Proposal for a COUNCIL REGULATION adjusting, for the sixth time, the system of aid for cotton introduced by Protocol 4 annexed to the Act of Accession of Greece

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Introduction

This Explanatory Memorandum and its accompanying legislative proposals are drafted in response to paragraph 11 of Protocol 4 annexed to the Act of Accession of Greece, amended inter alia by Protocol 14 annexed to the Act of Accession of Spain and Portugal, which required a report on the operation of the aid scheme. This requirement was partly anticipated in 1997/98 by the Report from the Commission to the Council on Greek requests in the cotton sector (COM(1998) 10 final). In June 1998, after the report had been studied and some of the recommended measures adopted, the Council invited the Commission to examine:

- the possibility of introducing a system enabling the aid to be paid directly to the producer,

- the compatibility of such a system with current commercial practice in the cotton sector,

- the possibility of setting up a system of regionalised penalties,

- the problems inherent in managing and monitoring such systems.

In evaluating the desired changes, attention has been paid to simplifying the rules and ensuring that the effectiveness of controls is maintained or improved. This was because the Court of Auditors, in its annual reports [1], had found serious shortcomings in the controls on the cotton aid scheme.

[1] OJ C 309, 16.11.1993, p. 1. JO C 340, 17.11.1996, p. 1.

2. The cotton aid scheme

The Community rules governing the arrangements for cotton are based on a Protocol annexed to the Act of Accession of Greece. Following the accession of Spain and Portugal, Council Regulation (EEC) No 1964/87 adjusting the system of aid for cotton introduced by Protocol 4 annexed to the Act of Accession of Greece was adopted, in particular to establish a maximum guaranteed quantity. Since then, this Council Regulation has been amended four times, to adapt some of its Articles but also to amend certain sections of Protocol 4. In addition, Council Regulation (EC) No 1554/95 lays down the general rules for the system of aid. This rather unusual legislative arrangement has become exceptionally complex and, in order to simplify it, the provisions of the Protocol should be reduced to essentials and all the other legislative measures should be brought together in a single Council Regulation.

The cotton arrangements are based on a minimum price per tonne of unginned cotton to be paid to producers by cotton ginning undertakings. The ginning undertakings receive Community aid per tonne, which varies according to market quotations so that ginned cotton can be sold at the world price. In addition, since the 1998/99 marketing year, it has been possible for producer groups to have ginning carried out on their behalf and to receive aid through the ginning undertakings.

The scheme is subject to guaranteed national quantities (GNQs) of 782 000 tonnes for Greece and 249 000 tonnes for Spain. If production exceeds the guaranteed national quantity, the guide price, the aid and the minimum price are reduced, although this does not necessarily ensure budget neutrality. However, there is a mechanism which, under certain conditions, in particular when the world price is relatively high, limits production. Under most circumstances, budgetary expenditure is limited to EUR 770 million, although it can be much higher, particularly when the world price is low and interest in the crop is growing as at present. Expenditure could exceed EUR 900 million.

Advances on the aid are paid, on the basis of the world prices recorded and crop estimates made before the beginning of the marketing year (1 September). Moreover, since the 1998/99 marketing year, advances have been revised on the basis of a new crop estimate made at the end of November when ginning is well under way.

Between 1982 and 1992, the Community encouraged the creation of producer groups in the cotton sector. Start-up aid and investment aid were provided, chiefly for the purchase of harvesting machinery. In both Greece and Spain, all growers now have access to harvesting machinery. The producer groups manage this machinery pool. Since 1992, the production aid scheme has encouraged the creation of producer groups and has facilitated their operation.

In Greece, 20 ginning cooperatives, accounting for about a quarter of all the ginning undertakings in the country (around 75 in all) own about one third of the ginning capacity. The total ginning capacity does not pose any special difficulties given the level of production in Greece.

In Spain, the 10 ginning cooperatives account for almost half of the 22 undertakings. There is surplus ginning capacity in relation to the supply from producers, particularly noticeable in recent marketing years (1993/94 to 1995/96) because of the persisting drought.

Monitoring the scheme focuses mainly on the following points:

- the producer makes a declaration of area sown, which is included in the area aid application provided for under the integrated administration and control system (IACS),

- producers and ginning undertakings conclude contracts, which include an undertaking to pay the minimum price,

- the unginned cotton is placed in supervised storage at the ginning undertaking,

- stock accounts are kept for products entering and leaving the ginning undertaking.

By checking these different points it is possible to determine the origin of each batch of unginned cotton, verify whether the quantities tally with the declared areas sown and identify which bales of cotton fibre are produced from which unginned cotton.

Checks on the application of the rules under the EAGGF accounts clearance procedure led to a financial correction amounting to 10% of the expenditure declared by Greece for the 1991 and 1992 financial years. In its Statement of Assurance for 1994, the Court of Auditors also reported shortcomings in compliance with certain provisions among Greek ginning undertakings. A financial correction of EUR 3.2 million was applied.

Since 1994, inspection procedures in Greece have been reviewed and the current view of the EAGGF accounts clearance department is that inspection arrangements have improved.

All in all, the present system enables a fairly high quality of cotton to be produced and permits the ginned cotton to be sold at the world price. However, the latest figures available show a disturbing rise in areas sown and output. This suggests that situations could arise which would make it difficult to respect overall budgetary discipline and to take environmental considerations into account. In order to overcome this problem, the budget neutrality of the cotton regime must be strengthened. It is therefore proposed to increase the percentage reduction in the guide price, without, however, amending the other components of the stabiliser mechanism.

3. Direct aid to producers

Disputes often arise between producers and ginning undertakings because of the time it takes for the advances on the aid paid to the processor to be passed on to the producer in the minimum price, and because of the adjustments to the minimum price according to the quality of the cotton. From the 1995/96 marketing year, the Community grading scale for increasing and reducing the minimum price according to quality was abolished in the interests of subsidiarity and at the unanimous request of all operators in the sector. As things now stand, when the quality of the cotton delivered does not correspond to the standard quality, the price agreed is adjusted proportionally by common consent between the contracting parties. In Greece, where there is no interbranch agreement, the intervention agency has imposed a scale of increases and reductions. It also charges a 1% levy on payments made by ginning undertakings to producers, thereby throwing the system out of balance.

While it is both difficult and inappropriate to regulate contractual relations between producers and ginning undertakings at Community level, it is important that the aid be paid in full to the beneficiaries in order for it to accomplish its role of bridging the gap between the guide price and the world market price. It is also worthwhile clarifying certain rules that must be complied with, such as the link there should be between the quality of unginned and ginned cotton, and the obligation to pay an advance on the minimum price.

In these circumstances, and to ensure that the aid more directly benefits producers, Greece has asked whether it would be possible to grant the aid directly to those producer organisations (POs) that pay the minimum price to their members, have ginning carried out under contract, and market the ginned cotton. This arrangement would be optional and, at least to start with, very few POs would qualify. None of the POs without ginning facilities currently market their ginned cotton.

There are two main obstacles to the payment of direct aid to POs on the above terms:

- in order to market ginned cotton, a PO must have sufficient capital to be able to guarantee the bank loans necessary to pay the minimum price; they must also have marketing equipment and premises (storage, handling, communications) and qualified staff, particularly managers able to monitor the world market, manage variable aid and conclude sales contracts. There is a considerable risk that the payment of the minimum price or the repayment of bank loans would place such POs in financial difficulties,

- the quantities of unginned and ginned cotton on which the aid is paid would still have to be checked mainly on the premises of the ginning undertaking carrying out the contract work. If the checks at ginning undertakings revealed irregularities, the POs could disclaim responsibility.

It therefore appears that producer groups that do not carry out their own ginning do not have the resources required to manage the variable aid arrangements under the current regime. The matter should be re-examined in a few years, in the light of the experience gained by groups that have their cotton ginned under contract against reimbursement of the aid received by the ginning undertakings under the rules introduced at the beginning of the 1998/99 marketing year. To date, this option has not been used.

In the light of the above, the current scheme whereby the aid is granted to ginning undertakings for the quantity they produce should be maintained.

4. Regionalisation of penalties

Greece wishes to establish the principle of regionalised cotton cultivation in order to prevent it from spreading to non-traditional zones in regions where water consumption is a source of conflict and poses a problem of environmental management. In Spain, cotton growing is concentrated almost exclusively in Andalusia.

The relationship between cotton and the environment is an ambivalent one. On the one hand, cotton is the most important textile fibre of plant origin and it is mainly because it is "natural" that it is perceived as superior to the competing synthetic fibres. On the other hand, however, the environmental consequences of cotton cultivation are sometimes condemned because of the high water consumption, the use of pesticides and fertilisers and the trend towards a one-crop economy in certain areas: the absence of crop rotation is liable to exhaust the soil and increase the dangers of plant diseases in the long term.

Many initiatives are already being undertaken throughout the sector to palliate these drawbacks. Drip irrigation and sowing under plastic help rationalise water consumption. Greece has initiated a programme to reduce the use of fertilisers and introduce drip irrigation, particularly on areas sown to cotton. In Spain, the "Asociaciones para Tratamientos Integrados del Algodón" (ATRIAS) have launched initiatives to cut production costs and introduce integrated pest control.

The Greek request to regionalise the guaranteed national quantity (GNQ) with guaranteed regional quantities (GRQs) could be a source of complication, risk for the EAGGF and conflicts between regions in relation to the following:

- regional production estimates and advances on aid,

- the reallocation of GRQs not fully utilised in some regions,

- verifying the origin of unginned cotton, which could qualify for different levels of aid per tonne.

Another solution put forward by Greece involves individual quotas. Under this proposal, the aid would continue to be paid to ginning undertakings, as it is under the present regime, with a GNQ for all the cotton produced. Producers would continue to be paid the minimum price, minus an appropriate reduction, for individual quotas which together would give a total figure equal to estimated production. Any cotton produced in excess of the individual quotas would not be subject to the minimum price requirement.

The precedents for this type of system, particularly as applied to milk and durum wheat, have shown it to be complicated. There are two main practical difficulties:

- managing the individual quotas, which would have to be reallocated every year, is a source of serious conflicts,

- the presence on the market of cheap ginned cotton giving ginning undertakings the same entitlement to aid as cotton at the minimum price seems likely to encourage deflections of normal marketing flows as well as fraud.

Either of the two solutions proposed, whether regionalisation of GNQs or individual quotas, would therefore result in additional complexity, more disputes and increased danger of fraud. However, in order to attain the objective of checking the spread of cotton cultivation, it is proposed that Member States introduce the appropriate environmental measures and restrict the surface areas or zones where cotton cultivation is eligible for aid on the basis of objective environmental criteria. In the light of the above, the proposal is in line with the general environmental objectives in the Agenda 2000 decisions. It is proposed that Member States send the Commission a report before 31 December 2003 on the environmental situation in the sector.

5. Other administration and control considerations

One potential source of difficulties in the way the current regime operates lies in the detailed rules for fixing the aid. Under the current regime, the aid to be granted is the amount valid on the date when the ginning undertaking makes its application. Ginning undertakings can make one or more applications, for one or more quantities, at any time between the date on which the cotton enters the undertaking (not before 1 September) and the following 31 March at the latest. This arrangement enables ginning undertakings to receive an amount that takes account of the world market price on the date of conclusion of the sales contract for the fibre produced.

The rules prevent beneficiaries from making an aid application before they are actually in possession of the product, and discourages contracts from being concluded on the world market before the harvest period. One proposal would be to extend the period during which the amount of the aid is fixed, but this would mean severing the link between calculating the quantities eligible for the aid and the physical check on each batch of cotton that enters an undertaking.

For example, aid applications for quantities specified by the applicant would involve the amounts in force at the time of application, between 1 July and the following 31 March. The total quantity covered by applications would have to correspond to the total quantity of cotton entering the undertaking between 1 September and the following 31 March. By contrast, the advances on aid would continue to be based, as they are today, on the quantities actually placed under supervision in the undertaking concerned.

6. Proposed measures

Having examined the operation of the cotton regime, the Commission's main proposals are as follows:

- maintain the current aid scheme,

- provide for aid to be granted in full to beneficiaries and lay down certain rules on payments and adjustment of the minimum price,

- increase the percentage reduction of the guide price,

- provide for Member States to draw up objective environmental criteria and, where necessary, restrict eligibility for the aid to certain areas,

- provide for a report from the Member States on the impact on the sector of national environmental measures,

- extend the period during which aid applications may be made under an updated system for the calculation of eligible quantities,

- simplify the Community rules by bringing the principles governing the cotton regime together in Protocol 4 and the legislative provisions on the production aid for cotton together in a single Council Regulation.

The proposed measures will simplify not only the rules but also the conditions for fixing and granting the aid, which is mostly paid to small and medium-sized undertakings. They also contribute to improving respect for the environment and for budgetary discipline.

This set of measures will contribute to the general goal of uniform application of the rules governing agricultural production. They fall within the exclusive competence of the Community.

1999/0201 (CNS)

Proposal for a

COUNCIL REGULATION

adjusting, for the sixth time, the system of aid for cotton introduced by Protocol 4 annexed to the Act of Accession of Greece

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to the Act of Accession of Greece [2], and in particular paragraph 11 of Protocol 4 on cotton, as last amended by Regulation (EC) No 1553/95 [3],

[2] OJ L 291, 19.11.1979, p. 174.

[3] OJ L 148, 30.6.1995, p. 45.

Having regard to the proposal from the Commission [4],

[4]

Having regard to the opinion of the European Parliament [5],

[5]

Having regard to the opinion of the Economic and Social Committee [6],

[6]

Whereas:

(1) Examination of the operation of the system of aid for cotton and of the support scheme for arable crops, as provided for in paragraph 11 of Protocol 4, reveals a need for adjustment of the system for cotton.

(2) Measures concerning cotton are set out in Protocol 4, in Council Regulation (EC) No 1554/95 of 29 June 1995 laying down the general rules for the system of aid for cotton and repealing Regulation (EEC) No 2169/81 [7], as last amended by Regulation (EC) No 1419/98 [8], and in Council Regulation (EEC) No 1964/87 of 2 July 1987 adjusting the system of aid for cotton introduced by Protocol No 4 annexed to the Act of Accession of Greece [9], as last amended by Regulation (EC) No 1553/95. The system provided for in Protocol 4 annexed to the Act of Accession of Greece should be maintained, in particular the opportunity for the Council to adjust the system, and, in the interests of simplification, the implementing measures concerning cotton production aid should be brought together in one Council Regulation,

[7] OJ L 148, 30.6.1995, p.48.

[8] OJ L 190, 4.7.1998, p. 4.

[9] OJ L 184, 3.7.1987, p. 14.

HAS ADOPTED THIS REGULATION:

Article 1

Paragraph 3 of Protocol 4 is replaced by the following:

"3. The system referred to in paragraph 2 shall include the grant of an aid to production."

Article 2

Paragraph 6 of Protocol 4 is replaced by the following:

"6. The Council, acting by a qualified majority on a proposal from the Commission and after consulting the European Parliament, shall decide on the adjustments necessary to the system introduced pursuant to this Protocol and shall adopt the general rules necessary for implementing the provisions of this Protocol."

Article 3

Paragraphs 7, 8, 8a, 9, 10, 11 and 12 of Protocol 4 are deleted.

Article 4

Paragraph 13 of Protocol 4 becomes paragraph 7.

Article 5

This Regulation shall enter into force on the seventh day following its publication in the Official Journal of the European Communities.

It shall apply from 1 September 2000.

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels,

For the Council

The President

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