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“Analysis from Brussels”- by Roger Waite- CAP Health Check Deal Formalised – But Growing Concerns About Market Situation

CAP Health Check Deal Formalised – But Growing Concerns About Market Situation

By Roger WaiteRoger is editor of AGRA FACTS, the Brussels-based newsletter on EU agriculture policy, and is a Journalism Fellow at the German Marshall Fund of the United States. “Analysis from Brussels” is posted exclusively at FarmPolicy.com.

EU Agriculture Ministers have formally adopted the legislative texts of the CAP Health Check this week – 2 months after the political deal agreed under the French Presidency of the Council. These further steps towards a more market-oriented CAP come as EU markets are facing serious problems – for dairy in particular – and the Commission has even announced the reintroduction of export refunds, and the likely purchase of significant public stocks of butter, milk powder and cereals expected in the months ahead. There is also growing pressure to use the remaining available market instruments to help the pigmeat and sugar sectors. In this context, I can’t help wondering if the Health Check would have been agreed so relatively easily if the end-game was now, rather than last November. Above all, the agreed 1% increase in dairy quotas for 5 years, starting in April 2010, would have had a much bumpier ride – even if no one appears to be questioning the de facto abolition of the quota regime in 2015. It was an irony not lost on observers that this week’s Farm Council discussed these market difficulties at the same time that it looked at a Commission report on high food prices, demanded by EU leaders last July!

Anyway, with the ink now dry on the Health Check, I thought I’d try and draw a few conclusions about what was agreed.

The Health Check was never intended to be a major reform – more a completion of various issues deferred in the 2003/4 reforms, and a number of points aimed at making the CAP more defendable vis-à-vis the European taxpayer, ahead of the next reform – the really big reform – for European farm policy after 2013.

In terms of achieving more market orientation, the Health Check agreement broadly accepted the Commission approach. Compulsory set-aside, potato starch quotas and a dedicated energy crop premium (45 € per hectare) are abolished; dairy quotas are clearly on the way out – and even though the foreseen increase in quotas (5x 1%, with the full 5% in Italy from year 1) will not be fully utilised, the main point is that the quotas will no longer be a production restraint (except maybe in Italy). [Just to clarify this, Italy has always exceeded its quotas. This is because they were established in the early 1980s on the basis of official production figures at the time – but many Italian producers had always significantly under-reported their production. The quotas did very little to stop this “black milk” economy until the issue was finally re-examined and a sort of amnesty agreed in the 1992 Mac Sharry reform. Despite subsequent increases in 1999 and 2003 reforms, Italy still produces 5-6% more than its quota – and pays a heavy superlevy bill every year, as a result. The Health Check agreement for them to front load their 5% quota increase, is therefore aimed more at reducing the superlevy bill than providing any incentive to produce more.]

One Health Check issue agreed with relatively little fuss, which symbolises just how far the CAP has come in recent years, was the agreement to abandon public intervention for barley, sorghum [and rice & pigmeat], and to limit the automatic purchase of common wheat to just 3 million tonnes every year. Greater volumes can be bought in, but only via a tendering system which allows the Commission to controls volumes (& costs). (For the record, intervention for rye was abolished in 2003, and this is the last year that maize intervention will be allowed.) Curiously, Ministers didn’t even realise that they had agreed to abolishing the long-standing monthly increment to the cereals support price – an issue which was blocked by French President Jacques Chirac himself in 1999. Despite all of these changes towards fewer and simpler market instruments, Commission officials are adamant that there are sufficient tools still available to help the market in times of difficulty. It will be interesting to see if they are saying the same thing in 2-3 months time!

On direct payments, there has been a clear move to greater decoupling – albeit over a slightly longer period than proposed – but suckler cow and sheep premium payments will be the only formally coupled payments still remaining in 2013. Member States are encouraged to move their “Single Farm Payment” model towards a flat-rate hectarage payment (per region) and away from a “historically-based model” (on the basis of 2000-2002 production) – but there is no obligation to do so. Despite pressure from the “New Member States” to change the allocation of funding towards a much fairer & more transparent flat-rate payment across the EU, this more fundamental question was well & truly excluded from the Health Check negotiations. This will be one of the biggest elements in the next reform – and the “Old member States” may yet come to regret their insistence on not touching the issue this time around.

Within the debate on how Member States can spend the EU funds for direct payments available to them, the existing “Article 69” concept has been broadened, giving more flexibility to Member States on using up to 10% of their direct payment “national envelopes” for more targeted issues still within the CAP 1st Pillar (i.e. without any need for co-funding them). The new options include potentially coupled compensatory payments for sheep, dairy, beef & rice farming, and public contributions to crop insurance or mutual funds to combat animal & plant diseases. To underline that this should not be “re-coupling by the back door”, the amount of potentially non-Green Box support [as defined within the WTO] is limited to 3.5% of the national envelope.

The other big issue was the move to establish options within Rural Development programmes [i.e. in the 2nd Pillar] to address the “New Challenges” of climate change, biodiversity loss, water scarcity and renewable energies – and the need to shift more funding from the 1st Pillar in order to finance them through the so-called compulsory modulation instrument. The end deal saw agreement that the existing rate of modulation (5%) should be increased by 2% in 2009 [the 2010 budget], rising by 1% a year to +5% in 2012 [the 2013 budget]. All farmers receiving less than €5000 in direct aid (more than three-quarters of EU farms) will continue to be exempted, as are all producers in the 12 New Member States (until 2012/13) because they are having their direct payments phased in to “old Member State “ level over 10 years.

On top of this, the Council agreed to Progressive Modulation, namely that farms receiving more than €300 000 in direct support every year will face an additional 4% shift in funds from 2009 onwards. This is much less than the Commission had proposed, and a long way from the €300 000 cap on direct aid per farm that was discussed in the past – and remains a controversial issue in the USA. However, it is the first time that the EU has agreed to any sort of instrument along these lines, and Commissioner Fischer Boel was very happy in the final deal to have introduced a mechanism that can be tightened next time.

In all, the additional modulation will see nearly €500m shifted to Rural Development this year, rising to €912m in 2011 and €1159m in 2012, some €3.2bn in total – all of which will have to be co-financed by Member States (but at much lower rates than usual – +25% & +10%, rather than the usual +50% & +25%).

The “New Challenges” idea is a good way of enabling the Commission to better defend the CAP budget in future years – as even the most euro-sceptic commentators accept that these are burning issues that are maybe best addressed at EU level. Nevertheless, for complicated domestic political reasons, Germany was insistent that a 5th New Challenge should be added aimed at providing measures to accompany the phasing out of dairy quotas, i.e. a Milk Fund.

In the end-game politicking, there were obviously a number of concessions, with the most obvious lubricants from the Commission being financial. The Commission agreed that the €90m saved by abolishing the energy crop premium should be divided up among the New Member States. And for the Old Member States, it was agreed that they could have more flexibility to use “unclaimed” direct aids from their national envelopes. (For example, under current rules, if farmland is sold off, the entitlements linked to that land is returned to the national envelope, but can never be claimed because the land is no longer in production.) This additional funding can be used for the targeted payments under the new Article 68, it was agreed.

Winners & losers
As I said at the start, this was not a massive reform, and so the magnitude of gains & losses should be viewed accordingly. All Ministers will have gone home with 2-3 of their main demands having been met in order to sell it as a good deal – that is normal. Nevertheless, it’s fair to say that a few Ministers did slightly better than others. For example, German Minister Ilse Aigner (appointed just a few days before the decisive meeting) got more or less what she was after with the Milk Fund, plus various assurances over the front-loading of Italian dairy quotas. Italian Minister Luca Zaia got his front-loaded dairy quota increase, which suggests that Italy might at least once manage not to exceed it quotas (before they are abolished). French Minister Michel Barnier, who chaired the meeting and co-wrote the compromise texts, appears to have emerged with absolutely all items on his wish list – most of which were more of a technical nature. Even though the New Ministers also made gains from the original proposals – the extra €90m and more flexibility on various issues – Latvia, Estonia & Slovakia voted against the final deal, and the Czech Republic abstained. Why? They perceived [perhaps accurately] that the Old Member States did better than the New Member States, and drew the [dubious] conclusion that the Health Check had therefore widened, rather than reduced the discrepancy between “old” and “new”.

Finally, I think Commissioner Fischer Boel comes out of the deal quite successfully. Yes, the modulation figures were negotiated down – but she still got a further 5% increase [whereas most of us expected a 4% figure]. The progressive modulation concept was significantly diluted – but the mechanism is there. And on all of the other issues, she basically got what she wanted – even if it will take a little bit longer for a few of the issues.

By Roger Waite