EN    EN EN 
 
EN    EN  COMMISSION OF THE E UROPEAN COMMUNITIES 
Brussels, 20.5.2008 
SEC(2008) 1885 
  
COMMISSION STAFF WORKING DOCUMENT 
accompanying the 
 
Proposals for 
 
COUNCIL REGULATION establishing comm on rules for direct support schemes 
under the common agricultural policy for farmers and establishing  
certain support schemes for farmers 
 
COUNCIL REGULATION on modifications to  the common agricultural policy by 
amending Regulations (EC) No 320/ 2006, (EC) No 1234/2007, (EC) No 3/2008  
and (EC) No […]/2008 
 
COUNCIL REGULATION amending Regula tion (EC) No 1698/2005 on support  
for rural development by the European Agricultural Fund  
for Rural Development (EAFRD) 
 
COUNCIL DECISION amending Decision 2006/144/EC on the Community strategic 
guidelines for rural development (programming period 2007 to 2013) 
 
Impact Assessment  
 
 
{COM(2008) 306 final} 
{SEC(2008) 1886} 
 
EN 2   EN TABLE OF CONTENTS 
A – PROCESS, OUTLINE  AND METHODOLOGY .............................................................10 
1. process and outline .....................................................................................................10 2. Methodology...............................................................................................................11  
B – INTRODUCTION .............................................................................................................16  
1. Scope and objectives ..................................................................................................16 2. Issues ...................................................................................................................... ....17 
C – SINGLE PAYMENT SCHEME........................................................................................19 
1. Problem Definition .....................................................................................................19 2. Objectives .................................................................................................................. .19 
C.a. IMPLEMENTATION OF TH E SINGLE PAYMENT SCHEME.............................20 
1. Background.................................................................................................................2 0 
2. Problem definition ......................................................................................................21 3. Objectives .................................................................................................................. .22 
4. Options SPS model.....................................................................................................22 5. Impact analysis SPS model.........................................................................................23 5.1. Option 0: status quo....................................................................................................23  
5.2. Option 1: EU-wide flat rate  per eligible hectare.........................................................25 
5.3. Option 2: SAPS for all MS.........................................................................................26 5.4. Option 3: regional flat rate s per eligible hectare ........................................................26 
5.5. Option 4: regional flat rate per entitlement ................................................................27 6. Options for Article 69.................................................................................................28 7. Impact analysis Article 69 ..........................................................................................28 7.1. Option 0: status quo....................................................................................................28  
7.2. Option 1: targeted revision .........................................................................................29 7.3. Option 2: extended revision........................................................................................29 8. Conclusions ................................................................................................................2 9 
9. Summary tables ..........................................................................................................31 9.1. Comparison between different options and their respective impacts – SPS flat rate .31 
 
EN 3   EN 9.2. Comparison between different options and th eir respective objectives – SPS flat rate
............................................................................................................................... .....33 
9.3. Comparison between different options a nd their respective impacts – SPS Article 69
............................................................................................................................... .....34 
9.4. Comparison between different options and their respective objectives – SPS 
Article 69 ....................................................................................................................3 5 
C.b. CROSS COMPLIANCE.............................................................................................36 1. Background.................................................................................................................3 6 
2. Problem definition ......................................................................................................36 3. Objectives .................................................................................................................. .37 
4. Policy options and analysis of their impacts ..............................................................37 4.1. Option 0: status quo....................................................................................................37  
4.2. Option 1: better targeting the curr ent scope of cross compliance ..............................38 
4.3. Option 2: broadening the scope of cross compliance.................................................38 5. Comparison of the options and their impacts .............................................................39 5.1. Option 0: status quo....................................................................................................40  
5.2. Option 1: better targeting the curr ent scope of cross compliance ..............................40 
5.3. Option 2: broadening the scope of cross compliance.................................................41 6. Conclusions ................................................................................................................4 1 
7. Summary tables ..........................................................................................................42 7.1. Comparison between different options  and their respective impacts – cross 
compliance..................................................................................................................42 
7.2. Comparison between different options a nd their respective objectives – cross 
compliance..................................................................................................................43 
C.
C. PARTIALLY  COUPLED  SUPPORT ........................................................................44 
1. Background.................................................................................................................4 4 
2. Problem definition ......................................................................................................44 3. Objectives .................................................................................................................. .45 
4. Policy Options ............................................................................................................45  
4.1. Timing and transition to full decoupling options .......................................................45 5. Impact Analysis ..........................................................................................................46 5.1. Economic impacts.......................................................................................................46 5.1.1. Status quo .............................................................................................................. .....46 
 
EN 4   EN 5.1.2. Full decoupling......................................................................................................... ..47 
5.1.3. Targeted selective decoupling ....................................................................................49 5.2. Social impacts and environmental impacts ................................................................49 6. Conclusions ................................................................................................................5 0 
7. Summary tables ..........................................................................................................51 7.1. Comparison between different options a nd their respective impacts – partially 
coupled support...........................................................................................................51 
7.2. Comparison between different options and their respective objectives – partially 
coupled support...........................................................................................................52 
C.d. INDIVIDUAL PAYMENT LIMITATIONS .............................................................53 1. Background.................................................................................................................5 3 
2. Problem Definition .....................................................................................................54 3. Objectives .................................................................................................................. .54 
4. Policy options .............................................................................................................5 4 
8. Impact Analysis of Upper Payment Limitations ........................................................55 8.1. Option 0 .................................................................................................................. ....56 
8.2. Option 1 .................................................................................................................. ....56 
8.3. Option 2 .................................................................................................................. ....56 
9. Impact Analysis of Lower Payment Limitations........................................................57 10. Conclusions ................................................................................................................ 58 
10.1. Upper limitations ........................................................................................................ 58 
10.2. Lower limitations........................................................................................................ 58 
11. Summary tables ..........................................................................................................60 11.1. Comparison between different options and their respective impacts – upper payment 
limitations ...................................................................................................................6 0 
11.2. Comparison between different options a nd their respective objectives – upper 
payment limits ............................................................................................................62 
11.3. Comparison between different options and their respective impacts – Lower payment 
limits ......................................................................................................................... ..63 
11.4. Comparison between different options a nd their respective objectives – Lower 
payment limits ............................................................................................................64 
D – MARKETS .................................................................................................................... ....65 
1. Problem Definition .....................................................................................................65 
 
EN 5   EN 2. Objectives .................................................................................................................. .65 
D.A. CEREAL  INTERVENTION  AND  SET  ASIDE ........................................................66 
1. Background.................................................................................................................6 6 
2. Problem Definition .....................................................................................................66 3. Objectives .................................................................................................................. .67 
4. Policy options for cereal intervention.........................................................................67 5. Impact Analysis of Cere al Intervention Options ........................................................67 
5.1. Economic impact ........................................................................................................67 5.1.1. Option 0: status quo – no further ch anges to the intervention system........................68 
5.1.2. Option 1: reduction of the interven tion price to a safety net ......................................68 
5.1.3. Option 2: extension of maize interv ention model to all feed grains...........................68 
5.1.4. Option 3: tendering..................................................................................................... 69 
5.2. Environmental impact.................................................................................................69 5.3. Social impact ............................................................................................................. .70 
5.4. Other ..................................................................................................................... ......70 
6. Impact Analysis of Set Aside Abolition.....................................................................70 6.1. Policy options for set aside.........................................................................................70 6.2. Economic impacts.......................................................................................................71 6.3. Environmental impacts...............................................................................................73 6.4. Social impact ............................................................................................................. .75 
7. Conclusions ................................................................................................................7 5 
8. Summary tables ..........................................................................................................77 8.1. Comparison between different options and their respective impacts – Cereal 
intervention.................................................................................................................77  
8.2. Comparison between different options a nd their respective objectives – Cereal 
intervention.................................................................................................................78  
8.3. Comparison between different options and their respective impacts – set aside .......79 
8.4. Comparison between different options and th eir respective objectives – set aside....81 
D.
B. THE  PHASING-OUT  OF MILK  QUOTAS...............................................................82 
1. Background.................................................................................................................8 2 
2. Problem definition ......................................................................................................82 3. Objectives .................................................................................................................. .82 
 
EN 6   EN 4. Policy options .............................................................................................................8 3 
4.1. Option 1: quota extension...........................................................................................83 4.2. Option 2: quota expiry in 2015...................................................................................83 4.3. Option 3: phasing-out of quotas .................................................................................83 4.3.1. Annual increases of national quotas  by 1% from 2009/10 to 2014/15.......................83 
4.3.2. Annual increases of national quotas  by 2% from 2009/10 to 2014/15.......................83 
5. Impact Analysis ..........................................................................................................83 5.1. Economic impacts.......................................................................................................84 5.1.1. Extension of quotas ....................................................................................................8 4 
5.1.2. Expiry of quotas in 2015  ("hard landing") .................................................................85 
5.1.3. Gradual phasing-out of dair y quotas ("soft landing").................................................86 
5.1.4. Other dairy policy instruments ...................................................................................88 5.1.5. Impact on international markets .................................................................................89 5.2. Social impacts............................................................................................................ .89 
5.3. Environmental impacts...............................................................................................92 6. Supplementary analysis ..............................................................................................93 7. Conclusions ................................................................................................................9 6 
8. Summary tables ..........................................................................................................97 8.1. Comparison between different options and their respective impacts – milk quotas ..97 
8.2. Comparison between different options and their respective objectives – milk quotas99 
D.c. OTHER SUPPORT SCHEMES...............................................................................100 
1. Background...............................................................................................................100  
2. Problem definition ....................................................................................................100 3. Objectives .................................................................................................................1 01 
4. Policy Options ..........................................................................................................101 
4.1. Timing and transition to full decoupling options .....................................................102 
5. Impact Analysis ........................................................................................................102 5.1. Economic impacts.....................................................................................................102 5.1.1. Status quo .............................................................................................................. ...102 
5.1.2. Full decoupling......................................................................................................... 103 
5.1.3. Targeted selective decoupling ..................................................................................104 
 
EN 7   EN 5.1.4. Other ................................................................................................................... ......104 
5.2. Social and environmental impacts............................................................................104 6. Conclusions ..............................................................................................................105  
7. Summary tables ........................................................................................................106 7.1. Comparison between different options a nd their respective impacts – other support 
schemes.....................................................................................................................106  
7.2. Comparison between different options and th eir respective objectives – other support 
schemes.....................................................................................................................107  
D.d. RISK AND CRISIS MANAGEMENT ....................................................................108 
1. Background...............................................................................................................108  
2. Problem Definition ...................................................................................................109 3. Objectives .................................................................................................................1 09 
4. Policy Options ..........................................................................................................110 4.1. Option 0: status quo..................................................................................................110 7.3. Option 1: EU-wide framework.................................................................................110 7.4. Option 2: enhanced role of risk mana gement in existing CAP instruments.............110 
5. Impact Analysis ........................................................................................................110 7.5. Option 1: EU-wide scheme.......................................................................................111 7.5.1. Subsidies of insurance premiums .............................................................................111 5.1.1. Supporting mutual funds ..........................................................................................112 5.1.2. Providing basic coverage against income crises.......................................................113 
5.1.3. Environmental impacts, and impacts in terms of internati onal constraints..............114 
5.2. Option 2: enhancing the role  of risk management in existing CAP instruments .....115 
5.2.1. Rural Development measures...................................................................................115 5.2.2. Single Payment Scheme ...........................................................................................116 
6. Conclusions ..............................................................................................................116  
7. Summary tables ........................................................................................................119 7.1. Comparison between different options and their respective impacts – risk 
management..............................................................................................................119 
7.2. Comparison between different options and their respective objective – risk 
management..............................................................................................................121 
 
EN 8   EN E – NEW CHALLENGES ......................................................................................................122 
1. Problem Definition ...................................................................................................122 2. Objectives .................................................................................................................1 22 
E.a RESPONDING TO NEW CHALLENGES .............................................................123 
1. Background...............................................................................................................123  
2. Problem definition ....................................................................................................123 3. Objectives .................................................................................................................1 23 
4. Policy Options ..........................................................................................................124 5. Analysis of Impacts ..................................................................................................124 5.1. Impact on the programming process ........................................................................124 5.1.1. Option 0: status quo..................................................................................................12 4 
5.1.2. Option 1: transfer of add itional funds to Pillar II .....................................................124 
5.1.3. Option 2: ear-marking ..............................................................................................125 5.1.4. Option 3: higher co-financing rates..........................................................................125 5.1.5. Option 4: higher aid intensities.................................................................................126 5.1.6. Option 5: obligation to use modulation funds for new challenges...........................126 5.2. Legislative and administrative consequences...........................................................126 5.3. Social/environmental impacts of alte rnative options for new challenges ................127 
6. Conclusions ..............................................................................................................127  
7. Annex to Chapter VIII – List of indicative action types ..........................................128 
8. Summary tables ........................................................................................................130 8.1. Comparison between different options and their respective impacts – New challenges
............................................................................................................................... ...130 
8.2. Comparison between different options and their respective objectives – New 
Challenges ................................................................................................................131 
E.b. MODULATION .......................................................................................................132 
1. Background...............................................................................................................132  
2. Problem Definition ...................................................................................................133 3. Objectives .................................................................................................................1 33 
4. Policy Options ..........................................................................................................133 5. Analysis of Impacts ..................................................................................................135 5.1. Global effects on budget and MS transfers ..............................................................135 
 
EN 9   EN 5.2. Economic and social impacts per farm.....................................................................139 
5.3. Environmental impacts.............................................................................................140 5.4. Administrative impacts.............................................................................................140 5.5. Supplementary analysis ............................................................................................141 6. Conclusions ..............................................................................................................144  
7. Summary tables ........................................................................................................146 7.1. Comparison between different options a nd their respective impacts – New challenges
............................................................................................................................... ...146 
7.2. Comparison between different options a nd their respective impacts – Modulation 148 
7.3. Comparison between different options and their respective objectives – New 
Challenges ................................................................................................................149 
7.4. Comparison between different options and objectives – modulation.......................149 
F – CONCLUSIONS ..............................................................................................................15 0 
1. Summary Results......................................................................................................150 2. Impact on stakeholders .............................................................................................151 3. Cross-cutting effects.................................................................................................152 4. Budgetary Impact .....................................................................................................153 5. Summary of different analysed options....................................................................155 6. Summary of cross cutting issu es between analysed options ....................................156 
G – MONITORING AND EVALUATION ...........................................................................157 
 
EN 10   EN A – PROCESS, OUTLINE AND METHODOLOGY 
1. PROCESS AND OUTLINE  
A Steering Group of 15 Commission  Services contributed to the identification of the analysed 
options and objectives, and discussed in several m eetings the preliminary results of the Impact 
Assessment. In parallel, public consultation with stakeholders included two publ ic seminars 
which discussed the HC Communi cation, and invited contributi ons based on a questionnaire. 
During the seven-week period of  public consultation, the Co mmission received a significant 
number of submissions (85) with wide-spread representation across Member States (MS) and 
stakeholders, from farm and environmental groups to industry. 
The conclusions are presented in this Impact  Assessment report, which together with its 
accompanying background material detailing the re sults of the various internal and external 
analyses, is annexed to the legal proposals. The Impact Assessment compares policy options 
against the baseline assumption of continuation of existing polic ies, including policies related 
to the WTO. The most recent market outlook indicates that a higher level of agricultural 
prices will persist for the foreseeable future. This outlook has been taken into account in the 
present analysis, and constitutes the baseline for market developments. Uncertainties about the prospects of a WTO agreement in the cont ext of the Doha Development Agenda (DDA) 
negotiations imply that, for this  analysis, the description of  a reliable scenario of a DDA 
agreement was not feasible. However, in selective areas, the potential outcome of such an agreement is assessed based on the comparison of options to the formal EU offer in DDA. 
The Impact Assessment used extensively quantitative analysis for issues related to the SPS 
and market measures. The impact from adjustments in SPS-related issues were analysed based on microeconomic data from the Farm  Accountancy Data Network (FADN), while 
econometric analysis was used to estimate the im pact of adjustments in market measures. On 
the other hand, for issues related to new ch allenges and cross compliance, analysis was 
mainly of a qualitative nature. 
This Report was examined by the Impact Assessment Board and benefited from its 
suggestions. To take account of its opinion, several modifications were introduced with respect to previous versions. An overall intr oduction was added to give  a better overview of 
the various elements of the Report, and better identify in the problem definition and objectives the inter-relation between the various issues. 
The three main areas of analysis (SPS, mark ets, new challenges) are now addressed in 
separate sections. In each s ection, a cover page introduces problem definition and specific 
objectives compared to a clearl y defined baseline scenario. At the end of each section, after 
the individual chapters, tables summarise th e impacts of each option and assess each option 
with respect to fulfilling its objectives. Specific modifications were also introduced in individual chapters, following the Board's va rious suggestions. A final section was added, 
bringing together the main c onclusions of the Assessment of  the Health Check proposals, 
including cross-cutting impacts of all options, and their impact on stakeholders beyond the 
agricultural sector. 
Additional analysis has been in cluded in those areas where developments in recent months 
rendered altered some of the initial assumptions (such was for example the case in dairy with 
respect to price developments or the quota  level were altered because of recent 
 
EN 11   EN developments), or existing analysis was added in the annexes to clar ify already analysed 
developments (such as the impact of price increases on consumers).  
A series of Annexes provide details supporting  the results of the an alysis. These Annexes 
summarise the results of the public consultation  of stakeholders (A),  provide information 
about the state and role of EU agriculture in  the EU economy and EU regions and the impact 
of CAP support (B), analyse issu es related to the SPS framewor k (C), include analyses on 
market-related measures (D), on the suitabilit y of existing RD instruments and financial 
resources to face new challenges (E), and provide additional internal (microeconomic) and external studies that were also used in the analysis (F and G, respectively). 
2. M
ETHODOLOGY  
To address the above issues, and analyse the impact of potential changes in the CAP, the 
present Impact Assessment (IA) followed these steps. 
Public consultation with stakeholders in cluded two public seminars, one on the global 
presentation of the HC, the other with focus on dairy issues. Stakeholders were invited to 
contribute to the preparation of proposals based on a questi onnaire. This resulted in a 
significant number of submissi ons with wide-spread representation across Member States 
(MS) and stakeholders, ranging fr om farm and environmental gr oups to industry (details are 
provided in Annex A). 
Many existing analyses and studies, both internal and external, were examined, leading to the 
overall assessment that the CAP reform proce ss has already radically reformed and improved 
the performance of the CAP. A nnex B provides information about the state of EU  agriculture 
and its role in the EU economy and the EU re gions which indicates th e contribution of CAP 
reform towards increased market orientation, be tter distribution of s upport among the various 
policy pillars, more transfer and budget effi ciency, and improved balance in EU and world 
markets. Annex B also sheds light on the imp act of CAP support based on the conclusion of 
an extended analysis about the prospects of EU agriculture for 2020. This study provides the 
best proof of what support does:  it contributes to regional farm income, less intensive farm 
practices and more territorial cohesion in a joined -up manner. It is not the overall level of EU 
agricultural production that would suffer from th e removal of support to EU agriculture, but 
the location and the inte nsity of this production. 
Annex C analyses the potential impact of chan ges in the SPS model towards a more flat, per 
area, rate of support on the distribution of fa rm payments, and on farm income at MS and 
farm level. It relies on the analysis of the di stribution of support base d on data concerning the 
most recent CAP payments, on microeconomic anal ysis at farm level, and on the conclusions 
of external studies about the impact of decoupled support on farm income and on land 
markets. It also looks into the impact of pa yment limitations on the distribution of support and 
on farm income. 
Annex D relies on different analytical approaches (in-house and external partial equilibrium 
econometric models to microeconomic analysis at the farm level) to assess the outlook for 
agricultural markets and the potential impact of  changes in CAP market instruments. This 
analysis also used the results of a commi ssioned external study on th e phasing-out of dairy 
quotas and its potential impact on production, pr ices and income. Furthermore, the annex 
summarises the conclusions of seve ral studies on risk management. 
 
EN 12   EN Annex E summarises the result s of the screening of RD instruments to identify their 
suitability for the new challenges facing EU ag riculture, and assesses the potential impact of 
an increase in modulated funds which shift support from the 1st to the 2nd CAP Pillar. 
Finally, Annexes F and G provide a list of add itional internal (microeconomic) and external 
studies that were also used in the analysis. 
 
EN 13   EN LIST OF ANNEXES  
ANNEX A – PUBLIC CO NSULTATION SUMMARY 
Stakeholders consultation (D/3377 – 2008) 
ANNEX B – ECONOMIC SITUATION OF EU AGRICULTURE 
1. The situation and perspectives of agri culture and rural zones (D/3338 – 2008) 
2. The impact of developments in agricultural prices fo r consumers (D/34703 – 2007) 
ANNEX C – NOTES 1-4 (Reg ulation (EC) No 1782/2003) 
1. Simplification of the Single Payment Scheme (D/1419 – 2008) 
2. Cross compliance (D/1327 – 2008) 
3. Partially coupled support (D/1327 – 2008) 
4. Individual limits for dire ct payments (D/1066 – 2008) 
ANNEX D – NOTES 5-7 (Reg ulation (EC) No 1234/2007) 
1. Cereal intervention and set aside (D/1029 – 2008) 
2. Milk quotas (D/1046 – 2008) 
3. Other support schemes (D/1408 – 2008) 
ANNEX E – NOTES 8-10 (new challenges) 
1. New challenges (D/1071 – 2008) 
2. Risk and Crisis management (D/1073 – 2008) 
3. Modulation (D/1333 – 2008) 
ANNEX F – MICROECONOMIC (FADN) ANALYSIS 
1. Analysis of the impact of a direct  payment flat rate (D/586/ – 2008) 
2. Impact of a capping of Dir ect Payments (D/1314 – 2008) 
3. Dairy sector: analysis of the evolution of milk margins in the European Union 
(1998-2005) (D/32731 – 2007) 
4. Dairy sector: impact on milk margins of a price reduction (D/955 – 2008) and 
additional analysis nº3401 (07/02/08) and 4955 (25/02/08) 
 
EN 14   EN 5. Cereal sector: impact of the reduction of the intervention price to a safety net level 
on farm (D/9771 – 2008) 
6. Impact of the suppression of the partial re-coupling (D/ D23894 – 2007) 
7. Rice sector: impact of the coupled payment  suppression on rice margins (D/953 – 
2008) and additional analysis 3308 (07/02/08) and 6878 (14/03/08) 
8. Nuts sector: impact of the coupled pay ment suppression on nuts margins 
(D/954 – 2008) 
9. Impact of additional modulation (D/ D1655 – 2008) 
ANNEX G – RELEVANT EVALUATION STUDIES 
1. Agricultural insurance schemes, 2006 
http://ec.europa.eu/agriculture/ana lysis/external/ins urance/index_en.htm  
2. Agri-environment measures, overview on general principles, types of measures, 
and application, 2005 – Mesures agro -environnementales, November 2005 
http://ec.europa.eu/agriculture /publi/reports/agrienv/rep_en.pdf  
3. Common market organisation (CMO) in  the cereal sector, October 2005 
http://ec.europa.eu/agriculture/e val/reports/cereal s/index_en.htm  
4. Community policy for starch and starch products, 2002 
http://ec.europa.eu/agriculture /eval/reports/amidon/index_en.htm  
5. Cross compliance as foreseen under Regulation (EC) No 1782/2003, July 2007 
http://ec.europa.eu/agriculture/eva l/reports/cross_compliance/index_en.htm  
6. Environmental impacts of CAP measures an d direct support measures related to 
the beef and veal sector, IEEP 
(not published) 
http://ec.europa.eu/agri culture/eval/program/2008_2010_en.pdf  
7. Environmental impacts of milk quotas, IEEP 
(not published) 
http://ec.europa.eu/agri culture/eval/program/2008_2010_en.pdf  
8. Implementing the energy crops CAP meas ures and bio-energy market, March 2006 
http://ec.europa.eu/agriculture/eva l/reports/bio_energy/index_en.htm  
9. L’organisation commune de marché dans le  secteur du lin et du chanvre, AND 
International 
http://ec.europa.eu/agriculture/eval/reports/lin/index_fr.htm  
 
EN 15   EN 10. An evaluation of the less favoured area me asure in the 25 Member States of the 
European Union 
http://ec.europa.eu/agricultu re/eval/reports /lfa/index_en.htm  
11. L'impact des mesures communautaires concer nant le gel des terres, February 2002 
http://ec.europa.eu/agriculture /eval/reports/g el/index_fr.htm  
12. L'impact sur l'environnement des OCM et de s mesures de soutien direct de la PAC 
relatives aux cultures arables, July 2007 
http://ec.europa.eu/agriculture /eval/reports/ocm/index_fr.htm  
13. L'organisation commune de marché dans le secteur du lin et du chanvre, 
septembre 2005 
http://ec.europa.eu/agriculture/eval/reports/lin/index_fr.htm  
14. Mesures communautaires dans le secteur de s fourrages séchés, AND International 
(not published) 
15. Rural Development programmes in view of post 2006 RD policy, 2004 
http://ec.europa.eu/agriculture/e val/reports/rdimpact/index_en.htm  
16. SCENAR 2020, Scenario Study on agricu lture and rural world, December 2006 
http://ec.europa.eu/agriculture/ publi/reports/scenar2020/index_en.htm  
17. Set aside measure 2000 to 2006 
(not published) http://ec.europa.eu/agri culture/eval/program/2008_2010_en.pdf
 
18. The administrative burden on farms arising from the CAP, 2007 
http://ec.europa.eu/agriculture/ana lysis/external/ burden/index_en.htm  
19. Withdrawals and crisis management in  fruit and vegetable sector, March 2007 
http://ec.europa.eu/agriculture/eva l/reports/withdrawals/index_en.htm  
20. Evaluation of the application of cross compliance as foreseen under Regulation 
(EC) No 1782/2003, July 2007 
http://ec.europa.eu/agri culture/eval/reports/cross_compliance/full_text_en.pdf  
 
EN 16   EN B – INTRODUCTION 
1. SCOPE AND OBJECTIVES  
The basic objectives of the common agricultural policy (CAP) are set in the Treaty. Following 
successive reforms since the mid-1990s, they have since been adapted in the European 
Summits of Berlin and Göte borg. In the Communication prep aring the 2003 reform, the CAP 
was identified as aiming to achieve: 
• a competitive agricultural sector, 
• production methods that support environmentally friendly, quality produ cts that the public 
wants, 
• a fair standard of living and income st ability for the agricultural community, 
• diversity in the forms of agriculture, main taining visual amenities and supporting rural 
communities, 
• simplicity in agricultural policy and the sh aring of responsibilities among Commission and 
Member States, 
• justification of support through the provision of services that the public expects farmers to 
provide. 
Implementing the above broad objectives in mo re concrete policy terms, the 2003 reform 
marked a new phase in the CAP reform proce ss by introducing changes in the CAP with three 
main objectives: 
• enhance competitiveness with significant adjustments in market measures in the sectors of 
cereals, dairy, and rice; 
• promote a market oriented, sustainable agricu lture by decoupling direct payments in the 
arable crops, beef and dairy sectors via the Single Payment Scheme (SPS); 
• strengthen rural development with  the shift of funds from the 1st to the 2nd pillar of the 
CAP via modulation. 
A similar path was followed by subsequent refo rms in 2003 (olive oil, cotton and tobacco), 
sugar (2006), fruit and vegetables (2007) and wine (2007). Finally, Ru ral Development (RD) 
policy instruments were also reformed (2005). 
With the reform implemented in 2005-07, it is too soon to assess its full impact. First 
indications are in genera l positive, whether measured in te rms of the implementation rate of 
decoupling, better market outlook or strengthen ed rural development programmes. In most 
areas, initially expressed concerns about the impact  of the reform did not materialise. Thus in 
the present context, a fundament al reform of the CAP for the remaining horizon of the present 
financial perspectives (until 2013) is neither necessary nor desirable. 
However, other, parallel market and polic y developments indicate a rapidly changing 
environment facing EU agriculture . These developments, together with the experience gained 
so far from implementation, indicate the ne ed for CAP adjustments which could not be 
foreseen when the 2003 reform was carried out . The aims of the HC  are therefore to: 
 
EN 17   EN (1) assess the experience from the implementati on of the Singe Payment Scheme and to 
introduce adjustments that further simplify and increase the effectiveness of the policy; 
(2) introduce adjustments to the CAP in order to  allow it to respond to present market 
opportunities and face new challenges rela ted to energy/climate change policy 
objectives. 
2. I
SSUES  
Following the HC Communication, the pres ent Impact Assessment is grouped in 
three main areas aiming to address the three main policy que stions of the HC: 
(1) How to make the Single Payment Scheme  more effective, efficient and simple? 
Regulation (EC) No 1782/2003 covers all i ssues related to the core of farm 
support today, the Single Payment Scheme (SPS). The analysed options are assessed based on their impact in allowi ng farm support to deliver the stated 
reform objectives of market orienta tion, simplicity and WTO compatibility, 
while in parallel being more respons ive to equity an d other societal 
considerations. 
(2) How to render market support instruments still relevant in a globalised world 
and an enlarged EU? 
Regulation (EC) No 1234/2007 covers i ssues related to the single common 
market organisation (sCMO). The impact of  various options in adjusting this 
recently consolidated legislation is assessed based on how such adjustments 
would permit a better response of the CAP to the emerging opportunities in 
world agricultural markets and fine tune existing market management instruments to render intervention a real  safety-net mechanism, and on how 
they would remove remaining supply constraints. 
(3) How to master new challenges by  adapting to the new risks and 
opportunities? 
Regulation (EC) No 1698/2005 covers i ssues related to Rural Development 
(RD) policy. Existing policy measures a nd financial resources are assessed in 
order to examine whether a better targeting of financial priorities within the CAP would allow it to respond to the ne w challenges and emerging risks from 
climate change, bio-energy, biodi versity and water management. 
The present Impact Assessment has a certai n degree of autonomy within each of the 
above three areas. But there are also importa nt cross-cutting linkages in the expected 
impacts of various options. Such  linkages are more evident in: 
• the removal of existing supply controls in arable crops (set  aside) which are 
driven by market considerations, but could create risks for existing environmental side benefits; 
• the risk that the expiry of dairy quotas pose for farm  income and employment in 
certain regions, and the resulting need for adjustment in the SPS and/or RD; 
 
EN 18   EN • the need to combine measures across di fferent policies (cross compliance and RD 
measures) in order to better respond to new challenges; 
• the increasing importance for farmers of ri sk management information and tools; 
• the need to carefully examine and balance the potential benefits form adjustments 
in CAP measures with the administra tive costs that they could entail. 
The potential impacts of th e various options for CAP adjustments were assessed 
based on the following criteria: 
Economic Social Environmental 
Market orientation Stability of farm income Environmental sustainability 
Competitiveness Vitality of rural areas Biodiversity 
Budgetary cost Employment Expected uptake by MS 
Transfer Efficiency Dist ribution of payments  
Administrative burden Simplification Others 
Cost to the farm Implementation rules Compatibility with 
WTO constraints 
Cost to public administration Better targeting Coherence with other relevant 
policy objectives 
 
EN 19   EN C – SINGLE PAYMENT SCHEME  
1. PROBLEM DEFINITION  
• The current SPS framework includes a degr ee of rigidity, which restricts the 
effectiveness of the SPS and reduces its  responsiveness to evolving conditions: 
– the SPS payments are based on a reference period, which, particularly under 
the historic model, reflects previous  production structur es and agricultural 
support; 
– there is no provision to allow MS to adjust their initial implementation 
decision, in terms of the SPS model chosen, partially coupled support and Article 69 options; 
– there is no instrument for addressing the uneven distribution of payments; 
– the current scope of cross compliance need s to be re-assessed in the light of 
new challenges facing EU agriculture. 
• SPS implementation has also created a number of extra costs, which lower the 
efficiency of the system in a ttaining its declared objectives: 
– some measures of cross compliance, not linked to agricultural activities, were 
therefore not appropriate for this instrument; 
– the receipt of high payment levels by a few beneficiaries raises the question 
of whether and to which extent payments  can be justified for farms of very 
large economic size; 
– the receipt of small payment levels of many beneficiaries raises the question 
of whether payments can be justified when they exceed their administration 
cost. 
• Several aspects of the current SPS implementa tion, in particular measures of partially 
coupled support and cross compliance, could benefit from a simplification, in order to 
ease the administrative burden for fa rmers and public administrations. 
2. O
BJECTIVES  
• Achieving improved competitiveness, better market orientation and better compliance 
with EU standards; 
• meeting the underlying sustainability goals of the reformed CAP; 
• meeting the societal expectations from th e CAP in terms of the provision of public 
goods, the distribution of direct payments and new challenges; 
• preserving the vitality of rural areas and specific types of farm ing, which may be low 
in intensity, but high in positive environmental or regional benefits; 
• further simplifying the CAP. 
 
EN 20   EN C.a. IMPLEMENTATION OF TH E SINGLE PAYMENT SCHEME 
1. BACKGROUND  
The objective of the 2003 CAP reform was to provi de a direct payment system that allows 
farmers to be market oriented, is as simple as  possible from an admini strative point of view, 
and is compatible with WTO requirements for Green Box payments. This was achieved with 
the introduction of the Single Payment Scheme  (SPS), which rendered decoupled farm 
support the central element of the 2003 CAP reform. 
In implementing the SPS, MS could opt for a hi storic model (payment entitlements based on 
individual historic reference amounts per fa rmer), a regional model (flat rate payment 
entitlements based on amounts received by farmers in a region in the reference period) or a 
hybrid model (mix of the two approaches, ei ther in a static or in a dynamic fashion)1. 
In order to receive payments, farmers have to activate their SPS entitlements by matching 
them with a corresponding number of eligible hectares. In the historic model the number of 
payment entitlements corresponds to the number of  hectares that generated support payments 
in the reference period; thus elig ible land not used to activate entitlements remains as "naked 
land". On the other hand, in the regional impl ementation the number of payment entitlements 
broadly matches the number  of eligible hectares. 
This significant shift in farm s upport was facilitated by the flex ibility that MS had in their 
choice. However, whatever the choice of mode l, both historic and regional approaches to 
decoupling are similar in two fundamental as pects. Both models do not guide production 
choices, but allow farmers to be market orie nted by reacting to market signals and price 
developments. Both models have a fixed referen ce in payments and in the area to which these 
payments correspond. 
But the two fundamental choices in implementi ng the SPS, and their variants, also have a 
significant difference with respect to the distribu tion of support, whether this is fixed in one 
shot (static) or gradually (dynamic). 
• The first approach (historic m odel) respects the previous level of support that farmers 
received, and leaves redistribution issues to be dealt with through m odulation. As a result 
this SPS model uses the farm as the fixed reference  for the allocation of payment rights 
(entitlements). 
• The second approach (regional model), dr iven mainly by equity arguments since 
redistribution was significantly scaled down because of the limited extent of modulation, 
addresses issues of redistri bution of support through the SPS. As a result, this SPS model 
uses the area as the fixed reference  for the allocation of entitlements. 
                                                 
1 Most of the new MS are still implementing the Singl e Area Payment Scheme (SAPS), a simplified area 
payment per hectare, introduced before  the SPS to facilitate transition to EU. 
 
EN 21   EN In practice, MS choices led to an almost even  split, in budgetary terms, between historically-
based and regionally-based support. Both approaches achieve the objective of WTO 
compatibility by introducing fixed references fo r the payments farmers receive. And although 
the initial implementation of the regional mode l proved to be more complex, once in place 
both models are similar in their implementation rules. 
To provide MS with additional flexibility to target specific needs, Article 69 of Regulation 
(EC) No 1782/2003 authorises them to take up to 10% of the component of the national 
ceilings of each sector to allo cate additional payments to the farmers engaged in important 
types of agriculture for the protection or im provement of the environment or for improving 
the quality and marketing of agricultural products. Payments are made to farmers within the sector(s) affected by this rete ntion. At its origin, Article 69 was intended to provide some 
limited flexibility to MS to deal with  unintended consequences of decoupling. 
2. P
ROBLEM DEFINITION  
SPS model 
As Member States prepare themselves for futu re adjustments in the CAP, they should be 
allowed to adjust their SPS model based on the experience gained so far from its 
implementation across the EU. However, in the cu rrent legislation there is no provision that 
would allow MS to make such changes. 
The possibility to introduce ad justments to the SPS model is pa rticularly relevant since the 
question of how equitably support  is distributed among farmers,  persists as an important 
issue, especially under the historic model. 
The historic model allowed farmers to be mark et oriented while keep ing their past support 
level while the regional model redistributed supp ort to farmers in a way that the support per 
hectare is similar within regions. The historic  model can, thus, be regarded as being less 
equitable since it gives aid to individual farm ers based on their past support levels, which 
reflect the previous structure of production a nd of agricultural support. As the historic 
reference period for payments becomes more distant, these individual differences will 
continue to become harder to justify. 
Article 69 
Further decoupling and the expiry of the dair y quota could affect th e income of certain 
producers in particular regions. This could also negatively affect the vitality of rural areas where farmers have no viable alternatives an d could lead to the di scontinuation of certain 
environmentally beneficial types of farming. Fu rthermore, the need for additional tools to 
address risk management has become apparent. 
The possibility to give targeted, flexible suppo rt under Article 69 has raised interest in the 
applicability of this Article as a means to m itigate such problems. However, in its present 
form, Article 69 does not appear su itable to address these issues due  to the fact that payments 
can only be made to farmers in the sectors aff ected by the retention of  funds, and this rule 
limits the flexibility of MS in applying Article 69. 
 
EN 22   EN 3. OBJECTIVES  
SPS model 
The specific objectives of adju stments to the SPS implementation in terms of the model 
applied are to give MS the possibility to: 
• adjust their chosen model to wards flatter rates of support; 
• address concerns about the equity and distribution of payments among farmers; 
• continue to ensure high transfer efficiency, market orientation of the farming sector and 
environmental sustainability of farming through compliance with EU standards; 
• limit administrative burdens and simplify the system where possible. 
Article 69 
With respect to the revision of Article 69 the specific objectives are to: 
• provide a flexible instrument to addre ss specific problems stemming from further 
decoupling and the end of the dairy quota; 
• address risk management needs, thus  mitigating possible income problems; 
• continue environmentally beneficial agricu ltural production in regi ons that could be 
negatively affected and the improvement of quality and marketing of the agricultural 
products; 
• contribute to the vitality of rural areas in  certain where farmers may not have viable 
alternatives; 
• ensure that supporting measures remain in conformity with WTO commitments 
4. OPTIONS SPS  MODEL  
The following policy options for SPS models were analysed2, and results were assessed with a 
view to whether these options meet the objec tives mentioned for the SPS model in section 3. 
Table 1. – Policy options SPS model 
Option SPS model Description 
0 Status quo – baseline No review possibility for MS; both historic and 
hybrid/regional models continue as present 
1 EU-wide flat rate per eligible hectare The same flat-rate payment entitlement per 
eligible hectare applies to all EU MS 
2 SAPS for all MS The Single Area Payment Scheme of new MS 
becomes the model for all EU MS 
3 Regional flat rate per hectare  Move towards regional flat-rate entitlements 
applied to all eligible area 
4 Regional flat rate per entitlement Move towards regional flat-r ate entitlements based 
                                                 
2 Analysis on the basis of FADN simulations with th e DG AGRI G3 Aids4k model, results from research 
projects and other DG AGRI calculations (see note 1 in Annex C for details). 
 
EN 23   EN on current entitlements 
5. IMPACT ANALYSIS SPS  MODEL  
In the public perception, the biggest differenc e between the two SPS m odels lies in their 
distribution impact; land value considerations are largely limite d to the research community. 
Therefore, the starting point for understanding the impacts of a move towards a flat rate is to 
consider the current distributio n of direct payments in the EU, and assess the impact of 
various SPS options on this distribution. These impacts, which lie mainly in the economic and 
social sphere, are discussed in some detail in this section but attention is also devoted to the environmental and administrative impacts. 
The overview table in the end of this chapte r provides a complete picture of the most 
important economic, social, environmental and ad ministrative/simplification impacts for all 
options for the SPS model. See also note 1 in Annex C for more detailed analysis. 
5.1. Option 0: status quo 
The two broad SPS models, historic and re gional, differ with respect to their 
equity/redistribution impact. The historic model did not redistribute support between 
farmers, and thus asset values (especially la nd) of the farms were little or not at all 
affected
3. A very high transfer efficiency resu lts from the fact that there is some 
"naked land", so support is better aime d at active farmers instead of landowners4. 
While the historic model gives aid to indi vidual farmers based on their past support 
levels, the regional model redistributed payments in a way that the support per 
hectare is similar. By setting flat rates at a regional scale, payments can be adjusted 
to the conditions of different regions wh ich may be justified by differing natural 
conditions and cost structures. However, the redistribution of support among farmers 
in the regional model could have an e ffect on asset prices, which may induce a 
structural response of farms. Its implementa tion led to increased capitalisation of aid 
in the value of land which may result in a somewhat lower transfer efficiency of direct support as some of it may benefit non-farming landowners. 
Analysis of the current distribution of support among EU MS demonstrates a 
complex situation. It is often pointed out that the distribution of direct payments 
among farm in the EU is “uneven”: 80% of beneficiaries receive roughly 20% of 
payments
5. When regarded at a per hectare basis, as can be expected, the range of 
direct payments per hectare tends to be wider in the MS appl ying the historic SPS 
model than in those applying regional/hybrid models. 
                                                 
3 Part of direct support is capture d ("capitalised") in the value of la nd. Therefore, any redistribution of 
support also affects land values. Capitalisation of su pport in land values should be the higher, the less 
"naked land" (eligible land not currently used to activate entitlements) exists. 
4 See note 1 in Annex C for more details. 
5 See also chapter C.d. (payment limitations) and notes 1 and 4 in Annex C for more details. 
 
EN 24   EN The average payments also differ widely among MS, whether the variable used as 
reference is the payment per area (hectare) or whether the payment is calculated per beneficiary. In Figures 1 and 2, to facilitate comparison of the analytical results, average farm payments were calculated in  a simplified way base d on their expected 
level after all MS fully implement CAP refo rms and new MS fully integrate into the 
CAP.
 It is worth noting that presently the MS  with the highest per hectare payments 
figure among those MS with the lowest rate  of payment per beneficiary; on the other 
hand, the MS with the highest payment pe r beneficiary is ar ound the EU average 
when area is the reference variable. 
Figure 1: Average direct payment  per MS (in € per hectare) 
0100200300400500600
Latvia
Estonia
Romania
Lithuania
Portugal
NMS12
Spain
Poland
Slovakia
Austria
Sweden
United Kingdom
Finland
Czech Republic
EU27
Luxemburg
EU15
Bulgaria
Slovenia
France
Hungary
Ireland
Cyprus
Italy
Germany
Denmark
Netherlands
Belgium
Malta
Greece
 
Figure 2: Average direct payment per MS (in €'000 per beneficiary) 
01020304050
Malta
Cyprus
Lithuania
Poland
Latvia
Slovenia
Portugal
Greece
Italy
NMS10
Spain
Estonia
Austria
EU25
Hungary
EU15
Finland
Netherlands
Ireland
Sweden
Belgium
Germany
Luxemburg
France
Denmark
United Kingdom
Slovakia
Czech Republic 
Source: DG AGRI calculations (see Annex C, note 1 for details). 
Due to the "whole farm approach" of cross compliance, both historic and regional 
model contribute similarly to respecting cr oss compliance standards. They are also 
similar with respect to administrative burdens. 
 
EN 25   EN 5.2. Option 1: EU-wide flat rate per eligible hectare 
Figure 3 demonstrates the potential redist ributive impact of a move towards an 
EU-wide flat rate per hect are by indicating the % change  in the overall amounts each 
MS would receive6. 
Figure 3: Redistribution between MS with an EU-wide flat rate 
-100%-50%0%50%100%150%200%250%
Greece
Malta
Belgium
Netherlands
Denmark
Germany
Italy
Cyprus
Ireland
Hungary
France
Slovenia
Bulgaria
Luxemburg
Czech Republic
Finland
United Kingdom
Sweden
Austria
Slovakia
Poland
Spain
Portugal
Lithuania
Romania
Estonia
Latvia
 
Source: DG AGRI calculations (see Annex C, note 1 for details). 
This option would imply a fundamental re form of the SPS, and is therefore beyond 
the scope of the HC Communication. Howe ver, it has found some proponents in the 
context of the present public debate, and wa s therefore analysed to better assess its 
potential impacts. This analysis arrives at the conclusion that it is very difficult to identify any benefits it could bring with  respect to the declared objectives of 
adjustments to the SPS. 
In summary, the implementation of this option: 
• would not improve the distribution of pa yments within MS – some of the MS 
negatively affected have average payments  per beneficiary that are very low, 
others are in the opposite situation; 
• would result in adverse impacts on asset (land) values, with very significant 
declines in some MS and the opposite e ffect on others. It could affect farm 
structures and would decrease transfer e fficiency due to higher capitalisation; 
• would not change much the skewed dist ribution of support between farms at EU 
level since the distribution of land in the EU mirrors to a large extent that of 
production value (which is the hi storic reference for payments)
7; 
• would have impacts on the distribution of  payments between farms in terms of 
their economic size and in terms of type of farming; 
                                                 
6 The graph compares the national ceilings currently established for MS in Regulation (EC) 
No 1782/2003 with the amounts they would recei ve if an EU-wide flat rate was applied. 
7 One counter-intuitive result of these simulations was that in some MS, a harmonised flat rate does not 
decrease but actually increases  the unevenness in the distri bution of direct payments. 
 
EN 26   EN • would possibly bring some new benefici aries into the system which could 
increase administrative costs but could also  slightly increase the land under cross 
compliance; 
• could be combined with further simplifications to the SPS system8. 
5.3. Option 2: SAPS for all MS 
The Single Area Payment Scheme was in troduced in the new MS before the 
introduction of the SPS to facilitate thei r adjustment to the EU because of their 
specific agricultural situation9. As a transitional system, SAPS was designed to assist 
the integration of new MS in a smooth manne r, given the very significant differences 
between the level of their general and rural economies and those in the EU-15. 
As the deadline for the expiration of SAPS approaches, and new MS consider their 
integration into the SPS, the possibility of extending this deadlin e to the end of the 
present financial framework if they so wish  seems a natural choice if, at the same 
time, EU-15 MS are allowed to review th eir SPS implementation and opt to move 
towards a more flat rate model. 
As a transitional scheme, SAPS clearly pe rformed its intended role. Yet at times 
SAPS has been considered as a system whic h should be applied to all MS, i.e. an 
inverse move from SPS to SAPS is c onsidered as desirable. Although such 
suggestions are not wide spread, they te nd, nevertheless, to confuse at times the 
policy debate because they fail to focus on the main difference between SPS and SAPS – the fixed entitlement reference of the former and the varying area reference 
of the latter. 
The single area payment is a flat rate payment per hect are at MS level. It is 
calculated by dividing the annual national financial envelope of the MS by the 
agricultural area under SAPS in a given year. As a transitional scheme, this is fine. 
But as a permanent scheme, it would contra dict the philosophy of  decoupled support 
because it would not be a system based on fixed entitlements. 
In terms of its distributional impact, a SA PS for all MS would lead to substantial 
redistribution within MS and higher capital isation of support, resulting in strong 
effects on land values. The distribution of  payments among farms would mirror that 
of land and would, thus, c ontinue to be skewed. 
The desire of farmers to maximise paymen ts by maximising their eligible area could 
put pressure on land not currently in agri cultural use and of high environmental 
value. 
5.4. Option 3: regional flat rates per eligible hectare 
A general flat rate could have significant re distribution impacts even within the same 
MS if its farm structures differ widely. However, such impacts could be mitigated 
                                                
 
8 This refers to simplifications that are neutral to the SPS model applied but lead to administrative 
simplification, e.g. reducing the number of different types of entitlements (see also note 1 in Annex C. 
9 This situation was characterised by  very different and much lower (whe re relevant) levels of support, 
the absence of previous payment and area references and the consequent absence of control systems. 
 
EN 27   EN with a targeted move towards a flat rate that takes into account such differences by 
harmonising payments in a regional context10. 
This can be done by dividing the total level of reference payments of the historic 
model in a region by the eligible area in this region. 
In a move towards a regional model, th e extent to which land remains “naked” 
becomes a crucial parameter. A regional flat  rate per eligible hectare reduces the 
percentage of "naked land” leading to mo re capitalisation of support in land values11. 
The following general conclusions can be derived: 
• a regional flat rate per eligible hectare does not change much with respect to the 
unequal distribution of support between fa rms in the EU (however, there are 
variations in results between the MS with improvements in some of them); 
• there is some reallocation of  direct support from larger to smaller economic size 
classes of farms and the impact is differ entiated for different farm types (however, 
both of these impacts are less pronounced  than for the EU-wide flat rate);  
• although regional flat rates per eligible  hectare increase th e capitalisation of 
support in land prices and reallocate support between farms, the effect on land 
values in the MS would be moderated by th e fact that the regional context can be 
taken into account; 
• the regional flat rate per hectare could re sult in new beneficiaries in MS where the 
historic model was previously applied b ecause of the expansion of support to all 
eligible area. This could increase administ rative costs but also slightly increase the 
land under cross compliance; 
• the option can be combined with further simplifications to the SPS system. 
5.5. Option 4: regional flat rate per entitlement 
In this option, the regional flat rate is de rived by dividing the to tal value of payment 
entitlements within a region by the area corresponding to these entitlements. 
At first sight, the difference with option 3 appears small, especially since a move 
towards a flat rate based on the existing entitlements, with respect to its overall redistributive effects, would produce largely similar results to that of regional flat 
rates per eligible hectare. However, there are also some notable differences between 
the two options when comparing their potential impact in the same region. 
The regional flat rate per entitlement: 
• could mitigate the undesired consequence of a redistribution of support favouring 
landowners while still keeping the desire d impact of more even levels of 
payments among active farmers; 
                                                
 
10 This realisation seems to reflect the choice of En gland, where the ratio between the highest and the 
lowest flat rate is 7 to 1. 
11 See more detailed discussion in note 1 in Annex C. 
 
EN 28   EN • would not change the degree of capitalisat ion of support in land values as 
compared to the status quo since the am ount of "naked land” would remain the 
same; 
• would not lead to new bene ficiaries in the SPS system since only those already 
holding entitlements would be affected, t hus limiting administrative costs and 
leading to no change in the am ount of land under cross compliance. 
6. OPTIONS FOR ARTICLE 69 
The following policy options for Article 69 were analysed, and results were assessed with a 
view to whether these options meet the objec tives mentioned for Article 69 in Section 3. 
Table 2. – Policy options for Article 69 
Option Article 69 Description 
0 Status quo – baseline No change to the current Article 69 
1 Targeted revision The sector-specific rule by which retention and payments have to 
be made in the same sector would be removed. MS would be 
allowed to use up to x% of their national ceiling to grant targeted support to farmers in specific sect ors (such as dairy, beef, sheep, 
goat meat and rice) and certain regions and in relation to risk 
management (in addition to the current use of Article 69). The 
share of support going to measures that do not with certainty meet 
the conditions of the Green Box would be limited. 
2 Extended revision Same as option 1 except that there would be no limitation on the 
share of support going to non Green-Box measures. 
7. IMPACT ANALYSIS ARTICLE 69 
This section presents a summary of the impact s of the different options for the revision of 
Article 69. 
The overview table in the end of  this chapter provides a comp lete evaluation of the most 
important economic, social, environmental and administrative/simplification impacts for the 
options. See also note 1 in Annex C for the analysis. 
7.1. Option 0: status quo 
No change to the current Article 69 implies that the flexibility for some MS to react 
to potential problems in the milk sector a nd other sectors due to the end of the quota 
and further decoupling, as well as to risk management issues, would be very 
limited12. This would be the case because the requirement that the 10% of SPS 
support that has to be retain ed and used within the sa me sector could severely 
constrain some MS, e.g. those with more mountainous or fragile dairy regions than 
others. 
This could not only present income probl ems to certain producers but may also 
negatively affect the vitality of rural areas  where farmers have no viable alternatives 
                                                 
12 See also Chapter 3 (partial decoupling), Chapter 6 (m ilk) and Chapter 9 (risk and crisis management). 
 
EN 29   EN and could lead to the discontinuation of cer tain environmentally beneficial types of 
farming (e.g. rice cultiva tion in certain regions). 
7.2. Option 1: targeted revision 
The targeted revision would give MS incr eased means to address possible problems 
in the milk sector and other sectors aris ing due to the end of the quota, further 
decoupling or the need for additional risk management tools. It would not mean a 
major revision of the current Article 69 but would imply some risk of further 
re-coupling (however wi thin clear limits). 
To take the example of the dairy sector, such a revision could address problems in 
two ways – either through an increase of  the decoupled payment in the regions 
negatively affected by the abolition of the quota system, or through a coupled 
payment to the sector in the form of  an area or per cow payment linked to 
production. 
The first choice would be fully compatible with the overall WTO orientation of the 
CAP, but would not necessarily guara ntee the continuation of production. 
The second choice implies an  increase in the level of partially coupled  (Blue Box) 
support. In the case of a DDA agreement, it w ould thus require a pa rallel reduction in 
other partially coupled support (e .g. in arable crops)  to allow the EU to remain within 
its expected margins of Blue Box support in the future. However, an appropriate 
restriction on the share of coupled measur es of support would resolve this problem. 
7.3. Option 2: extended revision 
A generalised extension of Article 69 woul d give MS much greater flexibility to 
address possible problems in specific sector s, as well as risk issues, but it would 
imply several risks for the consistency of CAP orientation. 
Most measures currently applied by MS under Article 69 are production-linked, and 
this option would mean a backtracking from further decoupling as it would not limit 
the share of coupled measures under a re vised Article 69. In  the case of a DDA 
agreement, it would clearly risk exceedi ng the ceiling of Blue-Box support (unless 
there was a corresponding parallel reducti on in other partially coupled support). 
8. CONCLUSIONS  
With the experience gained so far with the implementation of the SPS system, the lack of a 
possibility for MS to adjust their chosen mode l towards a more flat rate of payment is an 
anachronism. Possibilities to make adjustments in  the implemented models seem desirable as 
long as they respec t the stated objectives of the system. The historic model of the SPS enabled 
the smooth transition to decoupling in MS whos e variable production structures implied that 
various sectors were integrated successively into th e SPS. The time seems ri pe to allow MS to 
consider if they wish an adjust ment towards a more flat rate. 
But there are different ways of doing so and ve ry different impacts from each way. While all 
options analysed fulfil the objective of leading to  more equal rates per h ectare or entitlement, 
none does actually result in any fundamental changes to the unequal distribution of support 
among farms. Flat rates at a larger scale (E U-wide or MS-wide under SAPS) have strong 
 
EN 30   EN effects on land values with possible structural responses. The more targeted a move towards a 
regional flat rate is, the lower the impact  on land values would be from the implied 
redistribution of support, and the more support would remain among active farmers. 
A gradual move towards flatter rates could contribute to making the adjustment process easier 
for farms. With respect to environmental objec tives the options have largely similar effects 
(apart from more negative elements of the SA PS). The same is true for administrative impacts 
where, after some obvious initial  costs of adjustments to the system under all but the status 
quo, the operational costs shou ld not differ substantially,  although there may be some 
additional costs where there are new benefici aries to the system. All SPS options can be 
combined with further simplifications to the system. 
The best way to address potential problems in regions which could face a negative impact 
from the dairy quota phasing-out or further decoup ling, or to deal with the potential need for 
additional policies addressing risk management, seems to be through a revision of Article 69 
that would allow part of the available level of SPS support to target such regions, provided 
that the global amount and the proportion of  coupled support in the mix of supporting 
measures stayed within clearly defined ceilings. 
This would allow supporting particular sector s and regions, mitigating negative effects on 
income, vitality of rural areas and environm entally beneficial farming practices while 
respecting WTO commitments. 
 
EN 31   EN 9. SUMMARY TABLES  
9.1. Comparison between different options and th eir respective impacts – SPS flat rate 
☺☺ very positive; ☺ positive; . neutral; / negative; // very negative  
IMPACTS  Option 0 – baseline – historic 
and regional SPS model Option 1 – EU-wide flat 
rate per eligible hectare Option 2 – SAPS  
for all MS Option 3 – regional flat 
rates per eligible hectare Option 4 – regional flat rates 
per entitlement 
Economic Both models  
market orientation 
☺☺ 
Historic model 
no redistribution between 
farms and no impact on asset 
values ☺☺ 
very high transfer efficiency 
☺☺ 
Regional model 
redistribution between farms 
impacts on land values / 
high transfer efficiency ☺  
market orientation 
☺☺ 
 
very significant 
redistribution across MS 
results in strong impact on 
asset values // 
 
decreased transfer 
efficiency due to more 
capitalisation 
//  
market orientation 
☺☺ 
 
very significant 
redistribution within MS 
results in strong impact on 
asset values / 
 
decreased transfer 
efficiency due to more 
capitalisation 
/  
market orientation 
☺☺ 
 
redistribution between 
farms has limited impact 
on land values 
. 
 
decreased transfer 
efficiency due to more 
capitalisation 
/  
market orientation 
☺☺ 
 
more targeted redistribution 
between farms minimises 
impacts on land values 
☺ 
 
transfer efficiency unchanged 
with respect to present models 
. 
Social Historic model  
past individual references raise 
equity issues 
/ 
more support to active farmers 
☺ 
Regional model 
regional references respond to 
equity issues ☺ 
more support to landowners 
/  
equalises payment levels 
per area across the EU 
☺ 
payment distribution 
changes, but remains 
skewed (per area this time) 
// 
more support is capitalised 
in land, and thus shifts 
more to landowners 
/  
equalises payment levels 
per region within a MS 
☺ 
payment distribution 
changes, but remains 
skewed 
/ 
more support is capitalised 
in land, and thus shifts 
more to landowners 
/  
equalises payment levels 
per area in a targeted way 
☺ 
payment distribution 
improves (to a limited 
extent) 
☺ 
more support is capitalised 
on land, and thus shifts 
more to landowners 
/  
equalises payment levels per 
entitlement in a targeted way 
☺☺ 
payment distribution improves 
(to a limited extent) 
☺ 
support to land unchanged, and 
neutral with respect to present 
capitalisation on land values 
. 
 
EN 32   EN  
IMPACTS  Option 0 – baseline – historic 
and regional SPS model Option 1 – EU-wide flat 
rate per eligible hectare Option 2 – SAPS  
for all MS Option 3 – regional flat 
rates per eligible hectare Option 4 – regional flat rates 
per entitlement 
Environmental Both models neutral with 
respect to land under 
cross compliance  
. 
Both models are neutral with 
respect to production practices 
.  
May slightly increase land 
under cross compliance 
☺ 
No impact on production 
practices 
. Could put pressure on land 
not currently in agricultural 
use but of high 
environmental value 
/  
May slightly increase land 
under cross compliance 
☺ 
No impact on production 
practices 
.  
Neutral with respect to amount 
of land under cross compliance 
. 
No impact on production 
practices 
. 
Administrative Both models similar with 
respect to administrative 
burden 
. Initial administrative costs 
due to change in number 
and value of entitlements 
/ 
New beneficiaries cause 
additional administrative 
costs 
/ Initial administrative costs 
for SPS MS to change 
system 
/ 
No costs for MS applying 
SAPS 
. Initial administrative costs 
due to change in number 
and value of entitlements 
/ 
New beneficiaries cause 
additional administrative 
costs 
/ Initial administrative costs due 
to change in value of 
entitlements 
/ 
Avoids new beneficiaries and 
resulting additional 
administrative costs 
☺ 
Simplification Both models are neutral with 
respect to further simplification 
. Can be combined with 
further simplification  
☺ Can be combined with 
further simplification  
☺ Can be combined with 
further simplification  
☺ Can be combined with further 
simplification  
☺ 
Other   Contradicts aims of 
decoupled support because 
it is not based on fixed 
entitlements 
//   
 
EN 33   EN 9.2. Comparison between different options and thei r respective objectives – SPS flat rate 
☺☺ fully respecting objectives; ☺ partially respecting objectives; . neutral; / moving away from objective; // putting at risk objective 
OBJECTIVES  Option 0 – baseline – 
historic and regional 
SPS model Option 1 – EU-wide 
flat rate per eligible 
hectare Option 2 – SAPS  
for all MS Option 3 – regional 
flat rates per eligible 
hectare Option 4 – regional 
flat rates per 
entitlement 
Competitiveness . ☺ ☺ ☺ ☺ 
Market orientation . ☺ ☺ ☺ ☺ 
Societal expectations 
(Equity/distribution 
among farmers) historic: / 
regional: ☺ per ha ☺☺ 
between farms // per ha ☺ 
between farms / per ha ☺ 
between farms / per entitlement ☺ 
between farms / 
Environmental 
sustainability . ☺ . to / ☺ . 
Budget costs . Total costs . 
Distribution // . . . 
Administrative costs . / . / ☺ 
Vitality of rural areas . ☺ ☺ ☺ ☺ 
Simplification . ☺ ☺ ☺ ☺ 
Transfer efficiency historic: ☺ 
regional: . / / / ☺ 
 
EN 34   EN 9.3. Comparison between different options and their respective impacts – SPS Article 69 
☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS  Option 0 – Article 69 unchanged Option 1 – targeted revision Option 2 – extended revision 
Economic Limited flexibility to respond to problems 
in specific sectors and to some needs  
for risk management 
/ Increased flexibility to respond to problems 
in specific sectors and to some needs  
for risk management 
☺ 
Limited risks for backtracking  
in decoupling  
/ Significant flexibility to respond  
to a selective set of problems 
☺☺ 
 
Risk for backtracking in decoupling 
// 
Social Flexibility for support in specific vulnerable 
regions limited 
/ Increased flexibility for supporting affected 
farmers and regions 
☺ Great flexibility for supporting  
affected farmers and regions 
☺☺ 
Environmental . Environmentally beneficial farming 
supported 
☺ Environmentally beneficial farming 
supported 
☺ 
Administrative . Initial costs of reallocating support 
/ Initial costs of reallocating support 
/ 
Simplification . / / 
Other: WTO . In case of DDA agreement, should allow to 
stay within ceiling  
for Blue Box support 
. In case of DDA agreement, risks exceeding 
ceiling for Blue Box support 
// 
 
EN 35   EN 9.4. Comparison between different options and th eir respective objectives – SPS Article 69 
☺☺ fully respecting objective; ☺ partially respecting objective; . neutral; / moving away from objective; // putting at risk objective 
OBJECTIVES  Option 0 – Article 69 unchanged Option 1 – targeted revision Option 2 – extended revision 
Competitiveness . . to ☺ Depends on MS implementation 
/ to ☺ 
Market orientation . . to / // 
Environmental sustainability . ☺ ☺ 
Budget costs . . . 
Administrative costs . / / 
Simplification . / / 
Vitality of rural areas . ☺ ☺ 
Stabilisation of farmers incomes . ☺ ☺ 
Transfer efficiency . Depends on MS implementation 
/ to . Depends on MS implementation 
/ to ☺ 
 
EN 36   EN C.b. CROSS COMPLIANCE 
1. BACKGROUND  
Cross compliance creates a link between farm-rele vant support and farm-re levant legislation. 
It aims at being an effective mechanism to pr omote sustainable agricu lture and at the same 
time a tool which enhances the CAP's role in  meeting the expectations of the society. 
Payments under the first pillar and some rural development measures have to comply with 
parts of 19 existing and already implemented regul ations or directives, the so-called statutory 
management requirements (SMR). The SMR cove r rules relating to agricultural production, 
land and activities in the three areas of: the e nvironment; public, animal and plant health; and 
animal welfare. 
Payments also have to comply with good agri cultural and environmen tal conditions (GAEC) 
which concern the issues of soil erosion, soil or ganic matter, soil struct ure, minimum level of 
maintenance and maintaining the total area of pe rmanent pasture. In order to give technical 
support to farmers on the basic requirements of  cross compliance MS had the obligation to 
introduce a Farm Advisory Systems (FAS)13. 
As a control system, which reduces payments  to farmers who are found not to be in 
compliance with standards associated with their agricultural activity, cross  compliance 
contributes to the greater accep tability of agricultural support by the society at large. 
Furthermore, cross compliance, particularly th rough the systematic prov ision of information 
by MS to farmers about the require ments applying to the latter, has been evaluated as making 
a significant contribution to ensuring complian ce with obligations and as contributing to 
increasing farmers' awareness about oblig ations with respect to SMR and GAEC14. 
Practical problems in the implementation of cross compliance led the Commission to advance 
a report foreseen on the application of cross  compliance with the 2003 CAP reform. The 
March 2007 Report suggested lega l modifications aiming at simplification and streamlining 
of the system. In June 2007 the Agricultural Council adopted conclusions which supported the 
Commission's report, and shortly thereafte r the Commission prepared the necessary 
legislative changes. 
The report did not however address the scope of cross compliance, since at the time of 
drafting the report it was considered too ea rly to assess such changes. Instead, the 
Commission committed itself to address the scope within the context of the HC. 
2. PROBLEM DEFINITION  
The experience of implementing the cross co mpliance system has shown that not all 
requirements included in the scope are actually relevant to meeting the objectives of cross 
                                                 
13 SMR and GAEC are listed in Annex III, and Article 5 and Annex IV of Regulation (EC) No 1782/2003, 
respectively. FAS were to be set up by 1 January  2007 in all MS cross compliance will apply from 
2009/2011 following the Council agreement in January 2008. 
14 The evaluation study was carried out by Alliance Environment (a consortium comprising the Institute 
for European Environmental Policy and Oréade-Brèche) from June 2006 to August 2007. The final evaluation report has been published on the Europa website in November 2007. 
 
EN 37   EN compliance15. Some requirements may be irrelevant , while at the same time implying an 
administrative burden, and hence the costs of having these requi rements within the scope of 
cross compliance are higher than the benefits. Pr actical problems have been raised by MS, as 
well as by the Commission itself th rough its activities of  audits for the clear ance of accounts. 
Therefore, the current scope of requirements need s to be adjusted so that it does not pose an 
unnecessary administrative burden while not a dding anything towards meeting the objectives 
of cross compliance. 
Furthermore, additional legislative acts have  come into force since the 2003 reform, which 
could be relevant to include in  the scope in order to meet th e objectives of cross compliance. 
Also, new challenges have occurred since 2003 whic h could not be foreseen at the time of the 
reform, thus it is relevant to assess whether these challe nges could be better addressed 
through the cross compliance system. On top of this, changes which are suggested with the 
Health Check, such as the setting to zero of set aside, may have negative environmental implications. The cross compliance scope should th erefore be assessed as  to whether it could 
be adjusted to contribute to the retention of  environmental benefits from set aside.  
3. O
BJECTIVES  
The scope of cross compliance should be screened to examine whether the SMR and the 
GAEC could be better targeted or if more requirements should be added, in order to:  
• enhance the contribution of cross complian ce as an effective mechanism to promote 
sustainable agriculture16; 
• enhance cross compliance's role in meeting the expectations of the society, without 
increasing the administrative burden of cross compliance for MS and farmers. 
The screening aims specifically at; firstly, deleting requirements which are not considered 
relevant in meeting the objectives of cr oss compliance, and thereby decreasing the 
administrative burden for MS. Secondly, the scr eening aims at adding requirements which 
could enhance the CAP's role in better addres sing concerns regarding climate change and 
water management, although the requirements a dded should not imply higher costs than 
benefits17. The possibility of retaining environmental benefits from set as ide through the cross 
compliance system will also be analysed. 
4. POLICY OPTIONS AND ANALYSIS OF THEIR IMPACTS  
4.1. Option 0: status quo 
The options considered here, and their potential impact, are assessed with respect to 
the scope of cross compliance as defined in  existing legislation (status quo). The list 
of SMR and GAEC standards stay as they ar e in Article 5, Anne xes III and IV of 
Regulation (EC) No 1782/2003. By maintain ing status quo, more time would be 
allowed to analyse the potential benefits and costs of the existing scope, since these may become clearer over time. However, ma intaining status quo would also imply a 
                                                
 
15 The objectives of cross compliance are to be an effective mechanism to promote sustainable agriculture 
and to enhance the CAP's role in meeting the expectations of the society. 
16 This is considered to be achieved through the respect by farmers of the rules relating to the relevant 
aspects of cross compliance. 
17 The criteria outlined below will clarify this statement. 
 
EN 38   EN missed opportunity to address the concerns that have already been raised with the 
current scope, as well as to include potenti al new measures that  can contribute to 
meeting the overall objectives of cross compliance. 
4.2. Option 1: better targeting the current scope of cross compliance 
This option concerns mainly the assessment of existing SMR based on the analysis of 
the legal texts, on the questions and rema rks made by the Member States to the 
Commission based on their experience of controls, as well as on the audits done by the Commission in the framework of the clearance of accounts procedure. 
Increasing the acceptance of cross compliance by farmers, by only having relevant  
legal acts within the scope of cross co mpliance, is considered to enhance the 
contribution of cross compliance as an e ffective mechanism to promote sustainable 
agriculture. Hence, this option consists of identifying the requirements whose deletion would not impact upon the current substance of the scope of cross
 compliance18. As such, the list contains SM R proposed to be deleted because 
they do not fulfill one or more of the following criteria: 
• do not have a direct link to agricultural  activities and agricultural land, and/or 
whose non respect cannot be attribut able to an individual farmer; 
• concern MS and not farm ac tivities and as a result beco me difficult to control; 
• induce administrative costs  for MS that exceed the benefits  derived from the 
inclusion of these legal acts19. 
4.3. Option 2: broadening the scope of cross compliance 
This option consists of analysing the c onsequences from adding certain important 
legal acts relevant to farming activities in the areas of environment, public, plant and animal health and animal welfare, as we ll as certain standa rds to maintain the 
agricultural land in good agricultural and environmental condition. The relevant acts shall fulfill the criteria pr esented for the previous opti on, and in additi on they shall 
help meeting, where appropriate, the new challenges mentioned in the HC 
communication, in particular those of climate change and water management, and 
contribute to the re tention of environmental bene fits stemming from set aside
20. 
One legal act that could be, partly, consider ed to be included in  the scope of cross 
compliance is the Water Framework Directiv e (WFD). The purpose of the WFD is to 
establish a framework for the protection of all community waters (groundwater, 
surface waters, coastal waters, etc.) with the aim of meeting "good status" for all 
water bodies by 2015. Article 11 of the WFD foresees th e establishment of MS 
programmes with measures for the management of river basins by the end of 200921. 
                                                 
18 See note 2 in Annex II for details. 
19 http://ec.europa.eu/agriculture/eval/reports/cross_compliance/full_text_en.pdf. 
20 Only water issues are addressed here, while issues directly or indirectly related to climate change 
challenges are dealt elsewhere (sec tion VIII, and V for set aside). Certain public provisions that were 
examined, but considered either alre ady covered or not justified from a cost/benefit analysis are covered 
in note 2 in Annex C. 
21 Some measures will apply at farm level and are the ones which would be included in the scope of the 
cross compliance. However, they will not necessarily apply to all farms in the same river basin and will 
 
EN 39   EN MS then have to implement the programmes of measures (buffer strips, winter cover, 
input reductions, etc.) by the end of 2012 at the latest. Thus the difficulty of 
including the WFD as an SMR within the scope of cross compliance at this stage is that the programmes of measures are not defined yet, and hen ce their relevance for 
farming activity and farm res ponsibility canno t be assessed
22. 
However, although the WFD can be consid ered not to be mature enough to be 
included in the scope of cross compliance at  this stage, other ways of introducing 
water management within the scope of cr oss compliance could be considered. For 
example, the discussion about the "misuse of water resources" is mainly focused on including water as an issue and/ or standard within the GAEC. 
Currently, the issues and st andards do not cover water sp ecifically, since GAEC was 
introduced to ensure proper land management in order to handle risks associated with 
the decoupling of support in the 2003 CAP reform. Th erefore, including water 
management in GAEC would imply a broadening of its scope, but it would simultaneously increase the capability of MS to deal with the water management 
issue. 
This option also consists of analysing th e possibility of reta ining environmental 
benefits from set aside through cross comp liance. Losses of environmental benefits 
are not the same in every Member State, but  are specific to cert ain regions depending 
on the current use of set aside as well as the characteristics of its implementation. 
Therefore, instruments that could allow for flexibility in application should be 
introduced. A general GAEC so lution, such as a fixed envi ronmental area, should be 
avoided since this would give rise to disp roportionate effects compared to the current 
legal obligations.. Within the GAEC, such instruments could for example include the 
introduction of a standard on buffer strips (without a fixed quantification on EU 
level), and a reinforcement of the standa rd on retaining landscape features. These 
measures could however have implications for the baseline of Rural Development programs. 
5. C
OMPARISON OF THE OPTIONS AND THEIR IMPACTS  
Assessing the costs and benefits of new cross compliance measures at  this early stage of the 
implementation of the system is extremely diff icult. Measures in place have already provided 
some indications of their eff ectiveness and relevance, leading to the conclusions in the 
discussion of option 1. But how to assess options not  yet in place? 
The discussion in this section is , therefore, by necessi ty of a qualitative nature, and needs to 
be considered with this caveat  in mind. It lists potential adva ntages and disadvantages of the 
various options, but leaves open the assessment of the best policy choice (or combination of 
choices). This was considered necessary since many of the following advantages and disadvantages are part of a public debate  based more on assumptions, arguments and 
preferences, than on concrete evidence. 
                                                                                                                                                        
 
differ depending on the specificities of  each river basin and conditions w ithin the river basin, depending 
on the location of the farms. 
22 Note 2 in Annex C discusses in more detail the practical difficulties involved. 
 
EN 40   EN As for impacts, the analysis does not consider economic imp acts or impacts on employment 
for any of the option, since this is not considered to be affected by a change in the scope of cross compliance. 
5.1. Option 0: status quo 
Advantages: 
• it grants more time for proper defin ition, implementation and evaluation of 
existing SMR instead of modifying the sc ope of cross compliance at this time; 
• many of the potential benefits and costs of cross compliance will only become 
clear in the longer term a nd more time will be needed to properly assess them; 
• some MS have yet to define obligations for farmers for some requirements in the 
current SMR, or clarify the defi nition and extent of their GAEC; 
• a well developed awareness and understand ing of SMR is not necessarily present 
yet among farmers, and the FAS that should assist them are in their early stages. 
Disadvantages: 
• the opportunity of further contributing to new challenges by including more 
requirements or standards will be missed; 
• the opportunity of deleting requirements which are not relevant to meeting the 
objectives of cross compliance, or wh ich are redundant, will be missed; 
• the opportunity to clarify some existing re quirements in order to make them better 
accepted by the farmers and thus bett er implemented will be missed. 
5.2. Option 1: better targeting the current scope of cross compliance 
Advantages: 
• simplification to farmers since the controllability and targeting of current 
requirements (concerning a farmer's respons ibility or farming activity) would be 
improved, making it easier for farmers to understand the rules and issues, and thus 
increasing their acceptance for the system; 
• administrative costs for the Member States would be reduced; 
• due to synergy in effects and the overlapping between the regulations/directives, 
the objectives of cross compliance may still be achieved, even if some 
requirements are withdrawn from the scope. 
Disadvantages: 
• confusion among farmers may be created a bout the importance of  respecting legal 
requirements who will apply to farmers ev en though they are withdrawn from the 
scope of cross compliance. 
 
EN 41   EN 5.3. Option 2: broadening the scope of cross compliance 
Advantages: 
• additional requirements or standards could contribute  to better addressing and 
facing the new challenges (e.g. with respect to water) within the CAP, as well as 
to retention of environmenta l benefits form set aside; 
• broadening the scope of cross compliance would send a clear political message of 
the importance attached to these requi rements and the importance of these 
requirements being respected by farmer s. Thus, broadening the scope would 
improve the acceptability of public suppor t, and could therefore have positive 
social impacts; 
• introducing new obligations into cro ss compliance based on pre-existing and 
already implemented legislation (SMRs)  should in principle have no impact on 
production costs for farmers; as has been  the case for the majority of GAEC. 
Disadvantages: 
• may increase the administrative burden, since additional cross compliance 
obligations would demand additional effo rt from administrations, and would 
stretch the ability of inspectors to carr y out controls on wide ranging obligations; 
• negative attitudes of farmers towards cr oss compliance policy could increase as 
they may feel overloaded or over-contro lled, which might be counter-productive 
rather than improving the achievements of the objectives; 
• including the WFD in the scope of cross compliance and introducing water 
management issues within GAEC generate s reactions because WFD measures are 
not defined yet and GAEC wa s meant to ensure proper land management; 
• broadening the scope of requirements under GAEC impacts upon the "baseline" 
for the formulation of agri-environment al rural development measures, with 
potentially negative impacts when income  foregone for farmers is calculated. 
6. CONCLUSIONS  
There are advantages both from deleting some of  the current requirement s within the scope of 
cross compliance, and from adding new requirements. Better targeti ng is necessary in order to 
address some of the practical problems that ha ve arisen during the implementation period of 
the system. This will ease the administrative bur den while not putting at ri sk the objectives of 
cross compliance. Simultaneously, a broadening of  the scope will contribute to addressing the 
concerns of dealing with new challenges, as well as contributing to retaining environmental 
benefits from set aside. 
 
EN 42   EN 7. SUMMARY TABLES  
7.1. Comparison between different options and th eir respective impacts – cross compliance  
☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS  Option 0 – status quo Option 1 – better targeting the scope Option 2 – broadening the scope 
Economic . . . 
Social . . Improves acceptability of public support 
☺ 
Environmental . Neutral with respect to environmental 
impacts as changes affect only irrelevant 
provisions  
. Contributes to better meeting and 
addressing new challenges, and retain 
environmental benefits from set aside 
☺☺ 
Administrative Some existing rules have proven 
redundant of not relevant 
/ Eases administrative burden for MS 
☺☺ Increases administrative burden for MS  
/ 
Simplification . More pertinent, and thus simpler for 
farmers to grasp and implement 
☺☺ Implies more requirements for farmers 
within cross compliance framework 
/ 
 
EN 43   EN 7.2. Comparison between different options and th eir respective objectives – cross compliance 
☺☺ fully respecting objective; ☺ partially respecting objective; . neutral; / moving away from objective; // putting at risk objective 
OBJECTIVES  Option 0 – status quo Option 1 – better targeting the scope Option 2 – broadening the scope 
Competitiveness . . . 
Market orientation . . . 
Environmental sustainability . . ☺☺ 
Budget costs . . . 
Administrative costs . / // 
Simplification . ☺☺ / 
Vitality of rural areas . . . 
Stabilisation of farmers incomes . ☺ . 
Transfer efficiency . . . 
 
 
EN 44   EN C.C. PARTIALLY  COUPLED  SUPPORT 
1. BACKGROUND  
Decoupling introduces flexibility in the choice  of producers, who continue to produce where 
it is profitable, and adapt their output to the ma rket or change to alte rnative crops where it is 
adequate. Thus overall, decoupling leaves the pr oducer at least as well off as before when 
his/her choice is the same , and most likely better off when  he/she adjusts as a result of 
production flexibility an d market orientation. 
The fact that the actual level of decoupl ed support after the 2003 reform exceeded the 
minimum required indicates that the above argument is well unde rstood. Within this context, 
therefore, the continuation of pa rtially coupled support in certai n sectors begs the question of 
whether such support is still pertinent23. For an answer, one has to  recall the reasons by which 
the 2003 and 2004 reforms retained such support: 
• the need to provide stable supply to the proc essing industry and thus avoid negative social 
and economic consequences of the implied restructuring; 
• the need to sustain a certain level of specifi c production due to lack of alternatives and 
consequent social problems or environmental problems. 
2. PROBLEM DEFINITION  
Experience with decoupling in general shows that th is move did not imply dramatic changes 
in the production structure at the EU level, although a few sectors f aced significant reduction 
of production at the regional le vel.. Furthermore, the extent  of recent reforms and the 
integration of more sectors into the SPS render the partially coupled s upport less relevant and 
often preventing farmers to achieve furthe r competitiveness and market orientation. 
Moreover, in the cases of non profitable sector s farmers are worse of than farmers in a full 
decoupling situation receiving lower payments24. Besides, farmers still receiving coupled aid 
are have also to face both coupled and dec oupled systems running in parallel, thus adding 
complexity and administrative costs without an y income benefits. For the reasons mentioned 
above, move to full decoupling would be desira ble. However, adjustments in production may 
represent short-term challenges for the agri-food chain, and in few cases these may create more costs than benefits. In some specific cases  a minimum level of ag ricultural production is 
important to sustain economic activity in regions with few economic alternatives, to ensure an adequate supply of raw material s to processing industries, or to generate environmental 
benefits. 
Thus the potential risks and possi ble alternatives in the region s should be identified on a case-
by-case basis before deciding to which extent and until when coupled or industry support should remain, and where these were desi gned to promote certa in production, their 
effectiveness should be assessed. 
                                                
 
23 See note 3 in Annex C for details about the remaining partially coupled support. 
24 This argument was already raised during the discussion in the Council that preceded the 2003 reform. 
See Council "CAP Reform: Explanatory note DS 222/03", Luxembourg, 18 June 2003. 
 
EN 45   EN 3. OBJECTIVES  
The following policy options were analysed, and results were assessed based on whether these 
options met the following objectives: 
• fulfil the principal objectives of the 2003 CAP Reform: competitiveness, market 
orientation and sustainability; 
• simplify the support scheme; 
• contribute to vitality of rural areas, pr event land abandonment and allow smooth 
restructuring of downstream industries, where they  are crucial for the vitality of rural areas. 
4. POLICY OPTIONS  
Table 3. – Analysed policy options for pa rtially coupled support schemes25 
Option SPS model Description 
0 Status quo – baseline No change in the present set of measures 
1 Full decoupling Inclusion of all partially coupled aids in the Single Payment 
Scheme 
2 Targeted selective decoupling Case-by-case analys is to identify if, and in which sectors, the 
shift of partially coupled support to full decoupling could 
create social, regional or environmental problems. 
4.1. Timing and transition to full decoupling options 
Options 1 and 2 above do not exclude the possi bility of transition to full decoupling, 
and a gradual phasing out process could be foreseen to attenuate impacts. Specific sectors may require specific solutions, and measures under rural development or 
measures such as the previously mentioned Article 69 (section C.a.) could tackle the issues of providing alternatives, divers ification, infrastructure development and 
restructuring to prevent abandonment and adverse effects on processing industries 
that were behind partially c oupled payments and environmental impact in specific 
areas. However, as the an alysis of other support sc hemes (section D.c.) will 
demonstrate, the issue of transition to full d ecoupling is more pertin ent for aids to the 
industry than aids to farmers. For the latter 's point of view and income prospects, the 
risk of production decline is be st managed with full decoupling. 
                                                
 
25 The following sectors are excluded from this analysis because they have been recently reformed or are 
included elsewhere in the present analysis: fruit and vegetables, tobacco, sugar, cotton, payments for outermost regions. 
 
EN 46   EN 5. IMPACT ANALYSIS  
5.1. Economic impacts 
The assessment of the economic impacts from a move towards full decoupling was 
based on two sets of interrelated analys es – those focusing on a specific sector’s 
market and income outlook and those focu ssing on a farm’s reaction to further 
decoupling26. It also looked into th e experience of decoupling into the EU since the 
reforms of 2003 and afterwards. 
5.1.1.  Status quo 
a. Market and income outlook 
The potential impact of this option is esse ntially driven by th e present medium-term 
outlook for EU agriculture27. From this outlook, it is the production and price picture 
that is more relevant here. 
The price outlook for most EU cereals appear ed particularly strong both within the 
EU and in world markets, but a number of risk factors particular ly those related to 
weather and climate could result in greater pr ice fluctuations than seen in the past 
decade. This outlook affects all related cr op sectors, generating price increases, 
especially for oilseeds.  
The medium-term perspectives for animal  products are very positive for dairy 
markets, relatively positive for poultry and pig meat, but beef production is expected 
to continue to decline over the medium te rm in line with the structural reduction of 
the dairy herd and the impact of decoupli ng in certain high cost, extensive regions. 
Sheep and goat meat production is projected to decline gradually in line with past 
long-term trends and the impact of d ecoupling of ewe premiums in the major 
producing countries.  
The medium-term income projections displa y a rather favourable income outlook for 
EU-27, supported by positive price developments and by the implementation of the 
CAP, including the sharp rise in the subsidie s granted to agricultural producers in the 
EU-1228. 
                                                 
26 The market and income outlook is based on the input from AGRI.G2, while analyses on farm reactions 
are based on FADN data analysed by AGRI.G3. The Scenar2020 stud has also been used, where 
appropriate, to supplement conclusions. All relevant so urces are available in full detail in the site of DG 
AGRI. 
27 See http://ec.europa.eu/agriculture/analysis/markets/index_en.htm. 
28 This market outlook is based on current macroeconomic assumptions. Changes in assumptions on 
exchange rates and oil prices could alter this outlook, but not the conclusions of this section. The latest update is found in http://ec.europa.eu/agriculture/analysis/markets/index_en.htm. 
 
EN 47   EN b. Summary conclusions for coupled support29 
The present level of coupled support in the arable crop sector, or in the much smaller 
hops and seeds sectors, does not seem to relate to the percei ved fears about the 
potentially negative impact on farmers e xpressed before the 2003/04 reforms. It 
seems to be more related to developments that characterise these sectors and that are generally positive
30. 
In the livestock sector, on the other hand, a nd especially in  the extensive beef and the 
sheep and goats sector, es pecially for meat production, partially coupled support 
seems to have a stronger impact on farm income. 
In general, the status quo raises a comple x problem already identified in the context 
of the debate for the 2003 reform. These payments are generally considered as 
slowing down production losses in the sectors involved; bu t at the same time they 
imply that producers cannot reap the full be nefits of SPS because in regions facing 
downward production trends coupled payments will keep being reduced (unlike decoupled ones, which are fixed). On the other hand, in some cases coupled 
premiums, by keeping a certain level of production activity could be important for 
some agri-food chains in certain areas and for delivering environmental benefits in 
cases where these are dependant on specific faming systems. 
In terms of administrative impacts, the st atus quo keeps by design intact the existing 
administrative systems which run in paralle l, and therefore ensuing administrative 
burden for both EU and MS administration and farmers. Finally with respect to trade, 
keeping the present level of coupled suppor t implies the continuation of the present 
level of "blue box" CAP payments. 
5.1.2.  Full decoupling
31 
With respect to cereals , full decoupling could imply decl ines of area in some regions 
of the MS involved, but these should be moderate based on the recent price 
increases. A drop of durum wheat (mor e sensitive because coupled payments 
represent a higher share of the farm's marg in) in favour of soft wheat could have 
implications for the processing industry, but the generally higher price levels over the 
medium term could partly offset some of this impact32. Full decoupling does not 
seem to change the profitability hierarchy in Spain for the cereals studied in FADN, 
but changes that of France. In the latter durum wheat growers could be willing to change to more profitable crops su ch as soft wheat or grain maize. 
The following table shows the impacts no farmers' margins over variable costs 
resulting from a move to further decoupling. 
                                                
 
29 For a discussion on this point, see in par ticular Section 5.1.3b of note 3 in Annex C. 
30 For olive oil, it is hard to see any economic reasonin g for the level of coupled support (6%) retained in 
Spain, given the positive developments in the sector and the experience from other producing MS. 
31 The conclusions of this part are common whether on e looks ate the sector level or the microeconomic 
level of the farm. 
32 The most sensitive regions to be affected appear in results of note 3 in Annex C. 
 
EN 48   EN Table 4. – Summary results of impact from full decoupling (production of specialist 
producers where margin over variable costs is affected) 
Coupled 
payment as 
% of the 
margin%  switching 
to negative 
marginCoupled 
Payment 
as % of the 
margin%  switching 
to negative 
marginCoupled 
Payment 
as % of the 
margin%  switching 
to negative 
marginCoupled 
Payment as 
% of the 
margin%  switching 
to negative 
margin
COP 23% 5% 39% 11%
HOPS
BEEF 
BREEDERS42% 4% 63% 19% 60% 19% 43% 7%
BEEF 
BREEDERS & 
FATTENERS36% 0% 56% 15% 43% * 31% 0%
BEEF 
FATTENERS
SHEEP MEAT 28% 5% 68% 19% 34% *
SHEEP MILK 7% * 10% * 18%
GOAT MILK 10% * 4% * 18%
Coupled 
Payment as 
% of the 
margin%  switching 
to negative 
marginCoupled 
Payment 
as % of the 
margin%  switching 
to negative 
marginCoupled 
Payment 
as % of the 
margin%  switching 
to negative 
marginCoupled 
Payment as 
% of the 
margin%  switching 
to negative 
margin
COP
HOPS 5% 0%
BEEF 
BREEDERS102% 35%
BEEF 
BREEDERS & 
FATTENERSn.a. 
(average 
margin is 
already 
negative)8%
BEEF 
FATTENERSaverage 
margin 
negative0% 61%
SHEEP MEAT 46% *
SHEEP MILK
GOAT MILK 
* FADN sample too small to assess the impact of supression of coupled paymentsAustria Sweden Finland GermanySpain France Portugal Belgium
* FADN sample to small too assess the impact of supression of coupled payments
 
Source: DG AGRI G3 – EU FADN 
In beef, the move to full decoupling could accen tuate present trends, with the most 
significant negative impacts expected among suckler cow producers, where the 
coupled premium represents a significan t part of a farm's margin. The more 
extensive and specialised the production syst em is, the higher the risk especially in 
those regions where output is low and/or production costs are higher. Suckler cow 
breeders are also more exposed to price reductions due to their lower margins, and more vulnerable to potential WTO developments. 
On the other hand, while for suckler cows the number of animals for which coupled 
support premium is claimed is close to the ceilings set with the 2003 reform, the 
number of animals is significantly lowe r for other beef premiums (except for 
fatteners in some MS), indicating less pot ential negative impacts in these sectors. 
The sheep meat  sector would be also affected  by decoupling as the 50% coupled 
premium sheep meat production plays an importa nt role in farms' margin (in France, 
 
EN 49   EN in particular, almost 20% of  sheep meat farm would not cover their variable costs, 
against 5% in Spain). But milk sheep or goat would be less aff ected because their 
output is higher. 
In summary, the analysis of a move towards full decoupling indicates that the 
stronger impacts will be in the sectors and regions where the coupled premiums represent an important share of farmer's ma rgin. Analysis has identified these sectors 
to be those of suckler cows, and sheep (espec ially for meat). In the cereals sector and 
in other beef premiums impacts would not be significant overall (although could still 
affect some particular regions). 
The biggest advantage from a generalised move towards full decoupling will be in 
market orientation , in income transfer,  and in administrative and simplification 
terms  for both public administrations and farmers because instead of several systems 
running in parallel there woul d be only one single SPS system for the premiums to be 
decoupled. The complexity and overhead of aid application controls would be 
reduced, specifically on the spot controls . It would also be advantageous in WTO 
terms where a full share of old direct payments would be fully “green box” 
payments.  
5.1.3.  Targeted selective decoupling 
This option, which stems directly from the conclusions of the previous one, suggests 
that the risks of production decrease in th e suckler cow and sheep meat sectors in 
extensive systems would be avoided by k eeping the corresponding premiums in the 
current partially coupled support. 
The budgetary impact of this (and the prev ious) option would not change in relation 
to the status quo (baseline)  because the partially coupled part of support would be 
transferred to the SPS. It would be positive in administrative and simplification terms 
for both administration and farmers as me ntioned in the full decoupling scenario 
except for the premiums to be kept coupled. 
It would also be advantag eous in WTO terms where a bigger share of old direct 
payments would be fully “green box” paym ents (just arable crops coupled premium 
in SP and FR accounting for 35% of the EU  remaining coupled elements), although 
at lower extent than in the previous option. 
In comparison to the full decoupling opt ion the disadvantages related to the 
premiums to be kept coupled would remain. 
5.2. Social impacts and environmental impacts 
The potential impacts that various options  of full decoupling could have in the 
sectors examined are summarised in the following Table 5. 
 
EN 50   EN Table 5. – Social/environmental impacts of alterna tive partially coupled  support options 
Option Social impact Environmental impact 
0 Production and farmers remain in regions with 
risks for abandonment, mainly in extensive 
livestock regions. 
Farm income would be lower than with full 
decoupling where the trend for production is 
already downward.  
The processing industry would not be affected 
because policy factor would remain unaltered.  Minor environmental impacts where payments 
are in extensive farming, such as beef and 
sheep production. 
In cereals, similar production patterns as at 
present will continue. 
1 Improved income transfer for farmers in all 
sectors. 
Decoupling could lead to reduction, 
abandonment or change of production in areas 
with low farm margins, such as in suckler 
cows and sheep for meat.  (FADN simulations shows that 33% of 
specialised suckler cows holdings in Austria, 
21% in France and 17% in Spain could not 
cover their variable costs and hence could 
abandon production. A similar situation would occur to 19% of French sheep meat farmers). 
Minor impacts in processing, except for 
regions that depend to a large extent on 
extensive livestock systems. The reduction of 
production in some areas can have negative repercussions for the pro cessing industry (and 
consequently on local employment) which 
depend on a minimum quantity of supply
33 Mixed picture, with some gains and also in 
certain regions some significant losses for 
environment. 
On the plus side, gains in terms of lower 
greenhouse gas emissions and, in certain 
areas, reduced pressure on limited resources. 
On the negative side, benefits from extensive 
livestock systems in fragile and normally 
environmentally of high value regions would 
be at risk (e.g. biodiversity and landscape 
losses, reduced forest fire protection). 
2 Keeping coupled support only where it is 
found necessary, social impacts are 
minimised, namely with respect to farm 
impact in local processing industry. This option minimises any potentially 
negative impacts by retaining support where 
its removal would imply high environmental 
costs. 
6. CONCLUSIONS  
The status quo  option contradicts the 2003 CAP reform path in terms of competitiveness, 
market orientation and simplif ication of the support scheme. Full decoupling  would have a 
positive impact on farm income in most regions due to higher transfer efficiency of direct support, it could put at risk production in certain sectors in  specific regi ons where local 
production is vital to ensure the viability of  local agri-food chain and to preserve the 
environment. Evidence from analysis suggests that targeted selective decoupling  whereby 
coupled support is retained in sectors of ex tensive livestock meat production (beef and sheep) 
would maximise the benefits from full decoupli ng in the crop sector, while at the same time 
maintaining the overall positive social and environmental impacts of coupled support in fragile regions of high environmental value. 
                                                
 
33 Following industry and DG AGRI estimations in 2005 red meat and pigmeat provided for 230 000 jobs 
in slaughtering/cutting and 600 000 in processing activity. 
 
EN 51   EN 7. SUMMARY TABLES  
7.1. Comparison between different options and their respective impacts – partially coupled support 
☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS  Option 0 – baseline Option 1 – full decoupling Option 2 – targeted selective decoupling 
Economic Continues current production trends 
. Full market orientation 
☺☺ Market orientation gains limited to sectors 
moving to full decoupling 
☺ 
Social Production and farmers remain in regions 
with risks for abandonment, mainly in 
extensive livestock regions 
☺ 
Supply to processing industry continues 
. 
Farm income declines where production 
trends are already downward 
/ Could lead to reduction of production in 
regions with low farm margins, such as with 
extensive beef and sheep farming 
/ 
Minor impact for processing industry except 
where extensive livestock 
/ 
Improved farm income transfer 
☺☺ Social negative impacts for processing 
minimised since production support in fragile 
areas continues 
☺☺ 
Improved income transfer limited to sectors 
where full decoupling applies  
☺ 
Environmental Positive environmental impact in extensive 
livestock farming 
. Losses  in environmentally high value regions 
of extensive livestock systems 
/ Production of extensive livestock systems 
retained 
. 
Administrative Two administrative systems continue to run 
in parallel 
/ Great administrative simplification 
☺☺ Reduction of administrative burden only 
where full decoupling is implemented 
☺ 
Simplification . All direct support instruments merged 
☺☺ Reduction of number of instruments in the 
sectors where decoupled is fully implemented  
☺ 
Other . All coupled payments shift to Green Box 
☺☺ Important part of the coupled payments shifts 
to Green Box  
☺ 
 
EN 52   EN 7.2. Comparison between different options and their res pective objectives – partially coupled support 
☺☺ fully respecting objective; ☺ partially respecting objective; . neutral; / moving away from objective; // putting at risk objective 
OBJECTIVES Option 0 – baseline Option 1 – full decoupling Option 2 – targeted  
selective decoupling 
Competitiveness / ☺☺ ☺ 
Market orientation / ☺☺ ☺ 
Environmental sustainability . / ☺ 
Budget costs . . . 
Administrative costs . ☺☺ ☺ 
Simplification / ☺☺ ☺ 
Vitality of rural areas . / ☺ 
Stabilisation of farmers incomes . ☺☺ ☺ 
Transfer efficiency . ☺☺ ☺ 
 
 
EN 53   EN C.d. INDIVIDUAL PAYMENT LIMITATIONS 
1. BACKGROUND  
Whether to introduce cuts in the highest paymen ts received by larger farms, because such 
payments are not considered econo mically or socially justified, ha s been an issue in the public 
debate on the CAP since the early 1990s. Several Commission proposals for payment 
redistribution mechanisms (1992, 2000, and 2003) were not retained in full by the Council. 
Currently, the only method for achieving a certain  redistribution of payments under the CAP 
is through the linear, 5% redu ction of payments above €  5 000 from compulsory modulation. 
Two provisions at the MS di scretion, however, currently impact on low payments: the 
possibility of setting up a minimu m size of agricultural parcels for which an SPS application 
can be introduced (0.3 ha), and the possibility not to grant any aid if the amount per application is less than €
 10034. 
Continued attention is being dr awn to the uneven distribution of direct payments between 
farmers (see Figure 4 below). A minority of beneficiaries (around 20% ) receives the large 
majority of payments (around 80%). Almost ha lf of beneficiaries in the EU-25 receive 
payments that do not exceed €  500. 
Figure 4: Distribution of dire ct payments in EU-15 and EU-25 
 
0,010,020,030,040,050,060,070,080,090,0
<0  
>=0< 5  >=5< 10  
>=10< 15  >=15< 20  
>=20< 25  >=25< 30  >=30< 35  >=35< 40  
>=40< 45  
>=45< 50  >=50< 55  >=55< 60  >=60< 65  >=65< 70  
>=70< 75  
>=75< 80  >=80< 85  >=85< 90  >=90< 95  
>=95< 100  
>=100< 150 
>=150< 200 
>=200< 250 
>=250< 300 
>=300< 350 
>=350< 400 
>=400< 450 
>=450< 500 >=500  
Classes in € per beneficiary (000)Share of DP (%)EU-25 EU-15
 
Source: DG AGRI calculation based on CATS data 
                                                 
34 New MS shifting from SAPS to SPS may fix a minimum size of 1 ha per holding for the establishment 
of payment entitlements and payments. 
 
EN 54   EN 2. PROBLEM DEFINITION  
High levels of payment per holding are exposed to  the criticism that they are excessive and 
socially unacceptable. This criticism has grown in the context of increasing transparency of 
EU policy, notably of CAP payments, and the shift of support to the SPS. In removing the 
link between production and the direct payment through the decoupling process, the question 
has been raised about whether an  individual beneficiary deserves  such a high level of income 
support and whether the money could be used w ithin the CAP in a more effective way. The 
situation has become more complex with enla rgement to EU-27 because of the structural 
characteristics of farms (i.e. large or very large co-operative farms) in some MS, including 
new MS. 
The other problem arising from the uneven distribu tion of direct payments relates to the large 
number of very small payments. This number essentially includes small farmers, but it also includes in certain MS recipients whose value of  payment is below the administrative cost of 
managing it. While this situation has existed fo r some time, the problem  has been exacerbated 
with the introduction of the regi onal SPS model in some MS, which extended payments to all 
eligible area, and brought with it new beneficiaries, some receiving very low payments. 
3. O
BJECTIVES  
Introducing individual limits for decoupled direct payments should be assessed with respect to 
its impact on the following policy objectives: 
• contributing to the overarching goals for the CAP (improved competitiveness, better 
market orientation, better compliance with EU standards), 
• meeting the societal expectations (in particul ar, for a more even distribution of direct 
payments), 
• preserving the vitality  of rural areas, 
• further simplifying the CAP. 
4. POLICY OPTIONS  
Against this background, and taking into a ccount the Commission's a pproach to keep any 
savings from payment limitations within the MS, and to apply lower payment limitations only at MS discretion, the following policy options were examined: 
Table 6. 
– Policy options for individual payment limits 
Option Upper payment limitations Description 
0 Status quo – baseline No change in the present set of measures. Currently, reduction in 
payments under the CAP is made through the linear, 5% 
reduction of payments above € 5 000 from compulsory 
modulation. 
1 Fixed individual limits at a 
certain level Individual limits set at a certain maximum level per beneficiary 
(e.g. €  100 000, €  200 000 or €  300 000), beyond which no 
payments are granted (capping). 
2 Progressive individual limits  The support level would be reduced at different rates as overall 
payments to the individual farm reach different thresholds (e.g. 
payments above €  100 000 would be reduced by 10%, payments 
above €  200 000 reduced by 25%, and above €  300 000 by 45%). 
 
EN 55   EN  
Option Lower payment limitations Description 
0 Status quo – baseline No change in the present set of measures. MS currently have the 
possibility of setting up a minimum size of agricultural parcels 
for which an SPS application can be introduced (0.3 ha), and the 
possibility not to grant any aid if  the amount per application is 
less than €  100. 
1 Compulsory application of 
current individual lower 
limits  The current lowest level of threshold (€  100 or 0.3 ha) is 
implemented in all MS. 
2 Increased individual lower 
limits  Increase in the value of lower payment limits in all MS to €  250 
and 1 ha. The minimum size for parcels (not exceeding 0.3 ha) remains unchanged. 
8. IMPACT ANALYSIS OF UPPER PAYMENT LIMITATIONS  
Detailed results of the various options are presented in Annex C35. These main results are 
summarised in Table 7. 
Table 7. – Summary impacts of upper payment limitations at aggregate EU level 
Payment threshold (option 1) Progressive cuts 
(option2) 
Variable A 
€ 100 000 B 
€ 200 000 C 
€ 300 000 A cut = 10% 
B cut = 25% 
C cut = 45% 
Number of affected MS 15 8 5 15 
Affected farms (number) 25 480 7 610 4 380 25 480 
Affected farms (% of total) 1% 0.2% 0.1% 1% 
Average size of affected farm 721 ha 1 440 ha 1 898 ha 721 ha 
Average labour per farm  16 AWU 38 AWU 51 AWU 16 AWU 
Changes in affected farms      
– in average payment (%)  – 55% – 54% – 47% – 14% 
– in average farm income (€) – 30% – 28% – 25% – 8% 
Budgetary savings (million €) 3 087 1 754 1 176 807 
Budgetary savings (% of SPS) 8% 5% 3% 2% 
Source: DG AGRI calculation based on FADN 
Note: The progressive cuts option is more comparable to the capping option with the threshold set at 
€100 000. 
Summary results in Table 7 and the more detailed results of Annex A lead to the following 
conclusions with respect to the main econom ic and budgetary impacts for the three options36. 
                                                 
35 See note 4 in Annex C, and the detailed Annex tables it contains.  
36 See in particular the summary table in Annex C, note 4.  
 
EN 56   EN 8.1. Option 0 
The status quo (baseline) is ne utral in terms of impacts. Ho wever it fails to address the 
problem of the uneven distribution of payments . The high levels of payment per holding will 
continue to be exposed to the cr iticism that they are socially unacceptable. An increase of the 
share of decoupled payments due to further de coupling, as analysed in  other parts of this 
impact assessment, will make payments more transparent to the public and further increasing societal concerns on equity issues. 
8.2. Option 1 
Individual limit thresholds set at high levels  as referred in option 1 (i.e. €
 300 000 and 
€ 200 000) affect a very small number of holding s (0.1-0.2% of EU total)  in a limited number 
of MS, particularly the new ones. On the aff ected holdings, capping results in very significant 
cuts in direct payment levels (47-54%) and redu ctions in income levels (25-28%). The burden 
of such a measure in terms of the budget rele ased by such ceilings wo uld fall on only three 
MS (Germany, Czech Republic and Hungary). 
Individual limit thresholds set at lower levels  (i.e. €  100 000) affect more farms across the EU 
(up to 1% of EU total of holdings) and more MS (15 in total are affected). However, even at 
this level, the measure would not attain  its specific objective because it would not 
significantly change the distribut ion pattern of payments, due to the heavy bias towards small 
payments in the EU. The lower limit would need to be set far closer to the average direct 
payment per beneficiary in EU-25 (€  6 100 in 2005 from the CATS payment database) to have 
any significant effect on paymen t distribution. Furthermore, the impact from such lower limit 
thresholds on the affected holdings on the le vel of direct payments (–55%) and income (–
30%), are stronger. Since many of these farms are large employers of agricultural labour, the 
consequences on the employment situation in th eir local areas could be significant. On the 
other hand, the incentives for stru ctural adjustment to avoid the limit (i.e. splitting of larger 
farmers into several sma ller entities or tr ansfer of entitlements) w ould be much stronger at 
this level of payment limitation. 
Various legal responses to this problem of impact in large farms which are important 
employers of agricultural labour were addr essed but found to have difficulties. Taking 
account of different farm stru ctures and ownership arrangeme nts (e.g. co-operatives) would 
require adjustment to the definition of the "l egal person" claiming the payment, which would 
in itself open the door to circumvention and fraudulent splitting. Preventing any 
circumvention of the ceilings (by the transfer  of entitlements or th e splitting of holdings) 
would be difficult to implement,  would require a definition of splitting and would lay the 
burden of proof on Member State administrations. 
8.3. Option 2 
Progressive individual limits  (i.e. step-wise as from €  100 000 upwards) maintain the more 
generalised nature of the measure across the EU (1% of EU total of holdings) but have 
significantly milder impacts on cuts in dire ct payments (–14%) and income (–8%) on the 
affected holdings. The total f unding released by the measur e is significantly less (€  807 
million) but more evenly spread across the 15 affected MS. 
The main advantage of progressive payment limitati ons is that they weaken the incentives for 
structural adjustment to avoid the limit (e.g. farm splitting). However, the possibility of an 
 
EN 57   EN increase in transfer of entitlements (sale or rent) to maximise benefits in the presence of the 
individual limitations remains. 
In terms of net budgetary ef fect and financial management , independently of the impacts at 
farmer level, the possibility that Member States  could retain the funding released through this 
measure significantly increases the possibilities for adoption of high-level individual payment 
limits. However, with progressive limitations, the current system of fina ncial control used to 
manage modulated funds would no longer be work able. Farmers receive a varying mixture of 
direct aids originating in different regimes and of different composition ea ch year; therefore it 
would be problematic to antici pate the amounts releas ed by the individual limit mechanism 
for each individual regime. Consequently, it would no longer be possible for the Commission 
to define net financial ceilings for each indi vidual direct aid scheme, which would imply 
important changes to financial management. 
9. IMPACT ANALYSIS OF LOWER PAYMENT LIMITATIONS  
The potential impact from an increase in lo wer payment limitations is shown in Table 8. 
Assuming that the current possibility of individual payment limits of €  100 was applied, 
around 12.5% of all beneficiaries would be excluded from direct payments. 
Table 8. – Summary impacts of lower payme nt limitations at aggregate EU level  
 Minimum payment Minimum total area 
% of total € 100 € 250 Affected 0.3 ha 1.0 ha Affected 
Beneficiaries 12.51% 30.84% 18.33% 1.54% 9.27% 7.74% 
Payments 0.16% 0.84% 0.68% 0.01% 0.17% 0.16% 
Source: CATS 2006. For minimum payment, all direct payments in EU-25; for area, 10 MS applying SPS. 
The percentage of beneficiaries affected vari es greatly between MS (see Table 9 below). 
Table 9. – Impacts of lower pay ment limitations at MS level 
P a y m e n t  r a n g e B E C Z D K D E E E G R E S F R I EI TC Y L V L T
0 and < EUR 100           3% 1% 5% 1% 18% 11% 10% 3% 2% 19% 40% 23% 22%
>=EUR 100 and < 250    2% 7% 7% 5% 25% 15% 11% 2% 1% 19% 31% 38% 44%
0 and < EUR 250 5% 8% 12% 6% 43% 25% 22% 5% 3% 38% 71% 61% 66%
P a y m e n t  r a n g e L U H U M T N L A T P LP TS I S KF I S EU K E U - 2 5
0 and < EUR 100           1% 14% 85% 14% 2% 15% 14% 16% 18% 0% 0% 7% 13%
>=EUR 100 and < 250    2% 26% 7% 16% 4% 32% 22% 26% 28% 1% 5% 7% 18%
0 and < EUR 250 3% 40% 93% 31% 6% 46% 36% 42% 46% 1% 5% 14% 31%% of beneficiaries affected
 
Increasing the minimum level to €  250 would affect close to 31%  of all direct payment 
beneficiaries and the amount saved woul d represent around 0.84% of the payments. 
The currently possible minimum i ndividual area limit of 0.3 ha involves around 1.5% of all 
beneficiaries, which may be excluded from th e SPS. The percentage a ffected again varies 
greatly, from 0.32% in Ireland to 9.2% in Portug al, but the amounts affected are even smaller 
than the rounded figure in the table (0.005% of the payments). 
 
EN 58   EN Increasing the minimum individual area limit to 1.0 ha  would affect around 9.3% of all 
beneficiaries of the SPS, represen ting around 0.17% of the payments. 
The very large number of small beneficiaries of  CAP direct payments reflects more general 
structural aspects of EU agricu lture. For many of these small bene ficiaries, agriculture may be 
only one of several economic activities. These ac tivities may be related more or less directly 
to agriculture. Consequently, any change in the payment rules would be unlikely to have 
significant agricultural employment impacts but c ould remove an alternative income source in 
rural areas with many sma ll and part-time farmers. 
While data on the administrative costs to MS of the management of direct payments is not yet 
available, studies on the transaction costs of the CAP on farmers have indicated that, in the 
range of MS studied, the average farmer in those MS imply total costs of applying for SPS payments above €
 25037. Only in one MS was the average farmer administrative cost below 
€ 250 (i.e. €  107), largely a reflection of the small farm size, since costs per ha were more 
similar between most MS, ranging between €  9 and €  14 per ha. 
10. CONCLUSIONS  
10.1. Upper limitations 
In relation to the attainment of  the objectives pertaining to th e SPS, the status quo (baseline), 
though neutral in terms of many impacts, fa ils to address the problem of the uneven 
distribution of payments. 
The introduction of fixed indivi dual limits, however, moves away from the general objectives 
of the SPS by having very severe impacts on la rge farms with high employment levels, and 
could jeopardise the rural fabric of the relatively few regions such payment ceilings would affect. 
The progressive individual limits option, thoug h contrary to the si mplification objective, 
becomes globally the most positive option, sin ce it addresses the probl em of uneven payment 
distribution in a manner which attenuates the negative impact s on farms in regions with 
productive structures based on large farms. 
10.2. Lower limitations 
By excluding an estimated 30% of all benefi ciaries from the SPS, in creasing the individual 
limits to a minimum of EUR 250 would signifi cantly affect the distribution of direct 
payments. However, it should be recalled that public perception of the uneven CAP payment 
distribution is focused more on the high payment level of a relatively small number of 
beneficiaries, and not on the other less widely  recognised feature of CAP payments, the very 
high number of small beneficiaries. 
From the point of view of simplification of  the SPS, increasing the individual limits would 
have the advantage of reducing the number of  small dossiers to be handled. Furthermore, 
raising the minimum size for SPS to 1 ha woul d mean that rules for EU-15 and EU-12 would 
no longer diverge, which would increase the degr ee of equal treatment between EU farmers. 
                                                
 
37 See “The administrative burden on farms arising from the CAP, 2007”, available in the following site: 
http://ec.europa.eu/agriculture/analysis/external/burden/index_en.htm  
 
EN 59   EN However, owing to the great difference in the pe rcentage of beneficiaries affected by such a 
measure, lower limits could be criticised in some  MS as an unfair treatment of small farmers. 
In relation to the attainment  of the objectives pertaining  to the SPS, the compulsory 
application of the curre nt optional rules on minimum payment size would address the need for 
simplification but have some negative social  impacts in some MS. Raising higher the 
minimum payments intensifies the gains in simplification and the negative impacts on regions with farms structures based on small farms. For that reason, leaving the choice of setting 
either a minimum size or a minimum amou nt to MS competence would allow better 
adjustment to their specific situation. 
 
EN 60   EN 11. SUMMARY TABLES  
11.1. Comparison between different options and their respective impacts – upper payment limitations 
☺☺ strong positive; ☺ positive; . neutral; / negative; // strong negative 
IMPACTS  Option 0 
Status Quo Option 1a 
Fixed individual limits at 
EUR 100 000 Option 1b 
Fixed individual limits at 
EUR 200 000 Option 1c 
Fixed individual limits at 
EUR 300 000 Option 2 
Progressive individual 
limits 
Economic . Cuts direct payments  
by 55% in 1% of farms 
in many MS 
// 
releases €  3 billion 
☺☺ Cuts direct payments  
by 54% in 0.2% of farms 
in a few MS 
/ 
releases €  1.8 billion 
☺ Cuts direct payments  
by 47% in 0.1% of farms 
in a few MS 
/ 
releases €  1.2 billion 
☺ Cuts direct payments by 
14% in 1% of farms in 
many MS 
. 
releases € 0.8 billion 
☺ 
Social Perceptions of uneven 
payment distribution in 
some MS persist 
/ Net income drops 30% in 
affected farms (avg. 
labour levels 16 AWU) 
// 
modest impact on 
payment distribution 
/ Net income drops 28% in 
affected farms (avg. 
labour levels 38 AWU) 
// 
minor impact on  
payment distribution 
/ Net income drops 25% in 
affected farms (avg. 
labour levels 51 AWU) 
// 
insignificant impact on 
payment distribution 
/ Net income drops 14% in 
affected farms (avg. 
labour levels 16 AWU) 
/ 
small impact on  
payment distribution 
/ 
Environmental . Cross compliance  
still applicable 
. Cross compliance  
still applicable 
. Cross compliance  
still applicable 
. Cross compliance  
still applicable 
. 
 
EN 61   EN Comparison between different options and their respe ctive impacts – upper payment limitations (cont'd) 
IMPACTS  Option 0 
Status Quo Option 1a 
Fixed individual limits  
at EUR 100 000 Option 1b 
Fixed individual limits  
at EUR 200 000 Option 1c 
Fixed individual limits  
at EUR 300 000 Option 2 
Progressive individual 
limits 
Administrative . Significant risk of 
circumvention, increase 
in controls required 
// 
affects only  
some MS 
/ Significant risk of 
circumvention, increase 
in controls required 
// 
disproportionate effect  
on very few MS 
// Some risk of 
circumvention, increase 
in controls required 
/ 
disproportionate effect  
on very few MS 
// Low risk of 
circumvention, increase 
in controls required 
☺ 
moderate effect  
on some MS 
// 
Simplification . Clear, simple and easily 
communicated rule 
☺ Clear, simple and easily 
communicated rule 
☺ Clear, simple and easily 
communicated rule 
☺ Introduces complexity in 
payment rules 
/ 
 
 
EN 62   EN 11.2. Comparison between different options and their respective objectives – upper payment limits 
☺☺ fully respecting objectives; ☺ partially respecting objectives; . neutral; / moving away from objective; // putting at risk objective 
OBJECTIVES  Option 0 – baseline Option 1a 
Fixed individual limits 
at EUR 100 000 Option 1b 
Fixed individual limits 
at EUR 200 000 Option 1c 
Fixed individual limits 
at EUR 300 000 Option 2 
Progressive individual 
limits 
Competitiveness . ☺ ☺ ☺ ☺ 
Market orientation . . to / . to / . to / . to / 
(Equity/distribution 
among farmers / ☺ ☺ ☺ ☺ 
Environmental 
sustainability . . . . . 
Budget costs . . . . . 
Administrative costs . / / / . to / 
Vitality of rural areas . . . . . 
Simplification . / / / / 
Transfer efficiency . ☺ ☺ ☺ ☺ 
 
EN 63   EN 11.3. Comparison between different options and thei r respective impacts – Lower payment limits 
☺☺ fully respecting objective; ☺ partially respecting objective; . neutral; / moving away from objective; // putting at risk objective 
IMPACTS  Option 0 – baseline Option 1 – Compulsory application of 
current individual lower limits Option 2 – Increased individual lower 
limits 
Economic . Exclusion from payments of 13% of 
beneficiaries, but minimal impact on 
total payments (0.2% of total) 
/ Exclusion from payments of 31% of 
beneficiaries, with small impact on 
total payments (0.8% of total) 
// 
Social Large number of small beneficiaries 
in some MS applying regional model 
/ 13% of total beneficiaries (and higher 
percentage in some MS) affected 
/ 
Net income loss to few beneficiaries 
. to / 13% of total beneficiaries (and higher 
percentage in some MS) affected 
// 
Net income loss to many 
beneficiaries in some MS 
/ 
Environmental . . . 
Administrative Administrative cost higher than 
payments in some cases 
/ Reduction in MS administrative 
burden 
☺ Significant reduction in MS 
administrative burden 
☺☺ 
Simplification . Extent depends on level of limits 
☺ Significant simplification across MS 
☺☺ 
 
EN 64   EN 11.4. Comparison between different options and their respective objectives – Lower payment limits 
☺☺ fully respecting objective; ☺ partially respecting objective; . neutral; / moving away from objective; // putting at risk objective 
OBJECTIVES  Option 0 – baseline Option 1 – Compulsory application of 
current individual lower limits Option 2 – Increased individual lower 
limits 
Competitiveness . ☺ ☺ 
Market orientation . . ☺ 
Environmental sustainability . . . 
Budget costs . . . 
Administrative costs . ☺ ☺☺ 
Simplification / ☺ ☺☺ 
Vitality of rural areas . / // 
Stabilisation of farmers incomes . / / 
Transfer efficiency . ☺ ☺ 
 
EN 65   EN D – MARKETS  
1. PROBLEM DEFINITION  
The changed policy environment and the favourab le market situation currently facing EU 
agriculture have raised questions as to the pertinence of CAP market instruments in their present form: 
– supply control measures of the CAP in the sect ors of milk (quotas) and cereals (set aside) 
restrict the ability of EU farmers to res pond to market signals and to grasp market 
opportunities, and contradict the obj ective of market orientation; 
– in several small sectors whic h retain policies of supply control and/or coupled aid 
adjustments are need to make adapt them to the overall orientation of the CAP; 
– the intervention system for cereal s has been adjusted to better  fulfil its safety-net function. 
However, further modifications are necessary in order for it to functi on more efficiently in 
the case of strong market disruptions, without reliance upon subsidised sales (both 
internally and externally); 
– differences among sectors in current interv ention rules make their application more 
complex than necessary. Harmonising provisions  for intervention across all sectors would 
further simplify the CAP; 
– increased market orientation of EU agricultu re and concerns for increased impacts from 
climate change, turn production and price risks into a heavier burden for farmers to bear, 
and bring calls for more risk manageme nt tools that need to be examined. 
2. O
BJECTIVES  
• Improve competitiveness and market orient ation, while preserving the environmental 
benefits of current policy tools, 
• provide a safety net for farmers in case of strong market disruptions, which does not lead 
to unsustainable public stocks, 
• assure that application of th e measures will not lead to excessive budgetary cost and 
complexity, 
• contribute to the vital ity of rural areas, 
• contribute to the stabil ity of farm income. 
 
EN 66   EN D.A. CEREAL  INTERVENTION  AND  SET  ASIDE 
1. BACKGROUND  
The current EU intervention system for cereals  is a single floor price of 101.31 €/t, with 
monthly increments, applicable to  all major cereals across the EU38. Through buying at this 
price level, CMO ensures that internal market  prices do not drop fa r below the safety-net 
intervention price. In the most recent reform of the cereal intervention system it was agreed 
that intervention quantities for maize will be gradually phased-out, but left open for the HC 
any further changes in the system39. 
Set aside was introduced  with the 1992 reform to limit the cultivated area and thus 
complement the role of intervention and borde r measures in balancing the markets. The 
importance of set aside has been significant in the past, but the recent increase in cereal prices 
and most importantly the transi tion to the SPS have raised que stions about its consistency 
with the overall objectives  of the reformed CAP40. 
2. PROBLEM DEFINITION  
The specificity of agriculture production41 has been at the basis of the policy makers' decision 
to provide for a safety-net to farmers in cas e of markets disruptions. The dismantling of the 
maize intervention was necessary to remedy possible risks of high regional intervention 
stocks; but may lead to a relative loss of comp etitiveness for barley and possibly soft wheat, 
which under normal market conditions (i.e. lower cer eals prices) may also trigger the risk of 
increasing public stocks for th ese cereals. In the current outl ook context, the probability for 
such outcome looks remote. Since price variatio ns are a feature of agricultural production, the 
intervention system has to be redesigned in a way that it still fulfils its sa fety-net role in case 
of strong market disruptions, but efficiently, without relian ce upon subsidised sales (both 
internally and externally). 
In addition, set aside needs to be reviewed because  it still restricts the ability of EU farmers to 
respond to market signals and to grasp market opportunities thus contra dict the objective of 
market orientation. In the context of expect ed high prices and decoupled support, further 
questions have been raised about the need of  set aside as a supply control mechanism. The 
question has become more pertinent with th e temporary setting of set aside at 0% for 
2007/2008 due to low stocks and the current market outlook. 
Yet, since mandatory set aside also delivers clear  environmental benefits, concerns have been 
expressed about the environmental impact with it s removal. This raises the question of where 
                                                 
38 At present, intervention is available for bread making wheat, durum wheat, barley, maize, and sorghum; 
not available for feed wheat, rye and oats. It is being phased out for maize. 
39 The June 2007 agreement set an upper ceiling on quantities going to intervention of 1.5 million tonnes 
in 2007/08, 700 000 tonnes in 2008/09, and 0 in 2009/10. It leaves the possibility to re-open intervention in case of changing market conditions. 
40 See Figure 5 of note 5 in Annex B, for the strong inverse relationship between lower set aside and 
higher intervention stocks in the past. In the same note, Figure 1 indicates why this relationship is weaker recently; SPS allows set-as ide entitlements to be transferred to less productive areas, thus 
limiting the supply control effectiveness of set aside.  
41 Production decisions have to be taken long in advance with limited knowledge of the final outcome, 
large number of producers, relatively homogen eous products, inelasticity of demand, etc. 
 
EN 67   EN and to which extent loss of environmental bene fits would take place, and of what type of 
measures would be appropriate to mitigate such impacts. 
3. OBJECTIVES  
The proposed options for adjustments in cereal in tervention and set aside were assessed with 
respect to their capacity to  meet the following objectives: 
• provide a safety net for farmers in case of strong market disruptions, which does not lead 
to unsustainable public stocks 
• ensure competitiveness and market orient ation for the sector, while preserving the 
environmental benefits of set aside 
• facilitate farmers' response to market conditio ns, especially prospects for high prices by 
eliminating mandatory set aside as well as simplifying the SPS implementation 
4. POLICY OPTIONS FOR CEREAL INTERVENTION  
Table 10. – Analysed optio n for cereal intervention  
 Option Description 
0 Status quo – no further changes to 
the intervention system The quantity of maize intervention is set at zero from 
2009/10, with the possibility to re-open intervention in 
case of adverse market conditions 
1 Reduction of the intervention price 
to a safety-net level The buying-in price could be reduced to a sufficiently 
lower level allowing the system to act as a genuine safety net (this scenario corresponds to a hypothetical low 
world price situation) 
2 Restrict intervention quantities to 
zero for all feed grains Similar to maize, zero ceilings are applied to coarse 
grains going into intervention, with the possibility to 
re-open intervention in case of adverse market conditions. No quantity interv ention ceiling is introduced 
for soft wheat. 
3 Tendering system A combination with option 2. Examines the possibility to 
introduce a tendering scheme for intervention from the 
first offered quantity. From the 2009/10 marketing year intervention would take place exclusively in the context of the activation of the special intervention measures, 
standard intervention for grain would only concern soft 
wheat and rice.  
5. IMPACT ANALYSIS OF CEREAL INTERVENTION OPTIONS  
5.1. Economic impact 
The analysis of the EU market situation under alternative intervention assumptions 
on production, consumption, public and privat e stocks, prices and trade was done 
using the ESIM model. Three of the f our options were simulated for the 2007–13 
 
EN 68   EN period based on the updated DG AGRI baseline which takes into account the latest 
market developments in the EU and world markets42. 
A particular difficulty in this analysis pr oved to be the current very high level of 
world market prices for cereals. Since in tervention is a safety-net mechanism, it 
makes sense to analyse its potential impact when prices fall below their intervention 
level, not when they are almost twice as hi gh as the latter. Thus  sensitivity analysis 
focused on the potential impact of the vari ous options under lower price levels (such 
as those witnessed in the recent past). 
Table 11. – Impact of intervention options on the cereal sector 
 Production 
(mio t) Consumption
(mio t) Imports
(mio t) Exports 
(mio t) Area 
(ha) 
 Option 0: Status quo  
Level 307.1 284 9.0 32.5 60.2 
change from baseline 1% 0 –13% 15% 2% 
 Option 1: Safety net  
Level (million t) 307.1 284.8 9.0 27.7 60.2 
change from baseline 1% 1% –13% –2% 2% 
 Option 2: Intervention only for wheat  
Level (million t) 306.8 284.1 9.0 32.9 60.1 
change from baseline 1% 0 –13% 17% 2% 
Source: DG AGRI based on ESIM model. Change is measured from baseline in 2013 
5.1.1.  Option 0: status quo – no further changes to the inte rvention system 
The impact of this option could be felt when  prices are at levels that were (until 
recently) considered "normal". Then, some of the previous pressure on maize intervention shifts to barley and soft wheat , and some build-up of intervention stocks 
for both would be inevitable (especially if export subsidies are abolished). In such a 
case budgetary costs will increase. 
5.1.2.  Option 1: reduction of the inter vention price to a safety net 
Under current high price levels the defin ition of a safety-net level appears very 
difficult. For demonstrative purposes a decrease of the intervention price to €
 95/t 
was chosen (based on minimum prices resulting from simulations with the ESIM model under a low price scenario). This opti on could bring benefits  of international 
competitiveness and market orientations, in cluding to the EU meat sector and its 
competitiveness, only in a lower price envir onment in world markets. Currently, this 
looks a very remote possibility. 
5.1.3.  Option 2: extension of maize inter vention model to all feed grains 
This option has the advantage to allow th e support of all cereals under low prices, 
without the disadvantage of hampering barleys' competitiveness. Such a case would 
                                                
 
42 See http://ec.europa.eu/agriculture/publi/caprep/prospects2007a/index_en.htm  and note 5 in Annex A 
for details. 
 
EN 69   EN lead to lower budget costs with respect to st atus quo. Previous analysis indicates that 
setting the support price only for one cerea l would be enough to allow all cereal 
prices to find their natural balance around it43. Wheat seems the natural choice for 
such a price based on its destination for food  and the fact that its price formation is 
more transparent with more competitors in world markets than in other cereals. 
5.1.4.  Option 3: tendering 
This option was not evaluated quantitativel y because it is not possible to model 
unknown future behaviour of cereal market  participants. Two strong arguments 
favour it. The first is the simplifica tion it will bring by harmonising cereal 
intervention rules to those of other CMOs. And although for some it would be seen as a drop in the effective in tervention buying-in price of those quantities that enter 
intervention, in reality it helps the average  market price to find its natural 
equilibrium level in a smoother manner when prices are low. In this case budgetary 
costs would be lower with re spect to the other options. 
5.2. Environmental impact 
Conclusions of a DG AGRI evaluation study
44 indicate that in the past, even when 
EU intervention prices were higher than wo rld prices, a direct link between the price 
support and the change in production techni ques was difficult to establish and cannot 
be quantified. Only when support prices we re increased signifi cantly above world 
market prices did the relevant profitabi lity of cereals change, and resulted in 
environmental risks (notably water and so il pollution, fall in biodiversity, and a 
degradation of soil structures ). For instance, risks on wate r quality, soil erosion, soil 
pollution, and biodiversity could be greater in regions where greater intensification is 
associated with higher specialisation, monoc ulture, and the elimin ation of existing 
landscape features. On the other side, cross compliance applies equally to all land, 
regardless of the crop produced. 
Since world market prices are significantl y above support prices in the EU, none of 
the above holds in the current context. This high level of prices could create risks of 
intensification, but these risks have no ev ident link with the cu rrent support policy. 
On the contrary, under low price condi tions the maintenance of the current 
intervention system may hamper the profita bility of feed grains (barley) and could 
lead to environmental implications anal ogous to those described previously. Risks 
will be higher in case of substitution with maize, and to a lesser extent with oilseed 
rape, with respect to other cereals given their relative higher negative impacts on 
water quality, soil erosion, bi odiversity and landscape45. 
None of the other options ( 1, 2 and 3) is supposed to ha ve strong incidence over the 
relative profitability of cere als. If the productio n of any cereal would increase with 
respect to others, considerat ions over its impact on the environment should take into 
account not only the differences in intensity with respect to othe r cereals, but also 
market and technical developments.  
                                                 
43 The idea was already proposed by  the consultants in the DG AGRI "Evaluation of the cereals CMO" 
carried out by LMC International in 2005. 
44 "Evaluation de l'impact sur l'environnement des OCM et des mesures de soutien direct de la PAC 
relatives aux cultures arables", 2007. 
45 Idem as note 44. 
 
EN 70   EN 5.3. Social impact 
The only option to have an impact on farmers' income is option 2. On average the 
reduction of the intervention pr ice to a safety-net level w ould not affect significantly 
the income per annual work unit of the farm s producing cereals. If compared with the 
baseline (option 0), the increase of inco me by 2013 would be 2% lower, e.g. there 
will be an increase of income of 2% against a 4% in the baseline. 
There would nevertheless differences with respect to the averag e income between the 
safety-net scenario and the baseline at Member State level, which would go from  
–6% (Slovakia) to +2% (Denmark ), and by region from –8% ( Marche , Italy) to +6% 
(Asturias , Spain). The main explanatory factor s are the degree of specialisation in 
cereals (the lower the specialisation in cere als, the lower the decrease of income (or 
the higher the increase); the ex tent of the feed costs (the  higher the feed costs, the 
lower the decrease of income (or the higher the increase), because of the high decrease of feed costs); the share of durum wheat in cere als (the higher the share of 
durum wheat in the cereals area, the higher the decrease of income, because of the 
high price drop applied in compar ison to the baseline, i.e. –25%)
46. 
5.4. Other 
In all cases, given that the EU has become  a net importer of cereals, there will be no 
impact on third countries. 
Options 2, 3 and 4 could require deconsolidation of import duties47, while for 
option 5 a pure tendering system would no longer operate on the basis of a fixed 
intervention price. 
6. IMPACT ANALYSIS OF SET ASIDE ABOLITION  
6.1. Policy options for set aside 
Table 12. – Analysed options for set aside 
                                                 
46 For more details see Annex F, in particular note 5. 
47 At present the maximum duty is calculated on the basis of the fixed cereals intervention price of 
€ 101.31 per tonne (Headnote 6 of the WTO schedules). 
 
EN 71   EN  Option Description 
0 Status quo – no further 
changes to the current system Set-aside obligation and entitlements are kept 
1 Removal of set-aside 
obligation Withdrawal of the obligation to set aside. The set-aside entitlements 
become regular entitlements. 
2 Mandatory 
environmental set aside, 
5% of total farm area Obligation for all farmers to keep a fixed percentage of total area (5% 
reflects some such ideas) as an "environmental compensation/priority" 
area, with existing landscape feat ures (e.g. hedges, ponds, fields 
margins) supplemented by strips along water courses. 
3 New GAEC 
environmental features  One variant of option 2 is to replace the fixed percentage of set aside 
for all farmers with new standards that would expand the present list in GAEC to reflect the above landscape features. 
4 Strengthening of 
environmental set aside 
within Pillar II Agri-environmental measures within Pillar II already include 
programmes with many features that  are similar with those advocated 
under cross compliance (GAEC), and provided additional funding 
were available they could be used to target the expected impact from the abolition of set aside. 
The two distinct aspects of mandatory set aside (a supply control mechanism with 
environmental side benefits) were examined in parallel in the various options of its 
abolition. Initially, supply control was the dominant set-aside fe ature, but as it 
became less effective and society started to realise the environmental benefits of set 
aside, more focus turned on its environmenta l aspects. Analysed options reflect this 
evolution of concerns about set aside. The first two options looked at the impact of 
set-aside abolition on cere al area, production, prices, and farm income, and the 
impact from the potential loss on environmen tal benefits. The last two focus on ways 
to mitigate potentially negative environmental effects. 
6.2. Economic impacts 
The table blow summarises the economic impact of first two set-aside options. 
Table 13. – Set-aside options of cereal area, production and prices 
 Area (mio ha) Production (mio mt) Prices (€/mt) 
Option 1: no set aside 
Level 60.2 307.1 150 
Change from status quo + 2% + 1% –4% 
Option 2: 5% mandatory set aside on all land 
Level 58.7 297.7 165 
Change from status quo –1% –2% + 5% 
Source: DG AGRI based on ESIM model. Change is measured from status-quo value in 2013. 
In 2007, around 3.7 million ha of EU arable  land was under compulsory set aside, 
including 0.8 million ha used for non-food production. All this area is in EU-15 
(most of it in Germany and France); new MS have no set-aside obligation. 
 
EN 72   EN An additional 3.0 million ha of agricultural land eligible for direct payments are non-
cultivated land, mainly u nder permanent set aside48. 
Baseline – Set-aside distribution in 2007 – % of COP area 
 
0, 02, 04, 06, 08, 010,012,014,016,018,020,0
Ger Aus
Bel-LuxDen FinFraGre eIreIta Net PorSpaSweUKLat
Rom
SlovenLitBulPo l Hu n Cze
Slovak Est CypMa lObli gator y set- as ide
Vol untar y set- asid e
Average voluntary set-aside = 3.8%Average obligatory set-aside = 7.7 % Ave rage tota l set-aside = 11.5%
 
The impact from the abolition of mandatory set aside (option 1) will be to bring back 
to production an area corresponding to roughly half of the area that  is currently under 
mandatory set aside. It is expected that  the total area under set aside (including 
voluntary set aside) will rema in in average at around 5% even with no mandatory set 
aside in place. By 2013, production woul d increase by 1% and prices drop by 4% 
compared to the baseline. 
Under option 2, production would decrease by 2% and prices increase by 5%, again 
from the baseline. Thus this option still limits production response in the EU, but adds 0.4 million hectares to set aside. But the flat rate imposed across all MS is 
significantly different than the one of toda y, since option 2 leads to a drastic change 
in the allocation of set aside across MS and farmers by imposing an across the board 
percentage, while the potential environmenta l impacts from the abolition of set aside 
are limited to a few regions. The administ rative burden, both at EU and MS, is 
expected to grow significantly due to the n eed to settle a brand new payment system, 
and also because of more controls at  MS level. Moreover, the merging of 
entitlements is rendered more complicated a nd the raises the baseline for other RD 
environmental measures. 
Option 3 allows for a more targeted approach, since it does not impose a fixed 
percentage of area under envir onmental set aside, but allows MS to choose the most 
appropriate feature from an expanded lis t of GAEC. On the negative side, the 
expansion of the scope of cross complian ce with this option risks affecting the 
baseline, and thus relevant provisions of  existing RD programmes in different MS. 
                                                
 
48 With the implementation of the SPS in all MS, no distinction is made between voluntary set aside and 
non-cultivated land. The latter is significant in Spain, Portugal, Finland, Sweden and the UK. 
 
EN 73   EN However, if on one side, the administrative burden in most MS and farms increases, 
on the other, the merging of set-aside entitlements implies a simplification of the system.  
Finally option 4 allows MS to target environmental benefits where they are mostly 
needed, building upon existing RD provision s. Although at MS level reprogramming 
will be needed at the beginning, the whol e set-aside system will become simpler 
following the merging of entitlements. The pr ospects for success of this option would 
depend on the debate on modulation and on MS priorities. More funds would be 
needed, but also more focus by MS on retain ing the environmental benefits from set 
aside in the regions that  could be most affected
49. 
6.3. Environmental impacts 
Quantifying the exact environmental benefits  of set aside remains difficult; however, 
qualitative conclusions can be drawn base d on the literature a nd on the expected 
market results. 
The environmental impacts of option 1 (removi ng set aside) are expected to apply to 
all MS, thought there would be  quite a strong regional compon ent, since the extent of 
set aside varies significantly across EU, with its area increasing in some MS and decreasing in others (see Figure 5). The magnitude of impacts will depend on the 
characteristics of these regions. Some move ment of set aside out of very productive 
regions to less productive ones would appe ar to have alrea dy happened where MS 
rules have allowed this. It is also to be  noticed that 25% of the set-aside area is 
currently cultivated w ith non-food crops, 80% of which is oilseed rape. 
                                                
 
49 The criticism of environmental NGOs often focuses on the very different em phasis that MS place on 
agri-environmental measures, whether within GAEC or within RD. 
 
EN 74   EN Figure 5: Evolution of set-aside area  in EU-15 since 1993, based on FADN data 
0100020003000400050006000
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
 France  Spain  Germany  United Kingdom  Italy  Denmark  Sweden  Finland
 Austria  Portugal  Ireland  Greece  The Netherlands  Belgium  Luxembourg'000 ha
 
Under current market perspectives for the medium term, production of cereals, and to 
a certain extent oilseeds, are expected to expand in the main producing regions, 
where set aside is mostly concentrated (e .g. some parts of UK, France and Germany). 
In these areas greater risks of losing benefits are associated to a greater intensity if set-aside land is converted to arable cr ops under monoculture (loss of biodiversity, 
landscape features, nutrient leaching, soil er osion and soil and water pollution). On 
the other side, if land conversion takes pl ace in a context of diversification and 
rotation with the introduction of oilseeds and protein crops within the rotation, the 
negative risks on environment would be much smaller
50.  
In the less productive areas obligatory set aside assumes particular relevance in the 
farm rotation scheme. It is likely that in these areas set-aside land will remain 
broadly as it is with perhaps some return  into break crops such as temporary grass 
land, with minor impact on the environment.  
In some parts of southern EU areas, such as in Spain, there is already a requirement 
for mandatory rotation within the national legislation, but in other regions how the 
benefits of set aside are retained woul d depend on managing practices, the risks are 
very variable depending on agricultu ral practises and local conditions51. 
As for option 2, the retention of environmen tal benefits should be ensured over an 
area which is expected to be hi gher and distributed among 27 MS. 
Under option 3 the environmental benefits of  set aside are expected to be retained, 
but the exact extent is difficult to asse ss since it will depend on how MS implement 
                                                 
50 See reference in note 6. 
51 Idem. 
 
EN 75   EN GAEC standards. In several Member States GAEC standards with clear benefits to 
biodiversity are already in place. They incl ude mandatory buffer strips, e.g. 2 meters 
buffer trips along hedges and watercourses in UK, and 5 meters buffer strips in 
France. Other standards with benefits to biodiversity include the ban of converting 
grassland in certain areas in Austria, minimum stocking densities and requirements 
for buffer strips in England and Finland.  
Although the environmental impacts of the st rengthening of environmental set aside 
foreseen in option 4 are expected to be positive, they are also difficult to quantify. They will depend on the uptake of measures and the implementing modalities that MS will put in place, an d on the funding available. 
6.4. Social impact 
If the obligation of set aside would continue (baseline scen ario) in an environment of 
high prices farmers would be penalised since they could not increase their income, 
taking advantage of favourable market c onditions. On the contrary, under option 1, 
farmers could benefit from a higher inco me under the present market outlook. Under 
option 2, the area under production would be  reduced and also farmers income, 
although its extent depends on the extent of  the obligation and on the amount of the 
payments. Under option 3 and 4, the extent of  the impact would depend on the extent 
of the area under set aside. Both options imply a higher acceptability of the SPS to 
the wider public. 
7. C
ONCLUSIONS  
The intervention system being a safety-net mech anism, analysing the impact of alternative 
intervention systems under curr ent very high world market pri ces appeared difficult. Thus, 
considerations of the potential impacts of the va rious options focused on a sensitivity analysis 
under lower price levels. 
In brief, although the reduction of the interv ention price (option 1) would imply a real 
increase of competitiveness and market orientat ion, an effective reductio n of the intervention 
price appears difficult. Restricting intervention to zero for all feed grains (option 2) would 
allow a safety–net support to all grains without impacting on their competitiveness, but a 
combination with a tendering system (option 3)  would better reflect needs for intervention 
when prices are low as well as imply lowe r budget costs. This option has the further 
advantage of harmonising the intervention syst em to that of the other market sectors. 
As regards to set aside, under the current pr ice environment the impact of the baseline 
scenario would be negative in economic and so cial terms due to the lost opportunities for EU 
farmers. The withdrawal of the set-aside obligation (o ption 1) will allow a better response to 
market opportunities and will lead to a higher income for farmers and a simplification of the 
system, but there are potential risks of losing the environmental side benefits of set aside.  
The three alternative systems that were analysed , i.e. setting an environmental set-aside area 
(option 2), introduction of new GAEC features  (option 3) and the strengthening of RD 
environmental set aside (option 4) will bring environmental benefits, although to different 
extents. Option 2 will imply a lower response to markets, lower income to farmers and a 
significant increase in administrative burden and complexity, but higher environmental 
benefits. In the case of option 3 and 4, the economic impacts will depend on MS absorption of the relevant measures, as well as the extent of the environmental impact, which in any case 
 
EN 76   EN will be positive. In both cases the overall acceptability of the SPS to the wider public will 
increase. 
All proposed options for cereal  intervention and se t aside are not expected to have a 
significant impact on consumers because the transm ission from producer to retail prices is 
very limited. This is due to the very low shar e (4%) of agricultural raw materials on the final 
value of transformed products (bread , flour and other related products). 
 
EN 77   EN 8. SUMMARY TABLES  
8.1. Comparison between different options and thei r respective impacts – Cereal intervention 
☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS Option 0 – baseline Option 1 – Reduction of the 
intervention price Option 2 – Restrict intervention 
to zero for all feed grains Option 3 – Combination of 
option 2 and tendering system 
Economic With present outlook 
. 
If price were to drop, stocks of 
barley and possibly wheat 
could lead to budgetary costs 
/ Presently remote chances 
. 
Competitiveness and market 
orientation only in an 
environment of lower prices 
☺ Allows safety-net support to all 
grains without impacting on 
their competitiveness 
☺☺ Would better reflect needs for 
intervention when prices are 
low, and lower budget costs 
☺☺ 
Social . . or / depending on MS, and 
their relative degree of 
specialisation in cereals . . 
Environmental . . . . 
Administrative 
burden . . Small initially, but not under 
present high prices 
/ to . . 
Simplification . . . Harmonisation in all sectors 
☺☺ 
Other . Import duties to be changed  
/ Import duties to be changed  
/ Import duties to be changed / 
 
EN 78   EN 8.2. Comparison between different options and their respective objectives – Cereal intervention 
☺☺ respecting objective; ☺ possibly respecting objective; . neutral; / objective possibly at risk; // objective at risk 
OBJECTIVES Option 0 – baseline Option 1 – Reduction of the 
intervention price Option 2 – Restrict 
intervention to zero for all 
feed grains Option 3 – Combination of 
option 2 and tendering 
system 
Competitiveness . . / ☺☺ under low 
international prices . . 
Market orientation . ☺☺ . ☺ 
Environmental sustainability . / / under low prices . . . 
Budget costs . / / under low prices . ☺☺ ☺☺ 
Administrative costs . . initially // / then . . 
Simplification . . initially // / then . ☺☺ 
Vitality of rural areas . . . . 
Stabilisation of farmers 
incomes . . / / only under persistent 
low prices . . 
Transfer efficiency . . . ☺ 
 
EN 79   EN 8.3. Comparison between different options a nd their respective impacts – set aside 
☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS  Option 0 – Baseline Option 1 – Withdrawal 
of set-aside obligation Option 2 – obligatory 
environmental  
set-aside area Option 3 – New GAEC 
environmental features Option 4 – strengthen 
RD environmental 
set aside 
Economic If high prices persist, loss 
of opportunities for EU 
farmers 
/ Better response to markets; 
increased competitiveness 
☺☺ Lower response to markets; 
lower competitiveness 
// Impact depends on MS 
absorption of relevant 
measures 
. Impact depends on MS 
absorption of relevant 
measures 
. 
Social If high prices persist, loss 
of farm income 
/ Higher income with present 
market outlook 
☺☺ Impact on lowering farm 
income depends on extend 
of obligation  
. to / Increases acceptability of 
SPS to wider public 
☺ Increases acceptability of 
SPS to wider public 
☺ 
Environmental If high prices persist, 
set-aside entitlements could 
shift away from intensive 
farming  
/ Potential risks of losing 
environmental side benefits 
of set aside in some areas 
/ Environmental benefits 
increased (wider set-aside 
area) 
☺☺ Environmental benefits 
from GAEC standards 
depend on MS 
implementation 
☺ Environmental benefits 
from RD measures depend 
on MS implementation 
. to ☺ 
Administrative 
burden . Significantly reduces 
administrative burden 
☺☺ Significantly increases 
administrative burden, 
including of controls 
// Increases burden for most 
MS and farms 
/ Increases burden at MS 
level (reprogramming)  
/ 
Simplification . Entitlements merged 
☺ Complicates merging of 
entitlements and increases 
RD baseline 
/ Entitlements merged 
☺ 
Increases RD baseline  
/ Entitlements merged 
☺ 
Extent depends on 
implementation by MS 
 
EN 80   EN ☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS  Option 0 – Baseline Option 1 – Withdrawal 
of set-aside obligation Option 2 – obligatory 
environmental  
set-aside area Option 3 – New GAEC 
environmental features Option 4 – strengthen 
RD environmental 
set aside 
. to ☺ 
 
EN 81   EN 8.4. Comparison between different options and their respective objectives – set aside 
☺☺ respecting objective; ☺ possibly respecting objective; . neutral; / objective possibly at risk; // objective at risk 
OBJECTIVES  Option 0 – Baseline Option 1 – Withdrawal 
of set-aside obligation Option 2 – obligatory 
environmental 
set-aside area Option 3 – New 
GAEC environmental 
features Option 4 – strengthen 
RD environmental 
set aside 
Competitiveness / ☺☺ // . . 
Market orientation / ☺☺ // . . 
Environmental sustainability . to / / ☺☺ ☺☺ ☺ 
Budget costs . . 
/ under low prices . 
☺ under low prices . . 
Administrative costs . ☺☺ // / to . /  
Simplification . ☺☺ // / to . . 
Vitality of rural areas . . to ☺ ☺☺ . to ☺ . to ☺ 
Stabilisation of farmers 
incomes . ☺☺ / . . 
Transfer efficiency . . . . depends on MS 
implementation 
 
EN 82   EN D.B. THE  PHASING-OUT  OF MILK  QUOTAS 
1. BACKGROUND  
With the introduction of milk quotas in 1984, market support fo r the dairy sector 
remained essentially unchanged in the EU since the late 1990s. Reforms in 1999 and in 2003 decreased support prices with the aim of enhancing the competitiveness of the 
sector, and resulted in a better balance betw een internal and world market prices. But 
supply control through the milk quota system re mains to date the defining feature of EU 
dairy policies, prolonged with the 2003 reform until 2014/15. 
At the same time with the restricted suppl y environment in the EU, world markets are 
experiencing significant demand growth, driv en not only by stronger demand but also by 
a shift in demand towards higher value added dairy products
52. Part of this growth is 
reflected in the improvement of the EU mark et balance, and the recent strength in EU 
prices. But any additional EU supply response is not possible with the present system. 
2. PROBLEM DEFINITION  
In the light of buoyant internal and extern al demand, the remaining quota system is now 
restricting production expansion, as opposed to  the situation in 1984, when quotas were 
introduced as a response to overproduction. Q uotas hold back the sector from achieving 
the objectives of CAP reform since they st ill reflect concerns of two decades back, 
instead of responding to present opportunities.  They reduce market orientation because 
they distort farmers' response to price signals , and prevent efficiency  gains in the sector 
by slowing down restructuring. 
In the absence of a decision to extend th e national reference quantities beyond 31 March 
2015 the quota regime would effectively expire because the levy on excess production and the national reference quan tities would cease to exist.  Since dairy production is 
relatively capital intensive and investment decisions have to be take n in a longer time 
frame than most other sectors, an early st rategy would allow the sector to gradually 
adjust to a quota-free policy environment. 
3. O
BJECTIVES  
The analysis of alternative policy options of  the phasing-out of da iry quotas was assessed 
with respect to the fulfilment of th e following CAP reform policy objectives: 
• promoting competitiveness, market-orientation and sustainability; 
• contributing to the vitality of rura l areas and preventing land abandonment; 
• preserving types of farming which are importa nt for the protection or enhancement of 
the environment or for improving the quality  and marketing of agricultural products. 
                                                 
52 An in-depth analysis of market situation has been presented by the Commission in a report 
“Market Outlook for the Dairy Sector” COM(2007) 800. 
 
EN 83   EN 4. POLICY OPTIONS  
The policy options analysed here were all ba sed on the assumption that the logic of the 
present system has run its course and is no longer sustainable beyond its expiration. This 
assumption is supported by all previous majo r analyses on the outlook of EU and world 
dairy markets, which demonstrat e two things: that the aboliti on of the quota will result in 
significant gains for the EU dairy sector, but al so that certain regions  in the EU will face 
significant adjustment costs and environmental risks53. 
4.1. Option 1: quota extension 
This option envisages the continua tion of the quota beyond to provide a 
reference scenario for comparison with  the other options. In a sense, it 
corresponds to the extensi on of the quota system for analytical purposes. 
4.2. Option 2: quota expiry in 2015 
This option, which envisages no cha nge to the current policy framework, 
enables the assessment of any adjustments in the system to make it less restrictive. It corresponds to a "har d landing" for the sector, which will face 
abrupt adjustments. 
4.3. Option 3: phasing-out of quotas 
This option envisages the gradua l phasing-out of the quota regime 
("soft landing") through a nnual increases of the quotas, in order to reduce the 
restrictiveness of the quota regime by 2015. Two sub-options with different 
rates of phasing out are foreseen through the introduction of two annual rates of 
quota increase: 
4.3.1.  Annual increases of national quotas  by 1% from 2009/10 to 2014/15 
4.3.2.  Annual increases of national quotas  by 2% from 2009/10 to 2014/15 
Results of the above sub-options provide  information that indicates whether 
there is also need for technical adjustments that would enhance the smoothness of the transition (such as the reduction of the super levy, the transferability of 
quotas, the distribution of additional quotas, etc.). 
5. I
MPACT ANALYSIS  
The quota system restricts the level of produc tion and consequently affects the price of 
milk and the market situation for milk produc ts. The consequences of different options 
have been estimated using a quantitativ e econometric model on the basis of a 
Commission funded study 'Economic analysis of the effects of the expiry of the EU milk 
quota system'54. 
                                                 
53 The recent Scenar2020 is the latest in a se ries of analyses supporting this conclusion. 
54 The study was done independently from the Commission's estimation of the medium-term outlook 
for dairy. General trends regarding markets are sim ilar balance in both forecasts, but there are also 
 
EN 84   EN 5.1. Economic impacts 
5.1.1.  Extension of quotas 
In this scenario, since production is restri cted at the quota level, demand trends 
for fat and protein shape milk prices, lead ing to a slight production response in 
those MS currently producing below thei r quota level. This restriction in 
production results in a price increase of 7.2% in the period 2008–2015, or about 
1% per year (see table below).  
Table 14. – The impact of quota extension in the EU dairy market 
 Situation in 2015/16 (compared to 2008/09) 
EU-27 Price Supply Demand Exports Imports 
Milk +7.2% +0.7%    
Cheese  +7.3% +5.5% +5.8% +0.4% 0.0% 
SMP +12.0% –14.8% –5.2% –37.6% 0.0% 
Butter –3.9% –4.3% –2.8% –20.4% 0.0% 
Fresh +3.4% +7.1% +7.2%   
Source: "Economic analysis of the effects of th e expiry of the EU milk quota system", IDEI. 
Demand in cheese and fresh milk products show the strongest increases in the 
medium-term, while demand for bulk commodities such as butter and skimmed 
milk powder declines further. SMP price increases, but the price of butter falls (yet both stay above their intervention level). This situation strongly influences 
EU exports of milk products. Despite strong demand growth on world markets, 
cheese exports stagnate and the exports of SMP and butter decrease strongly. 
For producers, rising prices lead to highe r quota rent and income, but the same 
higher prices are capitalised in the value of quota, thus rendering quota 
expansion more difficult
55. This slows down efficiency gains and most of the 
investment would be spent on additiona l quotas, eroding much of the advantage 
of high prices. The less efficient remain locked in the production, quota system 
would have little incentive to orient  towards more competitive markets. 
                                                                                                                                                 
some differences in particular values due to di fferent assumptions used in the models (such as 
different product definitions). 
55 A quota rent is defined as the difference between the price under quota (higher than market price 
when quotas are binding) and marginal costs of production. 
 
EN 85   EN The quota system is also identified as one  of the main obstacles to increased 
competitiveness of the dairy processing industry because of limited access to raw materials, increased costs of pr oduction and lost opportunities to supply 
growing international markets
56. It is also administratively burdensome in terms 
of management and control. Finally, high prices represent a loss to the 
consumer, but analysis s hows this impact to be smaller than often thought 
because of the very low price transmissi on of farm prices to consumer prices. 
5.1.2.  Expiry of quotas in 2015 ("hard landing") 
In this scenario, the market developments  are similar to those presented in the 
extension scenario until the point of quota expiry in 2015/16. When quotas are 
lifted in 2015, EU producti on increases by 3.8% (compare d to the baseline) in 
order to match demand. The result is a strong price decrease of 8.2% with 
respect to the baseline in the first ye ar after quota expiry (see table below). 
Table 15. – The impact of quota expiry in the EU dairy market 
 Situation in 2015/16 (compared to baseline) 
EU-27 Price Supply Demand Exports Imports 
Milk –8.2% +3.8%    
Cheese –6.4% +1.4% +0.7% +12% 0.0% 
SMP –7.5% +20% +3.8% +79% 0.0% 
Butter –4.5% +8.5% +1.4% +106% 0.0% 
Fresh –2.7% +0.5% +0.5%   
Source: "Economic analysis of the effects of th e expiry of the EU milk quota system", IDEI. 
The impact from the sudden removal of quot a restrictions is very different on 
the milk sector of MS, and depends mostly on prices and production costs in a given MS.
57 Similar changes with milk produc tion and milk prices are also 
observed in dairy products (see table a bove). For higher value added products, 
changes are small, but are more pronounced for the commodity products, where production increases in both butter and especially SMP (compared to 2008). But 
while for SMP exports also increase since the world price is a bove the EU price, 
the price of butter quickly reaches the intervention level a nd is sustained only 
through export subsidies (this scenario a ssumes present WTO policies); this also 
explains the export surge compared to baseline
58. 
For producers, the moment of expiry cr eates a great uncertainty. In the period 
until 2014/15, the quota system would become  increasingly restrictive and the 
quota rent would considerably increase until the moment of abolition, making it 
difficult to formulate a clea r perspective and reasonabl e expectations about the 
                                                 
56 "Competitiveness of the European Food Industry: An economic and legal assessment", J.H.M. 
Wijnands, B.M.J. van der Meulen,K.J. Poppe (eds), Reference no ENTR 05/75 
57 See Graph A5 in Annex B, note 7 for details.  
58 With a DDA agreement and the abolition of e xport subsidies, the current price for butter 
intervention is unsustainable. 
 
EN 86   EN future of the sector. Restructuring coul d slow down before the quota expiry due 
to high prices, but this would evoke a st rong supply response at the end of the 
regime. Such a situation would be disruptive for processors, who depend on a steady supply of raw materials and have limited capacity to accommodate large production increase. For the consumers, on the other hand, this represents a loss 
due to high prices until a bolition, but also relatively inelastic demand for dairy 
products, means that a sudden drop in prices is of limited benefit.  
5.1.3.  Gradual phasing-out of dairy  quotas ("soft landing") 
By contrast to the previous scenario, the phasing-out of dairy quotas supposes 
gradual annual increases of the quota leve l to allow for production to respond to 
growing demand, and thus avoid the dras tic production increase and price drop 
at the moment of lifting quotas. The im pact on EU market developments was 
simulated with two scenarios: six a nnual increases in the quota level by 1% 
(scenario Q1) and by 2% (scenario Q2 ). Results on price and production are 
summarised in the following table. 
Table 16. – The impact of quota increase s on EU milk production and milk prices 
 2014/15 
(compared to 2008) 2015/16 
(compared to 2014/15) 
Milk Q1 Q2 Q1 Q2 
Price –0.6% –2.9% –2.7% –0.9% 
Production  +3.9% +4.9% +1.3% +0.6% 
Source: "Economic analysis of the effects of th e expiry of the EU milk quota system", IDEI. 
EU-27 production is projected to increas e annually by 0.7% in scenario Q1 and 
0.8% in scenario Q2, which attenuates to some extent the expected price 
increases. Figure 6 shows the expected path of milk prices and Figure 7 the 
corresponding path of milk producti on under all four analysed scenarios59. 
Figure 6: Comparison of milk pr ices under the four scenarios 
                                                 
59 MS responses vary depending on their competitiv eness. Detailed results for production and price 
responses are shown in Annex B, note 7. 
 
EN 87   EN 250255260265270275280285290295300
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020€/ mt
Baseline 1% gradual increase 2% gradual increase Exp ir y
 
Source: "Economic analysis of the effects of th e expiry of the EU milk quota system", IDEI. 
Figure 7: Comparison of milk pr oduction under the four scenarios 
135138140143145148150
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020mio mt
Baseline 1% gradual increase 2% gradual increase Exp ir y
 
Source: "Economic analysis of the effects of th e expiry of the EU milk quota system", IDEI. 
Milk prices remain relatively stable under scenario Q1, with some increase 
towards the end of the quot a, and a decline when quotas  expire. In scenario Q2 
the initial milk price decr ease is bigger but, at the end of the quota period in 
2014/15, price adjustment is also smoother.  In both scenarios, milk prices are 
 
EN 88   EN partly sustained by butter in tervention and subsidised sales; in their absence, 
milk prices would be around 1.5% lower60. 
The impact of both scenarios on dairy pr oducts is shown in the tables below. 
Market developments follow similar path s with the baseline scenario, indicating 
once more the potential problem that may exist with butter intervention in the absence of subsidised supply disposal. The problem is more acute with the 
higher quota increase scenario (Q2). 
Table 17. – The impact of quota ext ension on EU dairy products (Q1) 
 Situation in 2015/16 (compared to baseline) 
EU-27 Price Supply Demand Exports Imports 
Cheese  –5.4% +1.2% +0.6% +9.7% 0.0% 
SMP –6.2% +17.6% +3.2% +69.1% 0.0% 
Butter –4.6% +7.1% +1.5% +86% 0.0% 
Fresh –2.3% +0.4% +0.4%   
Source: "Economic analysis of the effects of th e expiry of the EU milk quota system", IDEI. 
Table 18. The impact of quota exten sion on EU dairy products (Q2) 
 Situation in 2015/16 (compared to baseline) 
EU-27 Price Supply Demand Exports Imports 
Cheese  –7.4% +1.5% +0.7% +11.4% 0.0% 
SMP –9.0% +20.7% +4.6% +77.8% 0.0% 
Butter –4.6% +9.2% +1.5% +116.7% 0.0% 
Fresh –3.5% +0.6% +0.6%   
Source: "Economic analysis of the effects of th e expiry of the EU milk quota system", IDEI. 
For the processing industry and cons umers, both scenarios of phasing-out 
present clear advantages with respect  to the abrupt quota expiry. Their 
difference is in the price path, which is cl early more stable with scenario Q2; but 
the same scenario puts more pressure on the existing market support mechanism for butter. 
5.1.4.  Other dairy policy instruments 
In both expiry and phasing out scenario s, the SMP price remains above the 
intervention level. However, in each scenario the butter price reaches the intervention level, triggering market m echanisms to prevent any further fall in 
                                                
 
60 During the phasing out of quotas, the quota value decreases at the end of the quota period by 
about 60% in Q1 scenario and 90% in Q2 scenario. 
 
EN 89   EN the butter price61; in 2015 in the 'expiry' scen ario, in 2011 with 1% quota 
increase and in 2010 with 2% quota increase. 
5.1.5.  Impact on international markets 
As milk is a perishable product, the principal dairy products traded on world 
markets are milk powders, butter and ch eese. In the quota continuation option, 
the net exports are reduced as producti on moves to higher value products and 
domestic demand increases, which results in higher world prices. The expiry of 
quotas results in relatively high increase of  exports and a significant decrease of 
world prices. The phasing out scenario fo recasts gradual increase of exports as 
milk production increases which attenuate s the world price developments and 
reduces the effect at the moment of e xpiry. Notably, as EU butter price reaches 
intervention level during the phasing out  period, export refunds are used, which 
result in lower world price (at the sa me time increasing the value of refunds 
required). 
5.2. Social impacts 
The evolution of income between 1998 and 2005 in EU-15 shows that on 
average milk specialised farms have a hi gher than average farm income, with an 
increasing trend (a similar situation is observed in EU-10). But quotas have not 
stopped the number of small farms from d eclining; only resulted in larger farms 
stagnating over the same pe riod (with their average size  still being considered 
small with international standards). 
The expiry of quotas will lead to expa nsion of the dairy sector, allowing 
producers and the processing industry to  benefit, with associated positive 
impacts on rural economies, for exampl e on employment. However, since the 
quota system has been ring-fenced at na tional (and often regional) level, quota 
expiry leads to restructuring of the milk production sector with potential 
implications for selected regions. 
In most dairy producing regions, more th an 90% of milk specialised farms will 
retain positive margins over variable costs with the price drop expected with the 
sudden expiry of quotas. But in a number of regions (around 15 %), over half of 
the farms with negative margins were in  that situation even before simulated 
price decrease, which is indicative of more  general trends in the dairy sector in 
those regions (see table belo w). In some regions, this may lead to restructuring 
of diaries, which are localised close to  production sources. (Section C indicates 
potential ways of addressing this issue in the discussion on a possible revision of 
Article 69). 
Table 19. – Regions most affected with costs with a price decrease 
                                                 
61 In the standard model simulations, butter (and SMP) prices are prevented by falling below the IP 
level by the means of export refunds and/or domestic disposal aids. 
 
EN 90   EN Regions/MS where farms with positive 
margins are between 80-90% Regions where farms with positive margins 
are below 80% 
Estonia, Latvia, Sweden, England-East (UK) Czech Republic, Malta, Slovakia, Brandenburg 
(DE), Sachsen (DE), Sachsen-Anhalt (DE), 
Thueringen (DE), Aquitaine (FR)  
Source: DG AGRI analysis based on FADN data. 
The FADN analysis shows that on aver age milk farms in mountainous regions 
in the EU15 receive higher prices, whic h compensate higher variable costs that 
they incur and allow for a higher margin  per t of milk than in other areas, 
however on average their production is lo wer. On the other hand, in EU10 the 
margin in mountainous regi ons is on average lower62. An analysis of the impact 
of price drop indicates that results for mountainous  regions would not differ 
strongly from overall results in EU15. The percentage of farms remaining with 
positive margins would be 95% in LFA m ountainous areas, compared with 96% 
overall. In EU10, the decrea se would be greater, howev er still 89% of farms 
would retain positive margins (as compared to 97% overall). 
The phasing out of quotas would smooth out  the price developments and allows 
for production increase, providing a stable framework for farmers and 
development opportunities for processors. The transformation period given by 
phasing out allows less competitive farmers to adapt to a gradually changing situation rather than face an abrupt pr ice decrease. Rather than reinforcing the 
tendency to exploit short term benefits of  market constraints before the expiry, it 
would encourage moving towards more remunerative product mix and adjusting 
the relationship with processing industr y. Gradual phasing out provides for 
production that is less uneven between member states than a sudden abolition and at the same time prevents the effect  of increasing of th e quota value before 
2015 due to rising prices. More over, a transitional peri od allows for more time 
and flexibility in adjustment of the sect or and the regime to better prepare for a 
no-quota situation. 
                                                
 
62 Impact on milk margins of a price reduction – Complement on mountainous areas, Agri-G3, 
D(2008) D3926. 
 
EN 91   EN Figure 8: Cumulative production growth under 1% scenario (compared to 2008) 
-2024681012141618
NL
ES
BL
HU
IE
AT
IT
FR
DKDE
FI
GR
PL
SE
EU7
CZPT
UK% change2011 2012 2013 2014 2015
STRONG SUPPLY RESPONSE
WEAK SUPPLY RESPONSE
 
Source: “Economic analysis of the effects of the expiry of the EU milk quota system”, 
IDEI 
Figure 9: Cumulative production growth under 2% scenario (compared to 2008) 
-202468101214161820
NL
ES
AT
IE
BL
HU
IT
FR
DKDE
FI
GR
PL
SE
EU7
CZ
UK% change2011 2012 2013 2014 2015
STRONG SUPPLY RESPONSE
WEAK SUPPLY RESPONSE
 
Source: “Economic analysis of the effects of the expiry of the EU milk quota system”, 
IDEI. 
 
EN 92   EN The price impact from the phasing-out of the dair y quotas should normally 
benefit consumers, as more supply leads to lower prices. Results from the study 
'Economic analysis of the effects of th e expiry of the EU  milk quota system' 
show that such a consumer gain at the EU-25 level would amount to about €3.7 billion in the year of quota removal (2015/16). However, while this benefit 
would certainly pass to the industry as a user of milk, the transmission of such 
price changes to the final consumer shoul d be expected to be rather small. 
As DG AGRI analysis has shown, the shar e of the agricultural product to the 
final food product is generally low, and so  is on the average the share of food to 
total consumption. The same analysis indicates that the EU average masks 
significant differences not  only among MS, but also among different social 
groups, with lower income consumers be ing much more vulnerable to price 
changes. In this case, the latter group w ould be more prone to  reap the benefits 
from lower milk prices)
63. 
5.3. Environmental impacts 
Two recent studies have looked into the two main processes that influence the 
environmental impacts of dairy production64. Their conclusions indicate that 
policy in itself may not al ways be the main factor. 
These studies identified the following linkages between environmental 
indicators and policy-related factors that  could be influenced from the phasing-
out of dairy quotas: water quality  (from overstocking), soil protection  (from 
increased area under forage crops), biodiversity  (from intensive production 
methods), and emissions  of ammonia and greenhouse gases (from herd size and 
production methods). In addition, the loss of  dairy production in more marginal 
areas can be expected to lead to  a loss of related biodiversity. 
The continuation  of the quota regime constr ains production, increases 
specialisation and yields, and results in decreasing number of dairy cows by 
about 6.7% between 2008 and 2015 (or 1.6 million dairy cows). This leads to lower ammonia emissions of the dairy he rd (to a level of 652 Kt NH3 and lower 
GHG emissions (to a level of 58 Mt CO2 equivalent) in the last year of current quota arrangements
65. 
The expiry  of quotas results in rapid pr oduction growth with strong 
concentration and intensification, as pr ices decrease and cost efficiency is 
crucial. There are areas where margina lisation is a threat, while in others 
production responds and specialisation incr eases. At the moment of abolition the 
number of dairy cows increases by about  2% (about 0.5 million cows), but still 
remain by 3.3% below 2008 level. This  would also cause a strong one-off 
                                                 
63 See  "The impact of developments in ag ricultural prices for consumers". 
64 Environmental impacts are evaluated mainly on the basis of the study "Evaluation of the 
environmental impacts of CAP measures related to the beef and veal sector and the milk sector" 
and a supplementary study "Evaluation of the environmental impacts of milk quota". 
65 These estimates are based on Commission calculatio ns using data on emission factors in the 
GAINS model (http://www.iiasa.ac.at/w eb-apps/apd/gains/EU/index.login). 
 
EN 93   EN increase in ammonia and GHG emissions a nd the concentration effect could also 
lead to more nitrogen pressure. After th e expiry, the number of cows is then 
gradually reduced as production stabilis es and yield grows. By 2020, in all 
expiry and phasing out scenarios the nu mber of cows is reduced by 6.2% as 
compared to 2008 (1.5 million cows) and ammonia and methane emissions would reach respectively 674 Kt and 57 MtCO2 equivalent. The increase of 
GHG (methane) emissions compared to ba seline represents roughly 0.2% of the 
reduction needed to meet the 20% GHG reduction target in 2020 for the overall 
EU. It would also represen t in 2020 an increase of less than 1% of total NH3 
emissions (from all NH3 sources), which is well below the uncertainty surrounding the ammonia estimates. 
The phasing out  scenario results in a smoothe r process of adjustment thus 
limiting the extreme concentration and marginalisation effects. Relocation of production is less dramatic in this case and the number of cows continues to 
decrease, albeit at a lowe r rate than under the stat us quo, but by 2015 the herd 
size equals that of the e xpiry scenario. The number of  cows falls between 2008 
and 2015 by 3% in Q1 scenario (0.7 million cows) and 2.7% in Q2 scenario 
(0.6 million cows). This would lead to am monia emissions of a level of 673 Kt 
in Q1 and 679 Kt in Q2. As for GHG em issions, in the last year of quota they 
decrease more in Q1 scenario (2.3%), wh ile in Q2 they slightly increase in the 
first years with overall decline by 1.5% over the period. The gradual increases prevent the strong uneven production gr owth throughout the EU by allowing for 
a more gradual transition and reduce the very strong intensification pressure of 
the expiry option, thus easing the associated nitrogen pressure. 
Table 20. – Impact on ammonia and GHG emissions 
 Ammonia emissions (Kt) GHG emissions (MtCO2 equivalent) 
Option 2010/11 2014/15 2020/21 2010/11 2014/15 2020/21 
Continuation 657 652 643 60 58 55 
1% increase 665 673 674 60 59 57 
2% increase 671 679 674 61 60 57 
Expiry 657 652 674 60 58 57 
Source: Commission. 
6. SUPPLEMENTARY ANALYSIS  
The study, on which the quantitative analysis was based, was initiated before the most 
recent EU and world market price devel opments and the Commission proposal to 
increase for a 2% quota increase in 2008. A complementary analysis was carried out by 
DG AGRI with the OECD/AGLINK model, inco rporating those factor s in the baseline. 
The most recent DG AGRI baseline was used as  the reference scenario, and the following 
adjustments to the above scenarios were  introduced: no quota increase in 2009/10, 
followed by annual increases of 1% be tween 2010/11 and 2013/14,  no increase in 
 
EN 94   EN 2014/15 and no quotas thereafter. As such, th e cumulated quota increase (including the 
2% increase in 2008/09) approach es that of scenario Q1. 
Results in table 21 indicate that by the end of the phasing-out period (2014) milk 
production would increase by 2.2% and the pr ice decline by 4.9% below the baseline 
level. With respect to present price levels, however, the milk price remains fairly stable 
during the phasing-out period, declining by only 1% from its 2008 level. Quota expiry in 
2015 would lead to a further production increase of 1.1 % and a price drop of 2% 
compared to the respective 2014 levels. 
Regarding processed commodities, the produ ction of higher value added products 
exceeds baseline levels, responding to both domes tic as well as external demand growth. 
SMP production increases by almo st 6%, but butter productio n grows only slightly above 
its baseline level (0.5%) by 2014. For both products EU prices remain above intervention 
level throughout the phasing-out period. 
Table 21. – The impact on the EU dairy market in the phasing-out period 
 Situation in 2014 compared to the baseline 
 Price Production Consumption Exports Imports 
Milk –4.9% +2.2%    
Cheese  –3.3% +2.8% +2.1% +14.1% 0.0% 
SMP –6.7% +5.8% +4.5% +27.2% 0.0% 
Butter –0.7% +0.5% +0.1% +13% 0.0% 
Fresh  +1.7%    
Source: DG AGRI simulation based on OECD/AGLINK model. 
 
EN 95   EN Figure 10: Milk production compared to baseline 
140143145148150153155158
2008 2009 2010 2011 2012 2013 2014 2015 2016mio mt
Baseline 1% increase 2010/11-2013/14
 
Source: DG AGRI simulation based on OECD/AGLINK model. 
Figure 11:  Milk price compared to baseline 
280285290295300305310315320
2008 2009 2010 2011 2012 2013 2014 2015 2016€/mt
Baseline 1% increase 2010/11-2013/14
 
Source: DG AGRI simulation based on OECD/AGLINK model. 
 
EN 96   EN 7. CONCLUSIONS  
In the extension option , constrained production with gr owing demand increases milk 
price by 7% between 2008 and 2015 period. Market orientation and competitiveness of producers and processors is hampered. 
In the expiry option , when quotas are lifted in 2015/16, production jumps by 3.8% to 
match demand, causing a strong price decrease of 8.2% in the first two years after the 
quota expiry. 
Price declines and pr oduction responses are smoother under both phasing out options , 
but the extent of ad justment differs. 
– When the quota incr eases by 1% annually,  production increases  by 1.3% after the 
quota expiry while pri ce decreases by 2.7%. 
– When the quota increases by 2% annually,  production increases by 0.6% and a price 
decreases by 0.9%. 
In both phasing out scenarios, the butter price falls to its intervention price level (in 
2011/12 with the 1% scenario, in 2009/10 with the 2% scenario, immediately after the 
quota expiry). Model simulations assumed th at exports refunds would be needed to 
sustain butter at the intervention price level.  A sensitivity analysis indicates that the 
effect of the assumption of no export refunds would be to reduce the average milk price 
by an additional 1.5%. 
The end result for the expiry and phasing out options in terms of market balance is the 
same. However the transitional process affect s the social and environmental aspects. A 
smooth transition in the phasing out scenarios prevents rapid restructuring and allows 
preparing and adjusting accompanying measur es to the potential problems as they 
become apparent. 
Consumers would benefit only partially from  the price decrease that would follow the 
implementation of options 2 and 3, although opt ion 2 should bring the greatest benefits 
since prices are expected to  decrease at a higher rate. 
The decrease in prices foreseen in the various  options is expected to be only partially 
transmitted to retail prices, given that the share of agricultural raw materials on the processed dairy products is 39%. The extent of price transmission will also depend on other factors (food consumption structure in each MS, concentration and segmentation of 
supply chain, marketing strategi es of the retails sector). 
A complementary analysis was conducted, in corporating more recent world market 
developments and the recent 2% quota increase in the baseline, with a scenario of annual 
1% quota increases between 2010/11 and 2012/13. In  the last year of quota, production 
would increase by 2.2% and price would fall  by 0.8% compared to 2008 (2.2% and 4.9% 
respectively, compared to baseline). When  quotas expire, production is anticipated to 
increase by further 1.1% with an additiona l price decrease by 2.1%. Both EU butter and 
SMP prices would remain a bove the intervention level. 
 
EN 97   EN 8. SUMMARY TABLES  
8.1. Comparison between different options and their respective impacts – milk quotas 
☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS  Option 0 – Quota continuation Option 1 – Quota expiry in 2015 Option 2 – Quota phasing out 
Economic Higher prices, but increased costs 
and reduced market opportunities 
// Strong restructuring post-2015, but 
disadvantages of quotas until 2015 
delay benefits from markets 
☺ Smooth adaptation of sector with 
"soft landing" allows increased 
benefits from markets 
☺☺ 
Social Continued production in less 
competitive areas 
☺ Strong production increase and price 
decline 
// Transition allows less competitive 
areas to adjust more smoothly 
☺ 
Environmental Continuation of decline in milk 
cows herd 
☺ 
some pressure from concentration 
/ Strong restructuring of sector with 
concentration in regions and 
marginalisation in other 
// Smoother restructuring of sector 
with gradual decline in herd, less 
concentration and marginalisation 
☺/. 
Administrative Heavy administrative and control 
costs of the system continue 
// Administrative burden goes with 
expiry of quotas 
☺☺ Administrative burden goes with 
phasing-out of quotas 
☺☺ 
Simplification Complex system 
// Lifting of constraints with expiry of 
quotas 
☺☺ Lifting of constraints with phasing-
out of quotas 
☺☺ 
 
EN 98   EN ☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS  Option 0 – Quota continuation Option 1 – Quota expiry in 2015 Option 2 – Quota phasing out 
Other . . . 
 
EN 99   EN 8.2. Comparison between different options and th eir respective objectives – milk quotas 
☺☺ fully respecting objective; ☺ partially respecting objective; . neutral; / moving away from objective; // putting at risk objective 
OBJECTIVES  Option 0 – Quota continuation Option 1 – Quota expiry in 2015 Option 2 – Quota phasing out 
Competitiveness // ☺ ☺☺ 
Market orientation // ☺ ☺☺ 
Environmental sustainability ☺ / ☺/. 
Budget costs ☺ . to / . to / 
Administrative costs // ☺☺ ☺☺ 
Simplification // ☺☺ ☺☺ 
Vitality of rural areas ☺ / ☺ 
Stabilisation of farmers incomes ☺ / ☺ 
Transfer efficiency . . . 
 
EN 100   EN D.c. OTHER SUPPORT SCHEMES 
1. BACKGROUND  
Products covered in this note benefit from direct support, industry aid or both. Although 
of different origin and justification, all these measures have a common feature that 
support is granted to sectors of limited contribution to th e total value added of EU 
agriculture, but equally they represent s ectors whose regional importance could be 
significant. 
Table 22. – Examined sectors66 
 Direct aid Industry aid 
Nuts Yes – 
Rice Yes – 
Energy crops Yes – 
Protein crops Yes – 
Flax and hemp optional partial coupling Yes 
Potato starch Yes Yes 
Dried fodder – Yes 
2. PROBLEM DEFINITION  
The 2003 Reform continued the shift from product to producer support through the 
introduction of the decoupled Single Payment Scheme. This was done in order to encourage competitiveness and market orientation and at the same time increase the efficiency of income payments.  
Decoupling introduces flexibility in the choi ce of producers. Farmers will continue to 
produce where it is profitable, and adapt th eir production to the market or change to 
alternative products where it is adequate, while they are still obliged to keep  the land in 
good agricultural and environmental conditions  in line with cross-compliance rules. 
Overall, decoupling leaves the producer at least as well o ff as before, and most likely 
better off as a result of production flexibility and market orientation. With 90% of aids 
decoupled, farmers receiving coupled aid are less  oriented to markets and more limited in 
their production choices. 
However, the continuation of coupled suppor t in certain sectors is explained by: 
• the need to ensure steady supply to the processing indus try and thus avoid negative 
social and economic consequences of th e implied restructuring in cases where 
production is no longer profitable; 
• the need to sustain a certain minimum level of specific production to avoid consequent 
social problems or environmental problems; 
                                                
 
66 The durum wheat quality premium is anal ysed together with  partial support. 
 
EN 101   EN • the need to develop a partic ular production type consid ered desirable for economic, 
environmental or social reasons. 
The Health Check review poses the question of  whether coupled support in those sectors, 
despite the overall orientati on towards full decoupling, is  still pertinent. Are they 
fulfilling their role or are there other more targeted policy instruments, which may take 
on this role, as payments are decoupled. 
3. OBJECTIVES  
The following policy options were analysed, and results were assessed based on whether 
these options met the following objectives: 
• fulfilling the principal object ives of the 2003 CAP Reform: competitiveness, market 
orientation and sustainability, 
• simplification of support scheme, 
• contributing to vitality of rural areas and preventing land abandonment, 
• preserving specific types of farming whic h are important for the protection or 
enhancement of the environment or of social  importance to rural regions and allowing 
smooth restructuring of downstr eam industries, where they ar e crucial for the vitality 
of rural areas. 
4. POLICY OPTIONS  
Table 23. – Analysed policy options for support schemes67 
Option Degree of decoupling Description 
0 Status quo No change in the present set of measures 
1 Full decoupling Inclusion of all support in the Single Payment 
Scheme (except for energy crops premium which would be abolished). 
2 Targeted selective decoupling Case-by-cas e analysis to identify if, and in which 
sectors, the shift of partially coupled support to 
full decoupling could create social, regional or environmental problems. 
                                                 
67 The following sectors are excluded from this analys is because they have been recently reformed 
or are included elsewhere in the present analysis : fruit and vegetables, tobacco, sugar, cotton, 
payments for outermost regions. 
 
EN 102   EN 4.1. Timing and transition to full decoupling options 
Options 1 and 2 above do not exclude th e possibility of transition to full 
decoupling, and a gradual phasing out pro cess could be foreseen to attenuate 
impacts. Specific sectors may require specific solutions, and measures under 
rural development or measures such as  the previously mentioned Article 69 
(section C) could tackle the issues of  providing alternatives, diversification, 
infrastructure development and rest ructuring to prevent abandonment and 
adverse effects on processing industries  that were behind partially coupled 
payments and environmental impact in specific areas. 
The issue of transition to full decoupli ng is more pertinent for aids to the 
industry than aids to farmers. For th e latter's point of view and income 
prospects, the risk of pr oduction decline is best ma naged with full decoupling. 
5. IMPACT ANALYSIS  
5.1. Economic impacts 
The assessment of the economic impacts from  a move towards full decoupling was based 
on interrelated analyses on a specific sector’s market and income outlook and on a farm’s reaction to further decoupling.  
5.1.1.  Status quo 
The coupled payments are an income support instrument, but being linked to 
particular products, they influence produc tion decisions. In fact, the principal 
justification for retaining them rega rdless of an overall policy move to 
decoupled Single Payment Scheme has been  to increase or maintain a certain 
level of production for particular econom ic, social or environmental reasons. 
This implies that they have to provide incentive for farmers to grow particular crops, although within the restrictions imposed by ma ximum guaranteed areas or 
quantities (e.g. quotas).  
To what extent they can or need to pr ovide such an incentive depends on market 
and policy developments regarding those sectors. Where market prospects are 
positive or other policy instruments are us ed, the role of a coupled payment in 
production decisions diminishes. Where the prospects are negative, the role of 
coupled payment increases, although it is  very unlikely to solve the underlying 
problems which remain. 
In the feed market, both protein crops and dried fodder  are already of limited 
significance as plant protein sources, a nd the developments of the feed market 
with increasing feed efficiency, sl ower increase in meat production and 
availability of cheap prot ein-rich residuals of biof uel production would further 
contribute to marginalis ation of both products. 
Recent policy developments have in turn  overshadowed the role of the aid in 
production of energy crops . Most of the confidence in  the sector stems from 
 
EN 103   EN political targets and various other instru ments, but also market developments 
and improvements of the supply chain and related infrastructures. 
The recent developments on rice markets are positive as well. Since the 2003 
reform, the competitiveness of the sector increased, with stable production and falling stocks in the view of increasing demand, due partly to enlargement of the 
EU. The nuts production has also been stable. 
The future of industrial crops (flax and he mp for fibre, starch ), where links with 
the processing industry are crucial, al so has a positive outlook. The demand for 
flax for long fibre has been rising and production of hemp shows an upward 
trend. Also, the demand for starch  has grown over time, at  an annual rate of 
slightly over 5%. However, since the st arch potatoes can onl y be grown within 
the quota limits, it prevents the potato starch  sector to participate in the growth 
of the starch sector. 
5.1.2.  Full decoupling
68 
While the producers’ income does not cha nge with the inclusion of the payment 
into the SPS, the main effect of decoupling is that the payment no longer is part of calculating the profitability  of particular production. This choice is  guided by 
market demand and so it benefits consumers. At the same time, it influences the 
production decisions and so affect s the level of the specific. 
The analysis of comparison between ma rgin over variable costs with and 
without the coupled payment allows exam ining this effect. There is a high 
probability of abandoning production when ma rgins do not cover costs, but even 
if they do there is a chance of switchi ng to more profitable crops with higher 
margins. For the farmer it signifies the possibility to adapt better to the market 
requirements and benefit from most pr ofitable production and so higher market 
receipts. 
In the nuts and starch potato sectors the margins without coupled payment 
remain high
69. The decoupling of aid will also have small impact on profitability 
of hemp  production. 
In the case of aid for the energy crops  the examination of existing studies shows 
that the premium has been effective as  promoting energy crops only in very 
limited circumstances. Similarly in case of  protein crops, the ai d has not been an 
incentive for production. 
There is a high possibility of switchi ng to other crops in the case of flax and 
rice. The decoupling would have the stronge st effect on the dried fodder sector, 
as the profitability of production is str ongly relying on aid. The value added of 
                                                 
68 The conclusions of this part are common wh ether one looks ate the sector level, or the 
microeconomic level of the farm. 
69 However, the stakeholders' view has stressed that the margin will not be high enough to sustain 
production. 
 
EN 104   EN the dried fodder  sector is estimated at 25–30 % of the revenues (about 550 
million EUR), which roughly equals the budget of the aid. 
5.1.3.  Targeted selective decoupling 
Where production pattern changes will have  a greater social or environmental 
consequence, a targeted support could be granted to sustain a certain production 
level, such as in the case of flax  or rice. Its success depends on good 
understanding of needs and ta rgeting of assistance. Nota bly in the case of dried 
fodder a continuation of aid will not allo w the restructuring of the sector and 
will subsidise a production that is not viab le economically and of little relevance 
to the feed market.  
5.1.4.  Other 
In terms of administrative impact, th e decoupling reduces administrative and 
control burden, that is excessive compared to the benefits of the scheme. It also 
allows to treat the payments as WTO "green box". 
5.2. Social and environmental impacts 
The decoupling of direct aid would have no e ffect on the level of income for producers, 
as they would continue to receive the Si ngle Payment. However, in specific cases a 
minimum level of production c ould be crucial in regions wi th few economic alternatives 
or to ensure a steady supply to the processi ng industries. This may have important social 
consequences, especially in areas highly dependant on a given production in terms of 
employment, but also growth potential of the region. 
Indications about the impact of the 2003 CAP reform on employment have been explored 
in an ongoing project "The Impact of CAP Re form on the Employment Levels in Rural 
Areas" within the sixth RTD framework programme70. Significant diversity of regions 
throughout the EU means that the same measures  can cause different impacts in different 
regions, while it is difficult to identify th e exact causality of su ch measures. There is 
some indication, however, that decouplin g and support price cu ts induce a profit 
maximising behaviour in the farming sect or and increase technical efficiency. 
Notwithstanding the above, growth in a part icular sector may still lead to reduced 
employment, albeit promoting more efficient,  often younger, farmers and thus increasing 
the quality of labour. Rural development m easures reduce employment outflows, support 
structural changes and create new job opportu nities by supporting farm diversification 
and aiding small business to exploit rural location by using new technology. 
The potential social impacts described above  could be reduced if  the decoupling is 
introduced gradually with a certain transitio nal period that would allow the processing 
industry to adjust to new market conditions. 
                                                 
70 The Impact of CAP Reform on the Employment Levels in Rural Areas, CARERA (con # 022563), 
coordinated by Aristotle University of Thessaloniki. 
 
EN 105   EN Table 24. – Main social an d environmental impacts 
Option Social impact Environmental impact 
0 In sectors with good economic prospects, the 
aid has limited social impact. In the less profitable sectors, the aid forces farmers to maintain less remunerated production but it 
sustains the downstream industry. In the short 
term it benefits employment, but in the longer terms prevents restructuring and long term 
viability. Generally, minor environmental impacts as 
most crops concerned are planted in rotation regardless of the premia. 
Of particular significance are the sectors of 
rice (water management and as substitute wetlands) and, to a lesser degree, nuts (may 
have some impact on erosion and 
desertification) sectors. 
1 Improved income support transfer for farmers 
in all sectors and possibility of more market 
oriented production decisions and higher 
market receipts. The analysis of margins 
indicates that abandonment of production is 
not likely. 
Decoupling will have an impact on processing 
industries, especially for flax (currently about 
4000 jobs) and dried fodder (currently about 3500 jobs) and potato starch (currently about 
4000 jobs) that will require rationalisation of 
production.  For most of the sectors overall environmental 
effects will be marginal, as farmers continue 
to produce crops or switch to alternatives. 
Where production would be abandoned, cross compliance rules have to be respected. The 
particular benefits of rice cultivation in some 
areas may be lost. The reduction of industrially dried fodder will have a positive 
impact. 
2 Keeping coupled support only where it is 
found necessary and bene ficial, social impacts 
are minimised, especially with respect to farm impact. This option minimises any potentially 
negative impacts by retaining support where its removal would imply high environmental costs. 
6. CONCLUSIONS  
The status quo  option contradicts the 2003 CAP reform path in terms of competitiveness, 
market orientation and simplification of the support scheme. Full decoupling  would have 
a positive impact on farm income in most regions due to higher transfer efficiency of direct support, it could put at risk production in  certain sectors in specific regions where 
local production is vital to ensure the viabil ity of local agri-food chain and to preserve 
the environment. The application of Article 69 and allowing transitional periods would maximise the benefits from full decoupling, while at the same time maintaining the 
overall positive social and environmental imp acts of coupled support in fragile regions of 
high environmental value (better than retain ing coupled payments in certain sectors). 
 
EN 106   EN 7. SUMMARY TABLES  
7.1. Comparison between different options and thei r respective impacts – other support schemes 
☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS  Option 0 – baseline Option 1 – full decoupling Option 2 – targeted selective 
decoupling 
Economic Farmers depend on production to receive 
support 
// Farmers benefit from stable income 
support and have freedom in production 
decisions 
☺☺ Where coupled support remains, farmers 
still face constraints 
/ 
Social Positive for regions, where a large role 
of production and processing dependant 
on aids 
☺ 
Neutral where support does not influence 
the sector 
. Short term employment impacts in 
regions with significant share of 
processing depending on production-
linked support 
/ 
Permits long term adjustment to more 
profitable production 
☺ Could reduce employment risks in 
regions with significant share of 
processing depending on production-
linked support 
☺ 
Prevents long term adjustment to more 
profitable production 
/ 
Environmental Rice ☺ 
Dried fodder // 
Other sectors . Rice / 
Dried fodder ☺☺ 
Other sectors . Could prevent potential negative effects 
in rice areas 
☺ 
Administrative Complex administrative and control 
system // Inclusion in the SPS 
☺☺ Complex administrative and control 
system // 
Simplification Detailed and complex systems run in 
parallel with main CAP 
// Better transfer efficiency  
of support to farmers 
☺☺ Where applied, different systems would 
continue running in parallel 
/ 
Other .. All coupled support transferred  
to Green Box ☺☺ Part of the coupled payments  
transferred to Green Box ☺ 
 
EN 107   EN 7.2. Comparison between different options and their respective objectives – other support schemes 
☺☺ fully respecting objective; ☺ partially respecting objective; . neutral; / moving away from objective; // putting at risk objective 
OBJECTIVES  Option 0 – status quo Option 1 – full decoupling Option 2 – targeted selective 
decoupling. 
Competitiveness // ☺☺ / 
Market orientation // ☺☺ / 
Environmental sustainability Rice ☺ 
Dried fodder // 
Other sectors . Rice / (unless remedied by Art. 69) 
Dried fodder ☺☺  
Other sectors . Could prevent potentially negative 
impacts only in some rice areas 
☺ 
Budget costs . . . 
Administrative costs // ☺☺ ☺ 
Simplification // ☺☺ ☺ 
Vitality of rural areas ☺ to . (varies by sector) ☺ to / (varies by sector) ☺ to . (varies by sector) 
Stabilisation of farmers incomes ☺ ☺☺ ☺ 
Transfer efficiency // ☺☺ ☺ 
 
EN 108   EN D.d. RISK AND CRISIS MANAGEMENT 
1. BACKGROUND  
While business risk is inherent in all economic activity, certain characteristics of 
agricultural production make it pa rticularly fraught with un certainty. Firstly, the amount 
and quality of output in agriculture that will re sult from a given set of inputs are typically 
not known with certainty, due to uncontrollabl e elements, especially weather. Moreover, 
there are long production lags, due to the bi ological processes on which agricultural 
production is based. Production decisions have to be taken long in advance with limited knowledge of final outcome and changing mark et situation due to high price volatility 
(due to typical features of agricultural markets: large number of competitive producers, 
relatively homogenous output  and inelastic demand). 
Price risks, stemming from variation in ou tput or input prices , and production risks, 
mainly from variation in yields but also fr om animal diseases, are considered the main 
sources of risks that farmers face. Some of th ese risks are easier to identify and predict, 
and therefore can be managed better by ex-ante  actions of farmers (on-farm strategies). 
Others are less predictable and require ex-post  reactions. 
Within the CAP, several measures are availabl e to deal with risks. The CAP now mainly 
relies on the SPS as an income stabilisation tool, by providing farmer s with fixed regular 
payments. Price support at safety net levels ex ists for the main sectors when farmers face 
situations of low prices. Limited climatic ri sks are usually addresse d by insurances which 
are available to most EU farmers. MS also have the possibility of giving state aid to 
respond to crises
71. Measures to manage sanitary cr ises are harmonised at EU level by 
animal health and feed/food strategy legislation and the EU Veterinary Fund. Rural 
Development measures also offer risk mana gement tools, for example measures aiming 
at mitigating natural disasters and climate ri sk, measures for training farmers in risk-
reduction strategies, measures for supporting dive rsification, or the possibility of using 
advisory services for risk management72. 
The 2003 CAP reform provided for a modified  system of farm income support to 
farmers, decoupled from production. On that  occasion, the Council gave mandate to the 
Commission “to examine  specific measures to address risk s, crises and natural disasters 
in agriculture.”  In March 2005 the Commission issu ed a Communication on risk and 
crisis management in agriculture, in which three options were put forward for discussion: 
a) subsidies on insurance premiums, b) a ssistance in setting up mutual funds, c) the 
provision of basic coverage against income  crises. In the subsequent discussion the 
Council did not indicate a preference for any of the options. However, a broad consensus 
emerged with regard to the conditions e ssential for the implementation of any new 
instrument: 
                                                 
71 The de minimis  level was recently increased from €3 000 to €7 500 over a 3 year period per farm. 
72 A list of possible measures available under the current Rural Development policy is provided in 
note 9 of Annex D.  
 
EN 109   EN • the introduction of new tools, and the relate d financing rules, must not undermine the 
operation of the instruments already existing at national level, e.g. insurance against 
natural disasters; 
• the new measures must comply fully with the "green box" criteria as defined by the 
WTO; 
• although public financing may be essential,  especially for the establishment and 
smooth start-up of new tools, joint responsib ility and therefore a financial contribution 
from agricultural producer s is also essential. 
Furthermore, the provision in the proposal for a Regulation on support for rural 
development, allowing financing of ongoing tr aining measures with a view to improving 
farmers' grasp of individual risk manage ment strategies, was considered by the 
delegations to be very useful. 
2. PROBLEM DEFINITION  
Both production and price risks cause variabil ity in farmers’ income and, as such, are 
relevant to agricultural policy in the view of  the CAP objective to aim at a fair standard 
of living and income stability for the agricultural community.  
The decoupling of aid in the 2003 reform implied more freed om to farmers with respect 
to their production decisions, and allowed them  to be more market-oriented. One result 
of the increased market orientation though, is that farmers are in a new situation where 
they individually have to manage risks more  actively and make use of tools and practices 
which reduce their risk. 
Moreover, the negative outcomes of risks that  farmers are exposed to are increasing in 
intensity due to the effects of climate change . Hence, access to information and tools that 
dampen negative consequences of climatic a nd price risks, without creating disincentives 
to follow market signals, are therefore more and more important to farmers. 
Public support is often instrumental in a ssuring the availability and encouraging the use 
of risk management tools by farmers. At th e same time, given the heterogeneous nature 
of risks, the scope of the EU role should be clearly defined. Current CAP market and 
income support contribute to the stability of income, but they do not explicitly target the 
variability, but rather the level of income. While state aids are permitted for risk management measures and are in place in se veral MS, there are shortcomings to the 
current, fragmented solution, such as the lack of transparency between MS, the 
complexity of the systems applied and differences in accessibility for farmers throughout Europe. 
3. O
BJECTIVES  
The objective of assessing the possible inclusio n of additional risk management tools in 
the CAP within the scope of the HC is to iden tify the best approach to deal with risk and 
crisis management. Such an approach should c ontribute to the stabil ity of farm income 
and should not lead to excessive budgetary co sts. Furthermore, the administrative burden 
that any instrument implies must be weighted against the additional benefits that such an 
instrument could provide.  
 
EN 110   EN 4. POLICY OPTIONS  
The following list of options for risk management were examined to assess their 
effectiveness to deal with three different t ypes of risk: price risk s, production risks and 
animal disease risks. 
4.1. Option 0: status quo 
This option is used as the baseline, considering that maintaining the current 
policy framework relating to risk and crisis management reflects the fact that the 
2003 CAP reform provides suffici ent tools to manage risk. 
7.3. Option 1: EU-wide framework 
This option envisages intr oducing a new EU-wide scheme, using one or several 
of the methods described in the 2005 Communication (insurance premium 
subsidies, mutual funds and basic covera ge against income cr isis). This option 
has to take into account the conditions set by the Council: no t interfering with 
existing instruments at national level, compliance with WTO green box criteria 
and joint financial respon sibility for producers. 
7.4. Option 2: enhanced role of risk ma nagement in existing CAP instruments 
This option envisages encouraging a nd strengthening risk management 
techniques within the current CAP instru ments, which can be targeted to match 
the diverse conditions thr oughout the EU. This could be done through allocation 
of modulated funds (section E.b) to Rural Development measures aimed at risk 
management, and/or through introducing more flexibility in Article 69 (as 
described in section C.a). 
5. IMPACT ANALYSIS  
When considering the policy options for ri sk management, and bearing in mind the 
objective of contributing to income stabilit y for the agricultural community, it is 
important to be aware of the main features of  the evolution of farm income variability in 
the EU. Firstly, farm incomes vary widely both between MS and within MS. Farm incomes are also quite unstable. On aver age, each year between 1998 and 2003, more 
than half of all EU-15 farms (54%) expe rienced a drop in income; each year over a 
quarter (about 28% of farms in EU) incur losses greater than –30%
73. However, in most 
MS (except, notably, the UK and Ireland) the share of farms with negative income 
variations has fallen compared with the early 1990s, even if  an increase occurred in 2002 
and 2003. This would indicate that, as direct payments have increased, income stability 
has improved.  
                                                 
73 See note 9 in Annex D for details. 
 
EN 111   EN 7.5. Option 1: EU-wide scheme 
7.5.1.  Subsidies of insurance premiums 
Insurance provides an alternative to public ex-post  compensation payments for 
losses caused by natural disasters at EU and national or regional level. Certain 
MS have already established national schemes to encourage farmers to obtain 
insurances.  
Budgetary costs 
An external study looked into four types of insurance: income insurance, yield 
insurance for arable crops, area index in surance for cereals and yield insurance 
on fruit and vegetables and the costs s ubsidising 50% of premiums through an 
EU-wide scheme. The results are summari sed in the following table, with 
varying assumptions on the premium ra te and the uptake (p enetration level) 
revealing that the budget costs for subsidising insurance premiums for an 
EU-wide scheme would be substantial74. 
Table 25. – Budget costs for subsidising premiums for some insurance 
programmes options at EU level 
 Premium rate Penetration 
level Total premium 
value 
(€ bn) Subsidies 
(€ bn) if 50% 
of premiums 
Type lower upper lower upper lower upper lower upper 
1. Income 
insurance   40% 60% 2,0 3,0 1,0 1,5 
2. Yield insurance 
on arable crops 3.5%  5% 40% 40% 0,95 1,35 0,47 0,67 
3. Area index 
insurance for 
cereals 3.0%  5% 40% 40% 0,45 0,75 0,23 0,37 
4. Yield insurance 
on fruit & vegetables 9.0% 15% 15% 
(veg.) 50% 
(fruit) 0,5 
0,5 0,9 
0,8 0,25 
0,25 0,45 
0,40 
Source: Agricultural Insurance Schemes study, DG JRC 
Transfer efficiency and income stability 
The welfare effect from subsidising in surance premiums depends greatly on the 
insurance market structure. A subsidy to  the premium paid by buyers might have 
the effect of raising the prevailing pr emium while only having a limited effect 
on the wider market penetration, and therefor e little benefit in terms of farmers' 
reduced exposure to risk. A further problem is that mostly farmers with a high 
risk level will buy the insurance. This w ill push the insurer to raise the premium 
and the insurance will become less attract ive for most farmers. This danger can 
be reduced with a bonus-malus  system, but it takes a long time to fine-tune such 
                                                 
74 http://ec.europa.eu/agriculture/analysis/external/insurance/index_en.htm. 
 
EN 112   EN system. Hence, the impact on the agricu ltural communities' income stability 
from this option is not clear.  
Administrative burden 
The administrative burden depends greatly on the ty pe of insurance scheme 
chosen. An area based index insurance wh ich determines eligibility based on the 
regional yield would imply fewer prob lems than an individual insurance 
scheme. An individual insurance scheme in fact requires the availability of 
accurate information at farm level (i.e . claims for damages should be assessed 
for each insured farmer). This option requires a common definition of natural 
disasters, which could prove burdensome given the heterogeneous character of 
the disasters that occur throughout the Union. 
5.1.1.  Supporting mutual funds 
Mutual funds are a means of sharing ri sks among groups of producers who want 
to take on their own res ponsibility for risk manage ment. The fund's capital can 
be called on by members in the event of severe income losses to be specified by predefined rules. 
Budget costs, transfer efficiency and income stability 
If the Community participation under this  option would be limited to support for 
the administrative operation, it implies a low financial cost for the EU budget. 
The transfer efficiency of any financial support would be relatively high because it would entail making transfers directly to  the farmers, without involvement of 
intermediaries who could capture some of  the benefits. However participation in 
mutual funds requires trust among the farm ers and high level of  social capital. 
Also, the systemic nature of risks coul d put a mutual fund measure under strong 
pressure, especially if a crisis occu rs during the first years of having the 
instrument in place. 
Administrative burden 
Clear rules on when and how the fund's cap ital could be used would need to be 
predefined. The administrative burden of  this option would be limited for the 
Commission, but could prove  burdensome for MS and farmers. Schemes would 
be based on farmers' organisation that woul d have to be officially recognised by 
the MS.  
 
EN 113   EN 5.1.2.  Providing basic coverage against income crises 
The third alternative of an EU-wide sche me consists of a generalised approach 
to manage income crises in agriculture, as an alternative to other possible sector 
specific intervention. Under this option, general income coverage would be 
provided to all farmers, helping them to overcome temporary liquidity problems 
caused by whatever reason. Farmers would be compensated for a serious fall in income, specified as a negative variation of more than 30%
75. 
Budget costs 
To assess the potential cost payable with  this alternative, DG AGRI has carried 
out an internal study analysing the compen sation for income losses higher than  
–30%. The analysis was carried out on th e basis of FADN data for the EU-15 
for the period 1989 to 2003, by using the FNVA (Farm Net Value Added) as income indicator
76. 
The level of estimated compensation for farms represented in FADN if such a 
scheme was in place is presented in figure 7, which simulates the impact of a scheme based on data of the 1989–2003 period. The loss was defined as the difference between the income for a gi ven year (e.g. 1998) compared with the 
average income for the three previous years (e.g. 1995/96/97). 
Over the last six years (1998–2003) comp ensation would have amounted, on 
average, to nearly €
 9.3 billion per year for th e EU-15, varying between a 
minimum of €  8 billion to a maximum of 12 b illion The percentage of farms 
affected by income losses greater than –30% varies between 22 and 32% in this 
period. Hence, a great weakness with introducing an EU-wide scheme for 
providing basic coverage against income  crises would be the high budgetary 
variation and uncertain ty, which is difficult to conc iliate with a policy of budget 
stabilisation and the likely need of some tool to limit the expenditure. 
                                                 
75 According to WTO rules the amount of such payments should not exceed 70% of the producer's 
income loss in the year, defined as  the difference between the income  for the last year (e.g. 1992) 
and the average income of the thre e previous years (e.g. 1989/90/91). 
76 Lack of suitable data for the new MS – FADN income data for at least 4 years – has implied their 
exclusion from the analysis. The analysis co rresponds to WTO Green Box criteria, and its 
methodology is explained in note 9 of Annex D. 
 
EN 114   EN Figure 12. –  Costs for EU-15 farms with income losses exceeding 30% 
 
051015202530354045
1998 1999 2000 2001 2002 2003% of farms 
-113579111315Billion of Euro
% of farms with income variations higher than -30%
Estimated compensation 
Source: DG AGRI calculations based on FADN. 
Transfer efficiency and income stability 
Such a payment, made directly to th e farmers, should in theory imply high 
transfer efficiency, and thus the cont ribution to income stability for the 
agricultural community is hi gh. However, rent seeking behaviours on the part of 
the potential beneficiary might dissipate  some of the transfer. To avoid 
questions of "moral hazard" (a farmer wi th an income loss of 29% would get no 
compensation, while one with 31% would), would also require some solution (such as progressive levels of compensation). 
Administrative burden 
The implementation of an income stabi lisation instrument as described would 
present certain practical difficulties.  Compensation would depend on farm 
accounts, which are not available for a ll farms. Different types of accounting 
system could produce different results, whic h in turn could result in inequities in 
the compensation paid; thus harmonised and precise definition of agricultural 
income holding across EU-27 would be needed. 
The implementation of this tool would also require a decision on the type of 
system used to calculate it.  
5.1.3.  Environmental impacts, and impacts in terms of international constraints 
All of the options outlined above may have environmental impacts. The 
availability of risk management tools,  partly publicly funded, may cause farmers 
to take unnecessary risks and increase production intensity in sensitive regions. Introducing new risk management t ools may therefore have a negative 
 
EN 115   EN environmental impact in some cases, esp ecially those involving issues of moral 
hazard. 
The compatibility of the options outlined  above with the WTO green box rules 
depends on the actual design of the scheme. Schemes can be designed in order to fully comply with WTO green box rule s, but the closer one gets to the 
objective of stabilising farmers' income s, the more difficult it becomes to 
comply with WTO green box rules.  
5.2. Option 2: enhancing the role of risk management in existing CAP 
instruments 
Given the heterogeneity of the risks and crises that the EU faces (with respect 
both to the type of risk/crisis and the type of production) heterogeneous 
measures seem to provide the most suitable solution to help farmers deal with crisis situations ( ex ante  as well as ex post ). But the form that such measures 
may take could differ. It is not a single measure, but a well chosen combination of instruments that would al low MS to better address loca l risks, with respect to 
markets, animal diseases and climatic risks, and with the necessary degree of 
flexibility. 
5.2.1.  Rural Development measures 
Under the current Rural Development Programmes (2007–13) two measures are 
directly related to risk manageme nt for agriculture and forestry:  
• restoring agricultural pr oduction potential damaged by natural disasters and 
introducing appropriate prev ention measures (Axis I) 
• restoring forestry potential and intr oducing prevention actions (Axis II)  
In addition to these two m easures there are several other measures, both under 
Axis I and II, which may be used to provide support for risk management for 
agriculture and forestry. These measures provide complementary support for 
preventive action in the areas of phys ical investment or human capital 
formation. Concerning the up-take of the different measures, the measure 
"Restoring forestry potentia l and introducing prevention actions (Axis II)" is 
more popular than the analogous measure for restoring agricultural production 
potential and prevention acti on related to agriculture. In fact, the uptake of 
measures related to risk management for agriculture (both with respect to 
prevention and restoring) in the rura l development programmes is on average 
relatively weak, compared to the uptake of other measures in the strategies
77. By 
providing more means for Pillar II, the measures to address risk management 
within the rural development programmes could be reinforced and strengthened 
(see section E.b).  
                                                 
77 The screening of rural development strategies carried out by DG AGRI in November 2007 shows 
that the average up-take for "Introduction of (flo od) prevention actions against natural disasters 
related to agriculture" and "Restoring agricultural production potential damaged by natural disasters" is 2,5 and 2,4 respectively, on a scale where 1 is equal to very high up-take and 3 is 
equal to no up-take. 
 
EN 116   EN 5.2.2.  Single Payment Scheme 
Additional tools addressing risk mana gement could be allowed through a 
targeted revision of Article 69 that woul d allow part of the available level of 
SPS support to focus on such issues, provided that the global amount and the proportion of coupled support in the mix of supporting measures stays within 
clearly defined ceilings. The instruments could include those that were proposed 
in 2005 Communication who, while not fe asible at an EU-level, could 
correspond to the needs of particular MS at MS or regional levels.  
Budget costs 
Introducing additional risk management t ools within the curre nt scope of CAP 
would be budget neutral overall, since the new funding that these measures 
would require would have to be transfe rred from other measures. Thus, it would 
require a re-prioritisation of  existing budgetary means.  
Transfer efficiency and income stability  
The transfer efficiency of this op tion would depend on how the particular 
solutions that could be implemented are designed. Given that MS would be allowed to implement and design their indi vidual risk management tools, within 
the framework provided by the Community legislation, MS coul d be expected to 
design the solutions that have the highest  possible transfer efficiency for their 
particular situations. Thus, the higher the transfer efficiency, the higher is the 
possibility to contribute to income st ability for the agricultural community.  
Administrative burden 
By introducing new tools to address risk management within the existing CAP 
instrument, the additional administrativ e burden will be kept at minimum. 
Overall though, the administrative burde n stemming from this option could 
increase compared to status quo, if the risk management tools that are 
introduced within the CAP framework are not  already in place in MS within the 
framework for state aids. In that case, th e impact on the administrative burden is 
neutral. 
Environmental impacts, and impacts in terms of international constrains 
As noted for the option of the EU-w ide scheme, introduction of new risk 
management instruments may have environmental impacts. Furthermore, also for this option, the compa tibility with the WTO green  box rules depends on the 
actual design of the scheme. Schemes can be designed in order to fully comply 
with WTO green box rules.  
6. C
ONCLUSIONS  
In brief, price risks appear to be sufficiently addressed with safety-net intervention and 
with the flexibility that decoupling provides,  hence there is no need for additional risk 
management tools to deal w ith price risks. The extension of SPS to sectors which are 
 
EN 117   EN currently not included could also provide a positive contribution in mitigating price 
variability for the agricultural community. 
For dealing with the potentially  growing needs for production risks, an EU-wide scheme 
cannot be considered feasible  at this stage. Introducing an EU-wide sche me would be 
immensely expensive, and would imply an in creased administrative burden for farmers 
and MS. 
Given the heterogeneity of the risks and crises that the EU faces (with respect both to the 
type of risk/crisis and the t ype of production) heterogeneous measures seem to provide 
the most suitable solution to help fa rmers deal with crisis situations ( ex ante  as well as 
ex post ). A harmonisation at EU level of the ai d schemes currently su pported with state 
aids could contribute to increased transpar ency between MS, while at the same time 
allowing the CAP to better meet the objective of contributing to the income stability for the agricultural community. An introduction of new risk management tools within 
existing CAP instruments would be budget neutra l with respect to th e overall EU budget. 
National contributions woul d depend on MS preference, but introducing the measure 
would in any case be optional. On top of this, Rural Development programmes contain 
measures which are directly related to risk management for agricultu re and forestry, and 
that provide complementary support for pr eventive action in the areas of physical 
investment or human capital formation. 
Table 26. – Summary comparison of options 
DRAFT Advantages  Disadvantages 
Insurance 
against natural 
disasters Provide farmers with the 
means to manage their own 
risk Would depend on the type of 
framework agreed. Studies indicate 
that the cost of subsiding premiums 
would inevitably be high, entailing need for relatively expensive reinsurance 
Low transfer efficiency 
A common definition of disaster 
would be required 
Supporting 
mutual funds Low cost 
Social control reducing 
problems of moral hazard and adverse selection Given the "systemic" nature of risk, 
setting up a mutual fund is very 
difficult without public support.  
Requires a considerable level of 
social capital. EU-wide framework 
Providing 
basic coverage 
against income 
crisis High transfer efficiency 
Provide solid safety net for 
farmers  
 High cost 
Administratively complex and 
burdensome 
Require common definition of 
agricultural income across EU-27 
Risk of moral hazard  
MS Specific solutions:  Provide farmers with the 
means to manage their own Absorption capacity 
 
EN 118   EN risk (adaptation strategy to the 
changes) 
High degree of flexibility 
which allows MS better to address local risks with respect to markets; animal 
diseases and climatic risks 
 
EN 119   EN 7. SUMMARY TABLES  
7.1. Comparison between different options and th eir respective impacts – risk management 
☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS  Option 0 – baseline Option 1 – EU-wide framework for 
addressing production or revenue risks Option 2 – Introducing risk management 
as option within current CAP 
instruments 
Economic Current instruments not sufficient to 
cover increasing production risks 
/ Low target efficiency spreads benefits  
even to those not in need 
/ 
Significant budgetary costs needed  
for revenue scheme 
// Depends on scheme, but better targeting 
links benefits closer to needs 
. to ☺ 
Social . Unclear transfer efficiency for production 
risks; better transfer efficiency  
for revenue schemes 
☺ to ☺☺ Contributes to stabilising farm income  
and could respond to specific risks 
☺☺ 
Environmental . Affects farm risk behaviour and  
could increase intensity 
// Better targeting minimises risks  
for intensification 
/ to . 
Administrative . Very high administrative costs to establish  
and control 
// Administrative costs to establish and 
control depend on uptake 
/ 
Simplification . // Adds to existing legislation 
/ 
Other . Depends on scheme, but shall respect  
EU WTO commitments Depends on scheme, but shall respect  
EU WTO commitments 
 
EN 120   EN ☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS  Option 0 – baseline Option 1 – EU-wide framework for 
addressing production or revenue risks Option 2 – Introducing risk management 
as option within current CAP 
instruments 
. . 
 
EN 121   EN 7.2. Comparison between different options and thei r respective objective – risk management 
☺☺ fully respecting objective; ☺ partially respecting objective; . neutral; / moving away from objective; // putting at risk objective 
OBJECTIVES  Option 0 – baseline Option 1 – EU-wide framework Option 2 – Enhanced role of risk 
management in current CAP 
instruments 
Competitiveness . . . 
Market orientation . . . 
Environmental sustainability . // . to / 
Budget costs . // . 
Administrative costs . // . to / 
Simplification . // . to/ 
Vitality of rural areas / to . . . 
Stabilisation of farmers incomes / to . ☺ to ☺☺ ☺☺ 
Transfer efficiency . ☺ to / ☺ to / 
 
EN 122   EN E – NEW CHALLENGES  
1. PROBLEM DEFINITION  
• The CAP is facing a rapidly changing environment where a number of new 
(and ongoing) challenges have intensified: 
– short- and long-term climate change creates growing concerns about 
its impacts on agriculture; 
– the EU renewable energy road map has set ambitious binding targets 
that imply the contribution of the sector.; 
– water scarcity and increased risks for droughts render water 
management a priority for the EU, which is more pertinent following the removal of set aside; 
– the objective to stop biodiversit y decline by 2020 requires an 
enhanced contribution of agricultu re in protecting biodiversity. The 
removal of set aside reinforces this requirement; 
• the present set of policy instruments unde r RD appears to be sufficient, and 
new challenges have already been addre ssed to a large extent by the Strategic 
Guidelines for Rural Development that set EU priorities for the RDP in the period 2007–2013. However, the uptake of RD funds by MS suggests 
additional budget needs; 
• the 2005 decision on the Financial Persp ectives resulted in lower RD support 
than initially expected. 
2. O
BJECTIVES  
• Improve the MS uptake of second pillar measures linked to new challenges, 
following the Strategic Guidelines for Rural Development; 
• reinforce Rural Development funding, in order to address th e shortfall in the 
current budgetary period and meet the ex tra budgetary resources necessary to 
respond to new challenges; 
• respect the agreement on the exemption of new Member States from basic 
modulation until they reach the same le vel of payments with the EU-15; 
• find an appropriate balan ce for allocating funds fr om additional modulation 
to the MS. 
 
EN 123   EN E.a RESPONDING TO NEW CHALLENGES 
1. BACKGROUND  
The HC Communication identifies a number of  new, and ongoing, challenges facing the CAP 
(such as climate change, risk management, bi o-energy, water management and biodiversity) 
and considers the Rural Development Policy as one of the possibilities to deal with these challenges. 
2. P
ROBLEM DEFINITION  
EU agriculture is highly exposed to climate change. A wide range of short term concerns 
(precipitation patterns, extreme weather events, temperature levels, water availability, and soil 
conditions) and longer term impacts (increased frequency and severity of extreme weather 
events, and projected climatic changes) will affect crop yields, livestock management, or 
location of production. These risk s would, in turn, impact upon water availability, and pose 
renewed risks on biodiversity. 
In addition, the new and ambitious EU renewa ble energy roadmap has se t binding targets that 
imply the contribution of the agricultural sector and which is closely linked to climate change 
mitigation objectives. 
Most new challenges have been addressed to a large extent by the Strategic Guidelines for 
Rural Development, that set EU priorities fo r the RDP in the period 2007–2013. In total, more 
than 25 sub-measures directly or  indirectly related to climate change, renewable energies, risk 
and water management have been included in the programmes. However, uptake and mix of 
these measures varies substantially in the 89 national and/or region al rural development 
programs for the new funding period. The number of  sub-measures related to biodiversity is 
similarly high as several of the measures under axis 2 are relate d to this objective78. 
The present tool kit of measures  available under RD appears to be  sufficient, but the uptake of 
RD funds in 2007 suggests that MS have budget needs beyond their possibilities, which 
hamper their responsiveness to new challenges.  In fact, because of the decisions on the 
Financial Perspectives a number of Member St ates have been confronted with significant 
reductions of their rural development budget for 2007–13. 
3. OBJECTIVES  
A screening exercise of RD programmes indicates that ex isting measures are already 
providing various alternatives to address th e new challenges and th at MS have included 
related measures already in thei r RD programmes for the period 2007–1379. 
Thus, the analysis of the impact of the proposed  options for facing "new  challenges" via rural 
development measures focused on the imp act of such proposals on improving the EU 
responsiveness to new challenges, as outlined in the Strategic Guidelines for Rural Development, via greater MS upt ake of second pillar measures.  
                                                
 
78 See Annex E note 8, and especially its Annex, for details. 
79 idem. 
 
EN 124   EN 4. POLICY OPTIONS  
Table 27. – Analysed options for new challenges  
 Option Description 
0 Status quo  
1 Transfer of funds to Pillar II without 
any further requirements Simply modulation of funds without specific requirements. 
2 Earmarking a) Targeting of funds to  pre-determined but existing sub-
measures with a reporting obligation for the new funding. MS will have to implement a system that allows a separate reporting and management identifying funds from the 
original funding and new funds from modulation 
a) Targeting of funds to existing measures with a reporting 
obligation concerning the new funding (financial planning 
and reporting) and indicators of measures in areas of "new challenges", both financed by old and new funds. MS will be asked to report on results/impacts of the totality of new challenges, combined for old and new funding. 
3 Higher co-financing rates  Increase the rate of EU funds in relation to the eligible 
public expenditure (co-financing rate) for individual sub-
measures or groups of  measures that positively contribute to 
any of the identified new challenges. 
4 Higher aid-intensities Offer a higher percentage of the eligible total expenditure to 
be financed by public budget (aid intensities). 
5 Obligation to use modulation funds 
for challenges Member States are requested to direct the total amount of 
additional resources from compulsory modulation to the 
new challenge related actions by enlarging their number 
and/or scope whenever necessary. Aid intensity rates for new challenge related actions will be increased by [10] percentage points. 
5. ANALYSIS OF IMPACTS  
5.1. Impact on the programming process 
5.1.1.  Option 0: status quo 
A qualitative assessment of the programming of new challenge related measures in 
the RD programmes 2007–13 has indicated th at the uptake of measures related to 
New Challenges is often weaker than the extent to which they have been discussed by the Member States in the strategy a nd in the SWOT analysis in their RD 
programmes. Nevertheless, several measur es related to the new challenges are 
already included in the RD programmes
80. 
5.1.2.  Option 1: transfer of additional funds to Pillar II 
The Member States may have to adjust thei r National Strategy Pla n. In any case, they 
will have to adjust the fina ncial plans of the Rural Development Programs to amend 
                                                 
80 See Annex E note 8, and especially its Annex, for details. 
 
EN 125   EN the amounts of expenditure per axis and meas ure. The Member States will also have 
to amend the projected output that should result from the programmes. Under this 
option the administrative burde n at MS level will be high er due to re-programming. 
The uptake of measures/actions will possi bly increase, although is difficult to 
quantify. 
5.1.3.  Option 2: ear-marking 
(a) Targeting  of additional funds coming from modulation to pre-determined but 
existing sub-measures81 with a specific reporting obligation only for the new 
funding. For national strategy and projec ted output, as in option 1 MS would 
be obliged to report separately on "a dditional" modulation funds. This would 
necessitate a revision of the financial planning and a separate reporting by the 
MS administrations 
(b) Targeting  of additional funds coming from modulation to existing measures 
related to "new challenges" with  a reporting obligation concerning:  
– the new funding (financial planning and reporting); 
– indicators of measures in areas of "new challenges" fi nanced both by old 
and new funds 
An adaptation of existing indicators could be  necessary with this option. Apart from 
the additional reporting con cerning the exact allocation of the additional spending, 
this sub-option would oblige th e MS to have a separate re porting on the results of the 
support measures in the area of the new challenges.  
Under both sub-options the uptake measures/a ctions will surely increase, although it 
is difficult to quantify. The ad ministrative burden at MS leve l will be higher due both 
to reprogramming and the introducti on of new reporting procedures. 
5.1.4.  Option 3: higher co-financing rates 
In the programming period 2007–2013, for the sa ke of simplification, co-financing 
rates are defined at the level of each axis. Increasing co-financing rates for new 
challenges related actions would address the level of (sub)measures and would 
destroy one of the new elements of simplif ication in the new period. The system of 
financial programming would have to be changed, programming to be re-done, and 
the financial system would fall back into the approach of the old period, with the 
consequent increase in the administrative burden for MS. 
Higher co-financing rates for individual sub- measures or groups of measures that 
positively contribute to any of the dimensions of the new or on-going challenges should not be envisaged because it would i nvolve a turn back to a more complicated 
financing mechanism and it could also enta il the re-opening of the discussion in the 
Council on this issue which should be  absolutely avoided. The uptake of 
measures/actions will increase,  but it is difficult to quantify. 
                                                
 
81 The measures have a wide scope. Therefore, it may be necessary to have targeted sub-measures to 
address the new challenge issues. 
 
EN 126   EN 5.1.5.  Option 4: higher aid intensities 
If additional budgetary resources are inject ed into the system, higher aid-intensity 
rates may constitute a simple but efficient tool to provide additional incentives for 
those sub-measures which are expected  to contribute positively to the new 
challenges. This will imply reprogramming of  RD Plans for MS with its consequent 
burden. 
Due to the limited budget available for RD plans Member States in many cases kept 
aid intensity rates distinctly below the maximum rates possible. Before increasing the aid intensity, it should be carefully analys ed whether such incentives are really 
needed to make the new challenge related sub-measures attractiv e. There is a risk 
that such increase leads to dead-weight lo sses. The uptake of measures/actions will 
increase possibly more than under the othe r options depending on the aid-intensity 
rates implemented by MS. Again, th e uptake is difficult to quantify. 
5.1.6.  Option 5: obligation to use modul ation funds for new challenges 
MS will need to modify their programmes in order to include the additional amounts 
coming form compulsory modulation. In the context of this modi fication MS should 
clearly identify in the revised program th e choice of specific actions targeting the 
new challenges
82 and the additional amounts from m odulation to be allocated to each 
action. Member States will be invited, on the basis of an assessment of their 
respective situation and needs related to the new challenges, to make use of actions included in an indicative list of action types to be inserted  as an annex in the Council 
Regulation.  
In the annual reports of each program, a specific chapter should be dedicated to 
reporting on the progress made in impl ementing the actions targeting the new 
challenges (climate change, renewable ener gies, water management, biodiversity). 
This would include the obligation to repor t on expenditure and any other relevant 
information. 
This option is the most effective since it guarantees a higher uptake of 
measures/actions, although it implies highe r administrative burden and complexity 
both at MS and EU level. 
5.2. Legislative and administrative consequences  
A first step to initiate a targeted re-programming of RDPs 2007–13 would be to 
update and revise the Community Strategi c Guidelines on RD by highlighting the 
increased importance of the new challenges  and by focusing the EU priorities more 
on the new challenges related to all three main objectives of the EU's RD policy.  
A Council decision will be needed on the up- date of the Community Guidelines on 
RD and possibly a modification of the Council Regulation to oblige Member States to take up the reinforced EU priorities rela ted to the new challenge s in their strategies 
and to define specific actions in their revised RDPs 2007–13. In the case of option 5 
a new Article of the Council Regulation s hould indicate the obligation of Member 
                                                
 
82 See the complete list in the Annex to this chapter 
 
EN 127   EN States to channel al l funds available from increased  modulation to new challenge 
related actions in the contex t of re-programming. The indica tive list of new challenge 
related action-types should be also inserted as an Annex. 
Depending on the option chosen a revi sed Commission Regul ation would be 
necessary to update the Common Monitoring and Eval uation Framework. The latter 
would need to be up-dated by adding more  indicators to facilitate the follow-up on 
the impact of the revised objectives addres sing the new challenges. In the case of 
option 5 a new Article should be inserted  in the Commission Regulation specifying 
the additional reporting obligations related to the new challenges. 
5.3. Social/environmental impacts of alt ernative options for new challenges 
 Social impact Environmental impact 
Option 0 – baseline Neutral Difficult to assess, depends on MS 
implementation 
Option 1 – Simply transfer of 
fund to Pillar II Response to public concerns Possible improvement following 
higher uptake primarily of Axis 2, 
and specific Axis 1 & 3 measures83 
Option 2 – Earmarking Response to public concerns Possible improvement following 
higher uptake primarily of Axis 2, 
and specific Axis 1 & 3 measures 
Option 3 – Higher 
co-financing rates Response to public concerns Possible improvement following 
higher uptake primarily of Axis 2, 
and specific Axis 1 & 3 measures 
Option 4 – Higher 
aid intensities Response to public concerns Possible Improvement following 
higher uptake primarily of Axis 2, 
and specific Axis 1 & 3 measures 
Option 5 – Obligation to 
implement new challenges 
measures Response to public concerns Improvement following higher 
uptake primarily of Axis 2, and 
specific Axis 1 & 3 measures 
ensured by obligation 
6. CONCLUSIONS  
Continuing present policies would significan tly limit the responsiven ess of CAP to new 
challenges and its contribution to the key agenda s of climate change, renewable energy, water 
management and biodiversity. Extra RD fund ing would, in itself, lead to a greater 
responsiveness and uptake of measures, but the reprogrammi ng effort of RD measures 
required would not be compensated for by a better targeting or take-up of measures. 
Earmarking funds, higher co-financing rates or higher aid intensities would imply further 
administrative burden through the need for major revisions of financial planning and separate 
reporting by MS administrations. Targeting th e use of additional modulation funds for new 
challenges would be the most effective in guara nteeing a higher uptake of measures/actions, 
although it implies higher administ rative burden and complexity both at MS and EU level. 
                                                 
83 See note 5. 
 
EN 128   EN 7. ANNEX TO CHAPTER VIII  – LIST OF INDICATIVE ACTION TYPES  
Priority: Climate change  
Types of operations  Articles and measures  Potential effects  
Improve efficiency of n itrogen fertiliser use 
(for ex. reduced use, equipment, precision agriculture), improvement of manure storage Article 26: 
Modernisation of agricultural holdings 
Article 39: Agri-
environment payments Reduction of methane (CH
4) 
and nitrous oxide (N 2O) 
emissions. 
Improvement of energy efficiency Article 26: 
Modernisation of agricultural holdings Reduction of carbon dioxide 
(CO
2) emissions by saving 
energy. 
Soil management practices (for ex. tillage 
methods, catch crops, diversified crop 
rotations) Article 39: Agri-
environment payments Reduction of nitrous oxide 
(N2O); carbon sequestration.  
Land use change (for ex. conversion of arable 
land to pastures, permanent set aside, reduced use / restoration of organic soils) Article 39: Agri-
environment payments Reduction nitrous oxide (N
2O); 
carbon sequestration.  
Extensification of livestock (for ex. reduction stocking density, increase grazing) Article 39: Agri-
environment payments Reduction of methane (CH
4). 
Afforestation Articles 43 and 45: First 
afforestation of 
agricultural and 
non-agricultural land Reduction of nitrous oxide 
(N2O); carbon sequestration. 
Forest fire prevention Article 48: Restoring 
forestry potential and introducing prevention 
actions Carbon sequestration in forests 
and avoid carbon dioxide (CO
2) emissions. 
Priority: Renewable energies  
Biogas production – anaerobic digestion 
plants using animal waste (on farm and local 
production)  Article 26: 
Modernisation of 
agricultural holdings 
Article 53: 
Diversification into non-
agricultural activities Substitution of fossil fuel; 
reduction of methane (CH 4)  
Perennial energy crops (short rotation 
coppice and herbaceous grasses) Article 26: 
Modernisation of agricultural holdings Substitution of fossil fuels; 
carbon sequestration; reduction of nitrous oxide (N
2O). 
Processing of agricultural/forest biomass for renewable energy  Article 28: Adding value 
to agricultural and 
forestry products Substitution of fossil fuels. 
Installations/ infrastructure for renewable 
energy using biomass  Article 53: 
Diversification into non-agricultural activities 
Article 54: Support for 
business creation and development 
Article 56: Basic 
services for the economy and rural population Substitution of fossil fuels. 
 
EN 129   EN  
Priority: Water Management  
Types of operations  Articles and measures  Potential effects  
Water saving technologies, water storage  
Water saving production techniques  Article 26: 
Modernisation of 
agricultural holdings 
Article 30: Infrastructure Improve the capacity to use 
water more efficiently. 
Wetland restoration 
Conversion of agricultural land into 
forest/agro-forestry systems Article 39: Agri-
environment payments 
Article 41: Non-
productive investments  
Article 43 and 45: First 
afforestation of 
agricultural and non-agricultural land Conservation of high-value 
water bodies; protection of quality water.  
Development of semi-natural water bodies Article 57: Conservation 
and upgrading of the rural heritage Conservation of high-value 
water bodies; protection of quality water.  
Priority: Biodiversity  
Types of operations  Articles and measures  Potential effects  
No application of fertiliser and pesticides on 
high nature value agricultural land 
Integrated and organic production Article 39: Agri-
environment payments  Conserved-species rich 
vegetation types, protection and maintenance of grasslands. 
Perennial field and riparian boundary strips 
Construction/management of 
biotopes/habitats within and outside Natura 2000 sites 
Land Use Change (extensive grassland 
management, conversion of cropland to 
pasture, long-term set aside) 
Management of high nature value perennials Articles 38 and 46: 
Natura 2000 payments 
Article 39: Agri-
environment payments  
Article 41: Non-
productive investments 
Article 47: Forest-
environment payments 
Article 57: Conservation 
and upgrading of the rural heritage Protected birds and other 
wildlife and improved biotope 
network; reduced entry of harmful substances in bordering habitats. 
Conservation of genetic diversity  Article 39: agri-
environment payments  Conserved genetic diversity. 
 
 
EN 130   EN 8. SUMMARY TABLES  
8.1. Comparison between different options and th eir respective impacts – New challenges 
☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS  Option 0 – baseline Option 1 – Simply 
transfer funds  
to Pillar II Option 2 – 
Earmarking of 
transferred funds Option 3 – Higher 
co-financing rates Option 4 – Higher 
aid intensities Option 5 – Obligation 
to implement New 
Challenges measures 
Economic Sectors lags in 
adaptation 
/ . . . . . 
Social . Response to  
public concerns 
☺ Response to  
public concerns 
☺ Response to  
public concerns 
☺ Response to  
public concerns 
☺ Response to  
public concerns 
☺☺ 
Environmental Increased risks from 
climate change  
/ Improvement due to 
higher uptake 
☺ Improvement due to 
higher uptake 
☺ Improvement due to 
higher uptake 
☺ Improvement due to 
higher uptake 
☺ Improvement due to 
higher uptake and 
better targeting 
☺☺ 
Administrative 
burden . Reprogramming of RD 
required 
/ Reprogramming of RD 
and separate reporting 
required 
/ Reprogramming of RD 
and separate reporting 
required 
// Reprogramming of RD 
and separate reporting 
required 
/ Reprogramming of RD 
and separate reporting 
required 
// 
Simplification . . / / / // 
Other . . Increased uptake due 
to incentives  
☺ Increased uptake due 
to incentives  
☺ Increased uptake due 
to incentives  
☺ Obligation helps 
higher uptake 
☺☺ 
 
EN 131   EN 8.2. Comparison between different options and thei r respective objectives – New Challenges 
☺☺ respecting objective; ☺ possibly respecting objective; . neutral; / objective possibly at risk; // objective at risk 
OBJECTIVES   Option 0 – 
baseline Option 1 – Simply 
transfer of fund to 
Pillar II Option 2 – 
Earmarking Option 3 – Higher 
co-financing rates Option 4 – Higher 
aid intensities Option 5 – 
Obligation to 
implement new 
challenges 
measures 
Responsiveness 
to new challenges // ☺ ☺ ☺☺ ☺ ☺☺ 
Greater uptake of 
RD measures . ☺ ☺ ☺ ☺ ☺☺ 
Simplification . . / / / // 
 
EN 132   EN E.b. MODULATION 
1. BACKGROUND  
Modulation is a means of budgetary transfer by  which a percentage reduction is applied to 
farmer direct payments (Pillar I) and the budgeta ry resources released are reassigned to rural 
development (Pillar II) measures . At present, compulsory m odulation for all EU-15 Member 
states is 5% for all payments above €  5 000. 
In budget terms, in 2006 it was in itially calculated that compul sory modulation of 5% would 
release EUR 1 228 billion for re -distribution, as shown in th e table below. Although in pure 
static terms, the estimated impact on farm income is –1.7% for the farms affected, this 
estimate excludes the benefits for farms from th e impact of increased modulated funds on RD. 
DG AGRI has carried out a preliminary exercise to assess the associated indirect effects on 
farmers' income of rural development measures, which indicates that the income effectiveness of Rural Development measures for the period 2000–2006 could have been somewhat less than 100% over the short/medium term, a nd higher over the long term. The methodology 
developed relied on the calculation of  the leverage effect of each €
 1 of EU funding on other 
national or regional fund (proportional to the EU co-financing rate) and, more critically, to an 
estimate of a coefficient of income effec tiveness of each RD measure. The analysis 
represented a first contribution on the issue and will have to be complemented and strengthened by in-depth  quantitative analysis. 
Table 28. – The impact from the initial modulation on MS in budget year 2013 
20% directAdditional 
direct Key Total
AB C DE G = E - A H = F / A 2003 data
Belgium 22,6 4,5 4,2 9,3 18,0 -4,5 79,9% 1,1%
Denmark 39,4 7,9 8,8 14,9 31,6 -7,8 80,1% 1,7%
Germany 224,1 44,8 42,3 114,6 201,7 -22,4 90,0% 13,0%
Greece 41,1 8,2 0,0 48,0 56,2 15,1 136,8% 5,4%
Spain 153,1 30,6 0,0 170,0 200,6 47,5 131,0% 19,4%
France 336,0 67,2 32,3 169,3 268,8 -67,2 80,0% 19,3%
Ireland 41,4 8,3 1,1 23,8 33,2 -8,2 80,2% 2,7%
Italy 96,2 19,2 0,0 105,8 125,0 28,8 130,0% 12,1%
Luxembourg 1,5 0,3 0,4 0,5 1,2 -0,3 80,0% 0,1%
Netherlands 32,4 6,5 0,0 20,3 26,8 -5,6 82,7% 2,3%
Austria 16,2 3,2 0,0 36,3 39,5 23,3 244,1% 4,1%
Portugal 11,5 2,3 0,0 44,6 46,9 35,4 407,8% 5,1%
Finland 14,7 2,9 0,0 15,5 18,4 3,7 125,4% 1,8%
Sweden 27,5 5,5 0,0 18,3 23,8 -3,7 86,5% 2,1%
United Kingdom 170,3 34,1 15,2 86,9 136,1 -34,2 79,9% 9,9%
EU-15 1228,0 245,6 104,3 878,1 1228,0 0,0 100,0%EU-15 Distribution of m odulation savings in 2013
mio EURAllocation 
keyPercentage 
'return'Net loss/gainNet mod'n 
of 5%*Distribution
 
Source: DG AGRI Working Document of 3 August 2006 
 
EN 133   EN The released funds are re-distributed among EU-15 according to a common key, based on 
certain criteria84. 
In two MS, UK and Portugal, voluntary modulation also applies85. The new MS, on the other 
hand, were exempted from modulation until the tran sition to the full level of direct payments 
is achieved86. 
2. PROBLEM DEFINITION  
The constraints that MS are fa cing, due to the cut in the expe cted Rural Development support 
following the 2005 decision on the Financial Perspectives, present an obstacle to the realisation of Pillar II objectives  in the current budgetary period. 
In addition to the restrictions  posed by this tight budgetary fr amework, reinforcement of the 
budgetary resources is ne cessary in order to: 
• address the new challenges identified in the HC Communication (climate change, water 
management and risk management); 
• respond to the need for increased efforts to address new productivity and environmental 
challenges (biofuels; improved comp etitiveness in market sectors). 
3. O
BJECTIVES  
In the context of the objective to improve the MS uptake of second pill ar measures linked to 
new challenges, the specific objectives of modulation options examined should be to: 
• reinforce Rural Development funding, in order to address the shortf all in th e current 
budgetary period and meet the extra budgetary  resources necessary to respond to new 
challenges; 
• respect the agreement on the exemption of new Member States from basic modulation until 
they reach the same level of payments with the EU-15; 
• find an appropriate balance for allocating funds generated thr ough additional to MS 
4. POLICY OPTIONS  
Four options are analysed in comparison to status quo. The first three assumed the same 
overall level of increase in modulation, 8% , achieved with annual 2% steps from 2009 
onwards, but took into account different assump tions for new MS and re -distribution of the 
fund released. 
                                                 
84 The allocation criteria safeguard 1 percentage point of modulation to be distributed directly back to the 
MS where it was generated, the rest being dist ributed between the Member States according to 
agricultural area, agricultural empl oyment and GDP. However, it is also guaranteed that any MS must 
receive back at least 80% of what it contributes to  modulation (in case of Germany 90%). An analysis 
of the impacts of the current modulation is found in Tables A1-A3 in note 10 of Annex E. 
85 Portugal will apply from 2008 10% voluntary modul ation with a EUR 5 000 franchise. In the UK the 
voluntary modulation is applied without franchise and the rates foreseen in 2012 are the following: 14% 
in England, 6.5% in Wales and 9% in Scotland and Northern Ireland. 
86 This will happen in 2013 for EU-10 and 2015 for Romania and Bulgaria. 
 
EN 134   EN The fourth option looked into the potential impact  of an idea under c onsideration in the 
European Parliament that introduces a progre ssive element in modulation based on different 
thresholds of payments, thus addressing in parallel equity issues87. 
Table 29. – Policy options for modulation 
Option Modulation Description 
0 Status quo – baseline No change in the present set of measures. Currently, reduction in 
payments under the CAP is made through the linear, 5% reduction of 
payments above € 5 000 from compulsory modulation. 
1 Increase in EU-15 
compulsory modulation 
by 8%, using current 
distribution key Increasing the existing (basic) compulsory modulation by with a higher 
level of compulsory modulation wo uld be one possibility, based on the 
current EU-15 distribution key method employed.  
2 Increase in EU-25 
compulsory modulation by 8%, using current distribution key Increasing compulsory modulation to EU-15 fails to offer to new MS the 
opportunity to address the new challenges of the CAP through increased rural development. A second option could be to increase the basic compulsory modulation by the same amount as in option 1, but including 
the new MS (EU-25), using the same distribution key method for EU-25, 
updated with 2005 data
88. 
3 Increase in EU-25 
compulsory modulation at different rates The limitations of applying more basic modulation only to EU-15 with 
the existing key (option 1) and the di fficulties of opening up the current 
agreement on the exemption of new MS from basic modulation (option 2) 
could be potentially avoided by proposing changes to the re-distribution 
criteria. From the broad range of different re-distribution criteria, the one analysed applies 6% modulation for EU-15, but applies only a last step of 
2% for EU-25 because only  in 2013 would EU-10 complete the transition 
to the full level of direct payments. To address the issue of redistribution, in this option the last 2% of modulation for both EU-15 and EU-10 
remains within the MS, the 6% for EU-15 being allocated based on the 
current distribution key. 
4 Progressive modulation, 
current distribution key + funds remaining in MS This option considers the economic size of the farm as an element in the 
calculation of modulation. Part of the funds from extra "basic" modulation is to be distributed in accordance with the prevailing rules 
governing modulation funds, while additional amounts ("special 
modulation") are to remain within the MS in which they accrue. 
This option is inspired from the EP COMAGRI Report on the HC 
Communication
89. However, here a different variant is applied to allow 
comparison with the previous thr ee options. It keep s the present €  5 000 
(to avoid two systems running in parallel), and changes the % reduction 
of the different payment thresholds to arrive an 8% reduction at the 
highest threshold. 
                                                 
87 In order to make comparisons between MS, the impact of increased compulsory modulation on 
voluntary modulation has not been calculated. Howe ver, it is assumed that, in the event of its 
application, any amounts generate d by compulsory modul ation would replace e quivalent amount of 
voluntary modulation. 
88 This option is purely hypothetical, and Romania and Bulgaria would be excluded because they do not 
reach high levels of direct paymen ts until late in the period. Furtherm ore, since data are currently not 
available, they cannot be included in the simulations at this stage. 
89 The Report was presented by MEP Goepel, and implies a trigger threshold of € 10 000, above which 
basic modulation would apply. 
 
EN 135   EN Table 30. – Three options increasing basic  compulsory modulation across EU-27 
 EU-15 EU-10 EU-2 
 Extra 
modulation Total 
modulation Extra 
modulation Total 
modulation Extra 
modulation Total 
modulation 
Option 1 + 8% 13% 0% 0% 0% 0% 
Option 2 + 8% 13% + 8% 13% " " 
Option 3 + 8% 13% + 2% 2% " " 
Table 31. – Option 4: Progressive modulation across EU-25 
 €5 000–100 000 €100 000 –200 000 €200 000–300 000 above €300 000 
Option 4 Extra  
mod'n Extra 
mod'n Special 
mod'n Extra 
mod'n Special 
mod'n Extra 
mod'n Special 
mod'n 
2012 2013 2% 4% 4% 6% 6% 8% 8% 
5. ANALYSIS OF IMPACTS  
The modulation options under c onsideration were analysed and evaluated according to 
economic and budgetary impacts (effect on farmer  direct payments, pot ential economic return 
to farmers through Pillar II, link to compe titiveness and broader economic impacts on rural 
areas, and net budget impact by Member States), social imp acts (income impact on farmers90, 
link to broader rural society issues, and governance issues such as administrative 
consequences) and environmental impacts.  
The baseline for comparing the impact of the exam ined options is the cu rrent situation of 5% 
compulsory in EU-15, with no modulation in EU -12 (option 0). For the distribution of funds 
among MS, net modulation has been estimated on th e basis of projected direct aids in 2013 
including sugar, fruit and vege tables and wine for all options . For option 4, the progressive 
element of the modulation was estimated on 2006 data of actual payments (CATS). These 
data differ somewhat from the da ta of the actual budget allocation. 
5.1. Global effects on budget and MS transfers 
Results presented here summarise two diffe rent aspects of each modulation option91. 
• the overall budgetary impact of each modul ation option on the level of funds 
released to MS (shift from Pillar I to Pillar II) at the EU level, 
• the impact of each option on increasi ng the RD funds from their presently 
budgeted level. 
                                                 
90 The data used for the simulations of direct payments per holding and income are the Farm Accountancy 
Data Network (FADN), which is representative of the commercial farm EU population, and covers 
around 90% of EU agricultural production and 93% of total direct payments. 
91 More details are found in note 10 of Annex E. 
 
EN 136   EN The table presented below indicates that di fferent variations of  allocating the 8% 
modulation increase propos ed in the HC Communicatio n would transfer between 
€ 2.0 and 2.2 billion for RD funds. The di fference between options 1 and 2, an 
additional €  200 million or 10% in total RD, is indi cative of the potential share of the 
new MS in modulation when they enter into the system92. 
Table 32. – Overall budgetary impact of modulation options 
 Option 1 Option 2  Option 3  Option 4*  
EU-15 contribution 8% 8% 6% + 2% 2%+4%+6%+8% 
EU-10 contribution 0% 8% 2% 2%+4%+6%+8% 
Total EU funds released to RD  1 985.15 2 183.6 2 034.7 660.32 
Total increase in MS funds to 
RD**  1 689.8 1 628.8 1 722.6 496.0 
Total increase in RD funding 3 674.9 3 812.4 3 757.4 1 156.2 
Source: DG AGRI calculations based on net modulation of budget projections for direct payments in 2013 
and an estimate based on 2006 CATS data for progressive modulation. 
Note:* The corresponding total of option 4 is proportional to the percentages of progressive modulation. 
Thus the EP option would yield half of the funds presented here. 
** Calculated on the basis of no change to current co-financing rates by MS.  
The rather limited contributi on of EU-10 is not only expl ained by the lower level of 
average payments in EU-10 compared to EU-1 5 (see section I), but also by the larger 
number of beneficiaries fa lling under the €5 000 threshold93. 
With respect to the net effects on MS, results of the various options are summarised 
in the table below, which shows the effect  of modulated funds on the percentage net 
returns of a MS from the CAP budget and the increase in their RD budget. The net 
effect (A in the table) is the differen ce between the modulated funds from Pillar I 
payments and receipts from these funds under Pillar II for each MS, and is presented 
as a percentage of their present po sition as recipients of CAP funds. 
The increase in RD funds (B in the table) is  measured as the percentage change from 
the present RD expenditure foreseen. Under option 1 , only EU-15 is affected by the 
extra funding available at EU  level for Pillar II meas ures, which would amount to 
€ 1 985 million in budget year 2013. The increase in MS match funding would 
amount to €  1 690 million, giving rise to a tota l increase in RD funding of €  3 675 
million. The main net beneficiaries would be Portugal, Greece and Spain, and the 
main net contributors France and Germany. 
With respect to the current al location of funding foreseen for Pillar II measures in 
2013, the average EU increase of Pillar II funding would be 18%. The highest increase would be for Denmark, and the Netherlands (in the UK, the resulting 
significant increase is assumed to compensa te an equivalent decline in voluntary 
modulation). 
                                                
 
92 Note that the above figure excludes Romania and Bulgaria. 
93 On the other hand, new MS have a much more significant level of RD funds than EU-15. 
 
EN 137   EN Table 33. – Impact of modulation options on MS net returns (A) and RD funds (B) 
 Option 1 Option 2  Option 3  Option 4  
 net % change net % change  net % change  net % change  
 A B A B A B A B 
Belgium – 20% + 53% – 20% + 53% – 15% + 56% – 20% + 13% 
Denmark – 20% + 82% – 20% + 82% – 15% + 87% – 19% + 22% 
Germany – 10% + 29%  – 10% + 29%  – 8% + 29%  – 6% + 11%  
Greece + 85% + 20%  + 25% + 13%  + 62% + 17%  + 20% + 3%  
Spain + 19% + 29%  – 11% + 21%  + 15% + 27%  – 3% + 7%  
France – 20% + 48%  – 20% + 48%  – 15% + 51%  – 19% + 13%  
Ireland + 15% + 25%  – 20% + 17%  + 11% + 24%  – 8% + 5%  
Italy + 22% + 16%  – 11% + 12%  + 17% + 15%  – 2% + 4%  
Luxemburg – 20% + 16%  – 20% + 16%  – 15% + 17%  +110% + 10%  
Netherlands – 20% + 62%  – 20% + 62%  – 15% + 66%  + 17% + 23%  
Austria + 56% + 8%  + 12% + 6%  + 41% + 7%  + 11% + 1%  
Portugal +390% + 15%  +232% + 10%  +284% + 12%  + 125% + 2%  
Finland + 20% + 10%  – 12% + 8%  + 16% + 10%  –3% + 2%  
Sweden – 20% + 15%  – 20% + 15%  – 13% + 16%  – 20% + 4%  
United Kingdom – 20% + 82%  – 20% + 82%  – 15% + 87%  – 8% + 27%  
EU-15 n/a + 18%  n/a + 32%  n/a + 35%  n/a + 10%  
Cyprus n/a n/a + 49% + 9%  0% + 2%  + 34% + 2%  
Czech Republic n/a n/a – 20% + 11%  0% + 4%  – 7% + 7%  
Estonia n/a n/a + 71% + 7%  0% + 1%  + 39% + 2%  
Hungary n/a n/a – 19%  + 10%  0% + 3%  – 4% + 5%  
Latvia n/a n/a +363%  + 13%  0% + 1%  +224% + 2%  
Lithuania n/a n/a +292%  + 13%  0% + 1%  +144% + 3%  
Malta n/a n/a + 17%  + 2% 0% + 1%  0% + 1%  
Poland n/a n/a +856%  + 13%  0% + 1%  +346% + 2%  
Slovak Republic n/a n/a – 9%  + 7% 0% + 2%  – 1% + 4%  
Slovenia n/a n/a +157%  + 7% 0% + 1%  +101% + 1%  
EU-10 n/a n/a n/a + 9% n/a + 2% n/a + 3% 
EU-25 n/a n/a n/a + 20% n/a + 18% n/a + 6% 
Source: DG AGRI calculations based on net modulation of budget projections for direct payments in 2013 and 
an estimate based on 2006 CATS data for progressive modulation.  
Note: Column A corresponds to net gain/loss with respect to current returns from CAP budget, 
B corresponds to percentage increase in curr ent RD budget. Where n/a, impact not applicable. 
 
EN 138   EN Table 34. – Impact of modulation on MS aver age direct payments (A) and income (B) 
 Option 1 Option 2  Option 3  Option 4  
 Net % change Net % change  Net % change  Net % change  
 A B A B A B A B 
Belgium –6% –1% –6% –1% –6% –1% 1% 0% 
Denmark –7% –3% –7% –3% –7% –3% 0% 0% 
Germany –7% –3%  –7% –3%  –7% –3%  0% 0%  
Greece –3% –1%  –3% –1%  –3% –1%  1% 0%  
Spain –5% –1%  –5% –1%  –5% –1%  0% 0%  
France –7% –3%  –7% –3%  –7% –3%  0% 0%  
Ireland –5% –3%  –5% –3%  –5% –3%  1% 0%  
Italy –5% –1%  –5% –1%  –5% –1%  0% 0%  
Luxemburg –6% –2%  –6% –2%  –6% –2%  0% 0%  
Netherlands –6% –1%  –6% –1%  –6% –1%  1% 0%  
Austria –4% –1%  –4% –1%  –4% –1%  1% 0%  
Portugal 0% 0%  0% 0%  0% 0%  2% 1%  
Finland –5% –2%  –5% –2%  –5% –2%  1% 1%  
Sweden –7% –6%  –7% –6%  –7% –6%  0% 0%  
United Kingdom 1% 1%  1% 1%  1% 1%  1% 0%  
EU-15 –5% –2%  –5% –2%  –5% –2%  0% 0%  
Cyprus n/a n/a –3% –2%  –1% 0%  0% 0%  
Czech Republic n/a n/a –8% –4%  –2% –1%  –2% –1%  
Estonia n/a n/a –5% –2%  –1% –1%  –1% 0%  
Hungary n/a n/a –6%  –3% –1% –1%  –1% –1%  
Latvia n/a n/a –4%  –2% –1% 0%  –1% 0%  
Lithuania n/a n/a –4%  –2% –1% 0%  0% 0%  
Malta n/a n/a n/a  n/a n/a n/a  n/a n/a  
Poland n/a n/a –2%  –1% –1% 0%  0% 0%  
Slovak Republic n/a n/a –8%  –6% –2% –1%  –2% –1%  
Slovenia n/a n/a –1%  0% 0% 0%  0% 0%  
EU-10 n/a n/a –4% –2% –1% 0% –1% 0% 
EU-25 –4% 19% –5% –2% –4% –2% 0% 0% 
Source: DG AGRI calculations based on FADN data.  
 
EN 139   EN Budgetary impacts under option 2  affect all EU-25. The ex tra funding available at 
the EU level for Pillar II measures would amount to €  2 184 million in budget year 
2013. The increase in MS match funding would amount to €  1 629 million, giving 
rise to a total increa se in RD funding of €  3 812 million. The largest net transfers 
occurring from France and Germany, and the main net beneficiary Poland94. 
The interest of this option is not so much  for the present, since new MS will not in 
fact contribute to modulation before 2013; it  is rather as an indication of potential 
transfers in the future with the current di stribution key. Only three EU-15 MS are net 
recipients of modulated funds under this opt ion, while three new MS would also be 
net contributors.  
With respect to the current allocation of funding foreseen  for RD measures in 2013, 
the average EU increase would be 20%, with Denmark and the Netherlands again the main beneficiaries. Yet, despite the net tr ansfer of funds from EU-15 to EU-10, the 
relative impact on EU-10 RD programmes is ra ther small because of the already high 
level of Pillar II in the new MS.  
Budgetary impacts from option 3  fall between the first tw o options, with funding 
available at EU level for Pillar  II measures would amount to €
 2 034 million in 
budget year 2013. The increase in MS match funding would amount to €  1 723 
million, giving rise to a total increase in RD funding of €  3 757 million. However, the 
redistribution effect for this option differs  because the special modulation would be 
retained by the Member State, which generated the savings. 
The main net beneficiaries would be Gr eece and Portugal, and the main net 
contributors once more France and Germa ny. The current allocation of funding 
foreseen for Pillar II measures in 2013 would increase by 19%, with Denmark and the Netherlands showing the biggest gains. 
Under option 4 , funding available at EU level for Pillar II measures would amount to 
€
 545 million, with an extra €  114 million being retained by MS. The increase in MS 
match funding would amount to €  496 million, giving rise to a total increase in RD 
funding of €  1 156 million. All impacts are thus considerably below the previous 
three options. The main net beneficiaries would be Portugal and Spain, and the main 
net contributors once more France and Germany. The current allocation of funding 
foreseen for Pillar II measures in 2013 would increase by 5%, with Denmark and the 
Netherlands showing the biggest gains. 
5.2. Economic and social impacts per farm 
One way of measuring the social impact cau sed by increased modula tion is to look at 
the effects on farmers' income. Each percen tage point of modulation results in an 
actual reduction of th e income per AWU95. This reduction will be less than the effect 
                                                 
94 These results reflect the weight given in the curre nt allocation key to agricultural area, agricultural 
employment and GDP. 
95 As an income indicator, Farm Net Value Added per Annual Work Unit is used because it is the most 
comparable between Member States. The FNVA is the difference between the output plus current 
subsidies and the intermediate consumption and depreciation. With this amount of money the farmer still needs to pay the external factors (wages, rent and interest).  
 
EN 140   EN on the amounts of direct payments received, since farmers have other incomes than 
solely the direct payments. The data  are presented in the table above. 
Under option 1 , when compulsory modulation is  increased by 8% in EU-15, the 
average income per AWU falls from €  20 730 to €  20 380, corresponding to an 
income cut of –2% for the average EU- 15 farm. Cuts range from 1% (Belgium, 
Greece, Spain, Italy, and the Neth erlands) to 6% in Sweden. 
Option 2  affects all EU-2596, and results in a drop of average farm income by 2%, 
from €  16 610 to €  16 320 per AWU. The range of cuts per MS is between 1% for 
Belgium, Greece, Spain, Italy, the Nether lands, and Poland to 6% for Sweden and 
Slovakia. 
Option 3 has the same impacts for EU-15 as option 1 but also  affects EU-25, but in a 
more modest way for new MS. The averag e income in EU-10 declines from €  6 310 
to €  6 280 per AWU (–0.5%). The average cut of  2% in EU-25 farm income ranges 
between –1% in Slovenia and –2% in Po land to –7% in Denmark, Germany and 
Sweden and –8% in the Czech and Slovak Republics. 
Option 4 has the more modest impacts. The average income in EU-25 declines from 
€ 16 610 to €  16 560 per AWU (–0.3%). The average cut in income ranges is most 
significant in the Czech and Slova k Republics, Sweden and Hungary. 
5.3. Environmental impacts 
All options increase availabl e funds in Pillar II.  As a result, they positively benefit 
the availability of funds for agri-environm ental programmes, and the higher the level 
of transfer to the second pillar, the highe r this benefit for RD will be. However, the 
impact per farm will depend not just on the impact of an eventual income drop on production, which is general is minimal, but  also on the capacity of each farm to 
absorb funds from rural development programmes. 
All these effects are difficult to quantity, but they generally move in the same 
direction. They would tend to support more  environmentally friendly methods, while 
cross compliance would guarantee exis ting standards do not deteriorate. 
5.4. Administrative impacts 
In terms of administrative consequen ces, applying an extra 8% compulsory 
modulation across EU-15 (option 1), rather than the current situation of 5%, with the 
same distribution key as today, would not be expected to have any considerable 
impact on the administrative burden of MS, or farms. 
The options affecting new MS would poten tially increase their administrative 
burden, but not with respect to the existi ng baseline; new MS will enter into the 
system anyway (EU-10 by 2012). 
The most complicated option would be w ith progressive modulation, because it 
would imply a change in the present system  of financial management. This burden is 
similar to the one discusse d under the upper payment limitations, while the risk of 
                                                
 
96 EU-24 since Malta is not included at this stage. 
 
EN 141   EN farm splitting could also occur (although this risk is rather small as ling as the gap 
between the progressive cuts is also small). 
5.5. Supplementary analysis 
The above analysis of the four options c onsidered has demonstr ated that option 4 
(progressive modulation) presents the a dvantages of combining elements of both 
individual payment limits and modulation and of minimising distributive effects 
between MS. However, the progressive m odulation option, as analysed, has the 
disadvantage of bringing EU-10 into the m odulation system earlier than foreseen, of 
generating relatively low levels of funding for reinforcing those RD measures needed 
to address the new challenges to agriculture  and of being administratively complex. 
To address these shortcomings while retaining the advantages of progressive 
modulation, further analysis has been made  of a system of progressive modulation 
based on the following principles: 
– all receipts from modulation stay wi thin the MS which generates them; 
– for EU-15, basic modulation, appl ying to all payments above €  5 000, is increased 
by 2% annually from 2009 until it reaches 8% in 2012; 
– a progressive element is introduced, whereby payments are reduced by additional 
steps of 3% for successive paymen t thresholds levels (0% for €  5000 to €  99 999; 
3% for €  100 000 to €  199 999; 6% for €  200 000 to €  299 999; and 9% above 
€ 300 000); 
– EU-10 become eligible for modulation in 2012 (with a basic rate of 3%); 
– a new system for the financial management  of direct aids, es tablishing net global 
ceilings per Member State, is introduced. 
The progressive modulation system would apply over time according to the schema 
below: 
Table 35. – Proposed schema for Progressive Modulation 
Budget YearEU-15 
Payment 
LevelBasic RateEU-15 
Payment 
Level0 - EUR 5.000 
(Franchise)EUR 5.000 to EUR 
100.000EUR 100.000 to 
EUR 200.000EUR 200.000 to 
EUR 300.000Above EUR 
300.000
2007 100% 4% 96% 0% 0% 0% 0% 0%
2008 100% 5% 95% 0% 0% 0% 0% 0%
2009 100% 5% 95% 0% 0% 0% 0% 0%
2010 100% 5% 95% 0% 2% 5% 8% 11%
2011 100% 5% 95% 0% 4% 7% 10% 13%
2012 100% 5% 95% 0% 6% 9% 12% 15%
2013 100% 5% 95% 0% 8% 11% 14% 17%
Budget YearEU-10 
Payment 
LevelBasic RateEU-10 
Payment 
Level0 - EUR 5.000 
(Franchise)EUR 5.000 to EUR 
100.000EUR 100.000 to 
EUR 200.000EUR 200.000 to 
EUR 300.000Above EUR 
300.000
2013 90% 0% 90% 0% 3% 6% 9% 12%Progressive Modulation Rates Current Modulation
 
The budgetary impacts of the proposed progr essive modulation are presented in the 
table below. In this analysis, the impact on those Member States currently applying 
voluntary modulation (UK, PT) has been ta ken into account, on the basis that any 
increase in compulsory modulation amounts substitutes existing voluntary 
modulation amounts. However, since it is assu med that the same ra te of co-financing 
 
EN 142   EN will apply to the new compulsory modulati on amounts as is currently the case, for 
the UK and PT, both applying voluntary mo dulation, the net increase in MS RD 
funding will differ where there are differe nt co-financing rates applied under 
voluntary modulation. 
 
EN 143   EN Table 36. – Impact of progressive m odulation on EU and MS RD spending 
Budget year 2013EU RD 
contribution*MS RD 
contributionTotal RD 
SpendingCurrent average 
co-financing rateProposed 
Progressive 
ModulationCurrent 
Voluntary 
modulationAdjusted 
voluntary 
modulationIncrease in EU 
RD fundingIncrease in MS 
RD fundingTotal increase 
in RD fundingIncrease in 
currentl y foreseen 
RD funding
A B C D=A/C E F G=F-E H=E+G-F I=(H/D)*(1-D) J=H+I K=J/C
Belgium 54,5                   94,5 148,9                  37% 36,6 0,0 0,0 36,6 63,5 100,1 67%
Danmark 61,6                   53,4 115,0                  54% 69,5 0,0 0,0 69,5 60,3 129,8 113%
Deutschland 1.131,1              711,2 1.842,4               61% 440,6 0,0 0,0 440,6 277,0 717,6 39%
Ellas 619,2                 229,0 848,2                  73% 71,4 0,0 0,0 71,4 26,4 97,8 12%
España 1.041,1              966,3 2.007,4               52% 265,7 0,0 0,0 265,7 246,6 512,3 26%
France 905,7                 773,6 1.679,3               54% 537,5 0,0 0,0 537,5 459,1 996,6 59%
Ireland 307,2                 257,2 564,4                  54% 68,2 0,0 0,0 68,2 57,1 125,3 22%
Italia 1.258,2              1.282,8 2.540,9               50% 222,4 0,0 0,0 222,4 226,7 449,1 18%
Luxembourg 11,8                   36,5 48,3                    24% 2,2 0,0 0,0 2,2 6,8 9,0 19%
Nederlands 66,6                   66,6 133,1                  50% 54,9 0,0 0,0 54,9 54,9 109,8 82%
Österreich 511,1                 511,0 1.022,0               50% 28,7 0,0 0,0 28,7 28,7 57,4 6%
Portugal 564,1                 151,9 716,0                  79% 32,9 40,8 7,9 0,0 0,0 0,0 0%
Suomi/Finland 271,6                 601,1 872,7                  31% 24,7 0,0 0,0 24,7 54,7 79,4 9%
Sverige 239,2                 274,0 513,1                  47% 43,6 0,0 0,0 43,6 49,9 93,5 18%
United Kingdom 267,4                 267,3 534,7                  50% 292,1 481,6 190,4 0,9 0,9 1,8 0%
Cyprus 21,0                   21,0 42,1                    50% 0,6 0,0 0,0 0,6 0,6 1,2 3%
Czech Rep 418,0                 118,8 536,8                  78% 49,8 0,0 0,0 49,8 14,2 64,0 12%
Estonia 113,3                 33,3 146,6                  77% 2,1 0,0 0,0 2,1 0,6 2,7 2%
Hungary 578,7                 205,8 784,5                  74% 46,4 0,0 0,0 46,4 16,5 62,9 8%
Latvia 151,2                 46,6 197,7                  76% 2,0 0,0 0,0 2,0 0,6 2,6 1%
Lithuania 253,6                 75,2 328,8                  77% 5,2 0,0 0,0 5,2 1,5 6,7 2%
Malta 10,7                   3,3 13,9                    76% 0,1 0,0 0,0 0,1 0,0 0,1 1%
Poland 1.850,0              557,6 2.407,7               77% 27,7 0,0 0,0 27,7 8,3 36,0 1%
Slovak Rep 317,3                 95,6 412,9                  77% 20,8 0,0 0,0 20,8 6,3 27,1 7%
Slovenia 112,0                 32,2 144,2                  78% 0,8 0,0 0,0 0,8 0,2 1,0 1%
EU-25 11.136,03          7.465,6                18.601,7             60% 2.346,5                522,4                198,3                2.022,4                  1.661,6                 3.684,0              20%  
Source: DG AGRI calculations based on FADN data. 
* For UK and PT, both applying voluntary modulation, it is assumed that the same rate of co-financing will apply to the new com pulsory modulation amounts as is 
currently the case. The net increase in MS RD funding will d iffer where there are different co-financing rates applied under vo luntary modulation. 
 
EN 144   EN This option would release a total of €  2 022 million of EU funds for transfer to and 
use under Pillar II (column H, table above). This figure is comparable to that of 
options 1 and 3 above and considerably highe r than the amount released by option 4. 
Though the biggest impacts of th is measure would fall on FR (€  537 million), DE 
(€ 441 million), ES (€  266 million) and IT (€  222 million), since there is no re-
distribution of the EU funds  generated, there would be no net budget impacts on MS. 
Assuming the same EU co-financing rate, as currently applied in each MS, it has 
been calculated that the tota l contribution of RD funding by MS would increase by 
€ 1 661 million. Column I of the table a bove shows individual MS impacts. 
The proposed modulation mechanisms woul d give a total increase (EU plus MS 
spending) of €  3 684 million for Pillar II measures , which would represent a 20% 
increase at EU-25 level (column K). MS in creases in RD spending would vary from 
+112% in DK and 82% in NL, to generally low increase in new MS. 
Further analysis of the social impact of the proposed progressive modulation on 
farmer incomes, based on FADN data, is ongoing. It may be expected that the 
average impact per MS will follow similar trends to those observed under option 4, which already contained an element of progressive modulation. A more detailed 
breakdown of impacts at farm level, in cluding those by payment size, can be found 
in note 10 of Annex E. 
6. C
ONCLUSIONS  
In relation to the attainment  of the objectives for modulat ion, the status quo option, though 
negative in terms of its failu re to address the budget needs for the current programming 
period, and new challenges facing EU agricultur e, keeps within the constraints imposed by 
the current rules regarding the exemption of new MS. The lack of ambition of the status quo option would be the main reason for its exclusi on in the light of the new challenges of the 
CAP. 
Increasing modulation at EU-15 or EU-25 level, with the ex isting redistribution method, 
addresses the budget issue but in an imbalanced way. Rest ricting modulation to EU-15 
excludes the new MS. Modulating EU-25 breaks  the agreement for th eir exemption until 
2012. The differentiated approach, outlined in option 3, contains more positive elements: 
more funding is available, the rules for modulation are respecte d until 2012 and th e last step 
of modulation finds a balance in te rms of the redistribution effect. 
Option 4, progressive modulation, while bringing EU-10 into the system earlier than foreseen, 
lacks in ambition in terms of th e funds released. However, this deficiency could be addressed 
by revising the percentage of ba sic modulation in the model, as well as the steps between the 
different payment thresholds. 
 
The option also has some promising features, with  regard to the fact th at it permits MS to 
retain the funds generated and it integrates an element of progressiveness in the payment cuts, 
thereby addressing, to some extent, the problem  in relation to the uneven distribution of 
farmer payments. 
 
EN 145   EN Supplementary analysis of a progressive modulation option, involving higher rates of step-
wise modulation and which would be applicab le to new MS only when they reach an 
equivalent level of direct payments to EU-15 in budget year 2013, has shown that it is 
possible to address the shortc omings of option 4 while reta ining its positive features. 
 
EN 146   EN 7. SUMMARY TABLES  
7.1. Comparison between different options and th eir respective impacts – New challenges 
☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS  Option 0 – baseline Option 1 – Simply 
transfer funds to 
Pillar II Option 2 – 
Earmarking of 
transferred funds Option 3 – Higher 
co-financing rates Option 4 – Higher 
aid intensities Option 5 – 
Obligation to 
implement New 
Challenges measures 
Economic Sectors lags in 
adaptation 
/ . . . . . 
Social . Response to public 
concerns 
☺ Response to public 
concerns 
☺ Response to public 
concerns 
☺ Response to public 
concerns 
☺ Response to public 
concerns 
☺☺ 
Environmental Increased risks from 
climate change 
/ Improvement due to 
higher uptake 
☺ Improvement due to 
higher uptake 
☺ Improvement due to 
higher uptake 
☺ Improvement due to 
higher uptake 
☺ Improvement due to 
higher uptake and 
better targeting 
☺☺ 
Administrative 
burden . Reprogramming of 
RD required 
/ Reprogramming of 
RD and separate 
reporting required 
/ Reprogramming of 
RD and separate 
reporting required 
// Reprogramming of 
RD and separate 
reporting required 
/ Reprogramming of 
RD and separate 
reporting required 
// 
Simplification . . / / / // 
 
EN 147   EN ☺☺ very positive; ☺ positive; . neutral; / negative; // very negative 
IMPACTS  Option 0 – baseline Option 1 – Simply 
transfer funds to 
Pillar II Option 2 – 
Earmarking of 
transferred funds Option 3 – Higher 
co-financing rates Option 4 – Higher 
aid intensities Option 5 – 
Obligation to 
implement New 
Challenges measures 
Other . . Increased uptake due 
to incentives ☺ Increased uptake due 
to incentives ☺ Increased uptake due 
to incentives ☺ Obligation helps 
higher uptake  
☺☺ 
 
EN 148   EN 7.2. Comparison between different options a nd their respective impacts – Modulation 
☺☺ strong positive impacts; ☺ positive impact; . neutral; / negative impact; // strong negative impacts 
IMPACTS  Option 0 – baseline Option 1 – Increase basic 
compulsory modulation 
by 8% in EU-15 Option 2 – Increase basic 
compulsory modulation 
by 8% in EU-25 Option 3 – Increase basic 
compulsory modulation 
at different rates in EU-
25 Option 4 – Introduce 
progressive modulation 
Economic Insufficient to meet 
additional demands for 
RD measures  
/ EU-15 direct payments 
reduced by 5% 
/ 
EU budget for RD up 
18% (€ 2.0 billion) 
☺ EU-25 direct payments 
reduced by 5% 
/ 
EU budget for RD up 
20% (€ 2.3 billion) 
☺ EU-25 direct payments 
reduced by 5%  
/ 
EU budget for RD up 
19% (€ 2.1 billion) 
☺ EU-25 direct payments 
reduced by 1% 
. 
EU budget for RD up 5% 
(€ 0.6 billion) 
. 
Social 2% farm income drop  
. 
 
RD strengthens 
☺ Farm income declines  
by a further 2% 
/ 
RD strengthens 
☺ Farm income declines  
by a further 2% 
/ 
RD strengthens 
☺ Farm income declines  
by a further 2% 
/ 
RD strengthens 
☺ Farm income declines  
by less than 1% 
/ to . 
RD strengthens 
☺ 
Environmental Insufficient to meet 
additional demands for 
RD measures  
/ Benefits from extra RD 
funding, but only in 
EU-15 
☺ Benefits from extra RD 
funding to EU-25 
☺☺ Benefits from extra RD 
funding to EU-25, but 
small in EU-10 
☺ Benefits from extra RD 
funding to EU-25, but 
small in EU-10 
. to ☺ 
Administrative No additional impact, 
current rules in place  
. Present rules continue  
. Modulation rules in 
EU-10 apply earlier 
/ to . Present rules continue  
. Modulation rules in 
EU-10 apply earlier 
/ to . 
Simplification No additional impact, 
current rules in place  
. Present rules continue  
. Modulation rules in 
EU-10 apply earlier 
/ to . Present rules continue  
. Introduces new rules and 
legislation 
/ 
 
EN 149   EN 7.3. Comparison between different options and thei r respective objectives – New Challenges 
☺☺ respecting objective; ☺ possibly respecting objective; . neutral; / objective possibly at risk; // objective at risk 
OBJECTIVES   Option 0 – 
baseline Option 1 – Simply 
transfer of fund to 
Pillar II Option 2 – 
Earmarking Option 3 – Higher 
co-financing rates Option 4 – Higher 
aid intensities Option 5 – 
Obligation to 
implement new 
challenges measures 
Responsiveness to 
New challenges // ☺ ☺ ☺☺ ☺ ☺☺ 
Greater uptake of 
RD measures . ☺ ☺ ☺ ☺ ☺☺ 
Simplification . . / / / // 
7.4. Comparison between different opti ons and objectives – modulation 
☺☺ respecting objective; ☺ possibly respecting objective; . neutral; / objective possibly at risk; // objective at risk  
OBJECTIVES  Option 0 – baseline Option 1 – Increase 
basic compulsory 
modulation by 8% 
in EU-15 Option 2 – Increase 
basic compulsory 
modulation by 8% 
in EU-25 Option 3 – Increase 
basic compulsory 
modulation at different 
rates in EU-25 Option 4 – Introduce 
progressive modulation 
Reinforce RD funds // ☺ ☺☺ ☺ . 
Respect rules  
for new MS ☺☺ ☺☺ // ☺☺ / 
Respect current key 
for distribution of 
modulation . ☺☺ // . / 
 
EN 150   EN F – CONCLUSIONS 
1. SUMMARY RESULTS  
The purpose of the Health Check is to asses the experience of the 2003 CAP 
reform and introduce adjustments to simplify and increase the effectiveness of the policy and allow it to respond to present market opportunities and face new challenges. A wide range of possible options were examined, ranging from no policy change to fundamental reform s, against the CAP objectives of: 
• a competitive agricultural sector, 
• production methods that support environm entally friendly, quality products 
that the public wants, 
• a fair standard of living and income st ability for the agricultural community, 
• diversity in the forms of agricultu re, maintaining visual amenities and 
supporting rural communities, 
• simplicity in agricultural policy and the sharing of res ponsibilities among 
Commission and member states, 
• justification of support through the provi sion of services that the public 
expects farmers to provide. 
The analysis of the status quo of th e CAP shows that the current policy 
framework, as reformed in 2003, contribute s positively to fulfilling the principal 
CAP objectives. The options analysed which indicate fundamental policy 
changes, did overall not indicate the need for a radical reform in order to better 
meet the CAP objectives. However, the an alysis showed that there are areas 
where adjustments of the current policy would lead to more optimal solutions. 
The historic model of the SPS and optiona l partially coupled support enabled the 
smooth transition to decoupling in MS whose variable production structures 
implied a need for successive integration into the SPS in 2003. However, the time now seems ripe to allow MS to consider a targeted adjustment towards a more flat rate for payments, which would address the societal concerns of unequal distribution of payments between farmers. Another way of addressing 
the uneven distribution of payments is  through the introducti on of progressive 
modulation of funds. For the areas wh ere the SPS does not address specific 
concerns, solutions could be addressed through Article 69. A revision of Article 
69 would allow MS to use part of their available SPS support to target particular 
sectors and regions with specific needs from an economic, social or 
environmental point of view. This revision would allow for mitigating negative effects on income, it would contribute to the vitality of rural areas and to promoting environmentally beneficial farming practices, while respecting WTO 
commitments.  
 
EN 151   EN Revising the scope of cross compliance, by deleting and adding requirements, 
contributes to easing the administrati ve burden as well as addressing new 
challenges that were not as present at the time of the 2003 reform. At the same time, environmental benefits of set as ide could be retained through GAEC and 
Rural Development Measures. 
In terms of agricultural markets, the pha sing out of milk quotas and removal of 
set aside will allow the farmers to bette r respond to market situation. Moreover, 
restricting intervention quant ities to zero for all feed grains and introducing a 
tendering system in all sectors would make the system more efficient and 
simple, while at the same time provide a safety net role. Within the current CAP 
there would also be an increased possi bility to promote the use of risk 
management tools and techniques thr ough Article 69 and Rural Development 
funds. 
The continuation of the move to pr oducer support and full decoupling of 
remaining sectors would have a positive impact on farm income in most regions due to higher transfer efficiency of direct support, and any possible 
environmental and social effects could be addressed through Article 69 and by 
allowing transitional period for the sector to adjust. 
The analysis shows that most new challenges are being addressed in the 
Strategic Guidelines for Rural Development that set EU prioriti es for the RDP in 
the period 2007–2013. In total, more than 25 s ub-measures directly  or indirectly 
related to climate change, renewable ener gies, risk and water management have 
been included in the programmes. The best  way to strengthen their role within 
the Rural Development policy is to create mechanisms that guarantee that they are taken up by Member States and that  ample financing is provided through 
modulation.  
2. I
MPACT ON STAKEHOLDERS  
The overall impact of the proposals on fa rmers is positive. By enhancing their 
market orientation and reducing existing policy rigidities, pr oposals allow them 
to better grasp existing opportunities and respond to challenges. The overall 
income effect of proposal moving to a furt her decoupling is also positive, as the 
flexibility in production choices allows farmers to adjust to what is more 
profitable for them.. There are, however, some sectors where specific pressure 
on farm income may emerge. This is generally the case in regions where 
alternative production choices are very lim ited and a significan t part of farm 
income is associated to th e level of coupled support. In these cases, options have 
been identified that would allow the mitigation of such income pressures either by continuing existing support or by allowing accompanying measures that would ease the transition of farming to  an economically sustainable situation. 
 
EN 152   EN The overall positive effect of more mark et orientation, further decoupling and 
the removal of supply control will e nhance the competitiveness of the EU 
industry, especially in the dairy indust ry. The expected imp act on employment 
would also be positive overall. There ar e however specific regions and sectors 
where potential problems on employment have been identified, and for which 
the impact on employment, although rather limited overall, could still be felt more strongly at the local level. In a ll such cases, existing measures both in the 
first pillar an especially in RD could fac ilitate necessary adjustments, especially 
since a transition period has been sugges ted to allow the industry to adapt. 
EU consumers should benefit from th e Health Check mainly through the 
reduction of market intervention and the abolition of supply-management tools, 
notably the mandatory set aside in the arable crop sector and the production 
quotas in the dairy sector. These measures are expected  to reduce the prices of 
arable crop products and the prices of meat products (in particular those of 
poultry and pig meat). Likewise, the phasi ng-out and eventual abolition of the 
milk quota system is foreseen to induce a significant welfare gain for consumers 
through the decrease in farm milk pri ce, that would result in lower dairy 
commodity prices.  
The extent to which final consumers will fully benefit from the Health Check 
measures is linked to the low and declini ng share of agricultural raw materials in 
food production costs and to the competi tive structure of th e food supply chain. 
Over the medium to long term there is no significant evid ence of partial 
transmission of price changes between the farm and consumer levels, although 
this may happen in the short run in so me sector/country specific situation. 
With respect to the environment, the Health Check will allow a further positive 
contribution of the CAP by a significant a nd targeted proposed shift of funds to 
RD to respond to new challenges includ ing climate change, biodiversity and 
water. The loss of set aside could be compensated by a combination of adjustments in GAEC and by the use of some of the additional RD funding. 
Finally, with respect to ta xpayers the overall co ntribution of the Health Check is 
not so much in term of the overall budget which is fixed in the Financial 
Perspectives. It is rather with respect to the increase in the transfer efficiency of 
the existing budget, by reallocating exis ting funds and better targeting these 
funds to meet the overall pol icy priorities of the EU. 
3. C
ROSS -CUTTING EFFECTS  
The detailed analysis of the Impact  Assessment focused mainly on the 
individual areas of the proposals. Howeve r, there also are cross-cutting impacts 
both because the overall philosophy of proposed adjustments is the same and because there are linkages between th e various areas, whether of economic, 
environmental or social nature. The vari ous options are summarised in tables 32 
while their cross-cutting eff ects and presented in table 33. 
 
EN 153   EN From the latter table it becomes eviden t that impacts associated with the 
additional risks related with  proposed adjustments are more often cutting across 
the various areas, while the revised Article 69 is considered as the most appropriate means of best addressing these impacts. The linkage of cross compliance and new challenges is also one that requires a certain balance in proposed solutions since changes in cross compliance affect the existing 
baseline of mandatory standards and obligations for farmers, and as a 
consequence impact on the compensa tion for higher voluntary standards 
introduced via RD measures linked to new challenges. 
Finally, cross-cutting effects are also important in another area, that of 
administrative costs. For farmers, HC pr oposals are either neutral or moving in 
the direction of reduc ing them. With respect to ad ministrative costs for public 
administrations, on the other hand, things are more complex because to a large extent they depend on the choices of MS. In terms of quantifying such costs, the 
relevant issue is not the overall costs, which are often referred to in the relevant debate. Most of these costs will be made  anyway because they are linked to the 
need of scrutiny not just of public s upport but also of the implementation of 
existing legislation. 
What is relevant for the HC is the ma rginal cost (or cost saving) of any 
additional measures linked to the HC. Yet what this cost is depends on the 
existing MS administrative structure an d their capacity to readjust their 
implementing measures. In most cases, the qualitative assessment of such costs indicates very small changes with existi ng rules, but their exact level cannot be 
quantified. It is only in the area of  new challenges that certain additional 
administrative costs could be identified because of the need to review RD 
programmes and identify nece ssary adjustments, yet their exact level is not 
possible to quantify at this stage.  
4. B
UDGETARY IMPACT  
Since the 2003 CAP reform, the CAP has an in-built mechanism of financial 
discipline if expected expenditure runs th e risk of exceeding the financial ceiling 
for market expenditure and direct aids . Most CAP support is now fixed and the 
market outlook has significantly improved since 2003. As a result , the risk that 
the financial discipline is applied (i.e. reduction in direct aids) have diminished 
compared to previous expectations.  
Proposals for modulation in the Single Payment Scheme and Rural 
Development are by design neutral with th e respect to the EU budget, as it is a 
simple compulsory transfer  between the second and th e first pillar of the CAP. 
For national budget the increased modulati on could lead to additional national 
expenditure in view of the necessa ry co-financing needed in Rural 
Development. This would mean that some  Member States have the possibility of 
returning to the (higher) leve l of national expenditure or iginally foreseen before 
the decision on the Financial Framew ork 2007–2013. As regards the transfer of 
measures into the Single Payment Scheme there could be moderate financial 
 
EN 154   EN consequences for the EU-budget, but most of the transfers are also budgetary 
neutral. 
With respect to market measures, the recen t increase in world prices has led to a 
clear improvement of prospects with respect to expectations when the 2003 
reform was decided. The reform of mai ze intervention has since then resolved 
part of the previously expected probl ems in cereals market, and the present 
proposals on cereals intervention improve further the situation. Some additional 
expenditure towards the end of the present financial framework is relatively small. In dairy the impact is more one of the timing of expenditure (before or 
after 2013). 
The expiry of the dairy quota will bring additional pressure in butter under all 
options. The present proposal , by initiati ng a gradual process of a quota phasing-
out, is overall more beneficial not just for the sector, but also for long-term 
developments of the CAP. However, the need for some limited additional expenditure on butter exports cannot be excluded. Whethe r this materialises will 
depend on factors that are at this stage unknown (DDA Agreement, world 
market developments). Therefore the pr esent proposals include a review clause 
in 2012 that would allow developments in dairy markets to be assessed to 
determine if additional measures will be needed to avoid any increase in the budget. Some savings are foreseen as a consequence of abolition of existing 
measures. However, the biggest budgetary effect of the soft landing on the milk 
quota is a loss of budgetary revenue due to  the foreseen decrease in milk levy. 
 
EN 155   EN 5. SUMMARY OF DIFFERENT ANALYSED OPTIONS  
Option SPS model A.69Cross 
compliancePartially 
coupled 
supportUpper limits Lower limitsCereal 
interventionSet aside Milk quotasOther support 
schemesRisk 
management New Challeges Modulation
0 Status quo Status quo Status quo Status quo Status quo Status quo Sta tus quo Status quo Quota extension Status quo Status quo Status quo St atus quo
1 EU flat rateTargeted 
revisionBetter targetting 
the scopeFull decouplingFixed individual 
limits at a certain 
levelCurrent 
individual lower 
limitsreduction of the 
intervention to 
safety net levelremoval of set 
asideQuota expiry Full decouplingEU wide frame 
workTransfer of 
additional funds 
to Pillar IIIncrease in 
compulsory 
modulation by 
8% in EU 15
2 SAPS for all MSExtended 
revisionBroadening the 
scopeTargeted 
selective 
decouplingProgressive 
individual limitsIncreased 
individual limitsrestrict 
quantities to 
zero for all feed 
grains5% 
environmental 
set asideQuota phasing 
outTargeted 
selective 
decouplingEnhanced role 
of risk 
management in 
current CAP 
instrtumentsEarmarkingIncrease in basic 
compulsory 
modulation by 
8% in EU 25
3Regional flat rate 
per hectareTendering 
systemNew GAEC 
environmental 
featuresHigher co-
financing ratesIncrease in basic 
compulsory 
modulation at 
different rates in 
EU 25
4Regional flat rate 
per entitlementStrengthening 
set-aside in pilar 
IIHigher aid-
intensitiesProgressive 
modulation
5Obligation to 
implement New 
Challenges 
measuresSPS model New Challenges Market
 
 
EN 156   EN 6. SUMMARY OF CROSS CUTTING ISSUES BETWEEN ANALYSED OPTIONS  
 
Option SPS model A.69Cross 
compliancePartially 
coupled 
supportUpper limits Lower limitsCereal 
interventionSet aside Milk quotasOther support 
sche me sRisk 
manageme n
SPS model
A.69
Cross 
compliance
Partially 
coupled 
support
Upper limits
Lower limits
Cereal 
intervention
Set aside
Milk quotas
Other support 
sche me s
Risk 
management 
New 
Challeges
Modulation
Note: Impact is indicated by direction of arrow.  
 
EN 157   EN G – MONITORING AND EVALUATION 
In order to provide for monitoring of the futu re performance of the CAP and in particular 
evaluate how the Health Check attained its objectives, Commission services will follow the developments in the foreseen period of adjustments under the Health Check. 
The monitoring and evaluation will use, among others, the following indicators (many of 
them used for the impact assessment of th e Health Check and/or in the multi-annual 
evaluation programme for CAP policies): 
Single Payment Scheme: 
• development in farm income, 
• amounts of direct payments and th eir distribution between farms; 
Markets: 
• volume of public stocks in intervention, 
• agricultural export perf ormance (e.g. EU share in world tr ade in agricult ural products), 
• international and domestic production; 
New challenges: 
• rural development expenditure, 
• uptake of Rural Development measures, espe cially those addressing new challenges 
(climate change, renewable energies , water management, biodiversity), 
• funds shifted to Rural Development through modulation. 
There will also continue to be evaluations  and studies on partic ular issues of CAP 
performance and the Commission will continue to follow relevant projects under the research 
framework programmes.