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Brussels, 14.6.2005

SEC(2005) 827 final

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

on EAGGF Guarantee Section expenditure Early warning system No 1–5/2005

TABLE OF CONTENTS

1. THE 2005 BUDGETARY PROCEDURE 3

2. COMMENTS ON THE IMPLEMENTATION OF THE 2005 BUDGET 4

3. CONCLUSIONS 6

1. THE 2005 BUDGETARY PROCEDURE

The 2005 budgetary procedure for heading 1 along with the corresponding amounts of appropriations involved at each stage of the procedure is presented in Annex 1.

The Commission adopted the preliminary draft budget (PDB) on 28 April 2004 involving commitment appropriations amounting to EUR 50 675.5 million and payment appropriations amounting to EUR 50 113.9 million for heading 1. The difference between commitment and payment appropriations amounting to EUR 561.6 is due to the transitional instrument for the new Member States which is applied through differentiated appropriations as opposed to all other measures of the EAGGF-Guarantee. The amount of forecasted appropriations, included in the 2005 PDB for sub-heading 1a, were based on an evaluation of internal and external market conditions for the various products concerned as well as on the estimated requirements for the numerous other measures. The amount of forecasted appropriations, included in the 2005 PDB for sub-heading 1b were set at the ceiling for this sub-heading.

On 16 July 2004, the Ecofin-Budget Council adopted the Draft Budget (DB) by imposing a linear cut totalling EUR 1 000.0 million from the PDB appropriations of all articles of sub-heading 1a (agriculture) for which the requested appropriations exceeded EUR 800.0 million. In contrast, the European Parliament, after its first reading of the PDB, reduced the Commission’s requested appropriations as presented in its PDB by approximately EUR 4.0 million for the same sub-heading.

In October 2004, the Commission proposed the Amending Letter to the 2005 PDB thereby requesting commitment appropriations amounting to EUR 50 451.5 million and payment appropriations amounting to EUR 49 889.9 million for heading 1. The Commission, on the basis of an evaluation of internal and external market conditions for the various products concerned, requested commitment appropriations amounting to EUR 43 289.3 million for heading 1a, thus, reducing its request by approximately EUR 224.0 million compared to the PDB’s level.. The amounts for sub-heading 1b were left unchanged from the ones included in the 2005 PDB.

On 26 November 2004, the Ecofin-Budget Council held its second reading of the Amending Letter to the 2005 PDB and, with regard to agricultural spending under heading 1, it maintained the level of appropriations decided during its first reading of July 2004. Essentially, the Council ignored the Commission’s Amending Letter of October 2004 whereby forecasted budget requirements had been updated by proposing an overall reduction of EUR 224.0 million. The European Parliament adopted the 2005 budget on 16 December 2004.

The 2005 EAGGF-Guarantee budget’s commitment appropriations amounted to EUR 49 676.0 million and its payment appropriations amounted to EUR 49 114.4 million for heading 1. Budgetary appropriations are equal to the level of the Draft Budget adopted by the Council after its first reading of July 2004. Specifically:

- for sub-heading 1a : commitment appropriations amounted to EUR 42 835.0 million and they are lower by approximately EUR 776.0 million when compared with the amount of appropriations proposed in the Amending Letter of October 2004. These appropriations relate to all three Commission activities, namely: agriculture (Policy area 05), fisheries (Policy area 11) and health and consumer protection (Policy area 17), included in this sub-heading. The significant factor characterising the appropriations included in the 2005 budget is that these are not based on any updated evaluation and analysis of internal and external market conditions for the various products involved as was the case with the credit needs forecasted in the proposed Amending Letter of October 2004. Consequently, the amount of appropriations agreed for the dairy and the sugar sectors are higher than the one requested under the latest update of needs included in the Amending Letter. At the same time, the amount of appropriations agreed for the cereals and the fruit and vegetable sectors are lower than the one requested under the latest update of needs included in the Amending Letter which had taken into consideration adverse factors like the bumper cereals harvest, the latest level of world market prices as well as the weakening of the dollar against the euro;

- for sub-heading 1b : the amount of appropriations included in the budget was left unchanged as it had been initially set at the ceiling for this sub-heading.

2. COMMENTS ON THE IMPLEMENTATION OF THE 2005 BUDGET

For the period 16 October 2004 to 31 March 2005, the budget’s actual implementation level compared to the expenditure profile pointed out by the indicator, established on the basis of the dispositions of Council Regulation (EC) No 2040/2000[1] of 26 September 2000 on budgetary discipline, is presented in Annex 2. Hereafter a brief commentary on the most significant divergences between the actual and the expected level of implementation for the various sectors of the 2005 budget follows.

2.1. Monetary factors

The dollar/euro rate

The expenditure incurred in the aforementioned period takes account of the movement in the dollar/euro rate. For a large part of export refunds for agricultural products, particularly for cereals and sugar, and of some internal aids such as aid for cotton, expenditure is influenced by the trend in the euro/dollar rate.

The budget adopted by the Budgetary Authority was based on the appropriations requested in the 2005 PDB which was drawn up on the basis of the average parity rate of EUR 1 = $ 1.25. It should be noted that for the period 1 August 2004 to 31 March 2005 the average parity rate was approximately equal to EUR 1 = $ 1.28, i.e. approximately 2% above the rate used for the establishment of the 2005 PDB.

2.2. Subheading 1a – Market factors

2.2.1. Market measures on cereals

While the levels of implementation and execution coincide at the end of this period, the Commission thinks that this situation is temporary. Indeed, the over-abundant 2004/05 cereals harvest resulted in increased quantities of cereals going into public storage. This led the Commission to request additional credits in its Amending Letter of October 2004 which, however, were not granted by the Budgetary Authority. At this point in time, while large quantities of cereals have been offered into public storage, a part of these quantities has not yet entered storage because of capacity problems in the new Member States. At this point in time, this situation makes it difficult to forecast the needed appropriations in this sector.

2.2.2. Direct payments for arable crops

The Commission is currently investigating the over-execution of appropriations compared to the level of the indicator. For a number of Member States, the Commission’s estimate of the amounts to be paid, on the basis of their communications with regard to the parameters underpinning the implementation of this scheme, does not coincide with the amounts actually paid or still forecasted for payment by these same Member States. Once this investigation is finished, the Commission will present its estimate as to the final credit requirements for this scheme.

2.2.3. Food programmes

The over-execution of appropriations for this period is expected to be temporary and to be eliminated by the end of the budget year as expenditure under this scheme is based on an annual approved plan which links the amount of available appropriations to the quantities of products and their corresponding value included in this plan.

2.2.4. Sugar

The Commission has observed that the rhythm of export refund payments has slowed down when compared to the situation in previous budget years and it is currently investigating whether this situation is temporary or whether it would last to the end of the budget year. In the latter case, an under-utilisation of this scheme’s appropriations id expected. On the other hand, the current market situation in this sector has led to the public storage of sugar for the first time in CAP’s history, a situation which could have a significant budget impact.

2.2.5. Textile plants

The Commission does not have any element which would confirm the budget’s execution, thereby any estimates could be hazardous at this point in time. Indeed, the final expenditure on cotton aid will depend on the declared total production of cotton in EL and in ES. This parameter will affect the rate of aid abatement to be applied in the case where this production exceeds the maximum guaranteed quantity. Furthermore, the world market price for cotton in conjunction with the euro/dollar parity rate at the time of the declaration of the final production figures will affect the calculation of the final amount of aid to be paid. This calculation is expected to be made by the end of May to mid-June.

2.2.6. Direct aids of a horizontal nature

The Commission considers that there will be an eventual over-execution of appropriations for the Simplified Area Payments Scheme (SAPS) which involves eight out of the ten new Member States. The reason for this over-execution is due to the double rate effect arising from the payment of aids in national currency by the Member States non-participating in the common currency. The eventual amount of this over-execution resulting from this effect will be only known once all payments have been made and declared to the Commission.

2.2.7. Milk and milk products

The Commission agrees with the under-execution shown in this sector by the indicator at this point in time and considers that it will probably continue to the end of the budget year if the current favourable internal and external market conditions persist in this sector. These conditions have allowed the Commission to reduce the overall level of export refund rates and internal market aids for the different products of this sector.

2.2.8. Beef and veal

The indicator points towards an under-execution at this point in time. The Commission considers that this under-execution is temporary since it has estimated that, if the Member States pay all animal premiums due for 2004, then the appropriations cut from the Amending Letter of October 2004, which amount to EUR 226.0 million, would be needed to cover these expected payments.

2.3. Sub-heading 1b – Rural Development

The appropriations for rural development (EU-15) and for the transitional instrument for the new Member States were set at the ceiling for this sub-heading. The over-execution shown for the transitional instrument is temporary since the corresponding indicator was established in the hypothesis that all commitments for this instrument will take place in April 2005. However, the Commission’s services were able to start committing these appropriations before that time, thus leading to this over-execution which will is expected to be regularised in the month of April 2005.

3. CONCLUSIONS

For sub-heading 1a, the uptake of appropriations for the Member States' expenditure from 16 October 2004 to 31 March 2005 amounted to EUR 32 902.6 million, i.e: 76.8% of available appropriations. The overall under-spending of the budget’s appropriations when compared to the indicator amounted to approximately–EUR 261.2 million for the same period. This is mainly attributable to the animal products’ sector while the plant products’ sector showed an over-execution of the budget’s appropriations. At this point in time, the Commission is closely monitoring the situation.

For sub-heading 1b, the uptake of appropriations for the Member States' expenditure from 16 October 2004 to 31 March 2005 amounted to EUR 2 705.6 million, i.e: 39.5% of available appropriations. At this point in time, the Commission expects that this sector’s appropriations will be executed as proposed in the 2005 budget.

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[1] OJ L 244, 29.9.2000, p. 27.