New Direct Payments Scheme: targeting and redistribution in the future CAP Alan Swinbank University of Reading 29 February 2012

Purpose of the Briefing Note:

• An analysis of critical issues and possible options for revising the Commission ’s proposals establishing rules for direct payments in the post-2013 CAP • Focused on the current stage of the reform process and the ways that the legislative texts could potentially be improved • A separate Briefing Note on

greening

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Outline of the Presentation:

• Direct Payments in the CAP • Likely Effect of Direct Payments • What are Direct Payments For?

• The Commission’s Proposals • WTO Constraints • Recommendations

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Direct Payments in the CAP

• System developed in an

ad hoc

fashion, starting with the MacSharry Reforms of 1992 • Shifted from ‘compensation’ to ‘income support’ in the early 2000s – But the 2003 Reforms still sought to maintain individual farm benefits • Decoupled direct aids account for 73% of the CAP budget for 2012

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Likely Effect of Direct Payments

• Unlikely to have a lasting effect on farm incomes • Instead they will be reflected in higher costs, particularly higher land prices • In the farming accounts, agriculture will remain shockingly dependent on direct payments • This will be particularly problematic for new entrants, who face inflated entry costs

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What are Direct Payments For?

• The European Commission has said:

“Decoupled direct payments provide today basic income support and support for the basic public goods desired by European society ”

(The CAP Towards 2020, November 2010)

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Farm Incomes?

• Article 39(1)(b):

“to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture ”

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Farm Incomes?

• Article 39(1)(b):

“to ensure a fair standard of living for the agricultural community , in particular by increasing the individual earnings engaged in agriculture ” of persons

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Farm Incomes?

• Article 39(1)(b):

“to ensure a fair standard of living for the agricultural community, in particular by increasing the individual earnings of persons engaged in agriculture ”

• European Parliament (June 2011 Resolution) :

“agricultural incomes are notably lower (by an estimated 40% per working unit) than in the rest of the economy ”

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Farm Incomes?

• If true, surely this is a shocking indictment of 50 years of policy failure?

• But are earnings from

commercial

agriculture really lower than those obtained in the rest of the economy?

• Note the Commission has said:

“there is little available data on incomes at the farm household level ”

(Annex 3 of the 2011 Impact Analysis)

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There is Little Evidence of Targeted Support

UK, 2010, All Direct Payments. Percentage, by size of payment http://ec.europa.eu/agriculture/funding/directaid/distribution_en.htm

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Public Goods?

Can perhaps be thought about on 3 levels: –

Basic public goods:

Cross compliance and Good Agricultural and Environmental Condition (GAEC) • Paying farmers to obey the law?

– Multifunctionality • But relies on altruism, and not contractual arrangements – Food Safety • Is imported food unsafe?

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The Commission ’s Proposals

To be discussed:

• The Budget for Direct Payments • Distribution

between

Member States • Greening • Active Farmers • Capping, Small Farmers, New Entrants, Partial Coupling

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The Budget for Direct Payments

• The CAP budget, and its allocation, is to remain more-or-less unchanged through to 2020 in money terms • This is a

political

decision. No attempt is made to justify the budget for direct payments by a costed approach • There needs to be a Plan B. A 20% cut would remove €80b from the CAP budget = 80% of Pillar 2

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Redistribution between Member States

• Again a

political

approach • The only criterion cited is average payment per hectare • No attempt to cite any of the justifications for direct payments (e.g. income support, public goods, cohesion) to determine the allocation – This rather weakens the case for an EU system of direct payments

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Greening

• 30% of a Member State’s National Envelope • Appears to be

one

payment, with nominally 2 components (the basic payment plus greening) • Prescriptive: e.g. 3 crops on arable land • No attempt to target the payment to objective criteria • Cost of €33 to €41/ha, and yet an average payment of €80.1/ha • Major problems in the WTO

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Active Farmers

• Motivated by fairness, transparency, and to meet the concerns of the Court of Auditors and the European Parliament • No reason to believe that ownership or management structures affect land management • Will remove land from cross compliance • Difficult to define a scheme that will not violate WTO rules

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Capping, Small Farmers, New Entrants, Partial Coupling

• All address

political

concerns • Difficult to discern an economic rationale for any of the proposals – All have the potential to hinder the structural change needed to enhance the international competitiveness of EU agriculture • For New Entrants, the proposal addresses the symptoms, not the cause of the problem

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EU ’s Domestic Support Declarations to the WTO

€ billion,

G/AG/N/EEC/ document series

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Some Numbers

EU27, € billion, 2007/08 AMS = Aggregate Measurement of Support • AMS binding €72.2 billion • Likely AMS binding, post Doha €21.7 billion • AMS declared 2007/08 • SPS & SAPS in 2007/08 €12.4 billion €34.5 billion

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Requirements of the Green Box (1/3)

• A

fundamental requirement

that policies have ‘no, or at most minimal, trade-distorting effects or effects on production ’

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Requirements of the Green Box (2/3)

• But, European Parliament (July 2010):

“there should be a basic EU-funded direct area payment to all EU farmers in order to ensure the social and economic sustainability of the European agricultural production model, which should provide basic food security for European consumers, allow farmers to produce high quality food competitively, ensure that farming activity and jobs in rural areas are encouraged across the EU …”

(paragraph 69)

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Requirements of the Green Box (3/3)

• Plus policy specific criteria • For example, Decoupled Income Support should

“not be related to, or based on, the factors of production employed in any year after the base period ”

(subpara. 6(d)) • And yet SPS Entitlements have to be activated on an annual basis, and matched by eligible agricultural land subject to cross compliance and GAEC

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Active Farmers and Greening are even more problematic

• Subpara: 6(e)

“No production shall be required in order to receive such payments ”

• Inactive farmers would be fine!

• If greening involves one payment, not two, then the whole of the payment could be ineligible for the Green Box

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Paragraph 12, Payments under Environmental Programmes

(a) Eligibility for such payments shall be determined as part of a clearly-defined government environmental or conservation programme and be dependent on the fulfilment of specific conditions under the government programme, including conditions related to production methods or inputs.

(b) The amount of payment shall be limited to the extra costs or loss of income involved in complying with the government programme.

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Does it Matter?

• Not at the moment, because there is plenty of scope in the amber and blue boxes – Unlikely that any WTO Member would bother to mount a challenge • But it would (eventually) matter if the Doha package is agreed • A challenge, and the outcome of any challenge, is uncertain

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Recommendations (1/2)

• Individual MEPs should think about

Plan B

– Target Pillar 1 for reductions, rather than Pillar 2 • Rather than

greening

of funds to Pillar 2 within Pillar 1, switch 30% – Or separate greening from the basic payment, and give Member States more discretion • Abandon the proposals on Active Farmers

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Recommendations (2/2)

• Avoid any suggestion that the availability of food within the EU is in any way linked to direct payments –

They are decoupled!

• Start preparing for the next CAP reform – –

Why is there a farm income problem?

What is the CAP for?

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