Considerations

Considerations for Landowners from the 2003 CAP reform The regulation 1782/2003 was published on 29th September 2003, and is available on www.europa.eu.int . An abbreviated version is available in the website of the England and Wales Country Land and Business Association, www.cla.org.uk . Decoupling The key decision of this reform is to decouple existing direct payments from production in the cereals, oilseeds, proteins, beef, sheep and dairy sectors. All these direct payments will be consolidated into a Single Farm Payment (SFP) which is the property of the active producer (the tenant in the case of let land) for which no particular pattern of production is necessary. Recipients of SFPs must be active farmers, but they may farm any eligible land. The producer is free to decide how to use the resources at his disposal according to market conditions rather than in response to rules for collecting subsidies. In the extreme producers can choose to produce none of the formerly supported product at all, and still receive his Single Farm Payment, (but see cross compliance conditions below). This market orientation, and simplification of the rules for CAP support has been welcomed by the European Landowners Organisation (ELO). It releases the private sector to do what it does best, to invest and to produce for the market. When to decouple The regulation proposes the SFP is introduced in 2005, but allows this to be delayed for up to two years. The ELO argues that producers in countries which decouple earlier will be at a competitive advantage, as they are free to choose how much to produce, whereas those in countries who delay decoupling may have to incur costs to produce crops and livestock which are uneconomic. Full or partial decoupling The regulation permits Member States to leave a proportion of COPs, sheep and beef payments coupled to production, ie producers are required to produce these commodities in order to receive the coupled part of the payments. The ELO advises that less than full decoupling imposes restrictions and, potentially, costs on producers and therefore is inadvisable. The main concern that partial decoupling is intended to combat is the abandonment of farming. It is far from clear that using partially coupled payments to force producers to produce beyond their chosen economic margins is a sensible way of avoiding abandonment. The ELO suggests Member Organisations seek more targeted and effective instruments to deal with this problem. The Article 69 so-called ‘National Envelopes’ may provide such an instrument.

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How to decouple? Individual Historic Claims… The architecture of the regulation is built around the assumption that the SFP for each individual producer will be based on the claims of that producer in the reference period of the three calendar years, 2000-2002. The hectares and livestock numbers claimed for the relevant products are aggregated, averaged over the three years, multiplied by the claim rates for 2002. This reference amount is divided over the claimed crop areas plus all forage hectares declared by the claimant. The regulation thus speaks of the number of entitlements (hectares) and the rate €/ha of each claimant. This will be the SFP of the claimant. This entitlement is tradable with or without land. …or, Regionalised Average Payments? Although the regulation was framed around the idea that the total support of each Member State will be distributed on the basis of the individual historic claims of farmers, there is an option to regionalise the distribution of the total SFP and to offer the same payment rate per hectare over all eligible agricultural land. This is the Regionalised Average Payment option. Choosing between Individual Historic Claims (IHC) and Regionalised Average Payments (RAP). From a purely landowner perspective, the historic basis for allocating the support has two severe disadvantages. First, it creates huge uncertainty and perhaps penalties for farms which have restructured since the beginning of the reference period. An extreme case is a farmer who purchased land in, say, October 2002, and who had no claims on that land for any of the three reference years. On the face of it he has no SFP relating to that land. This belongs to the vendor of the land, who may or may not be able to claim his SFP depending on what other land he has or acquires. The second problem concerns the tradability of entitlements (which the ELO actively opposed). This creates big uncertainty for landowners who let their land. Their tenants are free to sell off the entitlement, leaving their land bare of entitlements potentially reducing rents and land value. Both of these problems are reduced if not eliminated by the Regionalised Average Payment approach. Because all eligible land may receive SFP when the scheme comes in, this correctly rewards the current occupant of the land avoiding the complications for farms in transition. Once the SFP is allocated in this way, it is expected that it will be transacted (sold or leased) with the land. With virtually all land receiving SFP, the market in entitlements is only likely to involve a tiny area. However, compared to the historic entitlements, the regionalised average payments will certainly involve a redistribution of the support: some farms losing, perhaps a lot, and other farms gaining. The extent of this redistribution depends on farming structures and patterns, and in particular the relative importance of the supported and unsupported products. In southern Member States where unsupported crops are a very significant part of total agricultural area there would be such a large dilution involved in spreading the total payments over the whole agricultural area that it would be extremely difficult 2

to contemplate the RAP approach. Deeper analysis of this issue is available in papers to be found on the CLA website, see above. The National Envelope (article 69) Another part of the optional implementation of decoupling is the provision in this article which allows member states to reduce the entitlements relating to specific sectors by up to 10% to create an ‘envelope’ of money which can be then used to support specific types of farming which are important for the protection or enhancement of the environment or for improving the quality and marketing of agricultural products. These funds have to be retained within specific production sectors, effectively they permit a general reduction of payments in the relevant sector to help specific types of farming in that sector or marketing objectives. The vagueness of the objectives of this article, and the complexity of creating further sector-specific environment or marketing schemes do not make this an attractive option. Cross compliance conditions Receipt of the Single Farm Payment will be conditional on a variety of cross compliance conditions, and if they are not respected, payments will be reduced or withdrawn completely. The main conditions are that recipients of the SFP must respect 18 existing EU directives on plant and animal health, environment and animal welfare, and also claimants must keep their land in “good agricultural and environmental condition”. These conditions are to be defined by the Member States based on some broad guidelines in the regulation (Annex IV) concerning soil erosion, soil organic matter and soil structure and general maintenance of the land and its biodiversity. For landowners the challenge is to ensure that these cross compliance conditions are practicable, yet meaningful. There is scope for non-business organisations to pursue their own agendas and impose unworkable and costly conditions. It is for landowner and farmer organisations to prevent this outcome. However we must tread carefully on this issue. It would be very difficult to justify the continuation of financial support to land managers if it is perceived that the payments are for ‘doing nothing’. The ELO approach is that ultimately this support is to pay for the environmental and cultural landscape services supplied by farmers and other land managers which the public values but for which there is no market. They are also part of the process in assisting rural development by enabling farmers to diversify. The ELO would prefer that such agri-environment payments and rural development support were offered in more directly targeted and structured schemes, but in the interim the SFP is the best current political compromise. There are other conditions involving the continuation of the existing mandatory 10% set aside, and also restrictions that the area of permanent pasture as of December 2002 must not be reduced. Member States are obliged to set up advisory systems to provide advice to land managers to help them understand and abide by these conditions. The detailed application of these provisions are complex and landowner organisations will wish to involve themselves in these details to protect their members’ interests.

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Modulation and financial discipline The Single Farm Payment, once calibrated and allocated in 2005, will not remain constant thereafter. First, there is a schedule of National Ceilings of these payments which have to be respected each year. Second, they are fixed in constant Euro. They will therefore decline with general inflation, and for non Euro zone Member States they will vary in national currency as currencies vary against the Euro. Third, they will be cut by up to 3% to create a National Reserve (this is likely to be lower if Regionalised Average Payments are used). Fourth they will be cut by 3% in 2005, 4% in 2006 and 5% in 2007 and thereafter under compulsory modulation – to switch funds to pillar two Rural Development. Countries already using voluntary modulation have arrangements to allow their existing, and planned Rural Development programmes to be accommodated. Fifth, the SFP will be cut by such further amounts as are necessary from 2007 onwards to keep the CAP within its budget guideline agreed at the October 2002 Brussels Council. Thus funds required to bring about reforms of other sectors like sugar, and to finance part of the Eastern Enlargement will come from cuts in the SFP in the EU-15. The Rural Development Regulation This has been extended by the addition of two new chapters, one to help farmers meet higher environmental and animal welfare standards, and another to help farmers produce and market higher quality produce. The funding of these helpful new instruments will depend on new resources available as a result of the modulation. A0842643 rd

3 November 2003, European Landowners Organisation 67 Rue de Tréves, Brussels 1040 Belgium.

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