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
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
"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
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 decouplinga
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
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
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
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
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
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
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