Voluntary Report - public distribution

**Date:** 3/17/2005

**GAIN Report Number:** NL5009

NL5009

**Netherlands**

**Trade Policy Monitoring**

**Implementation of CAP Reforms in the Benelux**

**2005**

**Approved by:**

![](media/image1.wmf)Roger Wentzel

U.S. Embassy, The Hague

**Prepared by:**

Bob Flach

## **Report Highlights:** As result of the CAP Reforms, most farm subsidies will be replaced by a Single Farm Payment (SFP). The SFP is not linked to production, but is based on the level of payments received during 2000 -- 2002. It is expected that decoupling will lead to lower prices, lower incomes, increased concentration and a shift of production to the most productive areas.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

The Hague \[NL1\]

\[NL\]

**CAP Reforms in the Benelux: Decoupling and Allocation of Payment
Entitlements**

# Introduction

*1. The Reform*

The EU Council, in September 2003, agreed on a reform of the Common
Agricultural Policy (CAP). Accordingly, almost all direct payments will
be decoupled and replaced by Single Farm Payments (SFP). EU member
states are able to maintain a limited number of coupled subsidies. The
main elements of the reform include:

-   **Reductions in price supports** for individual commodities,
    including for milk (e.g. asymmetric reduction in dairy intervention
    prices of 22 percent).

-   **Decoupling** of the majority of direct support to farmers.

-   Introduction of **cross compliance.**

-   Introduction of **modulation.**

*2. Mandatory Models*

The Commission originally proposed two models for decoupling. The
"Fischler Model" and the "Regional Model." Member states were able to
select the format under which they would implement CAP reform.

The "Fischler Model" distributes support to individual farmers on the
basis of actual support payments received during the reference period
2000 to 2002.

The "Regional Model" in its original form distributed all decoupled
support via equal per hectare payments to all eligible farmers within a
region (or country).

The "Hybrid Model" is a mix of the two and provides greater flexibility
than the "Fischler Model." For instance:

-   Part of the future budgeted subsidies finance the SFPs, while the
    remainder is distributed according to the "Fischler Model" as an
    additional support to the SFP.

-   Differentiation in valuation of SFP Entitlements between crop areas
    and areas with permanent grassland.

-   The "Hybrid Model" allows decoupling of dairy support from 2005
    (opposed to 2007).

-   Horticultural areas (including areas with potatoes not intended for
    starch production) may be supported (via the SFP).

[The following EU(15) countries will implement the "Fischler Model" from
2005:]{.underline} Austria, Belgium, Ireland , Portugal, Italy, Scotland
and Wales.

[The following EU(15) countries are implementing the "Fischler Model"
from 2006:]{.underline} France, Greece, The Netherlands, and Spain.

[The "Hybrid Model" (with certain variations) is being
implemented:]{.underline}

In 2005 in Denmark, Luxembourg, Germany and England; in 2006 in Finland
and in 2007 in Sweden.

# 

*3. Decoupling in The Netherlands and Belgium*

Member States are able to maintain coupling for a limited number of
subsidies. Both Belgium and The Netherlands, however, have opted for
almost total de-coupling (see table). Information in this report applies
to both The Netherlands and Belgium unless specifically noted.

See FAS Report Number: E34044 "CAP Reform 2003 - Deconstructing
Decoupling" for an overview of CAP Reform implementation in the
twenty-five EU Member States.

+-------------+--------------------+---------+------------+----------+
| **Crop**    | #### Prior         | ##      | ## **De    |          |
|             | Support Mechanisms |  **Mand | coupling i |          |
|             |                    | atory** | n the Bene |          |
|             |                    |         | lux (d)**  |          |
|             |                    | ##      |            |          |
|             |                    |  **Rang |            |          |
|             |                    | e of De |            |          |
|             |                    | couplin |            |          |
|             |                    | g (c)** |            |          |
+-------------+--------------------+---------+------------+----------+
|             |                    |         | ## **Decou | ## *     |
|             |                    |         | pling in** | *Decoupl |
|             |                    |         |            | ing in** |
|             |                    |         | ##         |          |
|             |                    |         |  **The Net | ## **B   |
|             |                    |         | herlands** | elgium** |
+-------------+--------------------+---------+------------+----------+
| Date of     |                    | NA      | 1-1-2006   | 1-1-2005 |
| Decoupling  |                    |         |            |          |
+-------------+--------------------+---------+------------+----------+
| Arable      | Area Aid           | 75-100% | 100%       | 100%     |
| Crops       |                    |         |            |          |
|             | Set-aside Aid      | 75-100% | 100%       | 100%     |
|             |                    |         |            |          |
|             | Aid Grass Silage   | 75-100% | 100%       | 100%     |
|             |                    |         |            |          |
|             | Aid Durum Wheat    | 60-100% | 100%       | 100%     |
|             |                    |         |            |          |
|             | Special Aid        | 75-100% | 100%       | 100%     |
+-------------+--------------------+---------+------------+----------+
| Potato      | Production Aid     | 40%     | **40%**    | NA       |
| Starch      |                    |         |            |          |
+-------------+--------------------+---------+------------+----------+
| Sugar Beets | Sugar Regime       | Not     |            |          |
|             |                    | decided |            |          |
|             |                    | yet.    |            |          |
+-------------+--------------------+---------+------------+----------+
| Energy      | Area Aid           | 0%      | **0%**     | **0%**   |
| Crops (a)   |                    |         |            |          |
+-------------+--------------------+---------+------------+----------+
| Legumes     | Area Aid           | 0%      | **0%**     | **0%**   |
+-------------+--------------------+---------+------------+----------+
| Dried       | Payment Processed  | 100%    | 100%       | 100%     |
| Fodder (b)  | Products           |         |            |          |
|             |                    | 0%      | **0%**     | **0%**   |
|             | Drying Aid         |         |            |          |
+-------------+--------------------+---------+------------+----------+
| Tobacco     | Production Aid     | 40-100% | NA         | Min. 40% |
|             |                    |         |            | (e)      |
+-------------+--------------------+---------+------------+----------+
| Hops        | Area Aid           | 75-100% | 100%       | 100%     |
|             |                    |         |            |          |
|             | Resting Aid        |         | 100%       | 100%     |
+-------------+--------------------+---------+------------+----------+
| Seeds       | Production Aid     | 0-100%  | **Linseed  | *        |
|             |                    |         | 0%**       | *Linseed |
|             |                    |         |            | 0%**     |
|             |                    |         |            |          |
|             |                    |         |            | **Spelt  |
|             |                    |         |            | 0%**     |
+-------------+--------------------+---------+------------+----------+
| Beef and    | Special Premium    | 100%    | 100%       | 100%     |
| Veal        |                    |         |            |          |
|             | Deseasonalisation  | 100%    | 100%       | 100%     |
|             | Premium            |         |            |          |
|             |                    | 25-100% | 100%       | 100%     |
|             | Steer Premium      |         |            |          |
|             |                    | 0-100%  | 100%       | **0%**   |
|             | Suckling Cow       |         |            |          |
|             | Premium            | 60-100% | **0%**     | 100%     |
|             |                    |         |            |          |
|             | Slaughter Premium  | 0-100%  | **0%**     | *        |
|             | Cattle             |         |            | *0%(f)** |
|             |                    | 100%    | 100%       |          |
|             | Slaughter Premium  |         |            | 100%     |
|             | Calves             | 100%    | 100%       |          |
|             |                    |         |            | 100%     |
|             | Extensification    |         |            |          |
|             | Fund               |         |            |          |
|             |                    |         |            |          |
|             | Additional         |         |            |          |
|             | Payments           |         |            |          |
+-------------+--------------------+---------+------------+----------+
| Sheep and   | Ewe Premium,       | 50-100% | 100%       | 100%     |
| Goats       |                    |         |            |          |
|             | Supplementary      |         |            |          |
|             | Premium, and       |         |            |          |
|             | Additional         |         |            |          |
|             | Payments           |         |            |          |
+-------------+--------------------+---------+------------+----------+
| Dairy       | Dairy Payments     | 100%    | 100% in    | 100% in  |
| Products    |                    |         | 2007       | 2006     |
+-------------+--------------------+---------+------------+----------+

\(a\) Since 2004, for energy crops an energy bonus of € 45 per hectare
has been provided. (b) Dried fodder crops: mainly clover, lupines, and
grass. (c) Source FAS Report Number: E34044 "CAP Reform 2003 -
Deconstructing Decoupling". (d) The Luxembourg Government agreed to
impose maximum decoupling in the mandatory range. The decoupling will
start on January 1, 2005.

\(e\) Decoupling as from as from 2006. Level of decoupling not decided
yet. (f) In Wallonia, the Southern Region of Belgium, the Slaughter
Premium for calves will be decoupled.

**Single Farm Payments**

In both The Netherlands and Belgium, payment entitlements are based on
hectares in production and set-aside (reference areas) during 2000 --
2002 (reference period). The reference area is restricted to the area of
crops which received direct payments; grains, oilseeds, and all feed
crops (including grass, feed beets, alfalfa and clover) and mandatory
set-aside. Each SFP will be comprised of one or more types of payment
entitlements, based on individual farmers' production history. There are
three different payment entitlements:

1)  Regular payment entitlements (RPE), equal to the reference area
    minus the average number of hectares in mandatory set-aside during
    2000 -- 2002;

2)  Set-aside payment entitlements (SAPE), equal to the average number
    of hectares in mandatory set-aside during 2000 -- 2002; and

3)  Payment entitlements subject to special conditions (SCPE). For
    example in case of livestock farms with a limited reference area.
    The average premiums based on the number of animals are now divided
    across hectares.

# 

The unit value of one payment entitlement is calculated by dividing the
annual average of subsidies the farmer received during the reference
period, called the reference payment, by the number of payment
entitlements. If the farmer experienced an unusually low level of
production during the reference period because of force majeure (e.g. an
animal disease outbreak), this period can be excluded from the
calculation. If this situation took place over the whole length of the
reference period, the SFP will be based on 1997, 1998 and 1999. However,
if the farmer chose to produce only crops for which no direct payments
(e.g. potatoes, vegetables and fruits) were paid, they will not receive
any payment entitlements.

In Luxembourg, Payment Entitlements will be allocated according a
so-called "mixed model". According the mixed model, the reference
payment will be based on 65 percent of the average historical payments
during the reference period, and 35 percent of the regional average of
payments. Exceptions are the Dairy Premium and Suckling Cow Premium,
which contribute to the reference payment on a basis of 85 percent
historical and 15 percent regional.

***See Appendix 1 for examples of payment allocations.***

**Declaration and Use of Payment Entitlements**

The owners can activate their regular payment entitlements on land used
either for growing crops or by voluntary set-aside as long as the land
is maintained in good agricultural condition. The SFP is equal to the
total value of the payment entitlements activated. Crops which are
prohibited on land used to activate the payment entitlements include
potatoes (other than starch potatoes), fruits and vegetables (crops
which did not receive subsidies from the CAP), and permanent crops
(non-rotational crops that occupy the land for five years or longer).
Exceptions made on permanent crops are pastures and multi-annual crops
such as artichokes, asparagus and raspberries. Energy crops such as
rapeseed can be grown on land tied to a payment entitlement but will
then not be eligible for the energy bonus of € 45 per hectare. The owner
can choose not to activate a payment entitlement for up to three years
before permanently forfeiting the right to receive that payment
entitlement.

Set-aside payment entitlements can be activated on set-aside land only.
All set-aside payment entitlements must be used before regular payment
entitlements can be used. In order to activate payment entitlements
subject to special conditions, the farmer needs to maintain at least
fifty percent of his livestock units (LU).

See Appendix 2 for examples of methodology for distributing payment
entitlements

A payment entitlement is not linked to a fixed piece of land. Payment
entitlements can be sold with or without land (In Belgium's Walloon
Region conditions of transferability have not yet been set). In The
Netherlands, selling entitlements without also selling agricultural land
is only possible if the payment entitlements are sold to a farmer in The
Netherlands, and have been 80 percent utilized during one calendar year.
Leasing of payment entitlements is only permitted if they are rented out
with land.

### Modulation

A gradually increasing part of the SFP will be transferred to the Second
Pillar for rural development. In 2005, three percent of each of the
farmer's SFP will be withheld for rural development. In 2006, this will
increase to 4 percent and then to 5 percent in 2007.

### National Reserve

Each Member State has a national reserve to fund unforeseen
expenditures. The National Reserve is, for instance, intended to fund
SFPs to farmers who started their farming operations during or after the
reference period. The National Reserve is paid by (a) the residual of
the EU Member State budget after payment of the SFPs, and by (b) a
contribution of 0.15 percent per SFP allocated.

### Financial Discipline

Beginning in 2007, the SFP will be reduced by financial discipline
provisions. Each year, Agricultural Ministers will determine the degree
of the reduction, based on the available budget. Dutch Government
contacts expect these cuts will increase to 15 percent in 2010.

# Cross Compliance

As a precondition to receiving the SFP, the beneficiaries are obliged to
meet certain conditions, so-called "cross compliance". The regulations
governing cross compliance include eighteen Directives and Regulations
regarding public health, animal and plant health, animal welfare and
environment (Council Regulation No 1782/2003 Annex III;
http://europa.eu.int/eur-lex/en/consleg/pdf/2003/en_2003R1782_do_001.pdf).
These Directives and Regulations will be incorporated into National Law
beginning in 2005. Because cross compliance requirements are laid down
in Directives, EU Member States have some freedom in the implementation
and enforcement. Apart from cross-compliance, it has also been decided
that the ratio between arable crops and pastures will be maintained at
2003 levels.

**Implications of the CAP Reforms to the Agricultural Sector in the
Benelux**

Studies of the Dutch Agricultural Economics Research Institute (LEI)
anticipate lower Dutch farm incomes and uncertainty regarding the
continuity of farms as a result of CAP Reforms. Government and sector
sources indicate that most farmers have no management strategy, the
reforms are not yet clear to them, nor are the implications for their
farms.

Sector sources expect that an increasing number of farmers will stop
farming. These farmers will either set land aside, or will rent out or
sell their payment entitlements. It is expected that their production
will be, in part, taken over by other farmers, leading to increased
concentration of the farming sector and a shift of production to the
most productive areas.

It is not yet clear how the future trade in payment entitlements will
develop. Important pricing factors include inflation and the devaluation
of payment entitlements via modulation and financial discipline
provisions. In general, it is anticipated that the value of land will
increase and the price of primary products will decline during the first
years after introduction of the SFP.

# Appendix 1

# 

# In the following examples, payment entitlements are allocated to an (1) arable crop farmer in Belgium, and (2) a cattle farmer, and (3) a dairy farmer in The Netherlands.

Arable Crop Farmer in Belgium (Wallonia, Loam Region), farming 100
hectares.

+-------------------+-----------+----------+------------+------------+
|                   | Average   | R        | Calculated | Direct     |
|                   |           | eference | SFP        |            |
|                   | 2000 --   |          | Equivalent | Payment    |
|                   | 2002      | Yield    |            |            |
|                   |           | (a)      | (€/MT)     | (€)        |
|                   | (ha)      |          |            |            |
|                   |           | (MT/ha)  |            |            |
+-------------------+-----------+----------+------------+------------+
| Grains & Oilseeds | 72        | 6.64     | 63         | 30,119     |
| (RPE)             |           |          |            |            |
+-------------------+-----------+----------+------------+------------+
| Set-aside (SAPE)  | 8         | 6.64     | 63         | 3,347      |
+-------------------+-----------+----------+------------+------------+
| Feed Beets (RPE)  | 5         | \-       | 0          | 0          |
+-------------------+-----------+----------+------------+------------+
| Sugar Beets       | 15        | Sugar    |            |            |
|                   |           | Regime   |            |            |
+-------------------+-----------+----------+------------+------------+
| Total Reference   | 85        |          |            |            |
| area              |           |          |            |            |
+-------------------+-----------+----------+------------+------------+
| Reference Payment |           |          |            | 33,466     |
+-------------------+-----------+----------+------------+------------+

\(a\) Reference yields in Belgium are regional and range from 3.64 MT/ha
in Ardennes to 6.73 MT/ha in Polders and Dunes. In The Netherlands, the
reference yield is 7.08 MT/ha in the Clay Region and 4.92 MT/ha in other
regions.

In this example, the arable crop farmer has 85 payment entitlements
(area of sugar beets is not included) of which there are 77 regular
payment entitlements (sum of the average area of grains, oilseeds and
feed beet production), worth € 391 each (average direct payments
received for arable crop production divided by number of regular payment
entitlements), and 8 set-aside payment entitlements, worth € 418 each
(payments received for set-aside divided by number of set-aside payment
entitlements).

Cattle Farmer in The Netherlands, raising 75 head of cattle.

+----------------------+--------------+---------------+---------------+
|                      | Average      | Calculated    | Direct        |
|                      |              | SFP           |               |
|                      | 2000 -- 2002 | Equivalent    | Payment       |
|                      |              |               |               |
|                      | (ha or head) | (€/head)      | (€)           |
+----------------------+--------------+---------------+---------------+
| Pasture (RPE / SCPE) | 2            | 0             | 0             |
+----------------------+--------------+---------------+---------------+
| Total Reference Area | 2            |               |               |
+----------------------+--------------+---------------+---------------+
| Steers               | 50           | 210           | 10,500        |
+----------------------+--------------+---------------+---------------+
| Suckling Cows        | 25           | 101           | 2,525         |
+----------------------+--------------+---------------+---------------+
| Reference Payment    |              |               | 13,025        |
+----------------------+--------------+---------------+---------------+

Calculated Support will be allocated first into RPEs with a maximum
value of € 5,000 each. Any additional Calculated Support will be
distributed via a SCPE. In this example, the cattle farmer has two
regular payment entitlements, worth € 5,000 each, and one payment
entitlement subject to special conditions, worth € 3,025.

Dairy Farmer in The Netherlands, holding 50 milk cows.

+----------------------+--------------+---------------+---------------+
|                      | Average      | Calculated    | Direct        |
|                      |              | SFP           |               |
|                      | 2000 - 2002  | Equivalent    | Payment       |
|                      |              |               |               |
|                      | (ha or head) | (€/MT)        | (€)           |
+----------------------+--------------+---------------+---------------+
| Feed Beets (RPE)     | 10           | 0             | 0             |
+----------------------+--------------+---------------+---------------+
| Pasture (RPE)        | 30           | 0             | 0             |
+----------------------+--------------+---------------+---------------+
| Total Reference Area | 40           |               |               |
+----------------------+--------------+---------------+---------------+
| Steer Premium        | 2            | 210           | 420           |
+----------------------+--------------+---------------+---------------+
| Extensification (a)  | 50           | 80            | 4,000         |
+----------------------+--------------+---------------+---------------+
|                      | March 31     |               |               |
|                      |              |               |               |
|                      | 2007         |               |               |
|                      |              |               |               |
|                      | (MT) (b)     |               |               |
+----------------------+--------------+---------------+---------------+
| Milk Quota (c)       | 300          | 24.49         | 7,347         |
+----------------------+--------------+---------------+---------------+
| Milk Quota (c)       | 300          | 10.98         | 3,294         |
+----------------------+--------------+---------------+---------------+
| Reference Payment    |              |               | 15,061        |
+----------------------+--------------+---------------+---------------+

\(a\) During 2000 -- 2002, farmers were entitled to receive a payment of
€ 80 per head if the number of livestock units (LU) did not exceed 1.4
per hectare (cattle between 6 and 24 months is 0.6 LU, older cattle is 1
LU). (b) In Belgium, the SFP will be based on the milk quota on March
31, 2006. (c) As from 2006, a Dutch dairy farmer receives a milk premium
of € 24.49 per MT and an additional payment from the national envelope
of 10.98 per MT.

In this example, the dairy farmer has 40 regular payment entitlements,
worth € 377 each.

**Appendix 2**

In the following examples the payment entitlements are activated and
used by the arable crop farmer and the cattle farmer in Belgium, and the
dairy farmer in The Netherlands of the previous examples.

In 2006, the Belgian arable crop farmer (holding 100 hectares and 85
payment) could activate payment entitlements as follows:

+-------------------+----------------+---------------+-----------------+
|                   | Use of Payment | Value of      | Single Farm     |
|                   | entitlements   |               | Payment         |
|                   |                | Payment       |                 |
|                   | (number)       |               | (€)             |
|                   |                | Entitlements  |                 |
|                   |                |               |                 |
|                   |                | (€)           |                 |
+-------------------+----------------+---------------+-----------------+
| Grains and        | 50             | 391           | 19,550          |
| Oilseeds          |                |               |                 |
+-------------------+----------------+---------------+-----------------+
| Pasture           | 15             | 391           | 5,865           |
+-------------------+----------------+---------------+-----------------+
| Voluntary         | 12             | 391           | 4,692           |
| Set-aside         |                |               |                 |
+-------------------+----------------+---------------+-----------------+
| Set-aside         | 8              | 418           | 3,344           |
+-------------------+----------------+---------------+-----------------+
| Sugar Beets       | 15             |               |                 |
+-------------------+----------------+---------------+-----------------+
| PE activated      | 85             |               |                 |
+-------------------+----------------+---------------+-----------------+
| Deductions:       | 4%             |               | 1,338           |
|                   |                |               |                 |
| -Modulation       | 0%             |               |                 |
|                   |                |               |                 |
| -Financial        |                |               |                 |
| Discipline (a)    |                |               |                 |
+-------------------+----------------+---------------+-----------------+
| Single Farm       |                |               | 32,113          |
| Payment           |                |               |                 |
+-------------------+----------------+---------------+-----------------+

\(a\) As from 2007, the SFP will be cut by the financial discipline.

In 2006, the Dutch cattle farmer (holding two regular payment
entitlements, worth € 5,000 each, and one payment entitlement subject to
special conditions, worth € 3,025) could activate his payment
entitlements as follows:

+-------------------+----------------+---------------+-----------------+
|                   | Use of Payment | Value of      | Single Farm     |
|                   | Entitlements   |               | Payment         |
|                   |                | Payment       |                 |
|                   | (number)       |               | (€)             |
|                   |                | Entitlements  |                 |
|                   |                |               |                 |
|                   |                | (€)           |                 |
+-------------------+----------------+---------------+-----------------+
| Pasture           | 2              | 5,000         | 10,000          |
+-------------------+----------------+---------------+-----------------+
| PE activated      | 1              |               |                 |
+-------------------+----------------+---------------+-----------------+
| -Steers           | 20             | 3,025         | 3,025           |
|                   |                |               |                 |
| -Suckling cows    | 20             |               |                 |
|                   |                |               |                 |
| -Livestock Units  | 40             |               |                 |
|                   |                |               |                 |
| SCPE activated    | 1(a)           |               |                 |
+-------------------+----------------+---------------+-----------------+
| Deductions:       | 4%             |               | 521             |
|                   |                |               |                 |
| -Modulation       | 0%             |               |                 |
|                   |                |               |                 |
| -Financial        |                |               |                 |
| Discipline        |                |               |                 |
+-------------------+----------------+---------------+-----------------+
| Single Farm       |                |               | 12,504          |
| Payment           |                |               |                 |
+-------------------+----------------+---------------+-----------------+

\(a\) In order to activate payment entitlements subject to special
conditions, the farmer needs to maintain at least fifty percent of his
livestock units.

In 2007, the Dutch dairy farmer (holding 40 regular payment
entitlements, worth € 376) could activate his payment entitlements as
follows:

+-------------------+----------------+---------------+-----------------+
|                   | Use of Payment | Value of      | Single Farm     |
|                   | Entitlements   |               | Payment         |
|                   |                | Payment       |                 |
|                   | (number)       |               | (€)             |
|                   |                | Entitlements  |                 |
|                   |                |               |                 |
|                   |                | (€)           |                 |
+-------------------+----------------+---------------+-----------------+
| Pasture           | 40             | 376           | 15,040          |
+-------------------+----------------+---------------+-----------------+
| PE activated      | 40             |               |                 |
+-------------------+----------------+---------------+-----------------+
| Deductions:       | 4%             |               | 602             |
|                   |                |               |                 |
| -Modulation       | 0%             |               |                 |
|                   |                |               |                 |
| -Financial        |                |               |                 |
| Discipline        |                |               |                 |
+-------------------+----------------+---------------+-----------------+
| Single Farm       |                |               | 14,438          |
| Payment           |                |               |                 |
+-------------------+----------------+---------------+-----------------+