Special Report No 5/2002

on extensification premium and payment schemes in the common organisation of the market for beef and veal, together with the Commission's replies

(pursuant to Article 248(4), second subparagraph, of the EC Treaty)

(2002/C 290/01)

CONTENTS

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SUMMARY

I. The Court has examined the extensification payment scheme(1) (EPS), a direct beef payment scheme under the common organisation of the market for beef and veal aimed at encouraging extensive beef production in an environmentally sustainable way and reducing surplus production (see paragraphs 2 and 4). The aims of the audit were to consider the extent to which the EPS has encouraged extensive cattle production in the EU, and to examine the implementation of the scheme as reformed under Agenda 2000 (see paragraphs 10 to 12).

II. Two thirds of the EU's beef is produced from dairy herds (although this proportion is reducing gradually - see paragraphs 6 and 7) which are normally not eligible for the EPS, and which tend to be more intensively reared than specialised beef suckler cow herds. EPS expenditure totalled 4 039,4 million euro between 1994 and 2000, and benefited in particular the Member States that have significant suckler cow herds (see paragraph 41).

III. A weakness of the EPS was dealt with by the Agenda 2000 reform, when the actual number of bovine animals was taken into account for the calculation of the stocking density (see paragraph 3), and a requirement for pastureland was introduced (see paragraphs 14 (b) to 18). Stocking density is only a rough and ready basis for distinguishing between intensive and extensive farming practice (see paragraphs 17 to 20).

IV. EPS co-exists with area based agri-environmental and rural development schemes (see paragraph 21), and the stocking density requirements for the main livestock schemes are being reduced to levels similar to the those required by the EPS when the two-tier system is applied (see paragraph 20).

V. Implementation of the scheme was problematic in all the Member States visited (see paragraphs 22 to 28). There were weaknesses in inspection procedures and the bovine identification and registration systems, and some problems in the definition and measurement of forage areas (see paragraphs 29 to 32). Some farmers were paid EPS without expressly requesting it (see paragraph 33).

VI. The Commission has insufficient information on the impact of the EPS (see paragraph 34 and 35). While the EPS acts as an income support to extensive beef farmers, its impact on extensive cattle production is limited. It does little to encourage intensive farmers to use more extensive methods, and did little to encourage additional extensive farming (see paragraphs 36 to 45).

VII. The Court recommends that the Commission assesses the effectiveness and the efficiciency of EPS and its consistency with other schemes such as agri-environmental and compensatory schemes. Consideration should be given to amending regulations concerning risk assessment and inspection weaknesses (see paragraph 53).

INTRODUCTION

Background

Regulatory background to the extensification payment scheme (EPS)

1. Since the Agenda 2000 reforms introduced from 1 January 2000, the common organisation of the market for beef and veal(2) provides increased direct aids to farmers to compensate for income loss due to price cuts and reduced market support from storage operations, export refunds, and import controls. The direct aids are comprised of a special premium for producers of bulls and steers, a premium for maintaining suckler cow herds (that is for cattle bred and kept specially for their meat), slaughter premium for all types of bovine animals, and additional payments in the form of either headage and/or area payments(3) (the latter two aids were introduced by Agenda 2000). An additional extensification payment may be paid for cattle already receiving the "special premium" and the "suckler cow premium".

2. The extensification premium scheme was introduced by the 1992 common agricultural policy (CAP) reform(4), with the aim of compensating specialised beef farmers for the competitive advantage enjoyed by intensive and semi-intensive beef producers as a result of the drop in cereals prices (see paragraph 4). It sought to take account of the stocking density (SD) of the holdings, that is the forage capacity of each holding in relation to the number and species of animals held, in order to determine eligibility for the scheme. The extensification premium was paid if the producer maintained below a certain level the SD of animals claimed for the special premium and suckler cow premium. The scheme has been amended twice, to increase the amount of the additional payments, and to introduce two-tier SD limits in order to enhance the effectiveness of the EPS by paying higher amounts where lower SD were maintained (see Table 1).

Table 1

Amount of extensification premium

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3. The SD takes account of the number of animals with reference to the forage area(5) available to support those animals. The number of animals is calculated in terms of "livestock units" (LUs). Currently, bulls, cows and other cattle over two years count as 1 LU; cattle from six months to two years count for 0,6 LU and sheep and goats for 0,15 LU each. The current maximum SD of 2 LUs per hectare for eligibility for the beef premiums schemes was derived with reference to the maximum acceptable 170 kg N/ha from organic sources as laid down in the Nitrate Directive

4. While detailed objectives of the EPS are not clearly identified in the relevant Regulations, the EPS is one of a series of measures with the objective of reducing surplus beef production and encouraging environmentally sustainable agricultural production and food quality(6), and more specifically, by combating a rising trend towards intensification and encouraging extensive beef production(7). Production control objectives were added in 1996(8), and environmental objectives under the Agenda 2000 reforms(9). In common with other CAP support schemes, the EPS has a general objective of supporting farm income. The Court in its 1996 Annual Report(10) pointed out that the method of calculating the SD took account only of animals for which bovine premiums were claimed, and recommended that all animals on farm should be taken into account. The Agenda 2000 reform of the scheme, now known as the extensification payments scheme (EPS)(11), corrected this weakness, by taking all cattle and certain sheep and goats on farm into account, and by introducing more stringent eligibility conditions from 1 January 2000 (see paragraphs 14 to 16). The extensification supplement is separate from the extensification subsidies available under the agri-environmental measures, which were the subject of the Court's Special Report on Greening the CAP(12).

What is extensification?

5. The terms "extensive farming" and "extensification" are not defined in the relevant legislation. Extensive cattle farming is generally considered as farming where the livestock are supported by the land on which they are kept, as opposed to intensive farming, where the animals are usually under shelter for most or all of their lives and are fed with bought in feed. The current CMO in beef and veal applies this by setting SD limits (i.e. the maximum number of animals that should be kept for each hectare of forage land available (see Table 1), and by specifying that at least 50 % of the forage land should be available for grazing animals (see paragraph 14 (b)).

The link between extensification and beef production

6. Only a third of the EU's beef comes from specialised beef production (i.e. suckler cow herds - cattle belonging to a meat breed and kept for meat production), although this proportion is increasing(13) (see paragraph 7). The rest originates from the dairy herd. Dairy cows are not eligible for the main beef subsidies (suckler cow premium or special premium), nor the extensification premium (see paragraph 45 for the exceptions), and are normally reared more intensively than other cattle in order to produce sufficient milk. This tendency for intensification in the dairy sector is confirmed by a 1999 study(14) on herbivore farming systems in the EU carried out on behalf of the Commission, which found, inter alia, that 40 % of specialised dairy holdings in the EU had stocking densities greater than 2 LUs per hectare, as compared with 23 % for specialised beef holdings. Although there are variations between the Member States, the concentration of suckler cows in relation to the available grassland does not generally exceed one animal per hectare.

The proportion of specialised beef production has increased in the EU

7. Between 1995 and 1999 average beef prices fell in the EU by about 8 %(15), and the EU cattle population dropped slightly, with the reduction in male cattle and dairy cows being offset by a small increase in the number of suckler cows(16). Thus the proportion of the EU's beef production coming from specialist suckler cow herds has increased while between 1990 and 2000 the percentage of dairy cows in the total EU cow population decreased from 73 % to 63 %(17).

8. The number of animals receiving the basic suckler cow and special premiums between 1995 and 1999 was stable, with about a third of the animals getting the premiums. The number of these cattle also receiving the extensification premium went up slightly. While the situation varied across the EU, in the Member States except Spain there was a drop or very small increase in total cattle population.

9. In Spain, by contrast, the cattle population increased by almost 14 % (796000 animals). Spanish producers traditionally fall into two distinct categories - they either breed cattle or finish (fatten) them nearer the metropolitan areas where they are consumed. However, the EU beef premiums structure has been one of the factors contributing to the development of "integrated" farms which aim to keep the maximum value added within the production units, by both breeding and fattening the animals(18).

The Court's audit objectives and approach

10. While the main recommendation of the Court's 1996 Annual Report regarding extensification had been implemented by the Agenda 2000 reforms (see paragraph 4), the Court decided in 2000 to re-examine the issue of encouraging extensification, in view of the increased expenditure for EPS introduced by the reforms. The Court's audit objectives were to review the implementation of the reformed EPS in the Member States visited, and to consider the extent to which the EPS encouraged extensive cattle production in the EU. The role of EPS in supporting beef producer incomes was also considered.

11. As the Commission has not specified detailed, measurable objectives, the Court examined whether extensification was encouraged by EPS, by referring to:

(a) the extent that extensive producers were discouraged from intensifying their production; and

(b) the extent that intensive producers were encouraged to extensify their production.

While the impact of EPS in meeting its objectives of environmental protection was considered under the Court's Special Report on Greening the CAP, other objectives of food quality and production control issues were not directly considered by the Court, as these are affected by all the beef and veal measures.

12. Audit missions were carried out to the Commission and to five Member States (Spain, France, Ireland, Austria, the United Kingdom). As well as carrying out a review of management procedures in the Member States or regions concerned, the auditors accompanied the authorities on 15 inspections on the spot at beneficiaries' holdings and examined the claim files of 30 EPS beneficiaries in each country/region over the period 1993 to 2000, to assess the impact of the EPS on their activities.

FINANCIAL INFORMATION

13. Expenditure on EPS for 2000 (reporting year 2001) was 913,8 million euro(19) (see Table 2 for the evolution of total expenditure on beef and veal since 1994, including EPS). France, followed by the United Kingdom, Ireland and Spain, between them represent over 80 % of expenditure on EPS. Between 1999 (the last year before the Agenda 2000 reform of the EPS) and 2000 there was a decrease in the number of animals receiving both the basic premiums (suckler cow premium or special premium)(20), and the EPS (see Table 3). Although the situation varies from one Member State to another, and the long term effects of the reform on the numbers qualifying for EPS are not yet clear (see Illustration 1 for EPS expenditure since 1994 by Member State, and see Illustration 2 for the evolution of EPS expenditure).

Table 2

Expenditure on beef and veal

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NB:

Expenditure for extensification started in 1994.

Source:

DG AGRI evolution of EAGGF expenditure, 1994 to 2001; budget 2002.

Table 3

Comparison of cattle receiving special beef, suckler cow and extensification premiums - Application years 1999 and 2000((Payment years 2000 and 2001.))

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Source:

DG AGRI. D2 working documents.

Illustration 1

Total EPS expenditure 1994 to 2000: 4 039,4 Mio EUR

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Source:

Financial reports of EAGGF - Guarantee Section.

Illustration 2

Evolution of the EPS expenditure in the EU

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NB:

the increase from 1997 to 1998 is due to the introduction of a high EPS rate for compliance with a low stocking density threshhold.

Source:

Financial reports of EAGGF - Guarantee Section.

DESIGN OF THE EPS

Agenda 2000 reforms made significant changes

14. The main changes introduced from 1 January 2000 were:

(a) to take account of all bovines(21) on the holding (see paragraph 4);

(b) at least 50 % of the declared forage area, as defined in Articles 12 and 13 of Council Regulation (EC) No 1254/1999, should be pasture available for grazing animals(22), including land mown for hay or for silage;

(c) land eligible for arable area aid can no longer be counted as forage area for the EPS, although it still may count as forage area for the main suckler cow and special beef premium schemes.

15. The standard method for calculating the SD is to take the number of animals present on the producer's holding at certain "census dates" into account for the calculation of animal LUs. There is also a simplified system, whereby producers undertake to maintain the number of animals below the given stocking density at all times. Greece, Spain, Ireland and the United Kingdom all opted to allow a simplified system, as it reduces the administrative burden for both the authorities and the extensive producers who are unlikely to exceed the SD requirements (see paragraph 44).

16. In addition, Member States can either apply a single low SD threshold for EPS eligibility, or a two-tier system with different amounts being paid for each SD threshold(23) (see Table 1). Six Member States (Germany, Greece, Spain, Austria, Portugal and Sweden) opted to apply only one threshold, and to pay a higher EPS subsidy to those producers that have a lower SD. The other Member States opted for a two-tier system with lower EPS payments(24). The authorities in Spain and Austria informed the Court that they chose only one SD threshold in order to allow producers to benefit from a higher additional payment, as most beef producers in these countries would have no problems in meeting the lower SD. The authorities in France, Ireland and the United Kingdom informed the Court that they chose the two-tier system because it would allow producers to reduce their production over a number of years and/or because it allows more producers to benefit.

But stocking density is still a rough and ready way of identifying extensive farming practices

17. Including cattle, sheep and goats in the EPS SD calculation allows a rough distinction to be made between intensive and extensive producers, especially as many cattle producers in the LFAs tend to have mixed sheep and cattle holdings. Whereas all cattle(25) physically present on the holding count towards the SD calculation, only sheep and/or goats for which premiums have been claimed are taken into account for the SD of the holding of the owner of the quota, regardless of where these animals are physically present. As premiums on sheep and goats are only paid on female animals over one year old, all male animals and lambs less than one year old are excluded from the SD calculation.

18. According to Council Regulation (EC) No 1254/1999, 50 % of the forage area declared must be pasture, defined as "grassland, which following the local farming practices is recognised as being destined for grazing bovine animals and/or sheep"(26) (see paragraph 14((b)). Thus land declared as forage area for EPS may not necessarily be used for grazing bovines - even though EPS is paid on bovines, and not on sheep.

And the scheme does not provide an incentive for producers to reduce stocking density

19. SD limits fixed by the regulation aim to restrict intensive beef production(27). However, making EPS payments on a headage basis encourages producers who have not yet come close to the SD limits to maximise their production within these limits and hence their subsidy revenue (see paragraphs 37 to 44). In the case of the United Kingdom this finding is supported by the results of a broad survey carried out by its Countryside Commission(28).

20. For the main livestock schemes (suckler cow and special beef premium), which the producer already has to receive in order to be eligible for EPS, a SD of 2 LUs is applied on the number of animals claimed(29). Following the BSE crisis which started in autumn 2000, one of the measures introduced by the Council in 2001 to reduce future beef production, was to encourage further extensification by introducing more stringent SD requirements for the main livestock schemes. The SD requirement of a maximum of 2 LUs per hectare is reduced to 1,9 LUs in 2002 and to 1,8 LUs from 2003(30). This reduces the SD requirements for the main beef schemes to levels similar to those required by the EPS (see Table 1). From 2003, the limits of 1,8 LUs per ha will be the same when the two-tier system is applied (see paragraph 16)(31), and the differences between the SD calculations for the main scheme and the additional EPS II will be the forage area (see paragraphs 14(b) and 18) and the number of animals taken into account for the SD calculation (see paragraphs 15 and 17).

EPS and other schemes

21. Extensive beef and mixed livestock farming often takes place in areas of the EU where land quality, natural handicaps and climate allow little choice for other agricultural alternatives. In addition to direct beef and sheep premiums, livestock producers in these areas may also be eligible for EU-funded area-based agri-environmental schemes and compensatory allowances for less favoured areas, which are often implemented by different organisations from those managing the EPS. Eligibility for these schemes is conditional upon good farming practice and respect of stocking density limits which are calculated differently to take account of specific scheme requirements. Thus extensive beef farmers can be compensated in a number of ways for keeping a reduced number of animals on their land - with the headage-based EPS and with the area-based aid paid under environmental and compensatory schemes.

IMPLEMENTATION OF THE EPS IN THE MEMBER STATES VISITED

Weaknesses in the cattle databases caused problems

22. The bovine identification and registration databases(32) were scheduled for completion by 1 January 2000. They may be used by Member States to determine the number of LUs, on condition that the database offers, to the satisfaction of the Member State, adequate assurances as to the accuracy of the data. Otherwise, Member States have to determine LUs by information provided from each producer on census dates(33).

23. While not a regulatory requirement, the use of the cattle databases facilitates the calculation of LUs and SDs. At the time of the audit visits (November 2000 to July 2001), only Austria could use its cattle database successfully for this. In Spain, Ireland and the United Kingdom, the databases did not include all cattle, and the SD for standard scheme claimants was calculated on the basis of information provided by them on given census dates throughout the year. While the information in the cattle databases could be used for on the spot checks in Austria and the United Kingdom, this was not the case in Spain and Ireland.

24. In France, the authorities used the national bovine identification and registration system to calculate the LUs for EPS eligibility, although there were operational problems and problems with the accuracy of the data(34). Forms with the relevant information on the presence of cattle on their holdings for the year 2000 were only sent to bovine producers to confirm in May 2001, and resulted in 20 % of the EPS payments for suckler cows and 100 % of the EPS for male beef cattle being made after the regulatory deadline of 30 June 2001(35). Only in five of the 95 departments were the forms addressed correctly to holdings with cattle - in 19 departments, over 25 % of the forms were incorrectly addressed, and the rate exceeded 40 % in eight of these departments. In Saône-et-Loire, forms were sent to 13513 cattle holders, whereas there are only 6045 cattle holdings. Moreover, the forms often contained errors - 12 of the sample of 30 producers' files (40 %) examined for Saône-et-Loire contained errors, although the exercise was less problematic in Vendée, with two of the 30 forms containing errors(36).

Targeting of EPS inspections could be improved

25. Paying agencies are required to carry out on-the-spot checks on at least 10 % of livestock aid applications and 5 % of area aid applications selected on the basis of a risk analysis and an element of representativeness of the aid applications submitted(37).

26. In all the Member States visited, the animal inspections and the area aid inspections for extensification purposes were carried out separately, sometimes by different services, on the basis of separate risk assessments. During the EPS livestock inspections that the auditors accompanied, a systematic examination of forage area and land use by the inspectors was only performed in Spain and on some inspections in the United Kingdom.

27. Except in Ireland and France, the risk assessments for livestock and area aid inspections considered specific risk factors to include farmers close to the EPS SD threshold, as these are the holdings most at risk of being ineligible for EPS (if the inspection finds that forage area is overdeclared slightly or animals are underdeclared slightly). In Ireland, no such risk factor was built in for EPS livestock inspections, and in France, there was no such risk factor for EPS related area aid inspections.

EPS bovine inspection methods vary between Member States

28. Member States have some discretion over how the checks and inspections required under the integrated administration and control system (IACS) Regulation are carried out(38). While inspection methods can and do vary from one Member State to another, the results are not entirely satisfactory. The following examples demonstrate that the efficiency and efficacy of inspections in most Member States visited could be improved by establishing best practice, and thus ensuring that producers across the EU are treated equitably:

(a) the EPS inspections in Ireland, Spain, and France (since 2001) are carried out with inspections of the main livestock schemes. The United Kingdom has introduced a more effective integrated approach covering all bovine schemes, including physical and documentary checks;

(b) in Ireland, LUs for EPS purposes are reconciled with the producers' livestock records at given dates, but physical inspections of animals and documentary controls are limited only to those animals on which the main scheme payments have been claimed. Listings from the cattle database are not used (see paragraph 23), nor is a full animal count carried out and reconciled with the running totals on the holding's animal register;

(c) in France, there were no checks that notification deadlines had been respected, nor were underlying documents verified. The inspections did not check all the bovine herd nor verify their physical locations. As regard the area aid inspections, the service responsible for forage area inspections(39) did not adequately verify forage for EPS purposes nor for the calculation of the SDs;

(d) in France and Spain, the producers were not required to gather all their animals together, and eartags were checked from a distance, using binoculars as necessary. This did not guarantee that the animals concerned were correctly identified.

There are some anomalies in EPS implementation

Forage rape is treated as forage crop for EPS in Scotland, but not in England

29. Areas qualifying for area aid are not eligible as forage area(40). Using this criterion, the English authorities have excluded areas sown with forage rape (which does not qualify for area aid) from forage area for EPS purposes, whereas it is accepted as a forage crop in Scotland. Farmers in the two countries are therefore being treated inconsistently. The United Kingdom authorities have asked the Commission for guidance. In its reply the Commission states clearly that the current legislation does not make a distinction between different types of rape seed, and thus all rape seed should be excluded as forage for EPS purposes.

Forage area in the alpine pastures (Almen) is overstated in Austria

30. Every year, over 50 % of bovine holdings send their cattle (over 300000 cattle) to the Almen (alpine pastures) in the summer for grazing. Austria has almost 10000 alpine pastures covering a total area of 1,6 million ha, of which 50 % is considered as forage and accounts for approximately a third of Austria's forage area. The carrying capacity of the alpine pastures is much lower than for other pasture land. Most of the alpine pastures are publicly owned, and allocated to individual farmers by the Alm administrator (Almbewirtschafter).

31. While the total alpine pasture area is based on the land register, producers declare their part of the forage area based on the Alm administrator's estimates of the forage area. Since 1998, the regional authorities in Austria have been using aerial photography to determine the actual forage area. However, the Austrian paying agency has not obtained this information, and could therefore not use it to compare declared forage area for the alpine pastures with the actual forage area as established by the photographs.

32. Of the 554 on-the-spot controls carried out by the Austrian authorities in 2000, photographs were available for 185 alpine pastures at the time of inspection. Comparison of the declared forage area of 43200 ha with the forage area as established using the photographs indicated actual forage area of only 26167 ha, an overstatement of 61 %. This difference results from the fact that the Alm authorities had provided substantial overestimates of the area of alpine grazing on the basis of information contained in the land register. Aerial photography began to be introduced in 1998, bringing to light this problem, but had only been applied in some areas of Austria, such as the Salzburg region in the 2001 application year. In Bundesland Salzburg forage area declared for the year 2000 was overstated by 52 % and 33 % for two randomly chosen alpine pastures, and if the actual forage area is used instead of the declared area, five of the 11 holdings examined by the Court would no longer be eligible for the EPS.

Eligible French producers were paid EPS without requesting it expressly

33. From 2000, all producers wishing to get the additional EPS are required to indicate this on their area aid application forms. This requirement was not respected in France, where EPS was paid to all eligible producers provided that they had returned details confirming cattle on their holdings during 2000.

COMMISSION'S INFORMATION ON IMPACT OF EPS IS INSUFFICIENT

34. In order to allow it to monitor whether the scheme is being implemented correctly, and whether the scheme is meeting its objectives, the Commission needs adequate and timely management information at its disposal. The beef market management division of the Directorate-General for Agriculture has information on the animals that receive support under the main livestock schemes and how many of them also receive EPS. Coupled with other information, mainly from the clearance-of-accounts procedure, the Commission has adequate information on whether the scheme is being implemented correctly. However, the Commission has not yet systematically collected information to assess the impact of the EPS on extensive farming practices, nor has it set clear objectives and measurable performance indicators for this.

IMPACT OF THE EPS

35. Apart from analysis undertaken in the context of Agenda 2000 reform, there have been no evaluations of the EPS or the beef livestock schemes(41), nor do the Commission services have copies of evaluations and studies carried out by the Member States in this respect.

EPS is one of the measures providing income support for extensive producers

36. The EPS is one of a series of measures which provide income support to extensive beef producers. In 2001, EPS budget costs accounted for some 19 % (914 million euro) of total budget expenditure for direct aid schemes (4862 million euro - see Table 2) to cattle farmers. Together, these are a significant part of producers' incomes and encourage them to continue farming activities and stay in areas that might otherwise be abandoned. For example, in France and the United Kingdom, which together accounted for over half of EPS expenditure (see Illustration 1), many beef producers are dependent on the direct beef subsidies to keep them in business(42), and without these would otherwise make larger losses or no profit.

EPS does little to encourage intensive farmers to use more extensive methods

37. The impact of the EPS on extensive cattle production can be considered from two vantage points, namely, the extent to which it has maintained current extensive production practices, or the extent to which it has encouraged intensive farmers to switch to less intensive methods. In practice, other factors apart from the EPS influence producers' decisions. For example the cost and availability of lands and buildings, natural conditions, other grants, agricultural prices, consumer demand, the impact of BSE and other animal diseases, and export opportunities are all important.

38. The EPS is only paid to farmers who already qualify for the suckler cow premium or the special beef premium - and who for these schemes already have to respect maximum stocking density requirements that would exclude highly intensive producers.

39. EPS only provides an incentive to those farmers that have stocking rates close to or above the limits to reduce their SD (either by reducing the number of animals or by increasing forage area), as this would result in higher subsidies overall. Some producers have been able to increase their stocking rates within the regulatory limits and benefit from the EPS.

And EPS did little to encourage additional extensive farming, although it benefits holdings already farming extensively

40. As already found by the Court(43), the major weakness with the EPS (before the Agenda 2000 reforms) was that it did not take genuine SD into account for eligibility criteria. Beef producers were therefore able to benefit from higher animal subsidies either by excluding a number of animals from their special beef and suckler cow claims in order to achieve a lower theoretical SD, and therefore getting the extensification premium on all their claimed cattle, or by limiting their claims to 15 animals, as small producers are not required to meet the SD requirements to get the main beef premiums. These weaknesses were addressed by Agenda 2000 reforms (see paragraph 4).

41. Over 65 % of EU cattle on which either the special beef premium, or suckler cow premium was paid during 1994 to 2000 also qualified for the EPS (see Illustration 3). In France, Ireland and the United Kingdom, which have two thirds of the EU's suckler cow herd and where such farming was traditionally extensive, the proportion of these cattle receiving EPS was higher: France (80 %), Ireland (75 %), United Kingdom (76 %).(44) During the same period less than 5 % of the EPS payments were in Member States where intensive beef rearing is more prevalent (in order of financial importance: Italy, Belgium, Denmark, Netherlands).

Illustration 3

Average percentage of eligible cattle entitled to EPS 1994 to 1999

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Source:

Commission Working document, Beef Premiums: Additional amount for extensive holdings.

42. The auditors' examination of a sample of EPS claimants in each Member State visited found that the EPS had little impact on the production decisions taken by producers (see paragraph 43 and Table 4.)(45) In addition, the number of cattle eligible for EPS under the new regime in the application year 2000 diminished by 9,2 % (see Table 3).

43. The examination of a sample of EPS beneficiaries in the Member States visited showed that 83 % of the EPS claimants in the period 1995 to 1999 were already practising extensive farming as defined in the current (post 2000) EPS legislation (see Table 4). With the exception of Vendée in France, which has intensive and semi-intensive production systems, between 81 % and 100 % of the recipients of EPS in the period 1995 to 1999 would also have been eligible had the stricter post-Agenda 2000 conditions been applied in that period. Again with the exception of Vendée, where the new stricter rules will exclude producers who received the EPS in the past by making changes in stocking rates on paper, and where intensive producers are unlikely to switch to more extensive production, between 89 % and 97 % of the producers claiming EPS in 2000 were eligible to receive it. Most of the claimants would easily meet the SD requirements, and indeed in some cases could increase their stocking rates and still get the EPS. This confirms that the majority of producers who practice extensive farming as defined within the confines of the current legislation will continue to benefit from the EPS. Furthermore, most of the producers that the auditors met on the spot stated that they were unlikely to change their production methods as a result of the reformed EPS.

Table 4

Results of examination of sample of producer claims for EPS in the Member States visited

>TABLE>

Source:

Court of Auditors' examination of producers' files.

44. Moreover, 89 % of claimants in Spain, 43 % in Ireland and 44 % in the United Kingdom (52 % in Scotland, 40 % in England) opt to claim EPS under the simplified scheme, whereby they undertake to keep their stocking rates below a certain level at all times - indicating that these were most likely to be extensive farmers.

45. In Austria and Finland, producers may be eligible for EPS on their dairy cows(46). In Austria, since most extensive holdings are located in the mountainous areas and traditionally have dairy cattle, most holdings will see their EPS subsidy increase due to increases in number of eligible animals, without needing to change their herd composition or alter their production practices. Austria's EPS expenditure more than doubled between 1999 and 2000, from 15,5 million euro to 37,98 million euro, with 15,1 million euro due to EPS paid on dairy cows(47). Although mixed dairy and meat holdings are also a common feature in upland less favoured areas where grass-based production systems dominate, in other regions of the EU, Austria and Finland are the only Member States singled out for this advantage.

CONCLUSION AND RECOMMENDATIONS

Conclusion

46. The fact that under the original extensification premium scheme only bovines claimed under the main beef premium schemes were taken into account meant that some producers were eligible for the premium by changing their beef premium scheme applications, rather than by moving to or maintaining extensive farming practices. The reformed extensification payment scheme dealt this with (see paragraphs 4 and 14) by taking actual cattle on farm into account for calculating stocking density.

47. However, the SD is still an approximate calculation, as the actual number of sheep and goats on the holding is not considered (see paragraph 17); land that can only be used for sheep grazing is treated as eligible forage area (see paragraph 18); and farmers benefit most when maximising their production (see paragraph 19).

48. The coexistence of EPS and the agri-environmental schemes and compensatory allowances results in extensive farmers being compensated by several aid schemes (see paragraph 21), and the stocking density requirements of the main beef schemes are approaching that of the extensification payment scheme when the two-tier EPS system is applied (see paragraph 20).

49. Problems with the cattle registration and identification systems complicated EPS administration of the scheme for all Member States visited except Austria (see paragraphs 22 to 24).

50. There were weaknesses in the risk analyses used to target inspections in Ireland and France (paragraph 27), and weaknesses in the performance of inspections in all Member States visited (see paragraph 28).

51. There were problems in the measurement of certain forage areas (alpine pastures) in Austria; in the definition of forage area (forage rape) in the United Kingdom (paragraphs 29 to 32), and in the administration of the scheme in France, where eligible producers were paid EPS without making an express request to receive it (see paragraph 33).

52. While the Commission has information to administer the EPS, apart from the analysis carried out in the context of Agenda 2000, it does not have sufficient information to assess its impact (see paragraph 34), and no evaluations have been performed (see paragraph 35). The scheme has had little impact on farming methods in terms of discouraging intensive farming (see paragraphs 37 to 39) or encouraging extensification (see paragraphs 40 to 45), but is an important source of income and helps extensive farmers stay in business (see paragraph 36).

Recommendations

53. The Commission should:

(a) assess the effectiveness and efficiency of the EPS scheme as income support, taking into account other direct aids from which EPS beneficiaries may also benefit;

(b) define clear, non-conflicting objectives for the EPS scheme, and design support measures targeting more efficiently on encouraging extensification;

(c) assess consistency of the EPS scheme with other schemes such as the agrienvironmental schemes and compensatory schemes mentioned in paragraph 48;

(d) consider how to address the design weaknesses and complications referred to in paragraph 47;

(e) address inspection weaknesses by promoting integrated on the spot controls in all the Member States for all premiums received by each final beneficiary;

(f) amend the risk assessment requirements for livestock and area aid inspections in order to build in specific risk factors to choose producers close to the EPS SD threshold.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 17 and 18 July 2002.

For the Court of Auditors

Juan Manuel Fabra Vallés

President

(1) Known as the "extensification premium scheme" before 1 January 2000.

(2) Council Regulation (EC) No 1254/1999 of 17 May 1999 on the common organisation of the market in beef and veal (OJ L 160, 26.6.1999).

(3) There is also a "deseasonalisation premium" which may be granted for animals slaughtered out of season, but expenditure is not significant and benefits a limited number of Member States.

(4) Council Regulation (EEC) No 805/68 of 27 June 1968 on the common organisation of the market in beef and veal (OJ L 148, 28.6.1968), as amended by Council Regulations (EEC) No 2066/92 of 30 June 1992 (OJ L 215, 30.7.1992), and (EC) No 2417/95 of 13 October 1995 (OJ L 248, 14.10.1995) and (EC) No 2222/96 of 18 November 1996 (OJ L 296, 21.11.1996).

(5) Forage area is the area of a holding which is available throughout the year for rearing animals. For EPS purposes, 50 % of the forage area should comprise pasture land, which following local farming practices is recognised as being destined for grazing animals, the rest of the area being made up of land used for growing fodder crops.

(6) The development and the future of the CAP: reflection paper of the Commission (COM(91) 100 final, 1.2.1991).

(7) Preamble to Regulation (EEC) No 2066/92 amending Regulation (EEC) No 805/68.

(8) Preamble to Regulation (EC) No 2222/96 amending Regulation (EEC) No 805/68.

(9) Preamble Regulation (EC) No 1254/1999.

(10) Annual Report concerning the financial year 1996, paragraph 4.44 (OJ C 348, 18.11.1997).

(11) Council Regulation (EC) No 1254/1999. Commission Regulation (EC) No 2342/1999 of 28 October 1999 laying down detailed rules for the application of Council Regulation (EC) No 1254/1999 on the common organisation of the market in beef and veal as regards premium schemes (OJ L 281, 4.11.1999).

(12) Special Report No 14/2000 on Greening the CAP covers the environmental aspects of all CAP schemes. The section "The post-1992 environmental impact of common organisations of markets", paragraphs 19 to 26 and 92, covers the livestock schemes (OJ C 353, 8.12.2000).

(13) Source: Commission CAP 2000 working document, April 1997, "Situation and outlook - beef sector".

(14) Institut National de la Recherche Agronomique (INRA): "Typologie des systèmes d'élevage dans l'Union européenne - Étude réalisée à partir du Réseau d'Information Comptable Agricole (RICA), Rapport final, mai 1999.", Table 6.4.

(15) Prices vary according to category of animal, Member State, by season. For example, between week 8/1995 and week 8/1999, the EU average price for deadweight young bulls (quality class A R3) fell from 312,85 euro to 288,529 euro per 100 kg, and for steers (class C R3) from 298,419 euro to 274,058 euro. The BSE crises of 1996 and 2000 also led to temporary steep falls in prices.

Source for prices: EU market situation for bovine live cattle and carcases, DG AGRI, 1 March 2001.

(16) Source: Eurostat's New Cronos database.

(17) Source: Eurostat's New Cronos database.

(18) Source: Ministry of Agriculture, Fisheries and Food, Spain.

(19) Source: Commission document on EAGGF Guarantee expenditure 2001, budget item B1-2 1 2 5.

(20) Between 1999 and 2000, the total number of animals receiving the special and suckler cow premium decreased by 517870 heads - there was a sharp decrease of 590120 heads receiving suckler cow premium contrasted by a slight increase of 72250 heads receiving the special premium.

(21) Cattle over six months old.

(22) Council Regulation (EC) No 1254/1999, Chapter 1 "Direct payments", section 1 "Premiums", subsection 6 "Extensification payment", Article 13.

(23) Council Regulation (EC) No 1254/1999.

(24) Source: DG AGRI.

(25) Over six months old.

(26) Council Regulation (EC) No 1254/1999, Chapter 1 "Direct payments", section 1 "Premiums", subsection 6 "Extensification payment", Article 13(3) (c).

(27) Recital 13 of Council Regulation (EC) No 1254/1999.

(28) Final report of the Countryside Commission, March 1998, volume 1, "Conclusion and recommendations", paragraph 4.3.2.

(29) Council Regulation (EC) No 1254/1999, Chapter 1 "Direct payments", section 1 "Premiums", subsection 5 "Stocking density", Article 12(2)(a).

(30) Council Regulation (EC) No 1512/2001 of 23 July 2001 amending Regulation (EC) No 1254/1999 on the common organisation of the market in beef and veal, recital 5, and Article 1(9) (OJ L 201, 26.7.2001, p. 1).

(31) The two-tier system is applied in nine Member States: Belgium, Denmark, France, Ireland, Italy, Luxembourg, Netherlands, Finland and the United Kingdom.

(32) As required by Article 3(b) of Regulation (EC) No 820/97 of 21 April 1997 establishing a system for the identification and registration of bovine animals and regarding the labelling of beef and beef products (OJ L 117, 7.5.1997).

(33) Article 32(3) of Regulation (EC) No2342/1999 OJ L 281, 4.11.1999).

(34) The 2001 accounts of the paying agencies concerned were qualified by their certifying body, due to errors in the cattle identification system and the integrated administrative and control system (IACS), and to absence of follow up to anomalies identified by cross-checks. Concerning the EPS in particular, the certifying body identified that there was significant control risk due to procedures implemented. Source: 2001 reports of the "Commission de certification des comptes des organismes payeurs des dépenses financées par le FEOGA-Garantie" (CCCOP) for the "Office interprofessionnel des viandes" (Ofival) and "Services déconcentrés de l'Etat" (SDE).

(35) Due to mitigating circumstances, the Commission extended the deadline for EPS payments for France to 31 July 2001. The correction for late payment of EPS totalled 0,29 million euro, representing 0,1 % of the total EPS expenditure in France.

(36) The Court has estimated that the errors reported by the certifying body total 6,5 million euro for Ofival, (of which 0,82 million relates specifically to the EPS), and are due mostly to problems with the cattle identification and registration system.

(37) Commission Regulation (EEC) No 3887/92 of 23 December 1992 laying down detailed rules for applying the integrated administration and control system for certain Community aid schemes, Article 6(3) as modified (OJ L 391, 31.12.1992).

(38) Member States must comply with Commission Regulation (EEC) No 3887/92 of 23 December 1992, laying down detailed rules for applying the IACS system (OJ L 391, 31.12.1992 as modified), replaced by Commission Regulation (EC) No 2419/2001 from 1 January 2001 (OJ L 327, 12.12.2001). In addition to the IACS controls on the premiums paid, Member States also have to check that the Community provisions concerning bovine registration and identification are complied with as well as other requirements under health and sanitary legislation.

(39) ONIC - Office national interprofessionnel des céréales.

(40) Article 12(2)(b) of Regulation (EC) No 1254/1999.

(41) The Directorate-General for Agriculture is planning an evaluation of the beef market for 2004/2005.

(42) In France: "La réforme (Agenda 2000) renforce le rôle des aides directes dans la formation du revenu des exploitations agricoles ... Cette dépendance à l'egard des aides est plus importante pour les exploitations bovine-viande (133 % du résultat) et les aides directes représentent plus de 150 % du résultat courant dans près d'une unité par deux." Source: INRA "Le compromis de Berlin (Agenda 2000) - conséquences pour l'agriculture française, analyse des simulations à partir du RICA, Avril 1999."

In the United Kingdom: While beef direct subsidies represented 39 % of net farm income (NFI) on average for all farm types in 1999/2000, they represented between - 504 % (that is, the subsidy revenue was almost five times greater than the net loss) and 270 % of NFI for farmers in uplands and less favoured areas specialising in beef or mixed livestock farming. In the five years 1995 to 2000, direct livestock subsidies increased in importance as a percentage of revenue for livestock farmers in the LFAs, from 33 % to 45 %, with EPS making up between a fifth and a quarter of these beef subsidies. Source: analysis of income from farming, farm business subsidy data from DEFRA.

(43) Annual Report of the Court of Auditors concerning the financial year 1996, Chapter 4, paragraphs 4.40 to 4.44.

(44) Source: DG AGRI for expenditure and proportion of cattle receiving EPS; Eurostat cattle surveys for importance of suckler cow herd.

(45) In the United Kingdom, this was confirmed by the United Kingdom Countryside Research Unit's broader-based examination of the impact of the 1992 Mac Sharry reforms on the British countryside. Source: Final report of the Countryside Commission, March 1998, on the effects of the 1992 reform of the common agricultural policy on the countryside of Great Britan, volume 1 project overview and summary findings, and volume 1, executive summary, the beef sector p. xiv.,

(46) Council Regulation (EC) No 1254/1999, Article 13(4).

(47) In Austria, an additional 150552 dairy cows were eligible for the EPS, resulting in additional expenditure of 15,1 million euro. In Finland, EPS was paid on 170308 dairy cows, resulting in additional expenditure of 10,5 million euro.

The commission's replies

SUMMARY

I to III. As regards bovine production methods, the Council has set out two complementary instruments with a view to discouraging the intensification of production and encouraging the extensification. In both cases, the concept of stocking density remains the best tool as it is based on a measurable relation between animals and available area necessary for feeding them. The stocking density applied in order to limit the number of animals receiving the "basic" premiums is the instrument corresponding to the first aspect (discouraging) of the issue. The stocking density applied for the purpose of the extensification payment corresponds to the second aspect (encouraging) of the same issue.

The Commission undertook an analysis for the purpose of the proposals for the Agenda 2000 reform.

The Commission considers the impact of the extensification payment as resulting from the additional financial support provided to producers even if these producers already apply extensive production methods. The premium encourages extensive farmers to continue their extensive production.

IV. Even if the levels of the stocking density tend to become closer after the amendment to Regulation (EC) No 1254/1999 adopted in July 2001 the modalities for calculating the stocking density differ in the livestock units and in the area considered as a forage area. The stocking density for the "basic" premiums limits the number of animals eligible to the premiums and leads to a reduction in the number of premiums granted. The stocking density for the extensification payment works as a trigger for a top-up payment to the "basic" premiums.

V. The difficulties of implementation with the scheme which are stressed by the Court are adequately followed up by the Commission and are considered to be the normal difficulties encountered when a new aid regime is established. The problems are addressed within the framework of the normal procedures (clearance of accounts, legal interpretation; for more details see points 29 to 33).

VI. The scheme is in the start-up phase and will be assessed in 2004.

The Commission considers that providing producers (even if already engaged in extensive production methods or not) with the extensification payment allows them to produce a different quality of bovine meat corresponding to higher consumer expectations. Given the difficulties in the bovine market resulting from successive sanitary crisis, the Commission considers that without such specific support, extensive producers would have been encouraged to abandon this way of producing beef.

VII. The Commission has planned and will carry out the assessment of the common organisation of the market in beef and veal in 2004/2005 and will analyse the impact of the various instruments planned in this sector, particularly the new extensification premium introduced by Agenda 2000.

The measures introduced by the rural development plans for the period 2000 to 2006 will also be assessed, particularly from the point of view of their consistency with market measures.

Commission Regulation (EC) No 2419/2001 highlighted as from 1 January 2002 the specific risk factor involved, and also introduced or reinforced a series of on-the-spot control procedures and a sanctions regime.

In the framework of the mid-term review of the Agenda 2000, the Commission intends to bring forward proposals which go further in defining the respective roles of instruments both in the first and second pillar of the CAP in this area.

INTRODUCTION

10. Discouraging the intensification of production and encouraging its extensification are two complementary instruments set out by the Regulation as regards bovine production methods. In both cases, the concept of stocking density remains the best tool as it is based on a relation between animals and available area necessary for feeding them. The stocking density applied in order to limit the number of animals receiving the "basic" premiums is the instrument corresponding to the "discouraging" aspect of the issue. The stocking density applied for the purpose of the extensification payment corresponds to the "encouraging" aspect.

11. By setting out the two instruments affecting intensive or extensive beef production methods, the Council referred to two objectives: firstly, to limit animal premiums by taking into account the forage capacity of the holding in relation to the number of animals held on it in order to discourage the trend towards the intensification of production; secondly, to strengthen incentives to extensify production by granting an additional amount to the "basic" premiums.

The Commission considers the impact of the extensification payment as resulting from the additional financial support provided to producers even if these producers are already applying extensive production methods. The scheme encourages them to continue their extensive production methods. In the framework of the evaluation of the beef CMO, the Commission will evaluate any specified detailed impact achieved.

DESIGN OF THE EPS

16. The introduction of a two-tier density limit is aimed at giving more flexibility to Member States in applying the extensification incentive and at allowing producers to remain extensive. A large number of producers in a large part of the Member States would have been unable to respect with ease a single threshold system. A realistic choice has been made between the setting out of a unique and stricter system benefiting a potentially small number of producers and the laying down of an optional one applicable to a higher number of producers.

17. The new extensification premium arrangements, introduced by Agenda 2000, marked a significant improvement from the point of view of taking into account all the animals actually present on the holding. However, because of the existing regulations on identification, only sheep for which a premium had been claimed could be taken into account. Thus, taking account of all the sheep and/or goats present would have been extremely complicated to administer and very difficult to monitor. New advances are expected in the field of sheep/goat identification, however, which very soon will be the subject of a Commission proposal.

In more general terms, this question was examined as part of the study carried out for the mid-term review of Agenda 2000 adopted by the Commission on 10 July 2002. New measures will be proposed in this context.

18. A possible restriction of the forage area based on a separation of the pasture area according to the animal species grazing on it would be difficult to implement from a management and control point of view.

19. The stocking density laid down in Article 12 of Council Regulation (EC) No 1254/1999 is aimed at discouraging the trend towards the intensification of the production by limiting animal "premiums" on the basis of the relation between forage capacity of the holding and number of animals. Thus, it is aimed at restricting financial compensation of income to producers engaged in intensive production since it limits the number of animals for which a premium is paid.

The question raised by the Court is examined in the study carried out for the purposes of the proposal for a mid-term review of Agenda 2000, which is intended partly to limit the obligation to produce in order to benefit from premiums, and partly to reinforce cross-compliance.

20. Even if the levels of the stocking density tend to become closer after the amendment to Regulation (EC) No 1254/1999 introduced in July 2001, the modalities for calculating the stocking density differ in the livestock units and in the area considered as forage area. The stocking density laid down in Article 12 of Regulation (EC) No 1254/1999 limits the number of animals eligible to the basic premiums and leads to a reduction of the number of premiums granted. The stocking density laid down in Article 13 as regards the extensification payment is used as a trigger for a top-up payment to the "basic" premiums.

21. Motivations and justifications for agri-environmental schemes and compensatory allowances are fundamentally different from direct premiums for beef and sheep:

- agri-environment schemes remunerate environmental efforts of the farmers beyond good farming practice. Premiums are calculated on the basis of cost incurred, income forgone, and include in certain cases an incentive element. The commitments are made on a voluntary basis,

- compensatory allowances granted in the framework of the less-favoured areas scheme aim at compensation for farming in areas with natural handicaps or with environmental restrictions. The level of the allowance reflects these handicaps and takes into account practices in the area concerned, i.e. the entire livestock husbandry of a holding, the type of production in the holding, as well as all earnings such as overcompensation should be avoided (principle of proportionality, Article 15(1) of Regulation (EC) No 1257/1999),

- consistency between agri-environmental measures, compensatory allowances and the EPS and the exclusion of double funding for the same obligations (in the case in question the keeping of a reduced number of animals) are ensured by clear provisions in Article 37(3) of Regulation (EC) No 1257/99 and Article 35 of Regulation (EC) No 445/2002 (implementing rules for Regulation (EC) No 1257/99) further specifies this consistency aspect and addresses explicitly the extensification payment under Article 13 of Regulation (EC) No 1254/99.

Consistency is also a consequence of the fact that the implementing bodies in the Member States are using the same control tools for the various measures.

As regards the environmental objectives of the different measures, there can be a certain overlap between EPS introduced with the Agenda 2000 and measures under the second pillar of the CAP (agri-environment).

In the framework of the mid-term review of Agenda 2000, however, the Commission intends to bring forward proposals which go further in defining the respective roles of instruments both in the first and second pillar of the CAP in this area.

IMPLEMENTATION OF THE EPS IN THE MEMBER STATES VISITED

22. From a general point of view, the direct payments scheme established by the Agenda 2000 is based on the normal functioning of a computerised database laid down in Regulation (EC) No 1760/2000 on identification and registration of bovine animals. In reality, some Member States have not been able to set up such a computerised database in time. As a consequence, simplified solutions for the management of direct payments are not applicable everywhere.

Regulation (EC) No 1254/1999 gives the possibility to Member States to use such a database in this context on the conditions that the database offers, to the satisfaction of the Member State, adequate assurances as to the accuracy of the data it contains for the purpose of the extensification payment scheme. Firstly, it is for the Member State to evaluate to what extent the available database allows it to respect this requirement.

23. Member States are not obliged to use this database as a control tool. The computerised database is indeed one of the methods to be used, at the choice of the Member State, to count the animals according to Article 32(3) of Regulation (EC) No 2342/1999.

24. As regards accuracy of the data relating to calculation of livestock units in France, the Commission services have already noted the problem and action is being evaluated as a part of the ongoing clearance of accounts procedure.

The Commission's services have decided not to apply the penalties provided for in Article 4 of Regulation (EC) No 296/96 in view of the difficulties referred to by the French authorities. These difficulties are due partly to the changes in the conditions for granting premiums under Agenda 2000 and partly to the fact that a new computer system took longer to develop than originally expected.

The Commission's services conducted on-the-spot audit missions on extensification payments in France. The related clearance of accounts procedure is continuing.

26. The Commission's services have regularly urged Member States to better integrate their controls. Indeed, although provided by the previous IACS Regulation (EEC) No 3887/92, the new Regulation (EC) No 2419/2001 even further facilitates this arrangement. It is, of course, for Member States themselves to rearrange their organisational procedures as appropriate. In the event that this absence could create a risk to the Fund, appropriate action should be taken under the clearance of accounts procedure.

27, 50 and 53(f). As a consequence of the Commission's services' audit findings, the new IACS Regulation (EC) No 2419/2001 explicitly requires the risk analysis suggested by the Court.

In respect of Ireland and France, the Commission services made written recommendations for such a risk analysis factor already in 1999.

28. IACS Regulations lay down the control requirements. It is one of the prime roles of the Commission services to establish and encourage best practice. In the cases of France, Spain and the United Kingdom, as well as several other Member States, the clearance of accounts procedure begun with on-the-spot audits in 2000 and 2001, is continuing.

29. The specific problem raised by the Court in respect of the United Kingdom will be followed up in the clearance of accounts procedure.

30 to 32 and 51. The Court's findings on the extensification premium in Austria are the subject of an ongoing enquiry under the clearance of accounts procedure.

33. The fact that certain French eligible producers were paid EPS without requesting it expressly is in contradiction with Article 32(1) of Commission Regulation (EC) No 2342/1999.

The Commission services are including the Court's remark in the ongoing clearance of accounts procedure.

COMMISSION'S INFORMATION ON IMPACT OF EPS IS INSUFFICIENT

34 and 35. The information provided by Member States according to Article 46 of Regulation (EC) No 2342/1999 cumulated over a number of years will be used by the Commission to measure its impact. The experience acquired up to now is too short to carry out this exercise (only payments for year 2000 are known at this moment).

IMPACT OF EPS

35. The Commission has planned and will carry out an evaluation of the market in beef and veal in 2004/2005 and will study the impact of the various instruments planned in this sector, particularly the new extensification premium scheme introduced by Agenda 2000.

39 to 43. The Commission considers it as a positive impact of the extensification payment, that producers, even already engaged in extensive production, may continue to produce a different quality of bovine meat corresponding to consumer expectations by receiving an additional support allowing them to compensate higher production costs.

Given the negative evolution on the bovine meat market due to successive sanitary crises, the Commission considers that without such specific support, extensive producers would have been driven to abandon this way of producing beef.

The Commission points out that the scheme is in its start-up stage and an evaluation will be carried out in 2004.

45. The Council agreed on the principle to grant the extensification payment for dairy cows to producers where the holding is located in Member States and "more than 50 % of milk production takes place in mountain areas within the meaning of Regulation (EC) No 1257/1999". On this basis, the Commission had to decide in 1999 which Member States in fact met these conditions. Following the examination by the Commission of the situation in each Member State, considering the criteria set out by the Council, only Austria and Finland were found as meeting these requirements.

CONCLUSION AND RECOMMENDATIONS

46. By defining new and stricter conditions for granting the extensification payment, the Agenda 2000 reform introduced a larger differentiation between the common stocking density and the stocking density for the purpose of the extensification payment.

47. The question raised by the Court is examined in the study carried out for the purposes of the proposal for a mid-term review of Agenda 2000 which is intended partly to limit the obligation to produce in order to benefit from premiums and partly to reinforce cross-compliance.

48. As already stated under point 21, the motivations and justifications for agri-environmental schemes and compensatory allowances are fundamentally different from the EPS direct premiums. Clear legal provisions ensure consistency between these schemes and the exclusion of double funding.

The stocking density requirements, though tending to become closer, remain different as the modalities for calculating the stocking density differ in relation to the livestock units and the forage area.

49. The direct-payments scheme established by the Agenda 2000 is based on the normal functioning of a computerised database laid down in Regulation (EC) No 1760/2000 on identification and registration of bovine animals. Some Member States have not been able to set up such a computerised database in time. It is for the Member State to evaluate which limit in the available database allows it to respect the regulatory requirements.

50. As a consequence of the Commission's services' audit findings, the new IACS regulation explicitly requires the risk analysis suggested by the Court.

The Commission services will take into account the Court's comments on individual Member States' implementing systems in its clearance of accounts procedure.

51. As regards the problems concerning Austria, a clearance of accounts procedure is ongoing. With respect to the problems related to the United Kingdom, the Commission has refused the interpretation of the Member State concerned. As for France, the Commission services are including the Court's remark in the ongoing clearance of accounts procedure.

52. Extensive production methods generally imply higher costs for producers. This higher cost derives mainly from the need to have at one's disposal, by buying or renting it, a larger area available for feeding animals. The crop of this area is not sold directly but is used as an intermediary means of production. This cost does not exist in the same proportion for a more intensive producer, as the purchase of cereal-based feedingstuffs is less expensive. By compensating the extensive producer for this additional cost and specific effort to produce bovine meat of a specific quality, the extensification scheme works as an incentive as defined by the Council.

From a market point of view, as it is based on a longer process of rearing animals than a more intensive production, extensive production is an element in favour of maintaining regularity and equilibrium on the market. This is particularly the case in Member States where extensive beef production is traditionally employed and availability of land coexist.

The scheme is in its start-up stage and the Commission has planned and will carry out the assessment of the common organisation of the market in beef and veal in 2004/2005 and will analyse the impact of the various instruments planned in this sector, particularly the new extensification premium introduced by Agenda 2000.

53. (a) to (d) The Commission has planned and will carry out the assessment of the common organisation of the market in beef and veal in 2004/2005 and will analyse the impact of the various instruments planned in this sector, particularly the new extensification premium introduced by Agenda 2000.

Taken as a whole, the questions raised by the Court are examined in the study carried out for the purposes of the proposal for a mid-term review of Agenda 2000 which is intended partly to limit the obligation to produce in order to benefit from premiums and partly to reinforce cross-compliance.

(e) The Commission has for several years promoted an integrated approach to on-the-spot controls, which was highlighted by its own integrated audits of agricultural expenditure conducted in 1998 and 1999. Although provided for in Regulation (EEC) No 3887/92, amended by Regulation (EC) No 1678/98, as from 1 January 1999, integrated on-the-spot checks became a regulatory requirement, where appropriate, with the introduction of the new IACS regulation as from 1 January 2002.

(f) The Commission has already recommended to several of the Member States, visited by the Court, that their risk analysis should incorporate specific risk factors to select producers close to their stocking density threshold. These recommendations were further reinforced as from 1 January 2002 by Art 19(1)(f) of the new IACS regulation, which introduced the new factor "those farmers who are either just above or below ceilings or limits relevant for the granting of aids".