eunbil · GT0N1614 · 2006-07-14 00:00:00 — AGRIFIN 43 COVER NOTE from: Secretary-General of Commission, signed by , Director date of receipt: 23 2006 to: , Secretary-General/High Representative Subject: Communication from the Commission to the Council and Parliament: Towards a sustainable European wine sector - Commission Staff Working Document - to the Communication: Impact Assessment Delegations will find attached Commission document SEC(2006) 770. : SEC(2006) 770 COMMISSION OF THE EUROPEAN COMMUNITIES , 22.06.2006 SEC(2006) 770 COMMISSION STAFF WORKING DOCUMENT COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT Towards a sustainable European wine sector {COM(2006) 319} To address the main problems affecting the EU wine sector, e.g., a structurally unbalanced market situation, the continuous decline in consumption, the progressive loss of competitiveness of the EU wine production, the complexity of the legal framework and the insufficient consideration of environmental concerns in the CMO, four alternative reform options have been considered: Option 1: Status quo, with possibly some limited adjustments Option 2: Profound reform of the CMO Option 3: Reform along CAP reform lines Option 4: Deregulation of the wine market The expected impacts of the policy options are summarised as follows. Option 1, slightly adjusting the existing CMO, would not achieve the objectives of the reform. The status quo appears unsustainable in the long term, because it does neither tackle the problem of the structural imbalance of the wine market, nor enhance the competitiveness of European wine nor improve the consistency with other Community policies. Option 2, profound reform of the CMO, would address the problems of the wine sector in both the short and long term, by concentrating budgetary resources on measures to achieve smooth and rapid stabilisation of the market and the structural adjustment of the sector. Introducing national envelopes and transferring funds to rural development would leave Member States and wine regions scope to adapt the measures available at Community level to their specific conditions and needs, thus allowing greater subsidiarity. Option 3, the general introduction of decoupled support for wine producers, would also allow most policy objectives to be achieved in the long term, in particular market equilibrium in the wine sector. Moreover, it would address environmental concerns, since it allows direct application of cross-compliance to the whole vine area. However, as in the case of complete deregulation, albeit to a lesser extent, in the short and medium term the sector would undergo quite a tough adjustment process. Public intervention would mainly focus on supporting farm incomes rather than rapidly improving the market balance by providing help with structural adjustment. Furthermore, an even distribution of public support to the whole vine area would raise problems of political acceptability and of overcompensation of quality wine producers. Option 4, complete deregulation of the wine sector, would achieve a certain number of policy objectives in the long term, in particular wine market equilibrium and increased competitiveness of wine production. However, the serious adjustment that immediate implementation of this policy would require and the lack of structural measures accompanying this process would produce severe, negative short-term impacts on the sector and the rural economy of the regions concerned as a whole. Procedural issues and consultation of interested parties Work on this impact assessment on the reform of the () in wine was carried out by an () of Commission set up for the purpose in , and whose mandate is given in 1. was led by Directorate General for Agriculture and Rural Development (DG ). All Directorates-General () of Commission were invited to participate in the work of the Group, and the following DGs were actively involved in the exercise: the Secretariat-General (), Health and Consumer Protection (SANCO), Trade (TRADE), Environment (ENV), Budget (BUDG), Regional Policy (REGIO), Economic and Financial Affairs (ECFIN), Anti-Fraud Office (), (), and the (). The impact assessment work was carried out in the period to , during which time the ISG held several meetings. Firstly, the current situation of the wine sector was analysed in depth and the main problems of the CMO assessed. Secondly, the group identified the objectives of the wine regime and alternative policy options to achieve those objectives. Lastly, the impacts of the policy options were carefully evaluated. During this process, the ideas formulated by different stakeholders were also taken into account. To give stakeholders an opportunity to put forward their opinions and ideas on the present situation and future of the wine sector, a seminar, "Challenges and opportunities for European wines", was held on 16 February 2006. This seminar was attended by more than one hundred people representing a wide range of interested parties, in addition to the members of the ISG. The discussion was structured in three workshops dealing with the following subjects: How to strengthen European wines competitiveness in the EU and worldwide? How to achieve a sustainable European wine policy? The contribution of European vineyards now and in the future; European wines and consumers. In a rich and fruitful debate, stakeholders largely agreed on the preliminary analysis of the current situation and the mid-term forecasts for wine sector by the Commission (see 2). Furthermore, there was consensus on the need to keep a specific CMO for wine, but to reform it, in order to find solutions to the difficulties experienced by the sector . In addition to the seminar of 16 February 2006, the on Wine discussed the potential reform scenarios and many bilateral meetings were held between a wide range of stakeholders and the relevant Commission departments. Co-operatives in the EU (COPA/COGECA) presented a position paper on the wine sector reform on 1 February 2006. They are in favour of a revision of the wine CMO, which should encourage strong economic organisation of the sector based on three main concepts: verticality, co-responsibility and conditionality (mainly to link EU financing and production control). The "Comité européen des entreprises vins" (representing trade and industry in the wine sector) is in favour of a fully-fledged "wine policy" and in-depth reform of the present instruments. it favours the abolition of the ban after 2010. it wants to allow table wines without a geographical indication to state the grape variety and vintage year on the label. Owing to the extreme complexity of the wine sector and to the close interrelationships between single issues, this analysis could not always address all impacts in a quantitative way. This impact assessment remains thus partly qualitative. Table - Principal features of the wine economy in Union Year Volume/Value Trend (( Wine production value as % of the value of EU-25 agriculture 2004 Production EU-25 2005/2006 166 million hl of which EU-15 160 million hl Production EU-15 Average 163 million hl As % of world production of of which: 2000/2001 to 52 million hl 2005/2006 50 million hl 38 million hl Consumption Per capita per year, of which: 2004/2005 131 million hl 28.7 l ( table wine 13.9 l quality wine non-EU wine 12.9 l 1.8 l ( Trade World production being involved in World trade, of which: Imported into EU Aver. 2003-2005 11.3 million hl (( Exported by EU Aver. 2003-2005 12.2 million hl Prices ( Average value import (value/volume) 2005 207 /hl Average value export (value/volume) 2005 351 /hl Area EU 25 As % of total UAA of EU As % of world vine area 2000 (2003) 3.4 million ha Number of farms in EU 25 As % of all EU-25 farms 2000 (2003) 1.5 million ( Average area (all wine farms) EU-25 Of which vine area: Area under table wine for table wine specialists Area under quality wine for quality wine specialists 2003 9.2 ha 3.7 ha ( EAGGF Budget for all vine/wine products Budget 1 228 million ( As % of the EAGGF guarantee (Title 5) 2005 2. Economy of the sector wine sector is the largest in the world. The EU is the world"s leading wine producer (of vine areas and of wine production), the biggest consumer () and the main actor in the international trade (both the top exporter and the top importer). , and , which together account for more than of the EU production, are the three most important wine-producing countries in the world. The wine sector in the EU is composed of 1.5 million holdings (of all agricultural farms), utilising a vine area of 3.4 million ha (of the total agricultural area) and employing 1.5 million annual working units (of agricultural work). In 2004, wine production totalled 17.4 billion, which represents of agricultural output. Wine production plays a primary role in the agricultural activity of most wine-producing Member States: it represents around of the value of agricultural production in , , , , and , and a less in . The importance of wine production in economic activity is even greater at regional and local level: for certain regions the value of wine production exceeds or even of total agricultural production; the percentages can be even higher, when considering more restricted geographical areas. In addition, for most wine-producing Member States, wine is one of their most valuable export commodities, both for the agricultural sector and for the economy in general. For those countries, therefore, wine contributes significantly to the trade balance. For many decades now, wine market has suffered of recurrent overproduction problems, although the scale of the imbalance (or at least its perceived scale) has risen and fallen over time. During this period, there has sometimes been uncertainty about the structural nature of the market imbalance of the wine sector, mainly because production typically varies significantly from year to year, depending on weather conditions. Since 1975/76, the problem of overproduction has been addressed by means of a policy of limiting production potential, with a ban on new plantations and an incentive for the permanent abandonment of production through a grubbing-up premium. Those instruments contributed to a substantial decrease in EU vine areas over the period (from 4.5 million ha in 1976 to 3.2 million ha before the last EU enlargement). The reduction of vine areas, combined with a substantial stability of yields per hectare, led to a decline of the total wine production until the mid 90"s. In the last five wine years the total production varied between 166 and 196 million hl for the EU-25. However, the decrease in vine areas was mitigated, from 1996 onwards, by a restrictive application of the grubbing-up scheme and, following the last reform of the wine CMO in 1999, by the introduction of new rights. Furthermore, wine production recently felt the effects of a trend towards increasing yields in certain wine regions, notably in , mainly due to the more widespread use of irrigation. Within this general trend, the share of quality wines psr in total EU wine production has been increasing, and has currently almost equalled that of table wines. Wine consumption in Europe has seen a significant and continuous decline in recent decades, by an average of 750 000 hl (-) per year, or 15 million hl (-), in the last twenty years. This tendency is the combined result of a sharp fall in consumption (-per year) in the traditional wine-producing Member States (in particular and ), where the level of per capita consumption is higher, and a modest increase in the other countries. The falling trend in the consumption has particularly affected table wine, whereas the consumption of quality wine psr is growing. Currently, the total consumption in the EU-25 stands at approximately 130 million hl, almost equally shared between table wine and quality wine. For other outlets for wine production (grape juices, liqueur wines, , vinegar and aromatic wines), consumption has generally been stable. Imports of wine from non-EU countries into the Community have experienced extraordinary growth during the past decade: while they played only a marginal role until ten years ago, they are now substantial, having gained considerable market shares at the expense of domestic wines. The reasons for this trend are, on the one hand, the strong development of the wine sector in many countries of the so-called "new world", in particular , , South and the , and, on the other hand, the entry into force of the Round agreement of 1995, which has profoundly changed trade arrangements. In particular, the abolition of a minimum price for imports (the reference price) has considerably reduced the degree of border protection. In conclusion, since 1996, the volume of wine imports into the EU-15 has been constantly growing at a yearly rate of , reaching almost 12 million hl in 2004. In the last ten years, the volume of wine exported from the Community to non-EU countries has been stagnant, and in 2004 it stood at about 13 million hl. On the other hand, the unit price of exports has increased compared to ten years ago; therefore, at least the value of exports grew. Analysis of the most recent balance sheets for the wine sector in the EU-25 shows that the sector systematically produces a surplus. In the last six wine years (1999-2005), the average vinified production per year in the EU-25 was 174.8 million hl and imports from non-EU countries 9.1 million hl. By contrast, wine consumption was 132.1 million hl; other uses accounted for the equivalent of 16.1 million hl of wine and exports amounted to 11.5 million hl. Therefore, over the last six wine years, wine production has generated on average a yearly surplus of 24.0 million hl wine, or of the production. If the volumes distilled under the scheme supporting the production of potable alcohol (on average 11.4 million hl) are regarded as a market outlet of the wine production, although financed by the Community, then the average annual surplus still stands at 12.7 million hl (of production). This excess volume had to be removed from the market at the expense of the Community budget under specific distillation measures, or it accumulated in private stocks, thus contributing to depressing the wine market situation, and in particular prices. The problem of surpluses is particularly serious for table wine, but according to the most recent indications, the situation has deteriorated even for quality wines psr (in 2005 and 2006, five Member States requested crisis distillation specifically for quality wine). The high level of surpluses has led to serious stockpiling and lower market prices, particularly since the abundant harvest of 2004. The future enlargement of the Union to and will have significant implications for the wine sector, since they are two of the most important wine-producing countries of Central and Eastern Europe, with a joint vinified production of almost 8 million hl on average. Assuming an unchanged CMO and based on the expected trends in production, consumption and in trade dynamics, the DG mid-term outlook for the EU-27 wine sector to the wine year 2010/2011 is that the wine surplus will increase to 27 million hl (of production), or to 15 million hl (of production) if wine subject to distillation to support the potable alcohol sector is excluded. The differential surplus generated by the two acceding countries is estimated to be 0.5 million hl. That outlook is for a "normal" year (that is, damping yearly fluctuations in yields) and is based on "average" assumptions. The existing common market organisation in wine The common organisation of the wine market is one of the largest and most complex common market organisations in the common agricultural policy. This is because it covers not only the issues that many market organisations deal with, such as price, intervention and trade, but also issues specific to the wine industry (provisions concerning the production, transport and processing of wine products and wine-making practices). Community legislation divides wines into two major categories: "quality wine produced in specified regions", also known as "quality wine psr" (QWpsr), and "table wines" (TW), this category including table wines with and without geographical indications. However, it is the responsibility of the Member States to decide on the definition of quality wine psr, which has resulted in different approaches to classifying wines among the different Member States: , , and to a certain extent the and have opted to classify almost all manufactured wines as quality wine psr, whereas the other Member States have a much stricter approach. This classification does not necessarily reflect the quality of the wines, particularly as some table wines, such as those with a geographical indication (vins de pays, indicazione geografica tipica, vino de la tierra, Landwein, etc.) can rival top class wines in terms of price and quality, whereas some quality wines psr face disposal difficulties and are consequently sold at lower prices on the market. The majority of the market measures provided for by the common organisation of the wine market concern table wines. For instance, QWpsr does not benefit from any export refund. On the other hand, QWpsr is protected by designation of origin (at least inside the EU). Measures taken by the market organisation can be grouped in three major categories: measures concerning production potential, Measures concerning production potential The limitation of the production potential is essentially achieved using two types of measure: a ban on new (apart from newly created rights) and time restrictions on replanting rights (eight years); a premium system for the permanent abandonment of wine-growing areas. This measure achieved a substantial reduction in the wine-growing potential of the Union. Since 1996, the impact of this measure has diminished considerably following a change in the Regulation decided by the Council, allowing Member States to exclude part or all of their territory from the system. In recent years, less than 2 000 hectares per year have been definitively grubbed up, whereas at the peak of the system, close to 56 000 hectares per year were affected. Moreover, under the 1999 reform 51 000 hectares of new rights were granted; a programme of restructuring and conversion of vineyards. The aim of the measure is to adapt production to market demand, to accelerate structural improvement and strengthen competitiveness, by replacing low-quality vines with better quality vineyards and/or improving vineyard management techniques. Under the common organisation of the wine market, distillation is the principal instrument of intervention. The aim of distillation is to withdraw production surpluses from the market at a guaranteed minimum price. The wine is then processed into alcohol, which is intended partly for the potable alcohol market, with the remainder intended for the fuel market. Since the 1999 reform, Community legislation has provided for four different forms of distillation, two of which are compulsory for producers and two voluntary. The purchase price of wine for distillation varies from one type of distillation to the other. Compulsory distillation of "by-products of wine-making" aims to ensure the quality of wines preventing overpressing of grape marc and wine lees (this is why the by-products of wine-making sent for distillation must have a minimum alcohol content); the second compulsory distillation concerns wines with a so-called "dual purpose", mainly Charentes wine, which, beyond a certain quantity, must be distilled; potable alcohol distillation (optional for producers) aims to support the market in wines intended for this type of traditional processing; crisis distillation (optional), may be allowed when there is a serious disturbance of the market. A large part of the alcohol produced by distilling the by-products of wine-making and of wines with dual classification, together wit the entire alcohol of crisis distillation, enters Community public stocks and is disposed of in the EU biofuels sector or for industrial use. For a long time it was exported for use as fuel in non-EU countries. In , there were 2.5 million hl of alcohol in public storage. Other measures provide for a private storage system for wine, aid for the use of grape musts for enrichment and for the production of grape juices, and export refunds for table wine and must. These concern provisions on wine-making (or oenological) practices, on quality policy and the protection of geographical indications, and labelling rules. Wine-making practices (WMP) are the set of technical practices authorized for the production of wine from grapes. They apply directly to wine producers. They are intended to ensure the conformity of the final product and to maintain the quality of the product put on the market, thus protecting consumers against frauds and health risks. Among WMP, enrichment plays an important role. This practice increases the natural alcoholic strength of wine. It is carried out by adding either sucrose ("chaptalisation") or concentrated grape must. Chaptalisation is a traditional technique in a large number of wine-growing regions of the north-central and eastern regions of the Community. Elsewhere, this practice is prohibited, and only grape sugar (concentrated must) may be used for enrichment. Given that chaptalisation costs approximately one third as much as enrichment through concentrated grape must, in order to prevent producers from southern Member States from being penalised by Community rules, support for the use of concentrated must and rectified concentrated must to increase the alcoholic strength of wine was introduced. The aid for grape must for enrichment, in addition to the direct cost for the budget, has led to an artificial expansion of enrichment (including in regions where the practice was never used before), to a reduction in the natural alcoholic strength necessary to obtain wine and consequently to an increase in yields and production throughout the Community. Quality policy is intended to maintain a minimum quality standard for QWpsr and to encourage the production of such wines, without an uncontrollable expansion in the production. It also aims to harmonise the provisions of the Member States so as to establish conditions of fair competition in the Community. The protection of Geographical Indications (GI) is an instrument to reach the objectives the EU wine quality policy. Wine labelling is a legacy from earlier legislation of Member States and has been developed outside the framework of horizontal Community labelling legislation. The objectives of this legislation are to protect the legitimate interests of consumers and producers, to ensure the smooth functioning of the EU Internal Market, to promote the production of quality products and to improve the transparency, openness and clarity of the regulatory discipline of the wine market. Budgetary expenditure for the common organisation of the wine market mainly concerns table wine. Expenditure varies markedly from year to year due to changes in production conditions and represents between and of the total expenditure of the EAGGF Guarantee Section. 2005 expenditure amounted to 1 269 million, distributed as follows: represents the direct and indirect costs of the various forms of distillation, primarily distillation proper ( 321 million) followed by the cost of alcohol in public stocks of three of the four forms of distillation ( 185 million); represents expected expenditure on the restructuring programme in place since 2000 ( 446 million); support for enrichment by means of aid for must accounts for ( 198 million);