (known as the cup-plant which can be used for animal feed) to be counted towards the EFA requirement.
– The most controversial amendment is likely to be Amendment 55 which would increase the weighting factor for N-fixing crops from 0.3 to 1 to determine the area which can be counte towards EFAs. Given that the DG AGRI evaluation of the first year of greening indicated that, overall, the area covered by EFAs amounts to 14% of arable land before application of the weighting factors (note this percentage must be even higher on those farms that have an EFA obligation to receive the greening payment) and to 9% after this application, which is well above the regulatory requirement of 5%, it is hard to know the motivation behind this amendment.
Proposed amendment on active farmer rules

The proposed amendment on active farmers is no surprise. This was a major point of contention in the reform of the direct payments regulation in 2013, but Member States have found the rules difficult to implement. The Commission has proposed simply to allow Member States, if they wish, to scrap the active farmer requirement. Not surprisingly, the COMAGRI rapporteur in Amendment 41 has proposed to maintain the status quo. The justification: “The amendment aims at ensuring that CAP funds continue to target active farmers, as the only subjects entitled to receive direct payments, avoiding the dispersion of financial resources”.
However, Amendment 40 would allow Member States to decide that natural or legal persons who are registered as farmers in any national public register to be identified as active farmers which might contribute to simplification in some Member States.
Proposed amendment on risk management tools

The main proposal here (Amendment 17) is to create a new risk management instrument within the CAP, namely income insurance, and to allow Member States to make financial contributions to premiums for income insurance. Currently, the measures in the risk management toolkit include crop animal and plant insurance, mutual funds and the income stabilisation tool. However, uptake of the income stabilisation tool in Member States’ RDPs has been very low.
The amendment aims at creating a new risk management tool which could be easily utilised by farmers, given the extremely limited use of the income stabilisation tool made by Member States so far. Income insurance is available in the United States, but there would be major problems in transferring the US model to Europe, not least the lack of information available to the authorities and to insurance companies on actual farm incomes. Because income variability can be considered a systemic risk, income insurance is not likely to be attractive without considerable public support.
Other amendments would permit support for insurance products which cover losses (either yield losses or income losses) greater than 20%, rather than the 30% currently specified in the CAP legislation (the Commission itself has proposed reducing the threshold to 20% for the income stabilisation tool in an effort to make it more attractive). One of the difficulties in triggering insurance products given the 30% threshold is that income is defined including direct payments. Given the high dependence of many farm businesses on direct payments and their stability relative to market income, it can be difficult to show that overall farm income has fallen by 30% or more even with a sharp drop in market income. The rapporteur would also increase the maximum rate of public subsidy for insurance products from 65% to 70%. Both of these measures would make public expenditure on insurance subsidies ineligible for WTO Green Box status in the future.

Proposals on food chain relations

The two proposals in the Draft Opinion under this heading are (a) to give much greater powers to producer groups and interbranch organisations to control the supply of product to the market, without fear of breaking competition rules, and (b) to mandate legislation on unfair trading practices. The former proposal is justified as implementing recommendation 157a of the AGRI market Task Force report.
A series of amendments are designed to give producer organisations, and associations of producer organisations, much greater exemptions from competition law.
– First, Member States would be obligated to recognise producer organisations, not simply having the option to do so as at present (Amendment 61).
– Amendment 63 would allow a producer organisation or their associations to plan production, place on the market and negotiate contracts for the supply of the agricultural products, on behalf of its members for all or part of their total production. Some protection to consumers is provided by Amendment 65 which would allow the competition authority in individual cases (so no longer a blanket ban) to find that a particular negotiation by a producer organisation should either be reopened or should not take place at all if it considers that this is necessary in order to prevent competition from being excluded.
– Amendment 69 provides for recognition of a new institutional entity, a bargaining organisation. These organisations could be formed at the initiative of producers with the objectives to ensure that production is planned and adjusted to demand, to concentrate supply on the market, and to optimise production costs and stabilise producer prices. This proposal seeks to extend the provisions of article 149 of the Single CMO (milk package) to other agricultural sectors.
– Amendment 70 introduces the term ‘value-sharing’. It would allow producer organisations and undertakings marketing or processing their products to agree on value-sharing clauses, including market bonuses and losses, determining how any evolution of relevant market prices or other commodity markets is to be allocated between them.
Amendment 85 would mandate the Commission, before 30 June 2018, to propose a Union-level framework to combat unfair trading practices. This is clearly intended to tie the hands of the Commission which is currently considering whether to introduce such legislation on foot of the Agricultural Markets Task Force report.
Proposed amendments on market management

The Draft Opinion contains a series of amendments to the market disturbance articles in the Common Market Organisation Regulation. The list of measures which the Commission can take in response to a market disturbance is explicitly extended to include proposing “any appropriate supply management measures” (Amendment 88).
Amendment 89 then would add a programme to reduce production of agricultural products in time of serious market imbalances. This essentially codifies the voluntary supply management scheme introduced to address low milk prices at the end of last year and extends it to other agricultural sectors enable the mobilization of aid to reduce production. The text of the amendment reads:

1. In the event of serious imbalances on the market and where production techniques permit, the Commission may decide to grant aid to producers in a specific sector listed in Article 1 (2), which voluntarily reduce their delivery over a period of three months compared to the same period the previous year.
2. The aid shall be granted on the principle of an application by producers submitted within the Member State in which the producers are established, using the method laid down by the Member State concerned.
Member States may decide that applications for reduction aid shall be submitted on behalf of producers by recognised producer organizations or by cooperatives established under national law. In this case, Member States shall ensure that the aid is fully transmitted to producers who have effectively reduced their delivery.
3. In order to ensure that this programme is implemented effectively and appropriately, the Commission is empowered to adopt, in accordance with Article 227, delegated acts establishing:
(a) the maximum total volume or quantity of delivery covered by the programme to reduce production;
(b) the amount of aid in accordance with the reduced volume or quantity and its financing arrangements, in particular via a levy on producers increasing their production during the same period;
(c) the criteria for applicants to be eligible for the aid and for applications for aid to be admissible;
(d) specific conditions for the implementation of this programme.”

Amendment 90 amends Article 222 of the CMO Regulation which enables the Commission, during periods of severe imbalance in markets, to waive the application the competition rules of the Treaty with respect to agreements and decisions of recognised producer organisations, their associations and recognised interbranch organisations for certain specified activities, including temporary planning of production.
The amendment would allow Member States, at the request of a producer organisation, to make binding any of the activities mentioned in Article 222 also on non-members of the producer organisation. This is clearly intended to avoid the problem of free-riding which limits the effectiveness of voluntary supply management schemes.
Amendment 91 would remove the last-resort nature of Article 222 by removing the constraint that the Commission can only resort to its powers under this Article if it has already opened public intervention or if aid for private storage has been granted. This is intended to allow a more effective use of the powers under this Article.
Proposed amendment on rural development

One of the most intriguing amendments proposed by De Castro is Amendment 24 amending Article 58 of the Rural Development Regulation which sets out the duration of Member State Rural Development Programmes (RDPs). The amendment reads:

Without prejudice to a redefinition of the total amount of Union support for rural development, the current rural development programmes, approved in accordance with Article 10(2), shall continue to apply until 2024 or until a new reform is adopted.

Approval of the current crop of RDPs was a long-drawn out process. The statutory requirements for public consultation on draft plans and ex ante evaluations plus the time required for the process of gaining Commission approval would mean that, if new RDPs were to enter into force from 1 January 2021, the preparatory process in Member States would have to begin towards the end of next year. And this when farmer enrolment in the current programmes is still building up. It would be administratively very demanding and would add to the unpopularity of Pillar 2 programmes in Member State paying agencies.
I think this is a sensible simplification proposal from the COMAGRI rapporteur. It would also allow for the evaluation of the effectiveness of existing measures to be taken into account. While a mid-term evaluation is no longer required for RDPs, management authorities may commission reports on individual elements but the results of these are unlikely to be useful until towards the end of the decade. Member States would still be able to propose amendments to their programmes following the procedures in the Rural Development Regulation, while the rapporteur’s amendment leaves open the possibility that amendments to that Regulation might still be progressed in the normal way.
One also wonders if this is the first sign that decision-makers are beginning to resign themselves to the idea that the legislative timeline simply will not allow a new iteration of the CAP to be in place by 2021 in any case.
This post was written by Alan Matthews.

Posted on

What can we expect following the CAP public consultation?

DG AGRI launched its 12-week public consultation on modernising and simplifying the CAP on 2 February last. The publication of the on-line consultation was accompanied by an inception impact assessment to support the preparation of a Commission Communication on modernising and simplifying the CAP which is expected late this year, possibly in November.

According to the Q&A memorandum prepared by DG AGRI which accompanied these documents, the stakeholder consultation is expected to provide opinion-based information. “It is an opportunity to take into account societal demands in the policy discussions on the future of the CAP and adapt it to better integrate the new political priorities in an inclusive and comprehensive manner.” The impact assessment, on the other hand, proceeds on an evidence basis. “It identifies challenges, outlines objectives, and draws up policy options to achieve them. Impacts of these policy options are then assessed, considering economic, social and environmental dimensions.”

These initiatives follow the commitment in the Commission’s Annual Work Programme for 2017 to “take forward and consult widely on simplification and modernisation of the CAP”. The rationale given by Commissioner Hogan for re-opening the CAP regulations so soon after the completion of the 2013 CAP reform highlights two issues: the complexity of the CAP following the co-decision process in that reform which gives rise to a need for simplification to reduce red tape; and changes in the policy environment for EU agriculture – from markets and trade to climate change and environmental challenges – which require a modernisation of the CAP.

Commissioner Hogan has identified the three priorities that he thinks should be addressed in any overhaul of the CAP regulations. These are greater market resilience; more sustainable agricultural production; and progress on generational renewal. The Q&A memorandum is careful to note that this does not rule out the possibility that other concerns will be raised in the public consultation which may feed into and inform any proposals that the Commission will ultimately make. But I will not be surprised if these three issues make up the core of the Commission’s Communication next November.

A mid-term review of the 2013 reform or designing the CAP post-2020?

There remains some ambiguity about the likely scope of the Commission proposal which I have already discussed in this post. Will it be more of a mid-term review of the 2013 CAP reform, tweaking that reform in just a couple of (possibly significant) areas, or will it be a full-blooded review of all aspects of the CAP to redesign it for the years after 2020? I argue in this post that the former option is what this Commissioner will pursue.

There is much to suggest the more cautious and limited objective. The mandate in the Commission Annual Work Programme is hardly a clarion call for reform. The reference in the mandate to taking into account the view of the REFIT Platform also suggests a limited perspective, as the government members of the Platform have emphasised that its mandate is to reduce the regulatory burden of existing policies and not to conduct a fitness check of the CAP. So does the focus on modernising the CAP to maximise its contribution to the Commission’s ten priorities, which are the priorities for the current Commission which holds office until 2019.

Indeed, the Commissioner in talking about the public consultation does not make reference to designing the CAP post-2020. Nor does he use the term ‘reform’ of the CAP, preferring to stick to the term ‘modernisation’ which makes up his mandate. In fact, the only reference to the CAP post-2020 in the package of material presented by DG AGRI is in the Q&A memorandum where the hypothetical question is posed “Will the future CAP post-2020 be one of the five options [included in the impact assessment]?” to which the answer given is No. More specifically, “The options outlined will not necessarily be included in the proposals for future CAP. Other ideas might stem from the wide consultation. It is also possible that some combination of these options could be finally chosen.”

It might be argued that both the public consultation and the proposed impact assessment open the possibility for a more root-and-branch review. In particular, the inception impact assessment proposes to evaluate five wide-ranging options.

The description of the options is a little opaque in the inception impact assessment, but my interpretation of them is as follows:

  • 1. Maintaining the EU’s farm rules as they currently stand (baseline)
  • 2. No policy, full liberalization
  • 3. Programming with implied shift from area-based payments towards rural development, innovation and risk management tools
  • 4. Build on area-based payments to further leverage economic & environmental benefits in a simplified way, perhaps introducing co-financing for Pillar 1 payments while making greater use of technology to modernize controls towards performance-based outcomes
  • 5. Focus on small-holders, mandatory capping of direct payments, environmentally-friendly farms & local food.

In practice, this implies that there are three future options being evaluated. The option assuming a continuation of the existing CAP is included to give a baseline against which the economic, environmental and social impacts of the other options can be measured. The no CAP policy would not be in line with the Treaty, according to the inception impact assessment, but is included again as a baseline against which to demonstrate the EU value-added of the CAP as well as the economic, social and environmental impact of the absence of an EU-wide policy intervention.

As DG AGRI’s Tassos Haniotis pointed out to a recent meeting on the CAP after 2020 at the Centre for European Policy Studies in Brussels, options 2-5 are distinguished by the relative priority given to economic as opposed to environmental objectives for the CAP. Thus, Option 2 the absence of policy would solely emphasise market-driven economic objectives such as competitiveness.

On the other hand, Option 5 (which closely reflects the ideas put forward by President Juncker’s special advisor Karl Falkenberg) puts most emphasis on securing environmental and distributional outcomes regardless of the impact on competitiveness.

Option 3, which envisages the transfer of a significant proportion of Pillar 1 direct payments to Pillar 2 measures focused on innovation, environment and risk management (perhaps moving from the current 75/25 division between Pillars 1 and 2 to a 25/75 division) would target both economic and environmental objectives but would be more strongly oriented towards the latter. Option 4, which implies the least movement from the current CAP, is seen as delivering less for the environment but, by maintaining the basic payment at current levels (depending on the budget available), is assumed to underpin the economic objective of maintaining and encouraging production.

Commissioner Hogan, it seems to me, has already expressed a preference for a variant of Option 4. In his speech to the Farm Europe Event “A New Ambition for European Agriculture” on 7th February 2017 at the European Parliament, he declared:

There is one thing on which I would like to give some reassurance and that is: despite the emphasis on appropriate measures to ensure greater market resilience, I am also determined to maintain basic income support and an effective safety net through a system of direct payments. That continues to be an essential element of the CAP without which the viability of perhaps tens of thousands of farmers would be seriously compromised.

Accepting this as a red line seems to me to rule out all of the Options except Option 4. In addition to concerns about the elimination of direct payments on farm incomes, he may be encouraged to pursue a limited tweaking of the current policy by the constraints of the political timeline. With a Commission legislative proposal expected in the spring of 2018, this leaves at best a 12-month window to progress it through the legislative process before the current Parliamentary term expires. The only way in which that will be possible is by making a narrowly focused proposal (similar to the CAP provisions in the Omnibus Regulation proposal) in the hope that the co-legislators would confine themselves to debating these tweaks.

Potential pitfalls for the Commission strategy

Although Option 4 suggests the least movement from the current structure of the CAP, it does not mean that it will be uncontentious, at least if it were intended to set the framework for the CAP after 2020. Maintaining a significant role for basic payments as well as implementing the spirit of the Cork 2.0 Rural Development Declaration implies a continuation of the two-pillar structure of the CAP into the next Multi-annual Financial Framework (MFF) period.

However, there was much unfinished business around direct payments at the end of the last CAP reform. The countries of Central and Eastern Europe will be pushing for the further equalisation of payments per hectare (‘external convergence’). The Commission would presumably again want the consistent application of the regional system for the basic payment. Will those new Member States that continue to apply the Single Area Payment Scheme (SAPS) finally be required to adopt the entitlement system underpinning the Basic Payment System (BPS)? The further capping of payments will undoubtedly be proposed, even if not to the extent envisaged in Option 5. The ‘active farmer’ debate may not be fully put to bed in the proposed legislative changes in the Omnibus Regulation. Given the Commissioner’s insistence on maintaining basic payments, any of these issues could see the Council and Parliament adopting different positions which would only be resolved through a lengthy trilogue process.

There is another threat to the Commissioner’s apparent strategy. The impact assessment options differ in terms of the relative emphasis on economic and environmental objectives, but all assume a continuation of the current market orientation of the CAP. But there is another potential fault line around which debates will take place in designing the CAP after 2020, namely between continuing the path of market orientation or returning to greater market intervention.

Returning to greater market intervention could mean various things. It could mean adopting a US-style system of counter-cyclical payments which would inevitably have to be product-specific. It could mean greater use of ‘preventative’ supply management as recently seen in the dairy market. It could mean greater flexibility for Member States to use coupled support. It could mean raising safety-net intervention prices closer to current market levels. All of these ideas have been floated by major players in the CAP debate since the last reform.

However, they are not explicitly part of the Commission’s proposed impact assessment and are unlikely to be part of the Commission’s Communication later this year (a possible exception might be to offer to institutionalise voluntary supply management as a concession to the market interventionists as part of a wider risk management toolkit). But that will not necessarily prevent these ideas being proposed in the debate that will follow the Commission’s legislative proposals next spring. Again, significant controversies around these issues could prevent the passage of the Commission’s legislative proposal before the expiry of the current Parliamentary term.

The final threat to the Commissioner’s apparent strategy is that, once again, revisions to the CAP basic acts will be proposed at the same time as the negotiations begin on the next MFF. There is no reason to assume that these negotiations will be any easier than for previous MFFs. The loss of the UK net contribution to the EU budget after Brexit, competing demands on public funds both inside the EU budget (migration, security) as well as outside (defence), together with a diminished sense of solidarity within the Union (between east and west, and between north and south), suggest if anything that agreement on the next MFF might be even more difficult than heretofore. Even following the timetable of the last occasion, assuming that the Commission leaves its MFF proposal until the end of this year, then it would be at best the spring of 2019 and more likely the autumn of 2019 before the new MFF, and thus the budget for the CAP after 2020, would be known.

During the previous CAP reform when the legislative proposals were made by the Commission in October 2011, the Parliament refused to progress its mandate to open negotiations with the Council until it had a good idea of what the CAP budget would be. It was not until early February 2013 that the COMAGRI rapporteurs circulated their draft opinions, while the Council finalised its mandate for the trilogue negotiations in March 2013. It was the extraordinary achievement of the Irish Presidency that there was broad agreement in the informal trilogues between the two legislative branches by June 2013, although it took until September to address the issues on which the European Council had given an opinion and it was not until December 2013 that the four basic acts were approved on first reading.

The Parliament would be likely to adopt the same position on this occasion. Thus, if the MFF agreement in the European Council were delayed even until the Spring of 2019, there would be no opportunity to adopt the Commission proposals within the lifetime of this Parliament.

Speculating on the way forward

It seems to me that there may be just a small window of opportunity to agree changes to the CAP basic acts in this legislative period. This depends on three conditions.

The first is that the Commission restricts the proposals in its Communication in November this year and in its subsequent proposal for legislative changes to the CAP basic acts to some minimal tweaking of the 2013 reform, focused on the Commissioner’s three priorities. This would mean explicitly proposing to roll over all the other provisions of the basic acts until the early years of the next MFF period when they could be the subject of a more wide-ranging debate.

By keeping a narrow focus, the Commission can hope to keep the period between the Communication, the subsequent gathering of public reactions and the legislative proposal relatively brief, allowing it to make its legislative proposal early in 2018. A narrowly-focused set of reform proposals would also facilitate agreement in the informal trilogue process and the passage of the legislation prior to March 2019 when the Parliamentary term comes to an end.

The second condition is that the co-legislators agree to confine their amendments to the specific issues raised in the legislative proposals, and not seek to open up all the other grievances around the distribution of direct payments, rural development issues, common market organisations, etc. This will be hard for some members of the co-legislators to accept, but the Commissioner has a strong card to play. Unless the co-legislators play ball, they are likely to be left with nothing to show for their efforts as the legislative package would almost certainly fall.

The third condition is that the Commission brings forward its MFF proposal for the period after 2020 to, say, September, to give the possibility, at least, for the European Council to reach a decision on the next MFF by the end of 2018. This timeline may be required in any case if the European Council is going to address the budgetary implications of a UK Brexit three months later.

It may be that the immediate budgetary consequences of Brexit may not be as severe as some of us have assumed. The UK may well continue to make unrequited transfers into the EU budget in recognition of its share of the future liabilities of the Union arising from future programme commitments, pensions and so on (by unrequited transfers, I mean transfers that are unrelated to the UK’s future participation in EU programmes such as Horizon 2020 or ERASMUS where it would expect to get back as much as it put in). One estimate by the UK Centre for European Reform puts the UK’s divorce bill at around €60 billion which compares to the UK’s net budget contribution of around €10 billion per annum. If this were indeed the agreed sum and it were paid off over a six-year period, then the impact of Brexit on the EU budget would not show up until 2025.

An early decision by the European Council on the next MFF, together with a narrowly-focused legislative proposal amending the CAP basic acts to address the Commissioner’s three priorities and a vow of abstinence by the co-legislators not to seek the widen the debate, might just allow this legislation to squeeze through in the current Parliamentary term. It would depend on extraordinary luck, or political skill, to align all of these stars and the chances of success, at this point in time, must be deemed to be low.

Whether this simplification and modernisation initiative is successful or not, however, the possibility of any broader CAP reform is going to be postponed until well into the next Parliamentary period. Many of those responding to the public consultation may be disappointed by the outcome.

This post was written by Alan Matthews

Posted on

Why further reform of the CAP is needed now

Yesterday I took part in a meeting at the European Parliament under the heading “CAP – Out of the box thinking‘ jointly organised by the RISE Foundation and the European Landowners’ Association. The event was part of the preparation for a report by the RISE Foundation under the leadership of Professor Allan Buckwell aiming to provide ideas for the CAP post 2020. My contribution was to argue that further reform of the CAP is needed now. Below is a slightly edited transcript of my remarks.

Reform of the Common Agricultural Policy has been ongoing since the seminal McSharry reforms in 1992. They have covered both the common market organisations, which have become more market-oriented, as well as rural development programming.
Direct payments were originally introduced to compensate for the reduction in market intervention prices in the MacSharry and later reforms, but were subsequently extended to farmers in new Member States where this rationale did not apply.
Since then, various justifications for direct payments have been put forward.
They address the problem of low incomes among farmers.
They ensure food security for EU citizens.
They contribute to resilience and provide a safety net for farmers faced with market price and income variability.
And they support sustainable land management.
These are all important objectives. In my contribution, I want to ask whether decoupled area-based payments are a good instrument to achieve these objectives. I will argue this is not the case.
This is not a trivial issue. In recent years, direct payments have accounted for over 70% of the entire CAP budget and almost 30% of the entire EU budget. Ensuring that this money is well-spent and helps to achieve important EU objectives is crucial at a time when budgets are under pressure and the value of the EU itself is under question.
When we examine the contribution of direct payments to farm incomes, it is important to remember that not all of the money made available by taxpayers benefits farmers. At least some of it is capitalised into land values and higher input prices, and thus benefits actors outside of farming itself.
However, the more important point is that, given the very heterogeneous structure of EU agriculture, a flat-rate payment paid per hectare is inevitably going to benefit larger farms. Eurostat figures show just 337,000 farms manage just over half of all EU farmland in 2013.
It is thus not surprising that Commission figures show that the 450,000 farm holdings that received more than €20,000 per farm in decoupled payments in 2014 took more than 50% – actually 56.3% – of the entire €39 billion paid out in decoupled payments in that year. These are not farms with low incomes from farming.
Nor is the solution simply to lower the cap on direct payments. Many small farms have income from off-farm employment or pension or social welfare payments.
Food insecurity in the EU has been increasing, as evidenced by the greater use of food aid schemes and food banks since the financial crisis in 2008, but this is entirely an issue of lack of income among food insecure households which will not be addressed by producing more food in Europe.
If we look at sporadic threats to national food supplies, these will most likely to come from weather-related extreme events or the introduction of exotic pests or diseases where access to trade and imports is the best defence. Domestic food prices can also be influenced by price volatility on world markets, but exposure to this hazard is not reduced by increasing domestic food self-sufficiency.
A longer-term worry is whether unsustainable production practices are undermining Europe’s ability to feed itself. If so, decoupled direct payments are an ineffective way to address this threat.
The case that direct payments contribute to resilience and risk management in the face of unstable market returns is based on the observation that direct payments provide a more stable income stream to farmers than do returns from market activities.
But this is true of all public payments to farmers so it is not something unique to Pillar 1 decoupled payments.
And Pillar 1 decoupled payments are not particularly well targeted to address income instability. They are often smaller on those farms that face the greatest income variability. Nor do they vary between years of high and low farm incomes. The Agricultural Markets Task Force noted that, in periods of low prices, farmers look for exceptional crisis measures and do not consider direct payments a crisis response.
Over the years, a higher share of CAP spending has targeted sustainable land management. Around €6 billion per annum is foreseen for this purpose in Member States’ Rural Development Programmes.
The big innovation in the 2013 reform was to introduce a greening payment accounting for 30% of direct payment envelopes, thus notionally allocating €12 billion per annum for practices beneficial to the climate and the environment.
However, early evaluations suggest there has been very limited environmental improvement as a result of this trebling of EU expenditure on agri-environmental measures. This should not come as a surprise. Greening payments in Pillar 1 are constrained to be simple, generalizable and annual, whereas effective agri-environmental interventions need to be place-based, targeted, multi-annual and developed in collaboration with farmers and land managers. There is no link between the amount of the greening payment and the cost of compliance.
There is thus huge scope for more effective environmental interventions if the direct payments system were redesigned.
I conclude that uniform area-based decoupled payments paid on every hectare of agricultural land are an ineffective policy instrument, they are not an efficient use of taxpayers’ money and they are inequitable to boot.
For farmers, they increase competition for land, push up land rents and prices, slow down structural change, make entry for young farmers more difficult and put downward pressure on product prices.
The constraints on the farm budget are likely to be tighter going into the post 2020 period than in the 2013 CAP reform. Hence the urgency of this discussion on how to get the best value for money for both taxpayers and farmers from the CAP budget.
Given that many farm holdings have an unhealthy dependence on decoupled payments, no one is suggesting that these payments should be eliminated overnight. There will be a need to protect the incomes of smaller and more vulnerable farms during the transition. But the next CAP reform provides an opportunity to signal that the days of uniform, area-based payments paid to all farmers have no place in a modern agricultural policy. Instead, policy should aim to assist farmers face specific challenges or to provide specific public goods.

This post was written by Alan Matthews
Photo credit: Mairead McGuiness MEP via Twitter

Posted on

First COMAGRI discussion on Omnibus Regulation

On 5 December last, COMAGRI had a first exchange of views on the so-called “Omnibus” proposal for a Regulation on the financial rules applicable to the general budget of the Union and amending a number of sectoral regulations. In my previous post, I flagged that this legislation provided the first opportunity to make changes to the CAP basic acts since the 2013 CAP reform was concluded.
It was thus interesting to listen to the mood of the Committee as the co-rapporteurs for the opinion, Albert Dess (EPP) and Paolo De Castro (S&D) introduced the discussion (a video of the discussion can be viewed here, beginning at 16:07).

The general tenor of the remarks from the COMAGRI co-rapporteurs as well as other contributors to the debate was that the Committee should adopt a narrow interpretation of its powers to amend the proposal, keeping in mind that its purpose is to deliver simplification of the CAP both for managing authorities and for farmers.

Albert Dess noted that the proposed Regulation did not provide an opportunity for a reform of the 2013 reform, but rather a correction. De Castro warned that COMAGRI should not undermine the political agreement of June 2013 while noting the possibility of doing some work on the Commission proposals.
Michel Dantin, who noted that further options were needed in the risk management area, also concluded that these should be based on the Commission’s proposal. Martin Häusling, who also highlighted risk management as needing attention, warned that the Committee should focus on core issues and not wax lyrical. He noted the risk that the Committee might want to do too much, and become a victim of its good intentions.

De Castro laid out some specific guidelines. He noted that COMAGRI should not make changes that have financial implications, as otherwise the Regulation cannot come into force in 2018 as is planned. He also noted that amendments can be made not only to the articles which the Commission has proposed to change, but that the Committee can also intervene through amendments where the same principles apply to other aspects of the CAP. However, he stressed that there must be some link to the Commission’s intervention logic, and that it is not possible to open up completely new chapters.

Specifically, De Castro seemed to rule out substantive changes to greening where the Commission has made no specific proposals, noting that the discussions on the Commission’s Communication on the CAP post-2020 expected late next summer would provide the opportunity to take up that discussion.

Nonetheless, a wish to simplify greening has been expressed by a number of stakeholders. And in my previous post I noted I would not be surprised to see some amendments proposed in this area, even if De Castro’s remarks suggests these will not come from the co-rapporteurs.

Albert Dess stressed the tight timetable. According to him, it seems the co-rapporteurs’ draft report should already be completed by the end of this week in order to be ready for translation first thing in the New Year. Update 21 December: While the English translation refers to the draft opinion being ready by the end of the year, the German original version in fact suggests end February for the delivery of the draft opinion. A preliminary discussion of the report would be held in the AGRI Committee in late March with the end of March the deadline for amendments from Committee members.

This would be followed by a debate and vote in COMAGRI in April so that COMAGRI’’s work would be completed by the beginning of May. The vote on the Commission’s proposal and amendments will take place in the plenary in Parliament in June, followed by the trilogue process with the Council. This process must be completed by around September, if time is to be given to the Member State management agencies to modify their systems to allow the changes to take effect by 1 January 2018.

The trilogue process will be held with the AGRIFISH Council President on the CAP-related amendments, although the ECOFIN Council has the overall responsibility for the dossier together with the Budgets Committee in the Parliament.

This is a very tight schedule which does not allow much scope for creative thinking. Nonetheless, it remains to be seen how AGRI Committee members interpret the notion of a ‘correction’ of the reform.

This post was written by Alan Matthews

Posted on

Triggering the next revisions of the CAP

I have long puzzled over the timeline, processes and trigger points that could lead to the next revision of the basic CAP regulations. As long ago as September 2014 I wrote a lengthy post on the prospects for the next CAP reform before even the ink was dry on the 2013 reform. This highlighted the mid-term review of the 2014-2020 Multi-annual Financial Framework (MFF) as a possible trigger point. It also discussed the complications of the parliamentary timetable for concluding a new MFF for the post-2020 period and the implications this might have for a further round of CAP reform.

I returned to this issue in a post in November 2015 in which I asked whether there would be a proposal for a CAP reform in 2017 to coincide with the publication of the Commission proposal for the next MFF? My conclusion was that we were more likely to see a rolling series of proposals for incremental changes in the various basic acts over the period of the Commissioner’s tenure, designed to address specific problems and issues, but without fundamentally changing the structure of the 2013 reform.

During the past two weeks a number of processes which might lead to further revisions of the basic CAP regulations have become clearer, although there is still much uncertainty over how these trigger points might be activated. I review what I believe are the three main processes and their trigger points in this post, and whether they are likely to lead to incremental or ambitious revisions to the CAP basic acts.

Building on the Omnibus Regulation

The first process is already underway. In mid-September as part of the promised mid-term review of the 2014-2020 MFF the Commission published its proposal to amend some of the MFF ceilings (referred to as the MFF Regulation). In a companion draft Regulation, it proposed simpler and more flexible financial rules to enhance the EU budget’s ability to adapt to changing circumstances and to respond to unexpected developments. This Regulation would revise the general financial rules accompanied by corresponding changes to the sectorial financial rules set out in 15 different legislative acts concerning multiannual programmes (referred to as the ‘Omnibus Regulation’ which with its 250 pages lives up to its name).

The focus of the Omnibus Regulation is on revisions to what is called the Financial Regulation. This Regulation sets out the principles and procedures governing the establishment and implementation of the EU budget and the control of EU funds. However, in addition to revising the Financial Regulation, the Commission also proposed changes to the sectorial financial rules, including the rules governing disbursements of payments under the CAP. These measures are justified as “further simplifying the policy with a view to easing the burden on and making life easier for both farmers and national authorities”. While some of the changes are technical in nature, others have a more substantive impact.

The DG AGRI summary of the CAP-related measures included in the Omnibus Regulation is shown in the table below. Three changes in particular are highlighted by DG AGRI:

• A change to the Rural Development Regulation to provide for a sector specific Income Stabilisation Tool. This will give Member States the possibility to design a tool tailored for a specific sector, which it is intended will make it more attractive for both farmers and administrations.
• A change to the RD Regulation to introduce simpler rules for accessing loans and other Financial Instruments intended to provide greater access to capital for farmers, particularly young farmers for whom access to credit is an ongoing problem.
• A change in the Direct Payments Regulation to allow Member States greater discretion in the application of the definition of an “active farmer”. In effect, Member States will be able to decide whether or not they wish to continue applying the existing definition of “active farmer”.

Because the Omnibus Regulation deals primarily with technical adjustments to the Financial Regulation, the lead European Parliament committee is the Committee on Budgets (corrected 22 December 2016 from Committee on Budgetary Control). However, COMAGRI was successful in making the case to the Parliament’s Conference of Parliamentary Committee Chairs that it should be given exclusive competence on all CAP-related provisions in the Regulation.

According to reports in the agricultural press, the Conference has recommended that Albert Deß (EPP) and Paolo De Castro (S&D) should be appointed co-rapporteurs on the agri-related aspects of the dossier. COMAGRI’s fear was that giving the Budgetary Control Committee oversight could set a precedent for future CAP-related reforms.

The question is whether the co-rapporteurs, or other AGRI Committee members through amendments, might seek to broaden the scope of the Regulation beyond what the Commission has proposed. The most obvious area where expansion might occur is in the risk management area. The recital on this in the draft Commission proposal reads as follows:

Nowadays farmers are exposed to increasing economic risks as a consequence of market developments. However, those economic risks do not affect all agricultural sectors equally. Consequently, Member States should have the possibility, in duly justified cases, to help farmers with sector-specific income stabilisation tools, in particular for sectors affected by a severe income drops, which would have a significant economic impact for a specific rural area, provided that the international obligations of the Union are respected….

It is easy to imagine that some COMAGRI members might want to build on this to go beyond the possibility of sector-specific income stabilisation tools to mandate, for example, a voluntary or even mandatory supply management scheme in the dairy sector. Other extensions of the risk management toolkit in Pillar 2 might also be envisaged.

In the same way that the Commission has proposed changes to the rules governing young farmer payments, it would also seem open to AGRI Committee members to amend the rules governing other CAP payments, for example, the rules governing the greening payment. I would not be surprised to see a concerted effort by some political groups in the Parliament to relax some of the requirements for receipt of the greening payment.

The Commission hopes that the Council (with the Parliament’s consent) will approve the MFF Regulation before the end of the year (the Parliament’s first reading is expected on 30 November 2016). The time horizon for the Omnibus Regulation is longer, with Commissioner Hogan hoping that any changes can come into effect by 1 January 2018. This provides one obvious trigger point for more far-reaching changes to the basic CAP regulations than what the Commission has proposed.

The CAP post 2020 timetable

The second process which could lead to changes in the basic CAP regulations is Commission-led. It is mandated by the inclusion in the Commission’s Annual Work Programme for 2017 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”.

What is noticeably absent from this formulation is any reference to CAP policies after 2020. If anything, this mandate is about revising the 2014-20 CAP so that it is better focused on the current Commission’s existing ten priorities during the remainder of its mandate, while also taking into account any new measures necessary to implement the EU’s commitments under the UN Sustainable Development Agenda. On this reading, this Commission-led process would be very narrow in scope and focused on a few specific modifications designed to address some of the more obvious weaknesses of the last CAP reform. It would de facto be a mid-term review of the 2014-2020 CAP.

On the other hand, if the notion of ‘modernising’ the CAP is interpreted expansively, and given that implementation of any changes agreed as part of this process could hardly be implemented before 2020, then it is possible that this review process will become a discussion of the type of agricultural policy we want in the EU after 2020. I label this more expansive option the ‘post-2020’ option to distinguish it from the ‘mid-term review’ option described in the previous paragraph.

Further details on the timetable for the Commission process have been reported in the agricultural press. According to AGRAFACTS, the Commission is expected to launch a 12-week consultation process on future farm policy in early January. The scope and ambition of the options outlined in the consultation paper will play a crucial role in defining the possible parameters of any further revision of the CAP arising from this process, in particular, whether it will take shape more in a ‘mid-term review’ rather than a ‘post 2020’ framework.

Commissioner Hogan is likely to give some indication of his thinking, and the issues he would like to see addressed in the consultation, before the end of this year, possibly in connection with DG AGRI’s annual agricultural outlook conference in Brussels next week. AGRAFACTS reports that the consultation may cover up to five policy options ranging from retaining the status quo to a radical reform. If this proves to be the case, it would support the view that the Commission is preparing the post-2020 CAP and not simply a mid-term review of the 2014-20 CAP. This should become clear by early January at the latest.

As part of preparing potential legislative changes, the Commission services must prepare an impact assessment which is scheduled for the months April through August 2017. This would allow the publication of a Commission White Paper or Communication later in the year, perhaps between September and November 2017. A further period of a few months would then elapse before the Commission came forward with specific legislative proposals, possibly in the first quarter of 2018.

At this stage, as I explained in my earlier post, the proposal is running against the clock counting down the remainder of the current Parliamentary term. Elections to the European Parliament will be held in May 2019 and the house will not sit after March 2019. This would point to a maximum 12 month period for the co-decision process involving the present Parliament and the Council on any Commission legislative package.

Even if the legislative proposal is framed as modifying the 2014-2020 CAP as part of a mid-term review and is confined to addressing two or three specific issues, leaving all other aspects of the current structure of the CAP unchanged (extending the risk management toolkit, strengthening producers’ position in the food chain, revisiting greening and managing crises being the most obvious candidates), it would be challenging to conclude a co-decision dossier within this time period.

In addition, there are some specific issues arising from the 2013 CAP which must anyway be addressed in the period post-2020 regardless of any other developments and which must also form part of the Commission’s proposals. These include external convergence of Pillar 1 payments, internal convergence of these payments, the future of capping and the continuation of SAPS in the newer Member States. With these issues on the table, it is hard to see how what might start out as a Commission legislative proposal to modify the CAP as part of a mid-term review could avoid morphing into a full-blown review of the CAP post-2020.

The MFF constraint. There is another reason to doubt that there will be an appetite to complete a post-2020 review of the CAP before 2019. This concerns the parallel negotiations on the MFF for the post-2020 period. The Commission must make a proposal on this future MFF by the end of 2017.

If the timetable for the 2014-2020 MFF is followed, preparatory work would initially take place in the General Affairs Council with the first meeting of the European Council to agree this MFF scheduled for Spring 2019. If, as must be considered possible, the European Council cannot agree at this first meeting (recall here also the uncertainty over Brexit negotiations) it could be at least a further 6 months until Autumn 2019 before the parameters of the post-2020 MFF (and thus the CAP budget) are known.

It is possible that the next MFF might be agreed under a quicker timeframe by the European Council than on the last occasion, although I find it hard to find reasons why the next MFF would be easier to negotiate.

In the 2013 reform, the Parliament was clear that it did not wish to discuss the shape of the CAP until it knew the level of future resources that would be available. If it held to the same position for the post-2020 reform (and why would it not?), then it would not be in a position to discuss expansive changes to the CAP regulations until the Autumn of 2019. This is another reason not to anticipate major CAP changes in the term of the current Parliament.

The Parliament’s rules of procedure are relevant here. All votes taken by Parliament in plenary before the elections, whether at first reading, or second reading, or under the consultation procedure, remain legally valid for the next Parliament. This means that after the elections the new Parliament would pick up the files where the previous Parliament left them and would continue with the next stage of the decision-making procedure.

However, for legislative business that has not reached the plenary before the elections, there is no legally valid Parliament position. Parliament’s rules of procedure stipulate that in these cases the work done on them (in committee) during the previous parliamentary term lapses. However, the new Parliament’s Conference of Presidents may decide, on the basis of input from the relevant parliamentary committees, to continue the work already done on those files (rule 229 of the EP’s rules of procedure).

On the basis of the above timeline, it seems highly unlikely that the Parliament would have adopted a first reading position on the Commission’s CAP legislative proposals published in early 2018. It would be possible for the AGRI Committee in the new Parliament to take over rapporteurs’ reports plus any amendments that had been accepted. But I doubt the AGRI Committee would have got that far in its work. In any case there must be a high probability that there could be significant changes in the composition of the Parliament after elections in 2019, and the new members may be unwilling to simply carry on as before.

One option under discussion in Brussels is that it may make sense simply to extend the current MFF for a further two years, in order to allow a decision on the next MFF and associated EU programmes to be made by the newly-elected Parliament after 2019. If this view gains ground in the coming year before the Commission is legally required to make a proposal on the next MFF by the end of 2017, then this would push the discussion on the ‘post-2020 CAP’ out to 2022 or even 2023. It would make it more likely that the outcome of the Commission process in 2017 would be a very limited ‘mid-term review’ of the current CAP.

These arguments are made purely on the basis of the difficulties created by the legislative timetable. It is also possible to argue that political economy considerations also militate against anything other than incremental changes, also possibly in the direction of more protection, in the CAP basic acts.

Brexit impact on the MFF

While the two previous processes which could lead to revisions in the CAP basic regulations are deliberative, the third is disruptive. This is the possible impact of an early Brexit, specifically on the financing of the current MFF. The presumption that the CAP status quo can more or less continue until 2022 or 2023 is likely to be overturned by Brexit. The impact of Brexit on the EU budget is thus the third process which could lead to a revision of the CAP regulations.

Under the current Brexit timeline, the UK government plans to trigger the Article 50 process to leave the Union in March next year. Given the two-year timetable set out in Article 50, this would imply that the UK would leave before March 2019. Admittedly, there is an increasingly widespread view that this timeline may not be feasible, but until it is updated it remains the UK government’s stated position.

I have previously calculated that Brexit is likely to leave a hole in the EU budget of the order of €10 billion, which is around 7% of the €138 billion EU-27 budget (without the UK). If the UK were to leave in early 2019, then funding for the CAP (and other EU programmes) would be in jeopardy in the last two years of the current MFF.

There are various ways in which this funding gap might be met. First, under the Article 50 withdrawal agreement, the UK might agree/be required to continue contributions to the EU budget for some years to come, to cover various future liabilities resulting from its EU membership to date.

Second, if the UK leaves without some transitional trade arrangement to avoid the reintroduction of tariffs on UK-EU trade, levying EU tariffs on UK exports to the EU could raise several billion euro which would offset at least some of the budgetary gap.

Third, even if the EU budget as a whole were cut, there is no reason to assume that individual spending programmes would be cut proportionately. I have previously argued that there is likely to be much less appetite for cohesion spending among the contributor Member States next time around given the stated positions and actions of some of the major cohesion fund beneficiaries over the past year. Thus, the European Council might agree to make deeper cuts in cohesion spending in order to protect the CAP budget. Of course, the converse would also be possible, where deeper cuts in CAP spending might be demanded in order to maintain the level of cohesion or other spending programmes.

Fourth, the remaining 27 Member States could agree to maintain the same level of spending on EU programmes by increasing their respective net contributions to fill the gap left by Brexit. However, as pointed out in my previous post on the impact of Brexit on the EU budget, the demand for additional net contributions would not be felt proportionately across all Member States. It would fall heaviest on Germany, the Netherlands, Sweden and Austria because these countries currently benefit from a rebate on financing the UK rebate. Whether these countries would be prepared to increase their net contributions by the anticipated 10-15% to offset the impact of Brexit is an open question.

If there is a budget financing gap for the last two years of the current MFF, and if the agreed ceilings on CAP spending are reduced as a result, then a critical question will be where the cuts would be made. It is likely that Pillar 1 payments would be the most vulnerable. The financial discipline mechanism was put in place precisely to address this situation.

It provides that direct payments (over €2,000) should be reduced by means of an ‘adjustment rate’ whenever there is a risk that forecast expenditure under the MFF sub-heading ‘market-related expenditure and direct payments’ might exceed the applicable annual MFF ceiling.

Interestingly, in the conclusions on the debate on the future of the CAP held during an informal working lunch during the last AGRIFISH Council meeting in early November the Slovak Presidency reported that “[Ministers] also considered that the second pillar of the CAP, the rural development in particular, is the one element worth investing in because of its effectiveness and visibility”.

If Ministers really meant to say this, it is perhaps the one piece of positive news to hold on to when surveying the processes which could lead to the next round of revisions to the basic CAP legislation.

This post was written by Alan Matthews.

Photo credit: © eu2015lu.eu / Charles Caratini

Posted on

More on the future of direct payments

Yesterday, I had the privilege of presenting my report on the future of direct payments to a workshop on the future of the CAP after 2020 organised by the AGRI Committee in the European Parliament and its Policy Department (AGRI Research). I reproduce below my statement to the workshop which attempted to convey the flavour of my report.

It is an honour to be invited to address you today on the background note that I have prepared on the future of direct payments. Direct payments accounted for around 72% of the CAP budget and for just less than 30% of the EU budget in recent years. They are also an important source of income on many farms. They are therefore central to the debate on the future of the CAP.

Direct payments came about largely in response to successive reforms of the CAP. In the most recent reform, an important innovation was to convert a 30% share of direct payments into a greening payment to farmers respecting certain agricultural practices beneficial for the climate and the environment.

However, it seems few stakeholders are satisfied with the outcome of that reform. As discussions on the modernisation and simplification of the CAP after 2020 get underway, AGRI Committee members have the choice between making incremental changes to the current structure of the CAP, or rethinking more fundamentally the relationship between the objectives of agricultural policy and the way that these are pursued.

There is no need to remind this Committee of the background to this discussion and the challenges faced by European agriculture: supporting innovation and competitiveness in the production of food and biomass, encouraging generational renewal, improving the sustainability of agricultural practices, enhancing the protection of ecosystem services, increasing resilience to climate change while contributing to the mitigation and sequestration of greenhouse gas emissions, preparing farmers to better manage risk and market price variability, promoting agricultural diversity and agriculture’s role in rural regions.

In my note, I first identify issues that the Committee is likely to face if it opts for an incremental approach to the next CAP reform. I then outline the elements of a bolder approach to reform. I recognise that the choices made by the Committee are likely to be influenced by the budget envelope for the CAP which will be agreed for the post 2020 Multi-annual financial framework. If CAP funding is reduced in the coming period, it becomes even more important to focus spending on those areas which give the greatest value in return.

The incremental options

To structure the discussion on incremental changes, I identify three models or directions though these are not mutually exclusive. I have called the first model one of making technical adjustments to the last reform. Here, the Committee would confine itself to revisiting many of the contentious issues that were widely discussed in that reform.

• Should there be a further move to equalise payments per hectare across Member States?
• Should Member States be required to finally move to uniform regionalised basic payments?
• Despite the flexibilities around the active farmer definition introduced in the recent Omnibus Regulation proposed by the Commission, it is likely the debate on defining an ‘active farmer’ would continue.
• The Committee could discuss reducing the capping thresholds and/or increasing the use of the redistributive payment.
• It could also discuss altering the greening payment rules either to grant more or less flexibility to Member States in the way these rules are applied.

In my note I provide some commentary on each of these issues.

The second model I call farm-focused reforms. This is motivated by the direction taken by US farm policy in extending its farm safety net in the 2014 Farm Bill and the suggestions made by some commentators that the CAP should follow in that direction. I discuss specifically proposals to convert some or all of direct payments into either counter-cyclical payments or support for risk management instruments such as insurance. I see no merit in moving from the current system of decoupled payments to a system of counter-cyclical payments under EU conditions. There is obviously some interest in exploring the role of greater support for risk management instruments, I am cautious about this, but I leave the discussion of this to the second contribution this afternoon.

The third model I call revisiting greening. It assumes the Committee accepts the current structure of the CAP but wishes to improve the effectiveness of interventions to improve environmental and climate outcomes (as opposed to making changes to the greening payment which is addressed under Model 1). Again, the Committee would find itself going over familiar ground. I examine four alternatives to the current greening payment:

• Reverting the greening practices to cross-compliance
• Replacing the greening practices 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 agri-environmental-climate scheme in Pillar 2
• Transferring the greening payment to voluntary agri-environmental-climate schemes in Pillar 2

In each case, I review the pros and cons to provide some guidance to the Committee.

A bolder approach

In an important chapter in the note, I stand back and ask the broader question whether the present system of direct payments is fit for purpose. I focus on the contribution of direct payments to farm incomes and farm income stability, whether they provide support to improving productivity and competitiveness, and their success in contributing to environmental and climate objectives. I conclude that, while direct payments make some contribution to addressing the challenges outlined earlier, they can never be an efficient or satisfactory solution.

If Committee members were to design an agricultural policy afresh, I doubt there is anyone who would suggest that paying a uniform, decoupled payment on every hectare of agricultural land across the EU would be a sensible approach. I therefore also suggest a bolder strategy for reform which Committee members might wish to embrace.

I suggest, as a first principle, that we should listen to the recommendations of OECD Agricultural Ministers earlier this year when they stated that agricultural policy should:

“Be transparent (with explicit objectives and intended beneficiaries), targeted (to specific outcomes), tailored (proportionate to the desired outcome), flexible (reflecting diverse situations and priorities over time and space), consistent (with multilateral rules and obligations) and equitable (within and across countries), while ensuring value for money for scarce government resources.”

It follows that payments should be targeted on specific objectives with a clear results orientation.

I next suggest that the two pillar structure has outlived its usefulness. It did serve to give visibility and political prominence to rural development measures within the CAP. Already, in the last reform, we saw some blurring of the boundaries between the two pillars, in that the same measures could be financed from either pillar, and Member States could shift resources from one pillar to the other. Pillar 2 spending remains very farm-focused. Its key characteristic is that this spending is programmed based on a needs assessment, with specific objectives linked to measures, and with flexibility for Member States to choose from a menu of options. As this is the structure I propose for all future CAP spending, it would make sense to absorb all such spending into a single Pillar-2 type framework.

I also argue that all future CAP spending, and not only traditional Pillar 2 measures, should require co-financing by Member States. We need to think about how to incentivise Member States to make use of EU funds as ambitiously as possible and to ensure that value-for-money is given in return. Requiring national taxpayers to make a contribution is one way to ensure this. The co-financing rate can be adjusted to reflect the extent to which particular spending in a Member State has EU value added, and thus a low requirement for national co-financing, or is of more local interest, where the national co-financing requirement would be higher. A corollary of this, of course, is that there should be strong state aid guidelines to prevent undue distortions of competition including, for example disciplines on coupled aids. Member states already spend almost €8 billion a year on state aids to agriculture. The recent crisis aid packages also permitted, although they did not require, additional national expenditure, so this recommendation builds on already established precedents.

Over time, decoupled area-based direct aids should be gradually phased out. They were introduced to help farmers adjust to the reduction in administered support prices under the ‘old’ CAP. They are clearly an important element in farm income on many farms so this can only happen over time. There will be a need for transitional payments to smooth the impact of this decision. This will also allow time for the necessary adjustments in land rents and input costs which will play an important role in cushioning the impact on incomes. However, it is important to set the direction of travel so that young entrants and existing farmers making investment decisions have a clear idea of the future policy environment.

Of course, agricultural policy must continue to address various market failures which mean that free market outcomes are not optimal. Primary importance must go to ensuring that farmers are rewarded for practices that protect biodiversity and maintain ecosystem services and which go beyond good agricultural practice. We need to find ways to reward farmers and land managers who sequester soil carbon and thus contribute to mitigating climate change. The appropriate level of support for risk management and the design of risk management instruments should be evaluated, and you will hear more about this in the next contribution. Support for farming in areas of natural constraints will remain an important objective where there are concerns about the adverse effects of land abandonment. Support can be provided for quality production, including organic farming, agroecological practices and high animal welfare norms. Support for innovation and improved competitiveness, for strengthening producers’ role in the food chain, for young farmers, can all be justified. Agricultural policy should focus on these issues directly rather than use these as rhetorical arguments to defend an outmoded system of uniform decoupled direct payments paid on every hectare of agricultural land.

Linked to this shift to targeting payments would be an important paradigm shift, away from the notion of payments as entitlements to one where payments are made to farmers in return for specific and identifiable outputs on a contractual basis. Where payments are seen as entitlements, then any conditions attached are perceived as irksome regulations and bureaucratic interference which must be minimised. When farmers are paid for providing a service or a public good or for farm practices which go beyond what is statutorily required, it is natural that the customer, in this case the public and the taxpayer, will want to verify that the service or public good is delivered. Farmers will be at liberty to opt into such schemes if they find them attractive, or otherwise not.

An important question concerns the role of cross-compliance and the greening payment if direct payments are phased out. Cross-compliance obligations currently apply to all Pillar 1 payments, certain payments to wine producers under the CMO Regulations, and to recipients of annual payments under rural development programmes (although with the important exception of areas of natural constraint payments). Because we want farmers to observe the good agricultural and environmental practices embodied in cross-compliance, my proposal would be that all farmers who benefit from any CAP payment should be obliged to observe cross-compliance standards.

At present, these standards consist of both statutory and non-statutory standards. The argument is that the additional costs of complying with the non-statutory standards is met by the Basic Payment, while the cost of complying with the greening practices is met by the greening payment although, in practice, there is no relationship between these payments and the costs that farmers incur.

While we might debate what should be the statutory requirements that farmers should meet as a condition of doing business, it is right that farmers should be rewarded for practices which go beyond the statutory requirements. How to do this if the Basic and greening payment are phased out? My proposal is that cross-compliance and greening would be replaced by a requirement to enrol in a shallow agri-environment scheme co-funded by the CAP – this is the proposal for ‘conditional greening’ that was briefly considered by the previous AGRI Committee. The merit of this proposal is that it reunites non-statutory cross-compliance standards and greening practices in a single scheme, it would have wide coverage of agricultural land because of its link to other payments that farmers might receive, and it gives flexibility to Member States to design schemes which are appropriate for their local circumstances.

Some Members might be concerned that giving flexibility to Member States risks a low level of ambition. Member States have an interest in minimising the scope of agri-environment schemes in order to facilitate the quick disbursement of EU money. Requiring co-financing of all CAP payments is one way to encourage Member States to think hard about the design of their schemes. Another, more ambitious, way would be move away from fixed Member State entitlements in the CAP budget – that word again!- to allocating at least a proportion of CAP funds on performance-related criteria.

Mr Chairman, Members of the Committee, in your role as legislators you have a responsibility to taxpayers as well as farmers. It would be possible to continue with the current structure of the CAP, making some incremental adjustments in the coming MFF period. But I put it to you that the current system of direct payments is neither effective, nor efficient, nor equitable and that it is a very poor use of taxpayers’ money. For this reason, I hope you will think boldly about possible alternatives to modernise the CAP post 2020.

Thank you for your attention.

There were also presentations at the meeting by the authors of two companion reports on the future of risk management and the future of rural development. There was a vigorous discussion, and I will plan to return to some of the issues raised by AGRI Committee members in a future post.

This post was written by Alan Matthews

Update 9 Nov 2016. The European Parliament Audiovisual Service has now posted a video link to the entire session which can be viewed by clicking on this link.

Photo credit: Research_for_AGRI @pol_dep_AGRI via Twitter

Posted on

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.

Posted on

Has the starting signal sounded for the next CAP reform?

Yesterday, the Juncker Commission released its third annual Work Programme for 2017. This year’s Work Programme proposes 21 key initiatives as well as a further 18 REFIT proposals intended to improve the quality of existing EU legislation. In addition, the Commission Work Programme identifies 34 priority pending proposals made in the past two years where it seeks swift adoption by the Parliament and Council.

The Work Programme Communication contains two specific references to agricultural policy development. The full paragraph reads as follows:

The Commission will 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, taking account of the opinion of the REFIT Platform, and without prejudice to the Commission proposal to revise the Multiannual Financial Framework. As concerns the position of farmers in the food supply chain, in the light of the outcome of the ongoing work of the Agricultural Markets Task Force and the High Level Forum on the food supply chain, the Commission will consider further action as necessary.

There is no surprise regarding the reference to the position of farmers in the food supply chain. The Agricultural Markets Task Force report will likely be presented to the November meeting of the AGRIFISH Council. It will undoubtedly contain recommendations some of which may suggest legislative action, and the Commission must then decide whether to follow up on these recommendations with legislative proposals.

Modernisation and simplification of the CAP

The reference to the ‘modernisation and simplification agenda’ of the CAP in this paragraph first appeared in President Juncker’s Letter of Intent to the Presidents of the Council and of the Parliament accompanying his 2016 State of the Union message last month. This Letter of Intent marked the starting point of the interinstitutional dialogue on the priorities for the coming year. It contained an indicative list of the main initiatives that the Commission intends to take up to the end of 2017. Among the initiatives listed under Priority 1 (A new boost for jobs, growth and investment) of the Juncker Commission’s ten political priorities we find the following:

Modernisation and simplification of the common agricultural policy to maximise its contribution to the Commission’s political priorities and to the sustainable development goals.

The intent of this initiative has now been elaborated somewhat in the new Work Programme but there remain a number of curious elements around the proposal and how it is framed.

  • The reference to the ‘simplification and modernisation’ agenda (reversing the order of words in the Letter of Intent) is contained in the covering Communication from the Commission. It is not listed specifically as one of the 21 initiatives on which the Commission pledges to take action. Commissioner Hogan is reported to have indicated at the October AGRIFISH Council meeting in Luxembourg that DG AGRI would be working on a Communication to address Juncker’s commitment in the Letter of Intent ‘to modernise and simplify the CAP’. If this is indeed the case, it is somewhat surprising that this is not explicitly stated as such in the annual Work Programme.
  • However, the Work Programme Communication does make clear that DG AGRI’s work ‘will focus on specific policy priorities for the future.’ This would seem to point to a Communication, presumably together with an impact assessment of alternative policy priorities, sometime in the course of 2017.
  • The policy priorities are framed in the context of (a) maximising the CAP’s contribution to the Commission’s ten priorities and (b) maximising its contribution to the Sustainable Development Goals. It is unclear whether a focus on maximising the CAP’s contribution to the Commission’s ten priorities (and presumably especially Priority 1 on boosting jobs, growth and employment) will likely constrain the scope of DG AGRI’s review. Potentially, all the usual suspects one would expect to see addressed in an agricultural policy debate (the design of direct payments, appropriate risk management instruments, strengthening producers’ bargaining power, market management, rural development programming) would seem relevant to the jobs, growth and employment agenda. The hand of Karl Falkenberg is clearly evident in the inclusion of the reference to adjust CAP policies to specifically address the Sustainable Development Goals. Whether this will be used to stress the need to produce more food in Europe to contribute to reducing hunger (SDG 2) or whether it indicates that environmental issues, and sustainability issues more generally (SDG 12), will feature prominently in the review, will only become clear over time.
  • This ‘Communication’ and the policy priorities it evaluates will ‘take account of the opinion of the REFIT Platform’. The REFIT Platform is chaired by Vice-President Timmermans and consists of two groups – the ‘Government’ group comprised of one representative per member state, and the ‘Stakeholder’ group made up of representatives of business, social partners and civil society, the European Economic and Social Committee and the Committee of the Regions. It has the job to assess the merits of stakeholder contributions on how to make EU laws more efficient and more effective and to look at practical ways to follow up on these suggestions without undermining policy objectives.
  • Finally, the DG AGRI ‘Communication’ is to be “without prejudice to the Commission proposal to revise the Multiannual Financial Framework”. I confess I am at a loss to understand how this should be interpreted, or what the purpose of including this reservation is. One interpretation might be that the DG AGRI Communication on ‘modernisation and simplification of the CAP’ will be confined to rather technical issues, such as those raised by the REFIT Platform, which might require revisions of the basic acts but without addressing broader issues of policy relevance and design. This would then leave the Commission free to propose a broader vision for the CAP in the Commission’s proposal for the next Multi-annual Financial Framework expected at the end of 2017. But it would hardly make sense to stretch DG AGRI’s limited resources to work on two separate Communications simultaneously. We can only hope that the Commissioner will be able to clarify what lies behind this reservation in the coming weeks.

Update 26 October: A more plausible interpretation might be that the Commission is saying, fine, go ahead and conduct your consultation on the future CAP, but this is no guarantee that your recommendations will be funded in the forthcoming MFF proposal. One might see the hand of the Budget Commissioner here, who will not want to be committed to funding an expensive package of outcomes arising from the DG AGRI consultation.

The REFIT Platform

The Work Programme specifies that the opinions of the REFIT Platform will feed into the DG AGRI work over the coming months. The REFIT website contains the recommendations of the Platform grouped by theme, including agriculture and rural development. As of today, just three proposals have been progressed to decision stage although others are in the pipeline. To date, it has proved difficult for the Platform to agree on recommendations. The opinions issued are largely a list of the diverging views expressed by both government members and stakeholder participants, with little meeting of minds.

The three recommendations concern:

Effectiveness and Efficiency of the CAP

  • This suggestion from the European Environmental Bureau was supported by the Stakeholder group which recommended that the Commission complements existing evaluation plans by carrying out a more strategic review (i.e. ‘fitness check’) of the CAP as a matter of priority to supplement the evidence base and inform any future reform on an appropriate timescale. A few members of the Government group supported this recommendation. However, a majority of government members firmly object to any review of the CAP framework this soon after the last revision given that 2015 has been the first year of the application of this new CAP and no evaluation results are available so far. They also argued that the REFIT Platform should serve, only and exclusively, to try to achieve simplification, burden reduction and regulatory improvement. They argued that this suggestion may go beyond simplification and it is a proposal of a review of the whole CAP, where decisions should be taken in the respective and appropriate political forums.

Overlaps between Pillars 1 and 2 of the CAP

  • This addressed a concern expressed by Freistaat Sachsen that overlaps between the two pillars resulted in the risk of additional compensation and further administrative burden in managing consistently the respective measures in both pillars. For government members, a key issue was that a more targeted, risk-based and proportionate controls regime is required in order to enable the delivery of the environment public goods envisaged through agri-environment climate measures and to ensure farmers can continue to access this income stream. While some Stakeholder group participants agreed with this, others believed any broader review of both Pillars should take place in the context of a more holistic ‘fitness check’ of the CAP as proposed by the EEB. However, the majority of the Government group firmly rejected this recommendation for a fitness check.

Cross compliance rules under the CAP

  • The Danish Business Forum proposed a revision of the cross-compliance rules in order to create greater transparency and proportionality of the regulatory framework and to minimise the risk of differing interpretations in the Member States. Again, the Platform could reach no common consensus. The Stakeholder group wanted any review to be conducted in the context of a broader ‘fitness check’ of the CAP. Some Government members were open to the suggestion for new legislation on cross-compliance. Others felt it was too soon to review the legislation and a majority were strong opposed to the ‘fitness check’ recommendation from the Stakeholder group.

Based on this experience to date, it would seem that the REFIT Platform, at least with respect to agricultural regulations, is proving rather dysfunctional. It is hard to see much of value emerging from this source to inform the forthcoming DG AGRI consultation on future policy priorities.

Conclusions

On the basis of the Work Programme, the Commission, European Parliament and Council will now work on a Joint Declaration on commonly agreed objectives and priorities for 2017 intended to swiftly turn proposals into action. As no new agricultural legislation is envisaged in 2017, it seems unlikely that the CAP review will be specifically mentioned, but the Parliament in particular may wish to see a specific marker regarding the agricultural review inserted into the Joint Declaration.

Nonetheless, there appears to be a sufficient political signal in the Work Programme for DG AGRI to begin work on preparing a Communication to be issued next year. But many issues remain to be clarified.

These include the scope and ambition of this exercise (will it focus on incremental changes or consider options for bolder reform, will it confine itself to a handful of particular issues, such as risk management, greening, or functioning of the food chain, or will it provide a comprehensive review of all issues in the four basic CAP regulations) and what range of alternative policy scenarios will it describe?
Also the way in which any public consultation will be organised and how the results will feed into the definition of the alternative policy priorities to be considered will need to be clarified.

It all seems to add up to a busy year ahead for officials in DG AGRI.

This post was written by Alan Matthews

Picture credit: New Europe

Posted on

How external influences have shaped the CAP

When the external impact of the Common Agricultural Policy (CAP) is discussed, it is often in the context of evaluating the CAP’s impact on world markets and third countries. For example, there is a substantial literature which looks the coherence of the CAP with the EU’s development co-operation objectives by examining its impact on developing countries (see my 2014 review chapter here).

In a new study for the AGRI Committee of the European Parliament, Professor Alan Swinbank of the University of Reading turns this traditional focus on the impact of the CAP on world markets on its head. His study The Interactions between the EU’s External Action and the Common Agricultural Policy instead looks at how the external dimension of the EU – including trade policies pursued through the WTO and other international obligations and its development co-operation activities with neighbouring states and developing countries – have influenced the evolution of the CAP.

The impact of the external dimension on past CAP reform

The resulting study is a great romp down memory lane. It begins by recalling the concessions the EU (then the EEC) had to make in the Dillon Round of the GATT 1960-62 to compensate other countries for trade advantages they claimed to have lost due to the creation of the EEC customs union with its common external tariff at that time. This led to the EU binding its duties on soybeans at zero per cent. It also bound its duties on maize gluten feed and manioc to zero per cent as well.

When animal feed compounders found ways to mix these ‘cereal substitutes’ which displaced high-priced EU cereals in animal feed rations, this not only caused budget headaches as the EU tried to find ways to dispose of its surplus cereals, but also skewed the geographic location of the EU pig and poultry industries to regions with easy access to ports and away from those regions where the cereal surpluses were produced.

The EU attempted to support its oilseeds sector through a system of deficiency payments rather than border support, but in 1990 the US won a GATT dispute claiming that this nullified the trade advantages for soybeans it had been granted in the Dillon Round. With the US threatening trade sanctions, this was one of the factors that encouraged the EU to sign up to the Blair House Agreement in November 1992 which opened the way to the conclusion of the Uruguay Round and the creation of the World Trade Organisation (WTO). Here is one of the earliest examples of the influence of external factors on the evolution of the CAP.
Swinbank has long advocated the argument that the GATT/WTO dimension was an important driver of the CAP reforms through to the 2008 reform, and that it was the lack of a WTO driver that led to a rather different outcome for the post-2013 CAP. Nonetheless, the agreement at the Nairobi WTO Ministerial Conference in December 2015 to prohibit the payment of export subsidies on agricultural products (albeit with a transitional period) shows that multilateral trade rules continue to play a role in constraining agricultural policy decisions in the EU.

With further multilateral trade liberalisation in the WTO Doha Round apparently deadlocked, the EU like other countries has sought to pursue bilateral preferential trade agreements (regional trade agreements RTAs). The study reviews the state of play of these agreements and their likely impacts for the agricultural sector.

Although individual RTAs can involve both opportunities and threats for EU farmers, Swinbank emphasises that the cumulative effect of these agreements is more likely to depress EU market prices and imply tighter competition in the EU for those CAP products still protected by high tariffs: beef, sugar and ethanol, and dairy products in particular. The Commission is currently undertaking a study to analyse the economic cumulative effects of ongoing and upcoming trade negotiations on the EU agricultural sector, to be completed by Autumn 2016.

The influence of the development dimension

The Swinbank study also discusses how the EU’s efforts to promote development co-operation with developing countries have had an impact on the CAP. The chapter focuses on food aid policy and the main preferential trade arrangements offered by the EU to developing countries (the Lomé/Contonou Agreement with African, Caribbean and Pacific countries and the Generalised System of Preferences, including the Everything but Arms scheme for the least developed countries).

The study notes how these agreements contributed to the reform of specific CAP commodity regimes, including bananas, sugar and rice. However, in focusing on the direct links between trade arrangements and CAP reform in this chapter, the chapter arguably underplays the role of the development dimension in encouraging CAP reform.

The Maastricht Treaty in 1993 included a commitment to policy coherence for development which required the Union to take into account the impact on developing countries also in its non-development co-operation policies. While the practical impact of this commitment can be debated, it did encourage a campaign to improve the policy coherence of EU agricultural policy with developing country interests.

The successful highlighting of and mobilisation around the adverse effects of export subsidies on developing countries by development NGOs in the early 2000s was the first significant challenge to the dominance of farm interests in EU agricultural policy-making and helped to create the environment in which further CAP reform was possible.

Biofuels policy is another domain where development NGOs, in association with environmental NGOs, have exerted considerable influence. Biofuels policy is not directly part of the CAP and, as this new study highlights, there have been relatively few CAP provisions that directly encouraged biomass production for energy purposes, and none are operative now.

Instead, biofuels have been encouraged by a variety of policies such as excise tax exemptions and mandates which benefit as much imported biofuels as biofuels produced from raw materials supplied by EU farmers. The recent legislative decisions to reduce the percentage that first-generation biofuels can contribute to the target for renewable energy in transport fuels and to strengthen sustainability criteria, and the Commission’s decision not to propose a mandatory target for biofuels after 2020 in its Energy and Climate Framework package, reflect in part the campaigning by development NGOs on these issues. The significance of the policy coherence for development commitment might have been given greater prominence in the study.

The impact of the external dimension on the next CAP reform

The final contribution of the study is to identify those external influences which are likely to have the most influence on the shape of the future CAP. This seems to me to be an excellent summary of the issues and it is worth quoting this final section in full.

As the EU’s institutions begin their preparations for determining the post-2020 CAP, which of the EU’s external policy actions are most likely to influence the discussions and —more importantly— the outcomes? Perhaps the most pressing need is to implement the EU’s commitment in Paris to reduce its GHG emissions by 40% by 2030 (whilst recognising that, collectively the world will need to do more if it is to keep the increase in global temperatures to no more than 2°C). For the CAP this suggests that there needs to be a thorough assessment of the cost-effectiveness of the greening provisions introduced by the 2013 reform, and its possible revision. Incentive schemes to compensate farmers for carbon sequestration are another possibility.
With regard to trade negotiations, completion of the Doha Round would be unlikely to put much immediate pressure on the CAP, although it would lock-in the decoupling of support brought about by past reforms. If the Round is completed, and if the EU’s Green Box declarations are then challenged, it would be well into the 2020s before the EU would need to reformulate its policies to make them WTO compliant.
If, instead, the Doha Round remains in limbo, the EU retains a large margin of manoeuvre within its AMS binding that would allow an increase in its Amber Box support. This, for example, would allow a redesign of its environmental policies (particularly for carbon sequestration), which currently are constrained by the Green Box stricture that payments cannot exceed ‘the extra costs or loss of income involved in complying with the government programme’. Moreover, for those critics of decoupling and a neo-liberal agenda, more recoupling of support to boost EU food production could be accommodated within existing AMS constraints. Further WTO Dispute Settlement cases challenging various aspects of the CAP cannot be ruled out, but none are foreseen for the moment.
Completion of the Doha Round would though involve acceptance of a steep reduction of tariffs on a number of highly protected CAP products —sugar, dairy, beef, etc.— and in that respect involve changes to the CAP. But a similar impact on market prices could result from implementation of the many trade agreements in negotiation or contemplated: with Canada, the USA, Mercosur and Australia in particular.
The geopolitical tensions around the Mediterranean Basin, and in the former Soviet empire, remain dangerously fluid. New alliances and trade commitments could conceivably emerge. This could result in greater competition on the EU market for fruits and vegetables, olive oil, and wine, but this is probably unlikely to result in modifications to the CAP as such. Such a development would, however, likely reinforce calls to maintain a strong element of basic income support for EU farmers.
Perhaps the biggest challenge the post-2020 CAP faces is that of Brexit, which could occur as soon as 2018. Revised trade arrangements between the UK and its former EU partners will take time to formulate, but if a FTA that excludes agriculture is not put in place this could put severe pressure on market prices in regions that currently have a heavy dependence on the British market (e.g. Irish beef). Moreover, unless the UK can be persuaded to pay a sizeable fee to access the Single Market, the loss of the UK’s net contribution to the EU budget might trigger a reconsideration of CAP funding in the post- 2020 multi-annual financial settlement.

This post was written by Alan Matthews.

Photo credit: SumOfUs via Flickr under CC licence

Posted on

Karl Falkenberg’s reflections on the CAP

Karl who, you might well ask? Well, Mr Falkenberg has just published a reflections paper setting out a European vision for sustainability which goes into some detail about his views on the future of EU agricultural policy. Indeed, one-fifth of his relatively short document is devoted to this topic. You might well shrug that yet another viewpoint added to the hundreds of others (including those aired on this blog) discussing how Europe’s Common Agricultural Policy should be reformed after 2020 is hardly worth getting exercised about. But Mr Falkenberg’s views may deserve more attention than most.

After all, Mr Falkenberg spent more than six years as Director-General in DG ENVI after a distinguished career in the Commission civil service including a stint as Deputy Director-General in DG TRADE. Perhaps more important, he was appointed in September 2015 as a Senior Advisor for Sustainable Development to the President of the European Commission, Jean-Claude Juncker. He sits along with a group of elite advisors to the President in the European Political Strategy Centre (EPSC), an in-house think-tank within the Commission reporting directly to the Commission President.

His brief at the EPSC is to assess the implications of the commitments in the UN Agenda 2030 for Sustainable Development for the Commission and to advise on how to integrate sustainable development into EU policies. This reflections paper is his first public pronouncement and thus deserves close attention. At a minimum, Mr Falkenberg will surely find it easier to get the ear of Commission President Juncker than most others trying to influence the shape of the future CAP.

Unfortunately, despite good intentions, the advice given in the paper is rather vague and ill-defined and sometimes downright harmful. It remains to be seen what influence it might have in the debate now starting on the future CAP.

Starting observations

Mr Falkenberg observes that the great success of EU agriculture in increasing productivity in recent decades has come at a price:

continued reduction of the number of farms and farm employment, larger specialised production units, leading to monocultures with considerable environmental impacts and food quality that is increasingly questioned by consumers …. Long-term trends on rural employment, farming incomes and major environmental indicators for soil quality and biodiversity remain problematic.

He notes that “there are serious concerns about the environmental impact of our present agricultural production methods. Large-size animal production leads to large amounts of manure, which the crop production cannot absorb … [leading] to unhealthy levels of nitrogen in surface waters in the main production areas”.
In his view,

All of this argues for a lower animal per hectare production process. Comparable problems exist in intensive fish farming and intensive farming overall. The number of infringements and Court cases against Member States for not respecting the Nitrates and the Water Framework Directives illustrates that intensive farming negatively impacts the environment. Large monoculture affects biodiversity negatively to a point where pollinators are coming under real threat.

Despite several reform projects of the CAP, he notes that “its monetary benefits still largely go to large intensive farming practices which increases not only social inequalities, but also environmental problems, monocultures and rural desertification”.

Focus should be put on agroecology

In response to this damning diagnosis, Mr Falkenberg’s first suggestion, referring to the recent French initiative to encourage an integrated use of resources and nature-based solutions, is to propose that agroecology should be given full attention in a debate about transforming the Common Agricultural Policy. Now agroecology has developed a multitude of meanings for different groups (including, at a very basic level, whether it is spelled agroecology or agro-ecology, I tend to prefer the former while Mr Falkenberg prefers the latter). In particular, it is both a science and a political movement.

As a science, agroecology combines ecology (interactions among biological components at the field level, or agroecosystem) and agronomy (integration of agricultural management). It has been defined as “the global study of agroecosystems protecting natural resources, with a view to design and manage sustainable agroecosystems”. The objective of the science of agroecology is to understand better how to live with and take advantage of biological systems both to improve agricultural productivity, and enhance natural systems (natural capital). In the words of one advocate, “This approach is based on enhancing the habitat both aboveground and in the soil to produce strong and healthy plants by promoting beneficial organisms while adversely affecting crop pests (weeds, insects, diseases and nematodes)” (Altieri, p. 1).

Agroecological science has identified a number of practices which contribute to this objective. There is a strong focus on the importance of soil health, minimising the loss of soil nutrients and increasing soil organic matter. Another lesson is to minimise the use of external inputs and to work towards closed-loop systems. A further insight is the importance of promoting biodiversity, biological interactions and synergies, and to make use of these natural processes for purposes like pest management, weed control and waste management.

However, agroecology is also the name for a political movement which seeks to empower and champion the ingenuity of small farmers. From this perspective, agroecology is much more than simply a set of farm practices for managing land and growing crops. Political agroecology takes a food system approach and focuses on the distribution of power relationships along the food chain. Political agroecology is anti-industrial agriculture, anti-large scale agriculture, anti-biotechnology, critical of current food consumption habits and anti-trade. Political agroecology and the food sovereignty movement are largely overlapping responses to the perceived ills of a globalised food system dominated by large corporations.

Mr Falkenberg is careful to define what he sees as the merits of agroecology:

[A]gro-ecology … builds upon the natural synergies between plants, animals, humans and their environment. Agro-ecology brings back to farming the 3 dimensions of sustainable development: to sustain agricultural production, preserve healthy environments and support viable food and farming communities. Agro-ecology also builds upon innovation, but in an inclusive manner through e.g. social innovation and different production methods and new business models. Agro-ecology is highly knowledge-intensive, based on techniques developed on the basis of farmers’ knowledge and experimentation. Agro-ecology is economically viable for those making the choice to transform their production methods to be in charge of the process rather than dependent upon firms producing seeds and inputs. It also contributes to fighting climate change and to improving nutrition. It deserves full attention in a debate about transforming the Common Agricultural Policy.

While this paragraph is largely an advocacy of agroecology on scientific grounds, there are echoes of the political movement in the notion that innovation can only be based on farmers’ knowledge and experimentation (for those of us of a less religious disposition, the neglect of the contribution of modern science, informatics and engineering can seem absurd) while the claim that agroecology can also help to improve nutrition (in the context of developed countries) seems far-fetched. However, Mr Falkenberg comes closest to the political agroecology movement in his advocacy of a future European agriculture based on labour-intensive small farms.

The labour-intensive small farm mirage

Mr Falkenberg’s vision is set out as follows:

Agriculture potentially can offer significant employment opportunities if organised in less industrial fashion. A European policy that would support more labour intensive integrated farming could not only contribute to stop the exodus but also to create additional employment in rural areas to maintain a traditional landscape, reduce qualitative and quantitative water and soil problems and help restoring biodiversity in agriculturally used land.

Organic farming and other forms of alternative agriculture are indeed more labour-intensive than conventional farming. Whether this is a positive attribute in itself can be questioned. It is easy to absorb people into low-productivity occupations which pay low wages. Sustainability in the long run (which in its economic dimension must include competitiveness) requires the ability to generate high-productivity work which can remunerate those engaged in the industry at comparable levels to the rest of the economy.

What is striking is the ahistorical nature of Mr Falkenberg’s vision. It runs counter to the historical experience of employment trends in agriculture over the past century, historical trends which are grounded in well-understood economic forces and which have led to the steady consolidation of farms over time. The primary motor behind these trends is rising labour productivity in the non-farm sector which has allowed a steady rise in living standards.

For farm living standards to keep up, farm labour productivity must also increase, particularly as for most of this period the prices of farm products were rising less rapidly than the prices of manufactured goods and services. The rising cost of labour, in turn, encouraged the substitution of capital for labour and induced innovation in industrialised countries that was labour-saving. Economies of scale due to the greater use of capital equipment on farms as well as the need to spread the fixed labour input on farms over a larger area have both driven the process of farm structural change and consolidation.

Unless we are prepared to assume that labour productivity, and thus living standards, in the nonfarm sector are going to drastically fall, or that prices of agricultural products are going to go through the roof relative to the prices of nonfarm goods and services, these economic forces behind farm consolidation will continue to determine the evolution of farm structures. In that context, pursuing a more labour-intensive agriculture is really a call to return to a managed and regulated agriculture, with high prices, behind high tariffs and closed to the rest of the world (as, to be fair, the food sovereignty movement wants and desires). It is an unattractive manifesto with no long-term perspective.

Mr Falkenberg is aware of this criticism. He quotes some results from agroecological research in France which showed both lower use of external inputs (nitrogen and herbicides) and higher returns per hectare in grain production, mainly attributable to a larger presence of natural pollinators in a more diversified landscape. He argues this research tends to demonstrate that agroecological practices would by no means imply a reduction in output, nor substantial price increases.

While not dismissing these conclusions, the key indicator in terms of farm viability – the return per unit of labour input – is not quoted. Because agroecological farming is more management and labour-intensive than conventional farming with chemicals, I suspect the comparison on that account might not be so favourable.

What might this mean for the CAP post-2020?

The unwarranted attention to the political aspects of agroecology distracts attention from the serious environmental challenges associated with conventional farming rightly outlined by Mr Falkenberg. Agroecological practices are certainly one approach to tackling these problems. This raises the questions: why are these practices not more widely adopted, and how might the CAP do more to facilitate their adoption? How should the CAP encourage farmers to “produce differently”?

The economic perspective provides one answer. Innovation responds to relative prices (this is what is meant by saying that innovation is induced). During the post-war period, farmers were encouraged to take advantage of cheap supplies of fossil fuels, cheap supplies of chemical fertilisers, the availability of chemical crop protection products and plentiful supplies of water, while at the same time being able to externalise and pass on to others the negative environmental consequences of using these inputs. Industrial or large-scale agriculture is not resource-intensive per se, this was the economic environment in which it developed.

To develop a more sustainable agriculture, these negative externalities have got to be internalised. Were carbon emissions, soil erosion, depletion of water aquifers, nitrogen leakage, loss of biodiversity and air pollution all to be properly priced or regulated, agroecology and other sustainable farm practices would compete on a more level playing field. How to design proper incentives, and the relative roles of regulation and markets to achieve this objective, are hugely important topics. It is thus of interest to ask what the Falkenberg paper has to say on these issues.

His over-riding advice to President Juncker is unexceptional if still likely to be controversial in some quarters:

Planning the next agricultural reform, more attention should be placed on sustainability, and strengthening rural development support type instead of direct payments linked to acreage.

Mr Falkenberg recognises that this would be just a first step. But in spelling out what this might mean in practice, I confess to a certain sense of disappointment. Having expertly teed up the problems, his specific recommendations are a bit of a hotch-potch:

Do a Fitness check of the Common Agricultural Policy [an explicit reference to the recent NGO call for this]; reverse the trend to overspecialisation on single farm activity; support integrated farming as a means to secure farm income in the face of world price fluctuation; privilege quality over quantity and seek to sustainably use renewable resources on land and at sea; develop more awareness for health related dietary attitudes by consumers and orient producers in the same direction; foster a more strategic use of Public Procurement rules by the Member States, building on the Commissions’ work for Innovation (Horizon 2020 support for pre-commercial procurement and public procurement innovative solutions).

There are further specific suggestions scattered throughout the text.

“The Commission must think “circular” when it will redefine the Common Agricultural Policy.”

In view of the importance of diet-related diseases in the EU, nutrition, health, environment/climate impact and consumer perception are key elements to be integrated on equal footing in the shape of the next reform of the Common Agricultural Policy.

“Linking rural development and agricultural policy back to health and environment is an economic, social and environmental must”.

“Local foods, short supply chains and on-farm processing could become a key element in meeting the primary goal of the Common Agricultural Policy to increase farm revenue and to provide quality food to European citizens.

Ecosystem services should be part of a sustainable European agriculture, using “green infrastructures” to address issues like floods, climate change, soil erosion.

As part of a necessary re-evaluation of the role of natural capital, measures aimed at ensuring the preservation of pollinating insects in general terms (such as minimisation of harmful pesticides and a sufficient level of crop diversity for their nutritional needs) are essential.

These are all high-level objectives, but what these might mean for the precise modalities of the next CAP reform is not spelled out any further. This may be too much to expect. After all, the reflections paper addresses sustainability, and the CAP is addressed as just one of a number of sustainability hotspots. On the other hand, without specific recommendations, timelines and targets, the ideas will be easy to dismiss.

Next steps

Following the adoption by the UN in September 2015 of the 2030 Agenda for Sustainable Development, including a set of 17 Sustainable Development Goals (SDGs), the EU has a key role in the implementation of the SDGs.

As an initial step the Commission is carrying out a broad mapping exercise, including all relevant DGs, in order to identify which existing EU policies already address challenges set by the SDGs and where there are the gaps and weaknesses.

The Commission plans to finalise this mapping in October 2016 and to publish the results. It will be interesting to see how many of Mr Falkenberg’s ideas are reflected in this document and ultimately in the Commission’s thoughts on a future CAP.

This post was written by Alan Matthews

Photo credit: Montado in Portugal by Diana Tuomasjukka via Flickr.