Select Committee on Environment, Food and Rural Affairs Memoranda

Memorandum submitted by the Department for Environment, Food and Rural Affairs (H20)


  1.  The Common Agricultural Policy (CAP) was introduced in 1962 to respond to a strategic need for food security in Europe. The key objectives of the CAP, as enshrined in Article 33 of the consolidated Treaty of Rome, are to:

    —  increase agricultural productivity thus to ensure a fair standard of living for agricultural producers;

    —  stabilise markets;

    —  assure availability of supplies; and

    —  ensure reasonable prices to consumers.

  2.  The original CAP's main mechanisms to achieve this were market intervention to remove surpluses and protection for the domestic market through import taxes and export subsidies. This led to a deliberate increase in domestic food production and consequent reduced dependence on imports. But as production responded, surpluses grew and required increasingly heavy expenditure. This led to friction with other suppliers to the world market who were not so reliant on subsidy.

  3.  In response to burgeoning production and expenditure a number of reforms were introduced. These have included:

    —  artificial constraint of production via mechanisms such as milk quotas and compulsory set-aside for arable crops;

    —  cuts in support prices, although they remain for the most part above world levels and producers have normally been given direct payments in compensation;

    —  payments have been introduced for environmentally beneficial forms of farming and support for environmentally damaging investments has been reduced; and

    —  greater emphasis on rural development and encouraging farmers to look to markets and diversified forms of income to reduce their dependence on subsidy.

  4.  The most recent reform package, known as Agenda 2000, was agreed at the Berlin European Council in March 1999. This brought cereal, milk and beef prices closer to world levels, and established the Rural Development Regulation (RDR) enabling the formulation of an integrated EU rural development policy which underpins what has become known as the "second pillar" of the CAP.


  5.  Although the United Kingdom supported the general direction of the Agenda 2000 package, the Government was disappointed that the reform measures did not go further. The Agenda 2000 agreement contained provision for reviews of various market sectors and the budget between 2002-03. The European Commission has sensibly decided to bring these reviews together and on 10 July published a discussion document containing its proposals for the next stage of reform of the CAP. The UK Government has consistently argued that this Mid-Term Review (MTR) of Agenda 2000 should herald further substantial reform to respond to both domestic and international pressures. The forthcoming enlargement of the European Union and next round of World Trade Organisation negotiations means that we are in a different situation than when Agenda 2000 was agreed, and we should re-examine the CAP with this in mind.

  6.  The UK is committed to sustainable development, and to sustainable agriculture. Consequently, our domestic objectives for this sector include:

    —  to promote a sustainable, competitive and safe food supply chain which meets consumers' requirements;

    —  to improve enjoyment of an attractive and well-managed countryside for all;

    —  to promote sustainable, diverse, modern and adaptable farming through domestic and international actions and further ambitious CAP reform;

    —  to promote sustainable management and prudent use of natural resources domestically and internationally.

  7.  This memorandum sets out the UK Government's analysis of and approach to the Mid-term Review. The Scottish Executive, the National Assembly Government, and the Northern Ireland Executive have been closely involved in discussions on the proposed reforms and will continue to be involved as directly and fully as possible in the decision making as negotiations proceed.


  8.  The Commission's discussion document published on 10 July 2002 included reform proposals in four main areas: market reform; "dynamic" modulation, decoupling of support from production and rural development. A summary of the proposals is attached at Annex A.

  9.  At the 15 July EU Agriculture Council, the Secretary of State, Margaret Beckett, outlined the UK's initial response to the Commission's proposals. She welcomed the proposed shift in support from the first to the second pillar of the CAP and the proposal to decouple direct payments from production, describing it as a "brave and radical" proposal, and one which would remove one of the main incentives to overproduction. She also welcomed the Commission's proposal to introduce a more objective basis for the allocation of rural development funding, making clear that the current imbalance also had to be addressed. She argued that overall the proposals went in the right direction, but stressed that she did not believe that they went far or fast enough, and in some areas we disagreed with the detail of specific proposals, namely:

    —  there is no proposal for degressivity—the progressive reduction of subsidies with budgetary savings;

    —  nor is it planned to phase out dairy quotas;

    —  and we queried the proposals both for a franchise below which dynamic modulation would not apply, and the proposal to limit total subsidies payable to an individual farmer.

  10.  However, it was also clear that the UK's detailed reaction to the proposals would require additional detail about the proposals and would be influenced by the results of a full economic impact assessment. The proposals, their economic effect and likely effect on UK producers are discussed in more detail below. But it is important to recognise that we still lack some important details of how the proposed reforms will be implemented and, in particular, how a decoupled income payment scheme will work in practice.


  11.  We understand from the Danish Presidency that although discussion of elements of the MTR package is likely at every remaining Agriculture Council this year, they will not be seeking agreement to a reform package by the end of 2002. The European Commission is not now planning to table draft legal texts until early December, thus militating against progress before the Copenhagen European summit on 12-13 December to which little more than a report on work in hand will be possible. Agreement to a reform package is therefore most likely in the first half 2003 under the Greek Presidency.

  12.  The proposed reforms come at a crucial time for other equally important and related negotiations involving the EU, namely EU enlargement and the next round of World Trade Organisation negotiations.


  13.  The Danish Presidency's stated main objective is to secure a successful conclusion to enlargement negotiations, with the signing of accession treaties for up to 10 new Member States at the Copenhagen European Council in December. The likely slippage of MTR discussions into 2003 means that enlargement negotiations will have to be concluded in advance of a final MTR settlement. Applicant countries are therefore likely to find themselves signing up to a CAP, the main elements of which will be subject to change. From January 2003, though, new Member States may be granted observer status at EU meetings.

  14.  The Commission has proposed the phasing in of CAP direct payments to new Member States, starting with 25 per cent in 2004, rising to 100 per cent of what current EU members are receiving in 2013. No agreement has yet been reached on this issue. But full rolling out of an unreformed CAP, including the granting of direct payments, to 10 new Member States would cost an extra ‚8-9 billion a year by 2014 (and more on the accession of Romania and Bulgaria). This potential pressure on the budget makes significant reform as part of the MTR process even more important, in order that we can place the CAP budget on a more sustainable footing before enlargement.


  15.  A stated intention for the MTR is to enable the EU to reach a satisfactory agreement in the current round of World Trade Organisation (WTO) negotiations. Those negotiations are required to lead to "substantial improvements in market access; reductions of, with a view to phasing out, all forms of export subsidies; and substantial reductions in trade-distorting domestic support". WTO members are committed to reaching a draft agreement on implementing these changes by the end of March 2003.

  16.  The MTR proposals would strengthen the European Union's (EU) negotiating position and facilitate the WTO process as below:

    Price support—Insofar as the MTR reduces CAP support prices closer to world levels (eg 5 per cent reduction in the cereals intervention price, 50 per cent reduction in the rice intervention price) it will reduce the need for high import tariffs and export refunds, reducing the level of EU Amber Box support (see below).

    Dynamic modulation—Will shift support from the first to the second pillar of the CAP through a progressive reduction in direct payments of 3 per cent a year to a maximum of 20 per cent. This will reduce the level of the EU's WTO Blue Box payments (but see section below).

    Decoupling—The most significant element of the paper in relation to the WTO negotiations is the Commission's proposals concerning the decoupling of support from domestic production. The Uruguay Round Agreement on Agriculture distinguished three categories of subsidies to members' domestic industries:

    (i)  The Amber Box comprised those subsidies which significantly distort trade and production because of their direct link to current production factors;

    (ii)  The Blue Box comprised subsidies based on current production but which were designed to be self-limiting through the use of set-aside and other constraining measures;

    (iii)  The Green Box comprised subsidies with little or no trade or production distorting effect—eg environmental and structural aids or fully decoupled direct support.

  17.  Only Amber Box subsidies were subjected to reductions under the Uruguay Round. The majority of EU subsidies (direct payments) now fall in the Blue Box and are thus protected from reduction. However, the EU is virtually the only WTO member still using the Blue Box and there is strong pressure to abolish or severely limit its use in the forthcoming WTO agreement. The proposals in the Commission's paper would address this by effectively transferring the majority of CAP support into the Green Box. If the MTR leads to a fully decoupled payment system, the EU will be able to argue that the new system is Green Box compatible. But any weakening of the proposals towards the sort of partially decoupled scheme advocated by some would severely weaken the EU's position.


  18.  The UK is committed to meeting our global obligations to partners around the world, and especially those in developing countries. The recent World Summit on Sustainable Development in Johannesburg reaffirmed the commitments in the Doha Development Agenda and recent G8 Action Plan for Africa to reductions in agricultural support in developed country markets. CAP subsidies encourage over-production in Europe which helps to depress world prices and discourages agriculture in developing countries. The EU spends three times as much on support for its farmers through subsidies and higher food prices than it does on development aid (in 2000,

97.2 billion on farmers against

27.4 billion on aid)

  19.  The MTR proposals provide a good starting point for improving the position of developing countries, and allowing the EU to reduce substantially the distortions in the agriculture sector. The proposed introduction of a single decoupled payment is particularly welcome as it will begin to reduce the incentive to over-produce. A reduction in EU production levels would lead to higher world prices, which would benefit the agriculture sectors in developing countries. It should also lead both to a greater demand for developing countries' products and a greater potential for developing countries to export to third countries currently supplied by the EU.

  20.  The MTR proposals must be set in the appropriate context. Negotiations over Economic Partnership Agreements in the follow-up to Cotonou will determine EU market access for a number of priority countries and progress in the WTO will determine tariff and subsidy reductions in the other countries, including those that affect South-South trade. Progress in these areas will also have substantial affects on developing countries' agriculture sectors


  21.  In 2001 the CAP is estimated by OECD to have increased costs of food to EU consumers by some

53 billion and a further

40 billion (gross) from taxpayers under pillar one.

  22.  In the absence of reform the Commission estimate that the EU(15) Pillar one budget in 2006 will increase to just under

42 billion, but will remain about

1 billion below the financial ceiling agreed at Berlin in 1999. Our estimates broadly confirm this, and suggest a further increase to some

43 billion by 2008.

  23.  There are three elements to the proposed reforms. The changes to the commodity regimes are mainly in cereals and rice regimes with some adjustment to dried fodder and nuts. These changes are estimated to reduce the total economic cost of commodity support by

340 million (

40 million in the UK). This reflects a benefit to EU producers of

640 million (UK

70 million), consumer benefits estimated at

430 million (UK

60 million) and additional taxpayer costs of

730 million (UK taxpayer cost

100). Overall these impacts are relatively modest. The main components are the gain to producers (and the cost to taxpayers) arising from the excessive level of compensation for cuts in cereal intervention prices and the savings to consumers from the cut in rice support price. The overall impact of the changes in the commodity regimes on the EU budget is estimated at about

730 million. This is broadly in line with what we understand to be the Commission estimates (

780 million) for commodity areas. Overall (including the impact of decoupling) the Commission estimate that there will be savings to the EU budget of around

200 million.

  24.  The Commission outlines options for reform of the dairy sector, but has no specific proposals. Our analysis indicates that the best option in terms of economic welfare would be for the complete removal of quotas coupled with reductions in price support.

  25.  Decoupling is particularly difficult to analyse, not least in the absence of a clear indication as to how it would be implemented. In principle, it will reduce production distorting support and should enable the EU to meet WTO requirements for reducing subsidies. The proposals will have an impact on the way in which production decisions are made and hence on the levels of production. By removing the direct link between subsidy and production, producers will receive, and be able to respond to, real market price signals. Management resources will not be diverted to meeting requirements for obtaining subsidy, but will be used to produce for market requirements. Because producers will not have to continue producing at below cost in order to obtain subsidy, overall farm income should be improved and depending on the market position, these changes might also have an impact on consumer prices.

  26.  Overall, though, the impact of decoupling is very difficult to predict and will depend on the ways in which it is implemented. But the potential gains are large: preliminary work by Danish researchers suggests that the overall economy-wide gains to the EU could eventually be as much as

11 billion per annum.

  27.  There is a strong economic case for switching support from the first to the second pillar so as to assist in sustaining and enhancing the "public good" which agriculture delivers. The proposals for modulation, when fully implemented in 2010 are estimated to reduce the level of direct payments to producers by some

4.3 billion in the EU (15)—some

620 million in the UK. Based on the key proposed, our estimates of the funds available to the UK for expenditure under Pillar II from the modulated pool are

55 million in 2005, rising to

410 m by 2010 when the full 20 per cent modulation rate is reached.


  28.  Analysing the effect of the proposed reforms on producers is particularly difficult without knowing the precise detail of the reforms and how they would be implemented in practice. The Commission has a great deal of work to do to flesh out its proposals and there are genuinely difficult questions that will need to be resolved before a full assessment of the impact on producers can be made. That said, we have examined the main elements of the proposals and modelled as far as possible the likely effect on producers, as set out in the following paragraphs.

Market Reform

  29.  The changes due to the commodity reforms will have a generally positive effect on producers as the proposed compensation in the form of direct payments is estimated to exceed the reduction in market prices for cereals. The UK Government has thus far queried whether additional compensation is necessary, particularly at the level proposed by the Commission. The overall, cumulative impact of all the commodity changes proposed by the Commission is as estimated as follows:

  Summary of impact of proposals for all commodity regimes (excl dairy)
Impact in UK Impact in EU
million million
Producers returns70 640
Consumers savings60 430
Taxpayers costs100730
Net welfare40340

  Note:  figures rounded to nearest

10 million

  These figures suggest that overall, producer returns will be enhanced by the commodity regime changes as proposed by the Commission. The main taxpayer cost is the increase in direct payments associated with the cut in cereal intervention price.

  30.  Of course, dynamic modulation (see paras 36-38) would reduce the level of payments and hence producer returns especially for cereal and livestock farms where the level of direct payments is highest. As the modulated funds are to be recycled under the second pillar there will be some offsetting impact on incomes but the extent of this for any type of farm will depend on the nature of the schemes used for payment.


  31.  The Commission propose that most of the direct payments in the arable and livestock sectors (durum wheat is the main exception) should be decoupled from production and linked to cross compliance with environmental, animal welfare and food and occupational safety standards. A single decoupled income payment per farm would be created, based on historical receipts from direct payment. This payment would be split into "payment entitlements" on a hectare basis to facilitate the partial transfer of payment when only part of the farm is sold or leased. However, it is clear from discussions with the Commission that there remain significant gaps in the detail of how they believe such a system would be implemented. The UK Government is working closely with the Commission and other Member States towards a workable solution.

  32.  There is a strong economic case for supporting the policy of decoupling. By removing the link between subsidy and production of a particular commodity, the producer's decision will be based on the costs of production and the market price of the output. This change should improve the productive efficiency of the industry and bring producers much closer to the needs of the market, thereby enabling them to benefit from the production of high quality goods for which there is a demand, while discouraging production purely to maximise subsidy receipts. Assuming that the administration can be simplified, resources employed on farms in order to meet criteria for subsidy can be redeployed to encourage production for the market.


  33.  The UK Government supports the principle of cross-compliance, recognising the public benefits which can be delivered by linking, as proposed, the receipt of a single income decoupled payment to environmental, animal health and welfare, food safety and occupational safety standards. We understand from official level meetings that the Commission envisage the cross-compliance rules as encouraging compliance with EU statutory requirements, plus an obligation similar to that in the current EU small farmer scheme to keep land in good agricultural condition. As yet is unclear whether this will also be a measure for improving standards through national codes of practice—as is the case for existing environment cross compliance in Agenda 2000—or for introducing new standards. This will be crucial to determining the likely effect on producers.

  34.  The Commission has confirmed that they intend the cross-compliance measures to be applied on a whole farm basis, ie a producer receiving a decoupled payment on the basis of past arable production, could have his payment reduced or removed if he is found not to be meeting required standards on activities which did not generate entitlement (eg pig production).

  35.  The Commission also propose a system under which producers receiving more than

5,000 per year in subsidies will be subject to a compulsory farm audit (probably every three to five years). The Commission intend these audits to have an advisory rather than regulatory function (ie to advise farmers on how they can meet the required standards rather than to check that they are doing so) although we need to establish precisely where the boundary between these two objectives is to lie. Farms receiving less than

5,000 per year in direct payments will be exempt from the need for an audit but will be able to request one.

Dynamic Modulation

  36.  The Commission proposals on modulation exempt small farms and hit the largest producers with a ceiling beyond which no extra payments can be earned. All producers will benefit from the proposed franchise below which dynamic modulation would not apply. It is estimated that 16 per cent of UK producers would be completely unaffected by modulation with the proposed franchise level of

5,000. This rises by a further 5 per cent if the proposed Agricultural Worker Unit (AWU) element of

3,000 per AWU for every worker above two is applied.

  37.  The impact of modulation will vary from year to year. Not only does the rate of modulation increase, but as the ceiling is applied after the payments have been modulated the number of farms breaching the ceiling will decline. Data are not readily available to enable us to measure the precise impact of the franchises and ceilings on modulation. The table below sets out our best assessment for 2010 and subsequent years (when modulation has reached 20 per cent) of the effect in each Member State of the reduction in the level of direct payments made to farmers and the levels of funds withheld in Member States from payments in excess of the ceiling of

300,000 per farm.

  Estimated impact of ceiling and franchise by Member State: 2010
excluded by
excluded by
at 20 per cent
and AWU
in excess of
Belg/Lux583169 29 per cent285 per cent 77
Denmark1,025267 26 per cent414 per cent 1440.63
France8,5111,859 22 per cent3014 per cent 1,2706.4
Germany5,7231,464 26 per cent3176 per cent 788115.6
Greece2,3681,688 71 per cent1215 per cent 112
Ireland1,179467 40 per cent524 per cent 132
Italy4,3042,280 53 per cent1924 per cent 3677.0
Netherlands701246 35 per cent396 per cent 83
Portugal608436 72 per cent244 per cent 30
Spain4,6681,786 38 per cent1854 per cent 5397.5
UK3,960642 16 per cent1975 per cent 62420.6
Austria697410 59 per cent396 per cent 50
Finland462240 52 per cent225 per cent 40
Sweden657201 31 per cent244 per cent 86
EU1535,44612,153 34 per cent15834 per cent 4,342158

  38.  The mechanics of modulation in the proposal raise questions which bear on rural development:

    —  the proposed franchise (

    5,000, subject to increase for labour employed) will not only exempt a large number of farmers in the EU but substantially reduce the total of money captured by modulation;

    —  the ceiling (

    300,000) would not transfer any money out of the UK (as the Commission propose this being retained by the individual Member State for spending on rural development measures) but would hit UK producers harder than any other member state bar Germany. The case against the ceiling is that it discourages rationalisation and modernisation and unfairly discriminates against the efficient large-scale producer. It is also likely that those most affected will seek to restructure so as to avoid the penalty (with consequent loss of efficiency and, no doubt, complex arguments as to what is admissible);

    —  then there is the balance between what the UK contributes and receives once the modulation has taken place. The present arrangement gives the UK a disproportionately low share of EU RDP funds (see next section); we need to redress the imbalance but the present proposal does not fully do that.


  39.  At present, the UK receives 3.55 per cent of RDR funding under the second pillar of the CAP—around

170 million per year out of an EU pot of

4.8 billion. The Commission proposes allocating EU funds generated by dynamic modulation on an objective key incorporating agricultural land and employment criteria and an additional prosperity factor. Our broad calculation suggests that this would give the UK a little under 10 per cent, while we contribute around 15 per cent to the receipts from dynamic modulation.

  40.  The fact that a given level of dynamic modulation will not produce the same funds for the UK as a similar level of voluntary modulation (under which we retain all the monies we modulate) means that we will need to be careful to ensure that planned increases in activity in our Rural Development Programmes can take place. The Commission paper acknowledges the need for transitional arrangements for Member States which are currently modulating: we are working closely with the Commission on what this may mean in practice.

  41.  One way of avoiding a short-term funding shortfall would be to ensure that the new dynamic modulation funds are allocated so as to correct unfairness in the current allocation of rural development resource. This would not be popular with Member States which do relatively well out of current allocations; and the Commission will want to ensure existing countries who receive large amounts of Rural Development funding do not lose out. Even forcing them to accept a standstill will be difficult to achieve, when their farmers are contributing to dynamic modulation.

  42.  The UK has already called for some widening of the scope of rural development measures, in particular to provide a general power to fund rural development going beyond agriculture. However, some of the areas suggested by the Commission are questionable, and seem designed in part to allow Member States to spend more money on alternative methods of support to their agriculture industries. In particular, the exclusive focus of these measures on farmers is questionable, and the suggestion that they should be compulsory could reduce the scope for expenditure (in the UK) on more productive schemes. The WTO implications of some of the proposed new possibilities (for example, expenditure on animal welfare under the agri-environment schemes) will need careful consideration.



  43.  The Commission's proposals fail to respond to the UK's priorities for the MTR (as outlined in paragraph seven) in a number of ways. The key of these is that, if implemented in full, there would be inadequate overall budget savings, necessary if we are to put the EU budget on a sound footing before enlargement. The Commission has not yet published a detailed assessment of the financial implications of reform, but have estimated that there would be a annual saving of around

200 million compared to current policies. However, even were such a saving to be realised, it is insufficient in the overall context of a CAP budget of over

40 billion, and an additional cost of

8-9 billion a year by 2014 if the Commission's proposals for rolling out the CAP to new Member States are implemented.

  44.  The UK will therefore be arguing that the "dynamic modulation" proposal is inadequate and that we need a firm agreement to degressivity of direct payments. By this we mean application of annual, degressive cuts in direct payments, in line with the "dynamic modulation" model, but with some, rather than all of the money saved being recycled into the second pillar. This mechanism would deliver a shift in funding from the first to the second pillar of the CAP, but would also offer savings which could be returned to taxpayers. The level of the degressive cuts required would depend on the precise reform measures implemented, and the extent of the recycling of monies saved into the second pillar.

Dairy Reform

  45.  The other key missing element from the UK's point of view is a firm proposal for reform of the dairy regime. Under Agenda 2000, milk quotas were extended to 2008, with price cuts of 15 per cent to be phased in over three years from 2005, and accompanying direct aid as partial (60 per cent) compensation. As part of the final agreement, UK, Italy, Sweden, Denmark secured a commitment for the Commission to produce a report to form the basis of the Mid-term Review of the quota system "with the aim of allowing the present quota arrangements to run out after 2006". In accordance with this, the Commission has produced a report on the quotas system, published alongside the general MTR document, and summarised within it. The position on dairy is less developed than that of the rest of the MTR package, in that the report on the quotas system presents options for the future of the dairy regime, as opposed to concrete proposals.

  46.  The report first outlines the role that the quota system has had, since its introduction in 1984, in bringing EU budgetary expenditure on milk under control. It acknowledges that quotas are a source of economic inefficiency, driving up costs both for producers and consumers. Nonetheless, it attaches importance to the role of quota in yielding general social and environmental benefits, including the protection of Less Favoured Areas. This is inconsistent with the general MTR paper, which highlights the importance of attaining such benefits through targeted aid via the Second Pillar. The report outlines four possible scenarios for the future of the quota regime. The UK Government will want to ensure that the prospects are maintained for preventing an extension of quotas when they expire in 2008.

  47.  The Commission's discussion document also confirms that proposals for reform of other sectors not included in the MTR such as olive oil and sugar will be brought forward after conclusion of the MTR process, within the framework of the proposed new decoupled payment scheme.

Department for Environment, Food and Rural Affairs

30 September 2002

Annex A



  The Commission's document sets out reform proposals which it would like to see apply from 1 January 2004. These proposals address three main issues:

    —  Market support regime reforms.

    —  Decoupling of CAP direct payments from production.

    —  Reinforcing the Rural Development Pillar.

Market Support Regimes

  The package will:

    —  Apply the final 5 per cent reduction (of the 20 per cent proposed in Agenda 2000) of the cereals intervention price from

    101.31 to

    95.35 from 2004-05. This will be compensated "as foreseen by Agenda 2000".

    —  Propose abolition of monthly increments.

    —  Address some technical weaknesses in the EU's border protection regime on cereals (Commission has indicated its wish to negotiate a change under the WTO).

    —  Abolish intervention for rye.

    —  Reduce durum wheat support to

    250/ha in traditional areas over three years, and abolish the special aid in established areas. Establish a high quality premium at


    —  Contain no specific proposals on oilseeds.

    —  Reduce the rice intervention price by 50 per cent to a basic level of

    150/tonne for 2004-05. Introduce a private storage scheme to be triggered if the market price falls below the basic price. Safety net intervention will be at

    120/tonne. Compensation increased to

    177/tonne, of which

    75/tonne will be granted as a crop specific payment. Reduce the Maximum Guarantees Amounts to the 1999-2001 average or the current MGA, whichever is the lower.

    —  New stand alone protein supplement of


    —  Replace current dried fodder arrangements with an income support envelope of

    160 million, to be distributed between Member States in proportion to national guaranteed quantities for dehydrated and sun-dried fodder. A reduced single support payment of

    33/tonne will be maintained for a transitional period for both dehydrated and sun-dried fodder.

    —  Replace existing arrangements for nuts with a flat rate payment of

    100/ha, which can be topped up to a maximum of

    109/tonne by Member States. The maximum guarantee area will be 800,000ha.

    —  Introduce a new carbon credit of

    45/ha for energy crops (contract with processor required), within a Maximum Guaranteed Area of 1.5 million hectares.

    —  Leave beef market support arrangements (pretty minimal after Agenda 2000) unchanged.

    —  Commission to reinforce the conditions and controls under which export subsidies for live animals can be granted.

    —  On dairy float the following options:

    (i)  continuation of Agenda 2000 measures until 2015;

    (ii)  repeat the Agenda 2000 approach (further increase in quotas, +3 per cent, and lowering of intervention prices, -15 per cent butter and -5 per cent SMP);

    (iii)  create separate quotas ("A" + "C") for production for domestic consumption and export consumption;

    (iv)  abolish quotas from 2008;

    —  Propose nothing on Sugar, olive oil, fruit, and vegetables and wine which will be the subject of further proposals in 2003.

Decoupling Direct Payments from Production

    —  All direct payments (cereals, beef, sheep) to be decoupled from production from 1 January 2004 (dairy from 2005-06).

    —  Creation of a single decoupled income payment per farm, based on historical receipts from Direct Payments (but with modulation—see below).

    —  Exceptions from the single scheme to include durum wheat quality premia, new stand-alone protein crop supplement, the crop specific payment for rice, and payments to potato starch and dried fodder processors.

    —  Where allocating payments on a historical basis gives serious regional inequities, Member States will have the right to reallocate payments within their territory to achieve a balance.

    —  The "single income payment" to be split into "payment entitlements" on a hectare basis to facilitate the partial transfer of payment when only part of the farm is sold or leased. Member States will be able to establish different approaches (eg to define a balance between individual payment entitlements and regional/national averages).

    —  Payment entitlements cannot be transferred speculatively: agricultural land must be maintained in good agricultural condition and to mandatory environmental standards.

    —  All the old rules for Direct Payments (need to count cattle, measure areas) will fall away. There will be no obligation on recipients to produce anything. But there will be new, binding cross compliance rules: direct payments will be conditional on the respect of statutory legal standards (environment, food safety, and animal welfare) and keeping land in good agricultural conditions in line with environmental requirements.

    —  Compulsory long-term (10 years) non-rotational set-aside will be introduced on arable land. Farmers will be obliged to put an amount equivalent to current compulsory set-aside into long-term set-aside as an element of the cross-compliance rules. The non-food regime on set-aside land will be abolished.

    —  In addition to the checks on statutory standards, there will be whole farm audits (likely to be once every three, four or five years), to help farmers draw up a compliance plan to cover eg animal welfare, environmental and health and safety requirements. Farms receiving less than

    5,000 per year in direct payments will be exempt from the need for an audit but could request an audit.

    —  Energy and other non food crops will no longer be able to be grown on set-aside. A new carbon credit to be introduced at

    45/ha of energy crops with a maximum guaranteed area of 1.5 million hectares, to be paid to producers entering into a contract with a processor. Area allocation between MS to take account of historical energy crop production on set-aside and carbon dioxide commitment burden sharing arrangements.

Strengthening Rural Development

    —  There will be compulsory "dynamic" modulation at 3 per cent of the original entitlement in 2004, and a further 3 per cent of the original entitlement in each year thereafter to a maximum of 20 per cent (in six or seven years).

    —  There will be transitional arrangements for Member States (like the UK) which already operate modulation.

    —  Modulation to be operated in the same way in each Member State For the years up to 2006, there will be a commitment that all the funds will be retargeted to Rural Development spending. No commitment for post-2006.

    —  Modulated funds won't be reserved to the Member State which collects them but reassigned on the basis of agricultural area, agricultural employment and prosperity criteria, to target specific rural needs. However, money saved by application of a maximum upper ceiling on direct payment receipts per farm (see below) will be reserved to the individual Member State.

    —  Modulation will not bite on farmers evenly. All farms will be exempted the first

    5,000 and there will be a further

    3,000 allowance for every full-time labour unit beyond a basic two full-time workers. There will also be a maximum upper limit on Direct Payment receipts after franchise per farmer of


Use of Modulated Funds

    —  Modulated funds to be spent on any rural development measure under the EAGGF guarantee section. Member States will be able to use it to increase the level of Community co-financing within their programmes up to the regulatory ceilings, to finance new measures, to increase the scope and/or to finance additional beneficiaries.

    —  A new food quality chapter to be included in the rural development regulation, including incentives (on a flat rate basis for a maximum of five years) to produce to quality assurance scheme standards, and support for producer groups for promotional activities of quality products. These will be compulsory elements of a Member State's RDP in 2005-06.

    —  Also a new "Meeting Standards" chapter to assist farmers adapt to environment, food safety and animal welfare standards. Aim to encourage a more rapid and widespread adoption of (legal) standards, but in no case would aid be payable where a farmer has not respected standards already incorporated into national legislation. Aid to be degressive for up to five years, with a maximum of

    200/hectare in the first year.

    —  Flat rate aid also available under this chapter to help farmers meet costs of farm audits. In particular will help farmers prepare for and meet new cross-compliance requirements for receipt of direct payments.

    —  New animal welfare measure. Fixed co-financing of agri-environment and animal welfare schemes to be increased to 85 per cent in Objective one areas and 60 per cent in other areas.

    —  Some adaptations to the non-accompanying measures to complement the introduction of the above measures, including clarification of the marketing activities under Article 33 to include specific references to the eligibility of the cost of setting up quality assurance and certificate schemes.

State Aids

    —  To accelerate implementation of new state aid regimes, the Commission is examining the possibility of adopting a block exemption regulation at EU level in the field of agriculture.

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