Select Committee on Environment, Food and Rural Affairs Minutes of Evidence

Memorandum submitted by the National Farmers' Union of England and Wales (NFU) (H25)

  1.  The NFU is grateful for the opportunity to set out its initial considerations on the Commission "Communication" of July 10. These views are provisional on three counts. Firstly the Commission's paper is itself only a discussion document and in many cases the detail which would be required to take a definitive view is lacking. Secondly the timetable for response is short and it is difficult to consult our members at this time of the year. In particular the NFU Council does not meet until October. Thirdly, the Commission paper is a complex package, and many of the individual elements inter-relate. It is often difficult to take a view on particular proposals without looking at the overall picture, but that may of course be changed if the formal proposals differ significantly from this initial paper.

  2.  Unlike some of our sister organisations in the European Union, the NFU does not contest the right of the Commission to present proposals for change to the CAP at this stage. We did not regard the Agenda 2000 agreement reached in Berlin in 1999 as immutable until 2006 and we are open to examine all proposals, provided the case for change has been made and the consequences for British farming are acceptable in our view.

  3.  The NFU agrees with many of the objectives which the Commission announces for its proposals. In particular we share the guiding principles of encouraging a competitive agricultural sector; a fair standard of living for those in farming; market orientation; environmentally friendly production; simplicity and a reduction in bureaucracy. In addition, we would add the condition that changes do not result in a large or sudden redistribution in support going to individual farmers.

  4.  These are general introductory remarks. In the rest of our submission we respond to the specific questions (highlighted in bold text) that the committee has posed.

Will the proposed reforms encourage a more liberalised agricultural sector in within Europe and what impact will they have on negotiations for the enlargement of the European Union?

  5.  It is difficult to ascertain to whether the proposals are designed to encourage a more liberal sector, or to make the changes necessary to allow European agriculture to adapt to greater liberalisation brought about by the Doha WTO Round and the "Everything but Arms" initiative. The latter seems more likely.

  6.  Broadly speaking, the proposals would lead to greater liberalisation. Decoupling, and the consequent abolition of many quotas and production restrictions, should lead to greater focus on the market and to a situation where production is more likely to take place in areas and regions to which it is best suited.

  7.  As far as enlargement is concerned, the timing indicates that it will be impossible for the reforms to have any impact on negotiations for enlargement. The actual proposals may not be released until late December this year. Obviously there can be no decision before spring of 2003, at the earliest, with late 2003 being a more likely date. Meanwhile, it is the firm intention that negotiations with the 10 candidate countries will be concluded by December 17 in Copenhagen. So, it could only be the proposals that could affect the negotiations. But given the complete uncertainty about whether these proposals will be agreed in full, in part, or not at all, we are now in the territory of total speculation.

  8.  Another question would be whether the reforms, if implemented, would make the process of enlargement easier or more difficult. On the whole, it would appear that they would facilitate the process. The Commission's proposals for the negotiating mandate on agriculture have aroused considerable resentment among the applicant countries because they propose differential treatment over a lengthy period, and because the applicants are dissatisfied with the quota levels proposed.

  9.  The proposed reforms would reduce the difference between the policy applied in the current EU and the applicant countries in the following ways:

    —  "Dynamic modulation" would decrease direct payments and increase structural payments in the EU.

    —  "Decoupling" has already been proposed as an option for the applicant countries.

    —  Decoupling would eliminate many of the quotas in the EU (for beef and sheep payments, potato starch etc) thus removing one of the most contentious negotiating problems.

  10.  It is therefore possible to envisage, if the reforms are agreed, a situation in which the policies in the two parts of Europe were set on a convergent course. It might then be possible to have a shorter period of transition.

  11.  Whether this is in the best interests of British farmers is another question. The NFU has always supported enlargement on political grounds, while not disguising its concerns that a rushed or unconsidered accession could present both new and old members of the EU with formidable problems. For agriculture, as has been argued in paragraph 10, the Commission's MTR proposals could potentially ease some of the difficulties. But to make a proper assessment it is necessary to know what the alternatives are. There would certainly be a strong case for saying that a combination of no CAP Reform before 2006, an implacable demand by the accession countries for parity of treatment on direct payments and no increase on spending budget for agriculture would be a much worse scenario for British farmers.

How will the proposed reforms affect British farmers, and in particular what will be the impact of capping aid for larger farms and decoupling subsidies from production levels?

  12.  In most cases the lack of detail in the Commission's communication makes these questions impossible to answer. The exception to this is the capping proposal, which is clear. As far as the NFU can judge, about 600 farm businesses would be affected in the UK. For those whose current payments are significantly more than

300,000 the impact would be devastating, probably enough to cause the failure of the business in most cases. For some this might be the actual consequence. Most would seek to avoid the cap, either by artificially splitting their businesses, or by selling or renting out land. In private, at least, the Commissioner defends the proposal as a presentational issue, designed to improve the image of the CAP, so these consequences might be acceptable or even welcome to him. But it is important to underline that they would lead to unproductive expenditure on lawyers, accountants and land agents and, in most cases, would make the enterprises less economic and competitive. One of the grand objectives of the Commission's proposals on the MTR is to seek to ensure that farmers react to the market and not to the signals from the subsidy system. Ironically, capping would have precisely the opposite effect. The NFU is opposed to this proposal.

  13.  The NFU has been supportive of decoupling, as a principle, since 1994. There are clear advantages. Among the most evident are:

    —  Once the system is established, it considerably simplifies the administration and bureaucracy, both for farmers and the government.

    —  It will help farmers to distinguish the demands of the market, and society's demands for other goals and objectives. At present they are confused in the support system, and thus farmers themselves are often confused.

    —  Consequently, it would greatly help farmers to be more market focused. Once the link between subsidy and production is broken, farmers should be more able to concentrate on producing the quality and quantity demanded by the market. It is likely that total production would decline somewhat (although individual farmers might increase or decrease their production); which should improve market conditions. It would also be a positive development if processors recognised the need to offer more realistic prices.

  14.  Decoupled payments would, the NFU strongly believes, be regarded as non-trade distorting by the WTO and thus exempt from further cuts which are otherwise in the Doha Round of trade negotiations. The reform should, in fact, reverse the positions of the EU and the USA in the talks, putting the USA in a weak and defensive position.

  15.  On the other hand, there can be no doubt that the mechanism proposed by the Commission for decoupling—a whole farm payment based on historic entitlement and linked to the land- will give rise to formidable difficulties in an initial period. There are other systems which could be administratively simpler; for example linking the payment to the farmer rather than the land, or allocating the premium on some kind of flat-rate area basis, rather than on historical claims. But in both cases there would be other negative consequences that outweigh the supposed advantages. If the payment is allocated to the farmer, much of it will leak out of agriculture, it would not be possible to apply cross-compliance conditions to the land, and the system would lead to a rapid restructuring which, in much of Europe, would not be politically acceptable. If the payment is paid on a flat-rate basis at a regional level (an option that the proposals appear to offer) there would be an enormous redistribution of support among existing farmers that is bound to lead to both economic and political difficulties.

  16.  The most serious problem to resolve will be the initial allocation per farm, in the many cases where that is not straightforward, and the apportionment between landlord and tenant where there is a change in land tenure in the future. A system must be devised which resolves these problems as fairly as possible, and recognises the legitimate interests of both tenant and landowner. Tribunal arrangements seem essential. Many of the same problems arose with milk quotas, although the scale of the problem was much less. The NFU notes that the arrangements devised for apportioning quota at the end of a tenancy have generally worked satisfactorily.

  17.  Another serious issue is the choice of the reference period for determining the new whole farm payments. There are already signs that producers are looking to adjust their production to maximise their allocation. If there is a long delay in taking decisions on the MTR there will be a major risk of distortion.

  18.  A satisfactory resolution of these issues will be essential if decoupling is to go ahead. But the reason for raising these difficulties is to find solutions. Some others will be only too eager to regard them as insuperable. The NFU's analysis remains that the real choice for CAP Reform is between decoupling on the one hand and ever tighter supply management on the other. We remain convinced that decoupling is the better choice. Supply management can only lead to ever-declining production and ever-reducing competitiveness. In the end, it will be a dead end

What will be the practical effects of the new cross-compliance conditions, and will the conditions adequately balance environmental and commercial concerns?

  19.  This question is again impossible to answer because the Commission's Communication gives no indication of the detail of the conditions. The NFU believes very strongly that cross-compliance conditions should be aimed at preventing pollution or damage, and should be based on a harmonised understanding of "Good Agricultural Practice", including compliance with existing regulatory requirements. It is important to distinguish this notion of mandatory cross-compliance with the concept of voluntary measures, such as agri-environmental schemes, aimed at improvements or enhancements. If the bar of cross-compliance is set too high, the competitiveness of European production, on both domestic and external markets, will be damaged and farmers will be more and more driven into greater dependence on public support.

  20.  From our contacts with the Commission, we are comforted that the Commission's thinking is on these lines. Even so, cross-compliance will place a heavy responsibility on the Commission. Good Agricultural Practice obviously differs according to locality, but the Commission must ensure some equivalence of effect (cost of compliance for farmers) and equality of application (similar topics must be covered). And if some of the conditions rest on Regulation, there will be difficulties where common European measures co-exist with differing national measures. In all cases, it will be essential that the compliance regimes are as rational and unbureaucratic as possible. Cross-compliance must be integrated with existing approaches, not overlaid as an additional stratum. In the UK context, there would be much scope for using farm assurance schemes.

Will the proposed reallocation of funds from direct payments (pillar one) to rural development (pillar two) provide sufficient resources to achieve environmental goals and support rural areas?

  21.  The NFU's view is that if there is to be a shift of expenditure from the first to the second pillar, there must first be measures in the second pillar that have the potential to benefit most farmers. One of the major problems with the national modulation which now operates in the UK is that it takes money from all farmers who receive direct payments and redistributes it to the relatively few who can enter the very targeted and costly agri-environmental measures which are in place. It is for this reason that the NFU fully supports the development of the new "entry level" schemes (otherwise known as "broad and shallow") that should be operational in 2005.

  22.  On the face of it, the money available from the proposed "dynamic modulation" would be inadequate to fund the "entry level" scheme in its early years. (The CSR settlement states that the entry-level scheme needs £75 million in 2005-06 with match funding of £75 million from the Treasury). It would appear that a significant funding gap opens up as European modulation begins at low levels, and UK modulation is phased out. This gap would persist until dynamic modulation builds up.

  23.  This phenomenon would be made worse by the way "dynamic modulation" is likely to work. Our best guess is that dynamic modulation will contribute 16.5 per cent of the European funds, but only receive something like 11.3 per cent back. This means an annual loss to the UK of

9 million per percentage point of modulation,

185 million when modulation reaches 20 per cent. If dynamic modulation is to go ahead, both sides of this equation must be altered. On the receipts side, the UK's share may not seem wildly out of line, but this should be seen in the context of the UK's share of existing rural development spending, which is a pitiful 3.5 per cent. There is therefore every reason for the UK to get a disproportionately high allocation from modulation, until this existing injustice is remedied. On the contribution side, the problem arises from the proposal to exempt the first

5000 of direct payments from modulation. As the UK has relatively fewer farmers, it gets relatively less benefit. In our view the exemption has no economic or social justification and should simply be scrapped.

  24.  The British government must make changes to "dynamic modulation" one of its top priorities. If the changes outlined in the previous paragraph cannot be negotiated, it will be necessary to look at ring-fencing the modulation receipts at a national level.

  25.  Another concern about the Commission's communication is that it appears to weaken the obligation for national match funding of modulation receipts. This again would potentially reduce the amount available for pillar two measures in the UK. The NFU notes that the Treasury has made a commitment to provide match funding to finance the "entry level" agri-environment scheme, and we expect this to be honoured in the long term. Agri-environment agreements generate long term public benefits, but require similarly long term support.

  26.  The Commission proposes to expand the menu of schemes that could be financed by modulation to include: meeting standards; assisting in the production of locally branded products; farm audits; animal welfare and farm assurance schemes. We would support all these. However, given that it seems difficult to finance even the new agri-environment scheme in the early years, there must be strong doubts as to whether there would be any available budgetary resources for these measures.

  27.  The NFU supports the expansion of available measures, as described above. We agree with the Commission's view that the distinction between "accompanying" and "non-accompanying" measures should be retained (ie those which go directly to farmers and those which benefit the wider rural community). We would not like to see this line blurred.

National Farmers' Union

2 October 2002

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