Special report No 2/89 on the organization of the markets in fresh and processed fruit and vegetables. Replies of the Commission
Date: 1989-03-30
Institutions: European Court of Auditors
Subjects: food aid, food processing, fresh fruit, fresh vegetable, product quality, withdrawal from the market













EUR-Lex - 31989Y0524(02) - EN






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31989Y0524(02)

Special report No 2/89 on the organization of the markets in fresh and processed fruit and vegetables. Replies of the Commission  


Official Journal C 128 , 24/05/1989 P. 0044 - 0073 





SPECIAL REPORT N° 2/89 on The  organization of the markets in fresh and processed fruit and vegetables Replies of the Commission  (89/C 128/02)(Observations pursuant to Article 206a paragraph 4 of the EEC Treaty)>TABLE  POSITION>1. INTRODUCTION1.1. This report deals with the management and control of the  Community regime of support for the fruit and vegetable market. This regime has a number of unusual  features. When introduced in 1966 it was confined to fresh produce. Fruit and vegetables being  perishable, the usual instruments of intervention purchase and storage are not appropriate for  day-to-day market management. Accordingly the main forms of price support within the Community  market are: (a)producers may withdraw their produce from the market and receive financial compensation from  intervention agencies (). Produce withdrawn in this way can be disposed of in various ways, but in  practice most of it is destroyed; (b)in order to enlarge the outlets for producers in the home market, and to help them compete with  lower-priced imports, aid is available for the processing of certain fresh fruit and vegetables  into more marketable products; (c)following the accession of Greece, support was extended to the processing of dried grapes and  figs. Intervention purchase and storage was also provided for these products. 1.2. Although not covered in the present study, further support is provided by the imposition of  duties on imports, supplemented, when necessary, by a system of import reference prices and  countervailing charges. Export refunds are payable on produce (mostly fresh) exported to third  countries, but expenditure thereon is limited. Moreover, to improve the marketing structure, fruit  and vegetables marketed in the Community are subjected to a quality grading system. 1.3. This report () results from an examination of the measures mentioned in paragraph 1.1 i.e.  financial compensation for the withdrawal of fresh produce from the market (budget item 1501) and  of the subsidies for processing of produce (items 1503, 1511 and 1512), which together account for  some 90  % of total expenditure on the market, concentrated for the most part in Italy, and, to a  lesser extent, Greece and France. Audit on-the-spot was confined to these three countries and the  Netherlands. The audit in France was confined to processed products. The importance of the regime  will increase considerably in 1992, when Spain and Portugal, which are both substantial producers  of fruit and vegetables, will for the first time become significant beneficiaries. However given  the present low expenditure there, they were not included in the present study. 1.4. The main issues dealt with were: (a)whether appropriate controls were foreseen and applied to ensure the legality and regularity of  Community expenditure in relation to the withdrawal and processing of produce; (b)whether the operation of the various market measures at Community, national and local level  ensure sound financial management. 1.5. The market in fruit and vegetables is characterized by surpluses of certain produce,  accompanied by substantial withdrawals followed by destruction. The report shows that: (a)structural measures to redirect citrus production into more profitable lines have been  ineffective; (b)the original regime replaced previous national schemes of support and relied heavily on national  methods of administration and finance. The administrative provisions governing withdrawals of fresh  produce - modelled on the more highly organized Dutch system - are ill-adapted to the marketing  structures which exist in the Member States chiefly concerned; (c)there is no adequate incentive to seek useful outlets for produce withdrawn from the market; (d)only minimal control provisions are prescribed at Community level and producer organizations,  some of which are not even properly constituted, have far too much discretion in committing EAGGF  funds by the opening of withdrawals; (e)physical controls on processing are inadequate and the risk of fraud and irregularity remains  high. 1.6. A more detailed summary of observations is contained in Chapter 7. 2. PRODUCTION AND BUDGETARY EXPENDITURE2.1. Production of those crops which  are eligible for withdrawal under the Community's scheme has remained fairly stable during the  marketing years 1982/83 to 1986/87 at a level of between 29,1 and 30,8 million tonnes while market  withdrawals have varied between 1,2 million tonnes and 2,9 million tonnes. During the same period  between 800  000 and 865  000 tonnes of fresh oranges and lemons were processed into juice  annually, except for 1985/86 when both production and processing increased and 1  036  000 tonnes  were processed. There were large variations in the production of other processed products the most  notable of which being a large decrease from the 1985/86 marketing year in the quantity of  processed tomatoes produced following the introduction of production quotas. 2.2. The amount spent on overall market support varies from year to year due principally to  fluctuations in: (a)the quantities harvested; (b)the quantities withdrawn from the market at times of excess production; (c)the quantities taken up by the processing industry. 2.3. Budgetary expenditure between 1982 and 1987 averaged 1  125  Mio ECU per annum. Although  fairly stable in absolute terms, in relation to the total EAGGF Guarantee expenditure, it has  declined from a peak of 7,9  % in 1984 to 4,2  % in 1987. Within this global amount there have  been: (a)substantial fluctuations in the amounts spent on withdrawal of fresh produce; (b)a decrease of 50  % (some 250  Mio ECU per annum) in the expenditure on processed tomatoes due  to the imposition of quotas in 1985, offset in part by an initial rise of some 90  Mio ECU due to a  surge in withdrawals of the product; (c)a general decrease since 1985 in the amount spent on processed fruit. 2.4. From the inception of the market organization, Italian producers were by far the principal  beneficiaries. Even with the advent of Greece, Italy continued to be the biggest producer in the  Community of 10, accounting for over 50  % of total Community production of fresh fruit and  vegetables eligible for withdrawal and for over two-thirds of processed products receiving aid. 2.5. Further details of production and of Community expenditure on fruit and vegetables are  contained in Annex I and in the tables attached thereto. 3. ADMINISTRATION OF THE WITHDRAWAL SYSTEM FOR FRESH FRUIT AND VEGETABLESBasic  regulations and the objectives3.1. The withdrawal system is laid down in Council Regulation (EEC)  N° 1035/72 of 18 May 1972 () (the basic regulation), setting out the common organization of the  market in fruit and vegetables. The objective of the market organisation is to achieve 'a balance  between supply and demand at fair prices to the producer, account being taken of trade with third  countries, while encouraging specialization within the Community` (sixth recital). The marketing  year differs according to the type of fruit and vegetable involved. 3.2. Fresh fruit and vegetables are perishable and those products most frequently in surplus,  particularly so. Therefore storage for long periods is not practical. The financial compensation,  i.e. the withdrawal prices paid to growers for the different products, is designed to prevent a  drastic fall in market prices and is not meant to guarantee a fixed price over the marketing year,  as is the case with the traditional intervention machinery of the common agricultural policy. Thus  withdrawal prices are paid at levels well below the prices obtainable on the normal market. Rules for granting financial compensationProducts eligible for aid3.3. The intervention system  applies only to a limited list of products: applesauberginesmandarinsclementinespearsapricotstable  grapessatsumaspeachesorangescauliflowersnectarinestomatoes lemonsClementines, satsumas and  nectarines were added to the list under the terms of Council Regulation (EEC) N° 223/88 () of 25  January 1988. The former two were included because they form an important part of Spanish citrus  fruit production and the latter because it is a substitute for peaches, a product which is already  eligible for withdrawal. Implementation of the system3.4. The implementation of the system is delegated to nationally  recognized producer organizations in the Member States. Regulation (EEC) N° 1035/72 () specifies  the goals of these organizations among which are the promotion of concentration of supply and price  stability together with the provision of suitable technical means for the preparation and marketing  of produce. Setting the withdrawal price3.5. The price below which produce will not be offered for sale on the  market (i.e. the withdrawal price) is decided by the producer organizations concerned subject to  ceilings laid down each year by the Council. This is the price which the organizations must then  pay to their members for the produce so withdrawn and forms the basis for the financial  compensation paid by the Community to the organizations. The prices (and the compensation) reflect  differences in variety, quality class, size and packaging. The mechanism for setting the withdrawal  price is described in more detail in Annex II. Activating the system3.6. The Community withdrawal system for fruit and vegetables is based on  that operating in the Netherlands, a country with long and sophisticated marketing traditions.  Dutch produce is sold at auctions and withdrawals take place when no offers are received for a lot  at a price above the withdrawal price. In the southern Member States markets are more fragmented,  the auction system is rare and producer organizations there have wide discretion to intervene in  the market and withdraw produce. The withdrawal procedure3.7. The Community regulations do not lay down specific controls to be  performed at the time of withdrawal. In Italy and Greece the operation is supervised by a three man  control 'team` provided for under national regulations adopted in implementation of the Community  measures. The teams comprise two local officials including an agronomist. In Italy, the third  member is from the Guardia di Finanza, while in Greece, he is a representative of the producer  organization concerned. 3.8. The task of the above control teams is to ensure that the produce presented for withdrawal is  eligible for Community aid and is in a marketable condition - this means that it must be at least  quality class II (the marketing of quality class III fruit is permitted only in exceptional  circumstances). They also verify the variety, size and presentation of the produce, details which  are necessary to determine the withdrawal price, and supervise destruction. Disposal of withdrawn fruit3.9. The basic regulation provides (Article 21) for the disposal of  withdrawn fruit and vegetables by the following methods: (a)free distribution to charitable institutions, schools, prisons, hospitals etc. while ensuring  that such distributions are in addition to normal purchases; (b)use for non food purposes; (c)use for animal feed either in a fresh state or after processing; (d)processing into alcohol of apples, pears and peaches; (e)the processing of certain varieties of orange. 3.10. Producer organizations in the Member States are responsible for disposals and the proceeds,  if any, are deducted from the financial compensation paid by the intervention agency. A very high  proportion of withdrawn produce finds none of the above outlets and is destroyed, usually by  burial, despite the fact that such action is not explicitly foreseen by the regulations. Observations related to the administration of the withdrawal system3.11. The following  observations underline the need for the Commission to set out clearly adequate controls to be  performed by the national authorities. Recognition and monitoring of producer organizations3.12. Council Regulation (EEC) N° 1035/72 ()  requires that withdrawals from the market of fresh fruit and vegetables shall be conducted only by  producer organizations which are recognized by the Member State in question. Article 13 of the same  regulation specifies a number of conditions which these associations must satisfy in order to  qualify for recognition. Among these is a requirement that the entire produce of the members should  be marketed through the central organization. However, producers may be authorized by the  association not to apply this requirement for certain quantities. It was intended therefore that in  order to obtain recognition and to benefit from the Community aid, producer organizations should be  genuine marketing bodies. 3.13. The audit team visited producer organizations in Italy, Greece and the Netherlands. In Sicily  all four of the selected producer organizations were found not to be genuine marketing entities. It  was ascertained that the majority of the sales which actually took place were arranged by the  individual members and not marketed through the central organization as required by the regulation.  As a consequence, the main activities of the organizations consisted simply in attending to  withdrawal operations. In one case income from withdrawals accounted for 90  % of the total income  of the producer organization. 3.14. The above points call into question the effectiveness of the verifications carried out prior  to the granting of recognition to these organisations and of their subsequent supervision. It is  recommended that the Commission should critically review the procedures employed in the Member  States and should provide for a re-examination of existing producer organizations to ensure that  the Community regulations are respected and that the organizations are entitled to benefit from the  aid system. 3.15. The Court is aware of the Commission's attempts to correct such breaches of the regulations  in the past by conducting lengthy enquiries into the operations of producer organizations in France  and Italy. For this reason it is all the more disappointing to note that the problem continues to  exist. 3.16. Since the Court's enquiries began, the Commission's own auditors visited Sicily early in  1988, in connection with the clearance of accounts procedure for 1986. Based on an analysis of the  operation of four producer organizations, different from those visited by the Court, the Commission  has disallowed 54,2 billion Lire (35,6  Mio ECU) in respect of three of them. Supervision of destruction operations3.17. In view of the possibility that withdrawn produce sent  for destruction might find its way back into the normal market it is essential that effective  controls should exist at that point. As mentioned in paragraph 3.10, destruction is not  specifically foreseen by the regulations and this fact alone may lead to controls in this area  being less than adequate. In the Netherlands the authorities have interpreted the regulations  literally and have taken the view that destruction is not allowed. However, considerable quantities  of withdrawn fruit and vegetables which do not find any useful outlet in that country are allowed  to rot by the producer organizations in an area of their premises designated for that purpose. This  procedure is not the subject of any independent verification. Furthermore the authorities in the  Netherlands, when reporting to the Commission on the destination of withdrawn produce, declare all  such quantities as used for animal feed, although, in the case of tomatoes, a substantial portion  is destroyed. The Dutch authorities explained their actions by stating that all varieties of fruit  and vegetables withdrawn from the market are intended for use as animal feed and this possibility  continues to exist even where, due to insufficient demand, the produce has been sent to the dump. 3.18. In Italy and Greece, on the other hand, destruction of withdrawn produce is accepted by the  national authorities and is monitored by control teams described in paragraphs 3.7 and 3.8. However  the operation is described in aid applications as 'use for non-food purposes`, and is so certified  by the local verifying officers. The Court considers that this description is, at best, ambiguous  and should be changed to specify the precise nature of the use e.g., 'destruction under  supervision`. Furthermore the destruction operations should be the subject of a report by the  verification team to the paying agency, a practice which was not followed in any of the regions  (with the exception of one in Italy) visited by the Court's auditors. 3.19. The foregoing paragraphs highlight the unsatisfactory situation stemming from the absence of  Community provisions relating to destruction. If destruction, whether active or passive, were  recognized as a permissable destination Member States such as the Netherlands would be forced to  adopt proper controls, and reporting systems used by all Member States would be based on reality. Cash proceeds from sale of withdrawn produce3.20. The proceeds of sales of withdrawn produce are  to be declared each month to the intervention agency and subsequently deducted from the financial  compensation payable in respect of withdrawn produce. There was no evidence that the above  financial proceeds, which in the 3 marketing years 1984/85 to 1986/87 ranged between 1,2 and 3,2   Mio ECU per annum, are checked for accuracy or completeness by any control body. This matter should  be examined as a matter of urgency by the Commission. Timing of financial compensation3.21. Article 18 of the basic regulation provides that the value  of the financial compensation to be paid by the Community to producer organizations in respect of  withdrawn produce shall, in the normal case, be equal to the indemnities paid by the organizations  to their members, less any net receipts from disposals. Under Article 15, the organizations are to  set up intervention funds, fed from contributions levied on their members, in order to provide the  necessary resources. 3.22. In Italy and Greece, these provisions, which clearly imply that the organizations must have  paid the indemnities before claiming the financial compensation, are ignored. In Italy, the  indemnities are paid out of the proceeds of the financial compensation after it is received from  the intervention agency, and this despite the fact that the claims for such compensation are  certified to the effect that the indemnities have been 'paid`. In Greece, although it is understood  that the organizations pay an advance on account of the indemnities, the application for aid makes  clear that the indemnities have not yet been fully paid. In both Member States the authorities are  aware of this irregular situation but tolerate it because of the financial burden which would be  involved for the producer organizations in pre-financing the indemnities which for the marketing  year 1986/87 amounted to some 448  Mio ECU () for the two Member States in question. The Commission  services have also closed an eye to the problem. It is unacceptable that Community regulations  should be manipulated in this way. The Commission has a duty, in clearing the Member States'  accounts, to allow as a charge on Community funds only expenditure which conforms to Community  provisions. If there are practical difficulties in implementing legislation, steps should be taken  to change it. Supporting documentation3.23. To provide for the possibility of audit, it is essential that the  basic documents relating to deliveries of fruit to intervention centres - detailed listings,  weighbridge tickets, etc. - be retained. Here again, the audit team found that in none of the  regions visited, with the exception of one in Italy, were these documents retained. 4. THE ADMINISTRATION OF THE AID SYSTEM FOR PROCESSED FRUITProcessing  systems4.1. Processing aid (known in the regulations as financial compensation or production aid,  depending on the measure) is paid to processors under the following budget items: 1503  -Compensation to encourage the processing of citrus fruits, viz: lemons and certain varieties  of oranges; 1511  -Production aid for tomato-based products; 1512  -Production aid for fruit-based products, viz: peachesWilliams pearscherries          in syrupprunessultanascurrantsfigs            dried  goods4.2. Expenditure under 1503 is made under two regulations, for oranges under Council  Regulation (EEC) N° 2601/69 of 18 December 1969 () and for lemons under Council Regulation (EEC) N°  1035/77 of 17 May 1977 (). In concept the expenditure on the processing of oranges is an extension  of the support measures aimed at giving assistance to the fresh market. The measures granting aid  were introduced when the markets were in a critical situation; when there were heavy withdrawals of  certain varieties of oranges and when Community lemon juice came under pressure from imports. Since  then the system has arrived at a stage where those varieties of oranges admitted for processing aid  have only the production of juice as a market outlet, fresh sales being negligible. 4.3. Expenditure under both 1511 and 1512 is made under Council Regulation (EEC) N° 426/86 of 24  February 1986  (3). The production aid granted for the processing of tomatoes and fruit is intended  to facilitate competition with third country imports by compensating for the difference between  Community and world market prices. A condition for receiving the aid is that factories must pay a  Community set minimum price which assures growers' incomes. Fruit in syrupGeneral4.4. Regulation (EEC) N° 426/86 () and the implementing regulation  [Commission Regulation (EEC) N° 1599/84 of 5 June 1984] (), set out the rules under which aid may  be granted. Processors must have contracted for and purchased raw product at or above the relevant  minimum price set each year by the Commission. The raw material must be of sound and fair  merchantable quality and suitable for processing and the resultant processed product must meet  minimum Community quality requirements. 4.5. Table 1 shows the number of irregularities in the processed fruit sector reported by Member  States for the period 1983 to 1987. The information shown may not be exhaustive as it will not  include irregularities which have been detected by Member States but which have not been reported  to the Commission, a matter which the Court has criticized in the past (). During the audit on the  spot in Italy, officials emphasized the continuing fight against fraud and stated that in the first  four months of 1987 irregularities involving an estimated 40  000  Mio Lire (26,3  Mio ECU) had  been detected in the processed fruit and vegetable sector. The irregularities mainly concerned the  processing of tomatoes and peaches and were detected as a result of extended enquiries covering  payments over a number of years. The Court's audit identified a number of improvements, mentioned  in the following paragraphs, which should be made to the control systems of certain Member States. Control visitsNotification in advance4.6. In Italy most control visits by the national  authorities are notified in advance, while this was not generally the case in Greece and France.  Spot checks on the quantity and quality of raw material input and product output are, in the  Court's view key elements of the control system and it is recommended that where possible such  visits be made unannounced. The Italian authorities have advised the Court that they will  discontinue the practice of giving notice of visits. Checks on input and output4.7. In the Member States control visits are generally made at the  beginning and end of the processing season, to establish starting and ending stock levels, and  twice further during the processing period. The controls concentrate on production records with  test checks against stocks. The Court found the number of visits and consequent physical checks on  raw materials and finished products inadequate. Where such physical checks were performed, their  effectiveness was sometimes open to question. For example, in Italy it was found that officials  usually took the stated contents of cartons at face value. Furthermore they did not examine primary  records relating to production, storage and dispatch as a matter of routine. >TABLE>4.8. Although aid is paid in respect of finished processed product the Court  considers that the authorities in the Member States should seek to verify, by systematic physical  checks, the quantity and quality of raw product received and processed. This information should  then be used to establish that the declared output is feasible. 4.9. The importance of frequent physical checks combined with checks on primary documents is  underlined by the fact that the majority of frauds identified in this market sector concern  fictitious production. The Court considers that the Commission should provide for systematic checks  on raw and finished product. Member States should lay down for each claimant a programme of  frequent spot checks with records being kept of the product examined and of the documents verified.  While the Court believes that this is a general control problem it notes that the Corte dei Conti  has examined the Italian control system and has reached the broadly similar conclusion () that in  that Member State the system should be simplified so as to give special priority to permanent and  physical on-the-spot checks at the time of processing and to concentrate checks on accuracy at this  stage. 4.10. Processors regularly test the canned finished product to ensure that quality standards are  met. Due to the scale of the commercial operation and the low frequency of control visits Member  States require the undertakings to set aside representative cartons from daily production. During  control visits the inspectors select samples from this 'stock` and send them for analysis. The  Court considers that such a sampling system does not guard sufficiently against irregularities as  it is the undertaking itself which selects the production which may be subjected to further  official tests. In addition, in Italy the responsible officials do not as a matter of routine make  enquiries within the undertaking if official test results differ from those obtained by the  processor. The Commission should ensure that the sampling and analyses carried out by the  undertakings themselves be tested by means of a minimum scale of official sampling with samples  being taken both from the production line and from stock, and that any discrepancies between  official test results and those carried out by the undertakings be followed up. 4.11. The Italian authorities have introduced () credibility checks between input raw material and  output processed product. Maximum allowable percentages of output for raw material input have been  set nationally e.g. that for peaches in syrup is 70  %. Any claim exceeding the limit is reduced to  the maximum permissible. However, the check needs to be strengthened so that where there are  indications of overdeclaration of output follow-up action is taken. At present this does not occur.  In addition there has been no review to examine whether the limits laid down reflect realistic  input/output ratios; enquiries made at modern plants indicated that the maxima are in fact  overgenerous. Processed tomatoes4.12. The main tomato products in receipt of aid are canned tomatoes and tomato  concentrate. In 1984 following reports from the Italian authorities of a substantial and  unexplained increase in processing, the Commission launched an enquiry in that country under  Article 9 of Council Regulation (EEC) N° 729/70 of 21 April 1970 (). Its purpose was to ascertain  the true state of the market in processed tomatoes and the reasons for the rapid expansion of  processing. Commission officials accompanied by national representatives and industrial experts  visited a number of undertakings in three regions of Italy in October 1984. 4.13. No irregularities or frauds were identified and it was ascertained that the production,  indicated by the plants visited, was feasible. The explanation given to the Commission officials  for the increase in the quantities processed was that it resulted from an increase in the area of  tomatoes cultivated and a switch to tomato processing from products not eligible for processing  aid. 4.14. The Commission followed up the initial enquiry by requesting the Italian authorities to carry  out enquiries at certain undertakings under the terms of Article 6 of Council Regulation (EEC) N°  283/72 of 7 February 1972 (). Despite reminders from the Commission services, it was not until late  1988 that the Italian authorities gave some information on progress. The Court considers the delays  to be most regrettable and urges the Commission to take appropriate steps. 4.15. In view of the Commission's enquiry and that of the Italian authorities the Court's audit  effort was concentrated on other processed products. However, many processors of fruit in syrup are  also processors of tomatoes at other times of the year. It is considered that the observations  relating to fruit in syrup contained in paragraphs 4.6 - 4.11 are also relevant to the control of  tomato processing. Dried grapesGeneral4.16. The aid system for dried grapes which is operated in Greece only,  follows that outlined at paragraph 4.4. It consists of an aid for the processing of sultanas and  currants which have been dried on producers' premises and sold to processors at or above the  minimum price. This price is the subject of monthly increments. In order to qualify for aid,  producers of currants are required by Article 1 of Council Regulation (EEC) N° 1277/84 of 8  May  1984 () to withhold 5  % of their production from delivery to the processing industry which in turn  is required to withhold from processing and sale 8  % of sultanas and 15  % of currants bought  under contract. Such quantities not processed are not eligible for aid. This requirement is in  order to maintain the quality of the processed product. 4.17. If the producer has not sold his produce to a processor, he may sell it during the last two  months of the marketing year to storage agencies under the terms of Commission Regulation (EEC) N°  626/85 of 12 March 1985 (). The price paid by the storage agency is the minimum price before the  application of the monthly increments. The storage agencies, which are privately-owned, often by  producer cooperatives or associations, receive aid at a flat-rate to cover storage costs and also  financial compensation to cover losses on eventual sale (). The audit of the processing system did  not lead to any major observation. However, the Court has a number of remarks in relation to the  storage system. Approval and monitoring of storage agencies4.18. Regulation (EEC) N° 626/85 () lays responsibility  for approval of storage agencies on the Member States, but the conditions for approval are not  specified in detail. This failure to lay down the conditions which should be met is regrettable  because most storage agencies are also producer associations so that when goods are sold by  producers to a storage agency no 'arms-length` sale occurs. Similarly it is frequently the producer  association, owner of the storage agency, that is the purchaser. In practice, therefore, the  safeguard of opposed interests which should ideally exist between storekeeper, seller and buyer is  non-existent. 4.19. The main risks are: (a)that the quality of the product accepted into storage may be overstated and even sub-standard; (b)substitution of the product with a similar product of lower quality at some stage during  storage; (c)manipulative discrepancies between ingoing and outgoing quantities and qualities. At the limit  the stocks might be purely fictitious; (d)storage agencies may take decisions having adverse financial consequences for the EAGGF. 4.20. In the case of (b) and (c) the objective of removing produce temporarily from the market is  frustrated. In all cases the EAGGF may be financing unjustified transactions. Examples of how this  lack of opposed interests can work to the overall detriment of the scheme were identified during  the audit and are set out below. 4.21. At none of the three storage agencies visited in Greece was there any evidence that the  products had been weighed when handed over to the storage agency, as required by the regulations.  The weight recorded in the accounts was that established earlier in the marketing year when the  product was stored privately, without adjustment for any losses occurring before public storage.  Such weight losses do occur, particularly in respect of sultanas which are usually stored in  hessian sacks; these do not protect them fully with the result (apart from the fact that it is  contrary to the regulations) that total weight losses of up to 30  % can occur from the time when  the sultanas were first privately stored. Thus the weights recorded at the time of handing over to  the storage agency are not valid. Failure to correctly record the weight of product taken over by a  storage agency will lead to incorrect claims for storage aid and to the recording of larger losses  on eventual sale than in fact should be the case. An accounting system which accepts fictitious  figures should not be tolerated. 4.22. Losses in store, over a prescribed limit of 1  %, are at the charge of the storage agency.  Nevertheless, storage agencies are required by the regulation () to carry out a first physical  stocktaking at the end of February and subsequent stocktakings at the end of August each year,  which Member States are required to verify. The stock records kept by each of the three storage  agencies examined showed that no storage losses were recorded, nor were corrections made by the  verifying authority. As it was acknowledged that losses do occur both the accuracy of the records  and the checks made are questionable. 4.23. A producer association, which is also a processor, rejected offers from a competing processor  to purchase 200 tonnes of currants at the minimum price. This led to a greater quantity of currants  being handed over by the association to its own storage agency than would otherwise have been the  case, resulting in a net cost to the Community budget of 13,7 ECU/100 kg, i.e. in the above case  alone, 27  400 ECU. The same association in its capacity as storage agency later rejected an offer  from the same competitor to purchase 1  000 tonnes of currants for human consumption because the  purchase price fixed by regulation was not shown on the purchase application, a matter that could  under normal circumstances have been resolved by telephone or telex. The storage agency  subsequently sold the product to its own producer association for processing itself. 4.24. If the combination of storekeeper, seller and buyer retained by the storage agencies is to be  continued to be tolerated, the Commission should lay down strict criteria for the approval and  monitoring of storage agencies. In particular it should require Member States to implement a  systematic practice of formal checks at entry and release of stocks with regular reports on storage  conditions, including effective stocktaking and reconciliation of stock records. Sales for animal feed4.25. Sales from storage may take place either at prices fixed in advance by  the Commission, or by tender. Under Article 1(2) of Commission Regulation (EEC) N° 3205/85 of 15  November 1985 () products sold by tender for animal feed are required to be '... denatured in such  a way that they cannot be used subsequently for human consumption or incorporated into products for  human consumption including alcohol.`4.26. Currants sold for animal feed are purchased mainly by  individual farmers for feeding to their stock. During the audit the competent national authorities  received reports that currants denatured for animal feed had been later sold as fit for human  consumption. At the time of the audit routine checks were not made by the national authorities at  the purchasers premises to ensure that the currants were used for the intended purpose, or to  ensure that the denaturing was effective. The Greek authorities have informed the Court that they  are in the process of strengthening their controls. The Court considers that the Commission should  lay down the denaturing methods and subsequent checks to be undertaken by Member States. Citrus fruit4.27. Under Articles 18 and 19 of Commission Regulation (EEC) N° 1562/85 of 7 June  1985 () aid is paid in respect of the quantity of raw fruit supplied by a producer under a  processing contract and actually processed. The controls introduced by the Italian authorities to  ensure compliance with the requirements of the scheme are broadly satisfactory. Three officials are  required by the national rules to be present for the control of the receipt and processing, an  agronomist, an official of the regional Ministry of Agriculture and a member of the Guardia di  Finanza. 4.28. The elaborate nature of this control system which was introduced to combat the risk of fraud  or irregularity, has had a restrictive effect on processing. Undertakings may only receive and  process fruit when all members of the official control team are present, thus the plant is required  to lie idle outside normal official working hours and transport may wait up to a day to discharge.  Limiting the hours of operation inevitably increases the cost of processing and, indirectly, serves  to maintain a higher level of aid than would otherwise be necessary. In addition, the limit on  processing also serves to divert fruit to withdrawal. The Court considers that while the current  strength of controls should not be decreased, steps should be taken by the Italian control  authorities to relieve this situation. 5. MARKET MANAGEMENT - FRESH FRUIT WITHDRAWALSControl of the basis for  commencement of withdrawals5.1. It was mentioned in paragraph 3.6 that the producer organizations  which operate in the southern Member States rarely use auction systems. This means that, in cases  where auctions do not take place, withdrawals might occur if it were considered that the resultant  shortage would create higher prices later on. In these instances producer organizations would be  willing to accept the lower withdrawal price for a portion of their produce in the knowledge that  higher market prices would be available later. The Court considers that private trade organizations  should not be allowed access to Community funds without adequate supervision of their actions and  urges that the regulations be amended so as to place the onus on producer organizations to justify  the necessity for each withdrawal operation. End-use of withdrawn produce5.2. Table 2 shows the usage of withdrawn produce for the 1984/85,  1985/86 and 1986/87 marketing years. The quantity going for free distribution has remained stable  during the period despite the fact that total withdrawals have increased substantially. At only 1,3   % of the total quantity withdrawn in 1986/87 it is largely insignificant. Quantities used for  animal feed have also shown no great variation over the period. Quantities used for distillation  were exceptionally high in 1984/85 at 344  000 tonnes due to heavy withdrawals of apples and  peaches during that year. >TABLE>5.3. The quantities going for destruction were very high during 1985/86 and  1986/87 marketing years at 83,0  % and 83,4  % of total withdrawals. By contrast the level of  destruction in 1984/85 was relatively low at 46,6  %. This can be explained by the insignificant  citrus fruit withdrawals that year (the bulk of which find no useful outlet) and the relatively  high level of apple and peach withdrawals which are suitable for animal feed and distillation. Charity5.4. Free distribution to charities, schools, hospitals, etc. is permitted under the  regulations. In Italy such distribution is coordinated locally by the Prefettura, the regional  representative of central government. Despite this only 1,4  % of Italian withdrawals were released  in this manner during the 1986/87 marketing year. In Greece, where no government authority is  involved, less than 1  % of produce goes to charity. Among the reasons quoted for these low rates  of free distribution are transport costs (despite a Community subsidy towards such costs),  perishability of produce and fear of disturbing an already fragile market. The measures taken by  the Council in the context of the free distribution of certain foodstuffs following the harsh  winter of 1986 met with no greater success as far as fruit and vegetables were concerned. Distillation5.5. The regulations permit the distillation into alcohol of apples, pears and peaches  which have been withdrawn from the market. This possibility is applied principally in Italy but  also in France and the FR of Germany. In Italy the Court's audit team were informed that the  resultant alcohol is becoming increasingly difficult to market and in almost all cases it is  purchased and stored by the authorities at national expense. In view of the already difficult  situation in the alcohol market in general as described in the Court's Special Report on Community  Wine Distillation Measures (), large scale distillation would not appear to be a clearly superior  alternative to destruction. Processing5.6. Commission Regulation (EEC) N° 2448/77 of 8 November 1977 () subsequently amended  by Commission Regulation (EEC) N° 713/87 of 12 March 1987 () permits the supply of certain  varieties of oranges withdrawn from the market to the processing industry. Despite the fact that  substantial withdrawals of the varieties in question have taken place in Italy, no supplies have  been made to the processing industry from this source since the marketing year 1978/79. The  Commission is urged to consider how this potentially useful outlet may be exploited. Destruction5.7. In a market involving highly perishable goods such as fruit and vegetables, some  destruction is inevitable. However, in recent years wastage such as this has continued to grow  resulting in repeated criticisms by the European Parliament and by the public in general. While  equally concerned about this adverse trend, the Court's main preoccupation has been the weaknesses  of the control system and their financial consequences. These matters are discussed in paragraphs  3.17 - 3.19. 5.8. On a more general level, producer organizations have no incentive under present arrangements,  to seek alternative uses for withdrawn produce. The Commission should examine the feasibility of  some system which would dissuade a too-ready recourse to destruction. One possibility might be to  reduce the financial compensation for produce which is subsequently destroyed. This would encourage  producer organizations to make greater use of the other permitted outlets and also help to avoid  unnecessary withdrawals. It would also serve to reduce the cost to the Community of the withdrawals  system. Priority between withdrawals and processing5.9. Some fruit and vegetables which are eligible for  withdrawal also qualify for Community processing aid. Examples are 'long` tomatoes, Williams pears,  peaches, lemons and certain orange varieties. Producers of the above can choose either to dispose  of their fruit to processing undertakings by means of pre-harvest contracts or they can sell it on  the fresh market. In the latter event produce may be submitted for withdrawal. Fresh market prices  are normally higher than processing prices but sales to the processing industry contain a number of  advantages for producers - output may be disposed of through pre-harvest contracts, quality,  packing and presentation requirements are less stringent and transport costs are borne by the  factories. If the produce is submitted for withdrawal the price obtained will normally be lower  than either of the above alternatives. 5.10. Italy is the only citrus fruit producer Member State which also has a significant processing  industry. The price obtained by producers depends upon the quality of the fruit and the market  outlet (i.e. fresh market or processing industry). The fresh market normally demands the highest  quality fruit i.e. 'extra` or class I while the processing industry normally uses the lowest  quality i.e. class III (the regulations actually prohibit the marketing of class III fruit on the  fresh market). The remaining class i.e. class II, normally goes for withdrawal and subsequent  destruction. The regime therefore produces the paradoxical result that fruit of a higher quality  can be withdrawn and destroyed while poorer quality produce is reserved for processing. 5.11. Table 3 contains a comparison of withdrawal prices and minimum prices for selected products  for the marketing years 1986/87 and 1987/88. In the case of tomatoes and peaches the price gap in  favour of processing is sufficiently wide to ensure that factories receive all the supplies they  need and withdrawals are discouraged. In the case of citrus fruit however the situation is less  clear. For the Moro and Torocco orange varieties the withdrawal price was more favourable than the  processing price. In the case of lemons this was also true for the 1986/87 marketing year, but a  large cut in the withdrawal price for 1987/88 has reversed the situation. 5.12. The Court considers that the withdrawal of fruit and vegetables from the market should be a  last resort measure and that the withdrawal price should never be more attractive than the raw  material price of factories. Accordingly further cuts in withdrawal prices are advocated until in  all cases they are below the processing prices. In addition the Commission should review the  quality problem with a view to ensuring that factories can compete for good quality fruit and  destruction should be confined to produce of the lowest quality. Exclusion of mandarins from processing aid5.13. Major structural problems exist within the market  for mandarins and lack of demand for the product in recent years has pushed withdrawal rates to  levels of 80  % in the 1985/86 marketing year and 59  % in 1986/87. One way of alleviating this  serious situation would be to introduce a processing aid as was done in the past for the  problematic orange variety 'Biondo Commune`. The Commission has not proposed a change however  because it wants to see the product replaced by varieties more in demand rather than further  subsidised and because it fears future repercussions on the remainder of the small citrus fruit  market (satsumas and clementines which come principally from Spain). 5.14. In view of the slow progress on the reconversion programme (see paragraphs 5.15 - 5.17),  continued support will be necessary and it is the Court's view that the aid is better channelled  towards useful production rather than towards the continuous destruction of the product. Visits  on-the-spot in Italy have indicated that the industry has the spare capacity to process mandarins  and wishes to process the fruit if it could be obtained at sufficiently attractive prices. Costings  provided to the Court's auditors by the Italian citrus processing industry indicate that payment of  an aid, sufficiently attractive to encourage the processing of mandarins into juice, could produce  a net budgetary saving while avoiding destruction. In the Court's opinion the merits of introducing  a processing aid for mandarins, at least pending reconversion of this variety, and until the full  implementation of intervention thresholds in 1992 (see Annex II), should be considered by the  Commission. Reconversion plan5.15. A long-standing problem in the fruit and vegetable market has been the  continued production of varieties which are not adapted to consumer preferences. For example  problematic varieties such as the mandarin, the 'Elberta` peach and the 'Starking` apple are still  being produced year after year despite the fact that withdrawals remain consistently high. 5.16. Reconversion of citrus plantations is financed, in part, by the Guidance Section of the EAGGF  (), but progress has been slow. In Sicily for example reconversion approved to date amounts to 3   766 ha out of a total Sicilian area under citrus fruit of 110  000 ha. The most problematic of the  citrus fruits i.e. the mandarin, has been given a low priority in the plan by the national  authorities. Indeed any switching which has taken place involving mandarins has merely involved  replacing the 'Havana` variety with a later variety called 'Tardivo`. Progress recorded in other  areas of the Community was also slow. 5.17. The Court deplores the lack of progress under the reconversion plan almost twenty years after  it was first proposed. It reiterates the remarks contained in paragraphs 8.3 and 8.8 of its Annual  Report concerning the financial year 1986 () and recommends that the Commission should conduct an  examination of the problem including a qualitative assessment of the type of reconversion which is  taking place. Quality control>TABLE>5.18. Following repeated problems in the area of quality control  the Council () authorized the Commission in May 1985 to set up a special inspection unit to carry  out inspections in the Member States in conjunction with the national authorities. In view of the  particular importance of ensuring compliance with the quality norms laid down for the respective  rates of Community aid, the Court regrets that the Commission has been unable, until 1988, to find  the resources necessary for this task. 6. MARKET MANAGEMENT - PROCESSED FRUITFixing the aidGeneral6.1. Although the  regimes governing processed products differ according to the product, the rates of aid are usually  fixed by Commission regulation in accordance with criteria laid down by the Council. In view of  their crucial importance for market management, these aid calculations were examined by the Court  with a view to establishing their conformity with the legislative guidelines. Instances were found  where the Commission had not respected these guidelines. Paragraphs 6.2 - 6.7 describe certain  examples of non-respect, some of which may have led to a higher level of aid than would otherwise  have been the case. Paragraphs 6.8 - 6.13 treat of instances where the Commission, though not in  breach of the guidelines, is enjoined to take steps to improve its financial management of the  market. Fruit in syrup and dried fruit6.2. Article 5 of the relevant regulation () states that 'the amount  of the aid shall be so fixed as to enable the Community product concerned to be marketed`. The  information which should be taken into account is: (a)the aid fixed for the previous marketing year adjusted for changes in the minimum price; (b)the non-member country price, or the minimum import price where one exists; (c)the pattern of processing costs; (d)where relevant the prices at which the Community products are sold on the Community market. If imports supply less than 10  % of Community consumption, according to Article 4 of Council  Regulation (EEC) N° 1277/84 (), the third country price is considered to be unrepresentative and is  replaced by a calculated price based on the Community market price trend and the outlets  available. Prices of competing products6.3. While the aim of the aid is to compensate for the price  difference between Community and third country products, the Commission services applying the  procedure set out in Regulation (EEC) N° 1277/84 calculate the aid to compensate for this price  difference, using the price of the imported produce before the application of import duties. Table  4 shows the products and the various rates of duty to which they are generally subject, for 1986,  1987 and 1988. >TABLE>6.4. For each of the products listed, customs duty raised the price of the  imported product and for the products in syrup its impact was substantial. The Court considers that  the price difference to be compensated by means of the aid should be that between the Community  price and the price, after duty, of the imported products, since it is only at the latter price  (and not the pre-duty price) that the imports are marketed within the Community. The financial  effect of the inclusion of duty would be to reduce the rates of aid. For fruit in syrup, the  reduction would be substantial. Lemons6.5. The relevant Council regulation () specifies that aid for lemon processing should not  exceed the difference between minimum purchase prices in the Community and raw material prices in  non-member producer countries. In the preamble to the annual regulation () fixing the aid, the  Commission states that 'with a view to encouraging optimum marketing of lemon products it would  seem advisable to apply the full difference between these prices`. However, the Commission in  fixing the aid does not take account of the raw fruit costs in Argentina and Brazil, the main  competing third countries, which together supply some 60  % of Community imports of lemon juice.  Only data concerning Israel (16  % of imports), which has high raw material costs, are used. Given  the generally lower raw material costs in South America the inclusion of such costs would probably  result in a higher level of Community aid. While not advocating higher levels of aid, the Court  recommends that the inconsistency in the annual regulation should be removed. Oranges6.6. In the preamble to Council Regulation (EEC) N° 987/84 of 31 March 1984 () which  amended Council Regulation (EEC) N° 2601/69 (), it was acknowledged that the result of the previous  method of calculating the aid had been '... to establish progressively, an unwarranted commercial  benefit accruing to the processing industry`. The amendment laid down that the aid would be fixed  so that the processor would contribute at least 50  % of any increase in the minimum price. The  intention was that, as minimum prices increased, processors would contribute a greater percentage  to raw material costs. 6.7. In the Court's view, the 1984 amendment was introduced without adequate research into  processing costs. In view of this and because the 1984 arrangements did not foresee more recent  developments e.g. stable or falling minimum prices, the Court wished to examine their operation.  However, the Commission was unable to supply the necessary data, particularly relating to costs and  profits in the industry. Since 1985/86, as minimum prices have decreased, one effect of the  amendment has been that the net cost to the industry (after subsidy) of the raw material has  remained unchanged. In the interests of sound market management the Court urges the Commission to  undertake a comprehensive review of all the elements involved. Monthly increases in aid for dried grapes6.8. The minimum prices for currants and sultanas are  subject to monthly increases during the period 1 November to 31 August to cover the cost of storage  by producers or producer associations before processing. The visits on the spot identified a dead  period in marketing from the end of June to early September. This was due to the fact that the  processing industry, rather than pay an increasing minimum purchase price, preferred to await the  supply of those same currants at cheaper prices after they had been purchased by a storage agency  (see paragraph 4.17). 6.9. The financial effect of this is demonstrated by the development of the minimum price for  sultana N° 4 (the pilot product) during the 1986/87 marketing year. The cost of the raw material  net of aid to the processor at the beginning of the year was 91,8 ECU/100 kg which had increased to  107,4 ECU/100 kg by the end of the marketing year (an increase of 17  %). In October the same raw  material could be purchased ex-store at a fixed price of 78,1 ECU/100 kg (effectively 84,8 ECU/100  kg when the 8  % discard is taken into account). Indeed, already in September the new seasons crop  became available from producers at the same minimum price and rate of aid (i.e. at a net cost of  91,8 ECU/100 kg). 6.10. While the figures vary between currants and sultanas (15  % of currants and 8  % of sultanas  must be discarded by processors), and prices and aid vary according to type of fruit, the overall  problem remains the same. The Court believes that the Commission should examine the introduction of  decreases in the minimum prices in the latter part of the marketing year so that prices would  approach the level of the minimum prices for the new marketing year (and thus bring net costs of  fresh produce and stored product more into line). Such a system would reduce sales to storage  agencies which are reimbursed by the EAGGF for storage costs and (more importantly in this context)  losses on sales. This in turn would lead to a reduction of about 3 ECU/100 kg in the net amount  paid in aid i.e. financial compensation for losses on sale less processing aid. Conclusions on aid calculation6.11. In paragraph 6.7, reference was made to the absence of  essential management data relating to production costs and profit margins in orange processing. The  Court has found a general absence of such data in the Commission files for almost all processed  products covered by this report and requests that the Commission undertake urgent studies of the  markets in question, including profit margins, to ascertain whether present aid levels are in fact  justified. Orange processing6.12. The aid for processing oranges was introduced as a measure to support the  fresh market [see preamble to Regulation (EEC) N° 2601/69 ()]. However, the granting of aid to  problematic varieties such as Biondo Commune and to the blood oranges Moro and Tarocco, has  inhibited the effects of market demand and the switch to other varieties, thus contributing to an  overall market excess. The aid system for oranges is now viewed as an end in itself and oranges are  cultivated specifically to benefit from the subsidised processing outlet. However, in view of the  Community's low self-sufficiency in citrus juice and the quantities of fruit destroyed, the  Commission should examine whether further development of a processing policy might not, in the end,  be a more economical use of Community funds. 6.13. The varieties used for processing into juice have the same commercial value and, as  differences in minimum prices of the different varieties are compensated for by the rate of aid,  the net cost to the processing industry is the same. Yet, because of these differences in minimum  prices and rates of aid, the present aid system requires processors to draw-up and manage a number  of contracts, one for each variety of orange purchased from each producer association. In addition  each delivery has to be examined to ascertain the varieties concerned. The elimination of the  various controls would present savings for producers, processors and the administration which may  be able to be reflected in the level of aid. The Commission should examine the feasibility of  introducing a single rate of aid and minimum price for 'oranges for processing`, which would have  the advantage of eliminating the need for official checks on variety. Lemon processingClosed market in Italy6.14. Italy prohibited the importation of lemon juice, even  from other Member States, and justifies this action as being a plant health precaution under  Article 36 of the EEC Treaty. In order to force the Italian authorities to relax its ban, the  Council has limited the quantity of fruit processed into juice which may qualify for aid. This  amount is at present 40  % (). 6.15. The Commission services maintain that there is no plant health risk involved in the  importation of lemon juice into Italy. The Court observes that under these circumstances the  closure of the Italian market cannot be justified under Article 36 of the EEC Treaty. It is  therefore questionable whether any aid is in fact justified for lemons processed and marketed in  Italy during any period when a closed market exists. Quality criteria6.16. Under Article 9 of Council Regulation (EEC) N° 1562/85 () up to 15  % by  weight of lemons processed may be 'substandard` provided they are suitable for processing. This  tolerance is, according to official agronomists in both Greece and Italy, unworkable. It is  considered that in such circumstances all lemons should be required to meet minimum quality  requirements such as those set for oranges (class III). The Commission services have been unable to  give an explanation for this rule which is all the more questionable considering that during the  marketing years 1984/85, 1985/86, 1986/87  53  800, 79  300 and 483  900 tonnes respectively of  good quality lemons (i.e. Class II or above) were withdrawn and, for the most part, destroyed. Dried grapesThreshold guarantee6.17. The Court considers that the present threshold guarantee for  currants, which was set at 70  000 tonnes by Council Regulation (EEC) N° 989/84 of 31 March 1984 ()  is too high, particularly as there are considerable problems in marketing the crop. Average  production of currants in recent years is 75  000 tonnes. In order to maintain quality, 5  % of  production must be withheld from processing by the producer and a further 15  % must be withheld by  the processor himself at the time of processing if the product is to be supplied for human  consumption and receive aid. However, even with these large discards, quantities are regularly  'handed over` to storage agencies at the end of the marketing year. In recent years the average  quantity sold to intervention has been about 28  000 tonnes. Sales are made from storage for human  consumption and for pickle manufacture, but half of the quantity stored (14  000 tonnes) cannot be  sold for human consumption when it would be worth about 150 Drachma/kg and is sold at between 10  and 20 Drachma/kg for animal fodder. The cost to the Community of storage and reimbursing the  losses on sale are about 18  Mio ECU. 6.18. According to Greek officials and to trade representatives currants can be stored for 20  months without marked deterioration in quality. Yet, regular sales have to be made from storage at  substantially reduced prices in order to avoid a build up of stocks. The Community is thus 'locked  into` a situation where overproduction has to be disposed of at a considerable loss in order to  avoid disturbance of each new marketing year. 6.19. In the Court's view the Commission should examine the threshold guarantee with a view to  proposing a more suitable level. The Greek authorities have said that under Regulation (EEC) N°  777/85 of 26 March 1985 () 3  000 hectares of currants are intended to be grubbed up, out of a  present total area of 26  000 hectares. It may thus be appropriate to examine the threshold level  in conjunction with this. Product quality6.20. The cost of disposing each year of between 10  000 and 15  000 tonnes of  currants for non-human consumption varies from 11 to 18  Mio ECU. One of the ways by which  production could be brought more into line with demand is by increasing the percentage of the  currants to be discarded by processors (at present 15  %). Officials, producers, processors and  storage agencies believe that the quantity discarded could for currants be increased to 25 to 30   %. While processors might need additional compensation for this, perhaps in the form of an  adjustment to the minimum purchase price or by an increase in the aid paid on the remaining  quantity, the discarded product could be disposed of throughout the year for approved non-food use  without the expense of storage and cheap disposal. Such a change might cut overall expenditure,  with between 7  000 and 10  000 tonnes fewer currants being sold to storage agencies. Also it would  improve the marketing potential by increasing the quality of the crop. Any product that did enter  store would also be of a higher quality and thus more saleable. 7. SUMMARY - CONCLUSIONSWithdrawal system - fresh fruit and  vegetablesObservations on administrative system7.1. The enquiry into the withdrawals system has  revealed a number of control deficiencies at Member State level. These include the discovery that  many of the producer organizations operating in southern Italy do not meet the requirements of the  basic regulation thus casting serious doubts on the procedures for initial recognition and  monitoring of these organizations (paragraphs 3.12 - 3.16). The failure of the Community  regulations to recognize officially that substantial quantities of withdrawn produce are in fact  destroyed has resulted in inadequate supervision of that procedure in the Netherlands (paragraph  3.17) and ambiguous reporting of destruction in several Member States (paragraph 3.18). In those  cases where a useful outlet was found for market withdrawals the control over the cash proceeds  from these sales was found to be almost non-existent (paragraph 3.20). Finally it was found that  the Community regulations are being ignored in Italy and Greece where producer organizations are  delaying payment to their members in respect of market withdrawals until they themselves are paid  by the intervention agency (paragraphs 3.21 - 3.22). Market management and policy aims7.2. The responsible authorities are not making full use of the  possibilities contained in the basic regulation for end use of withdrawn produce in order to avoid  destruction (paragraphs 5.2 - 5.8), a fact which has led to repeated criticisms by the European  Parliament. Outlets which could be further expanded include free distribution and sales to the  processing industry (paragraphs 5.4 and 5.6). 7.3. The procedures for activating withdrawals are based on the more highly organized Dutch system  (paragraph 3.6) but do not readily adapt themselves to the type of market organization found in the  Mediterranean countries. As a consequence producer organizations in these countries have far too  much discretion. The regulations should be clarified so as to place the onus on producer  organizations to justify their withdrawal operations (paragraph 5.1). The pricing policy of the  authorities should be adjusted so that withdrawal is never a more attractive option for producers  than sale to processing undertakings (paragraphs 5.9 - 5.12). In view of the consistently high  withdrawals in the mandarin market (80  % in 1985/86) and the demand which exists for mandarin  by-products consideration should be given to the introduction of processing aid (paragraphs 5.13 -  5.14). The progress on the citrus fruit reconversion programme should be critically examined by the  Commission as regards the type of substitution which is taking place (paragraphs 5.15 - 5.17). 7.4. The question of quality control inspections has not been accorded the necessary priority by  the Commission, although the European Parliament had repeatedly urged it to do so. Processed fruitObservations on the administrative system7.5. The Court considers that the  anti-fraud activity recently conducted in Italy is to be commended; but that the extent of  irregularities detected gives considerable cause for concern (paragraph 4.5). Urgent action should  be taken by the Commission to review the control system laid down for processed fruit and tomatoes  with a view to generally tightening controls. Member States should in addition urgently seek to  improve their own verification system. 7.6. Physical checks on the input of raw produce and output of processed product need to be  considerably increased. Not only should these checks be more frequent but they should include  detailed checks on prime records and the credibility of output in relation to input (paragraphs 4.6  - 4.11). Discrepancies of any kind should be followed up until satisfactorily resolved. The Court  considers that without a concerted effort to improve each of these aspects of control, Community  expenditure will continue to be under threat from frauds and irregularities. 7.7. Similarly with the system for storage of dried grapes, storage agencies should be properly  approved, and act independently of any other organization in the interests of the aid system. There  is a need to improve stock controls generally and to ensure that the quantities taken over are  properly recorded and accounted for until sold (paragraphs 4.18 - 4.24). Where product is disposed  of at low prices for animal food, the controls over physical denaturing and end use should be  improved (paragraphs 4.25 - 4.26). Market managementAid calculation7.8. The non-inclusion of the duty element in the price of  imported processed fruit may have led, ceteris paribus, to higher levels of aid (paragraphs 6.3 -  6.4). In relation to lemons, the Court recommends the removal of an inconsistency in the  Commission's annual regulation (paragraph 6.7). 7.9. The Court advocates a thorough review of production costs and profit margins in all the  processed fruit markets (paragraph 6.11), but particularly in relation to the processing of  oranges, where the application of corrective rules adopted in 1984 may not be suitable in present  circumstances (e.g. decreasing minimum prices) (paragraphs 6.6 - 6.7). 7.10. The monthly increases in the minimum price of dried grapes during the marketing year have, in  the Court's view, led to problems in marketing and the Commission should examine the introduction  of cuts towards the end of the marketing year (paragraphs 6.8 - 6.10). General management7.11. The aid for processing oranges, while assisting with the disposal of fresh  fruit, has helped to insulate the varieties which are less in demand, from market pressures. This  should be examined in order to ensure that the scheme's objectives are clear and do not conflict  with other policies in the guarantee and guidance spheres (paragraph 6.12). In addition, it would  be opportune to examine whether a scheme for 'oranges for processing` with a single minimum price  and rate of aid should be introduced (paragraph 6.13). 7.12. The Commission should examine the justification for the payment of aid on lemon juice  produced and marketed in Italy and the fact that substandard lemons may receive aid when lemons of  Class II quality or above are withdrawn and destroyed (paragraphs 6.14 - 6.16).7.13. The market in dried grapes should be examined with a view to bringing production and demand  into line. The study should examine all aspects of the processing aid and storage systems for dried  grapes. Until the market is brought into balance the Community will continue to buy, store and sell  at a considerable loss surplus produce, without rectifying the underlying market problems  (paragraphs 6.17 - 6.20). Concluding remarks7.14. The findings of this report are of considerable significance, not least in  view of the expected increase in withdrawal and processing operations in Spain and Portugal over  the next few years and hence the growth in Community expenditure. The measures described and  commented upon have proved not to be able to cope with serious imbalances between production and  real demand for fruit and vegetables within the Communities. There is a need for a vigorous  programme to deal with structural surpluses and unwanted products. In this regard progress has been  slow. 7.15. The examination of the market system shows weaknesses, some of which are quite serious. As  far as the fresh market is concerned, neither the Commission nor the national intervention agencies  at present adequately control the multiplicity of producer organizations. In the Court's view this  is due to the absence of specific control guidelines in the governing regulations and a scarcity of  reports by Member States to the Commission, they are regularly beset by fraudulent and irregular  practices. The frequency, coverage and effectivenes of official inspections require to be stepped  up significantly. 7.16. Finally, a system which channels better quality produce for animal feed and for destruction,  while reserving a lower quality for processing, is considered by the Court to be unacceptable. The present report was adopted by the Court of Auditors at Luxembourg at its  meeting of 30 March 1989. For the Court of Auditors Marcel MART President() Buying-in is in fact foreseen  as a possibility, but in practice the Member States have opted for the withdrawal system instead.  () Previous work by the Court of Auditors includes a special report on measures affecting the  management of the EAGGF Guarantee Section published on 6 October 1980 which contained an item on  withdrawal measures for fruit and vegetables, OJ N° C 258, 6.  10.  1980.  () Council Regulation (EEC) N° 1035/72 of 18 May 1972 on the Common Organization of the Market in  Fruit and Vegetables, OJ N° L 118, 20.  5.  1972.  () Council Regulation (EEC) N° 223/88 of 25 January 1988 amending Regulation (EEC) N° 1035/72 on  the Common Organization of the Market in Fruit and Vegetables, OJ N° L 23, 28.  1.  1988.  () Council Regulation (EEC) N° 1035/72 of 18 May 1972 on the Common Organization of the Market in  Fruit and Vegetables, OJ N° L 118, 20.  5.  1972.  () Council Regulation (EEC) N° 1035/72 of 18 May 1972 on the Common Organization of the Market in  Fruit and Vegetables, OJ N° L 118, 20.  5.  1972.  () Commission Doc. PFLF-201/5, Annex I/b: Italy 340,8 and Greece 106,7  Mio ECU.  () Council Regulation (EEC) N° 2601/69 of 18 December 1969 laying down special measures to  encourage the processing of certain varieties of oranges, OJ N° L 324, 27.  12.  1969.  () Council Regulation (EEC) N° 1035/77 of 17 May 1977 laying down special measures to encourage the  marketing of products processed from lemons, OJ N° L 125, 19.  5.  1977.  () Council Regulation (EEC) N° 426/86 of 24 February 1986 on the common organization of the market  in products processed from fruit and vegetables, OJ N° L 49, 27.  2.  1986.  () Commission Regulation (EEC) N° 1599/84 of 5 June 1984 laying down detailed rules for the  application of the system of production aid for products processed from fruit and vegetables, OJ N°  L 152, 8.  6.  1984.  () Court's Annual Report for the financial year 1986, paragraph 6.10 (OJ N° C 336, 15.  12.   1987).  () Report of the Corte dei Conti on the results of the audit of financial management for the  financial year 1986 of AIMA (page 103).  () Article 25 of Italian Ministerial Decree dated 4 September 1985.  () Council Regulation (EEC) N° 729/70 of 21 April 1970 on the financing of the common agricultural  policy, OJ N° L 94, 28.  4.  1970.  () Council Regulation (EEC) N° 283/72 of 7 February 1972 concerning irregularities and the recovery  of sums wrongly paid in connection with the financing of the common agricultural policy and the  organization of an information system in this field, OJ N° L 36, 10.  2.  1972.  () Council Regulation (EEC) N° 1277/84 of 8 May 1984 laying down general rules for the system of  production aid for processed fruit and vegetables, OJ N° L 123, 9.  5.  1984.  () Commission Regulation (EEC) N° 626/85 of 12 March 1985 on the purchasing, selling and storage of  unprocessed dried grapes and figs by storage agencies, OJ N° L 72, 13.  3.  1985.  () Commission Regulation (EEC) N° 627/85 of 12 March 1985 on storage aid and financial compensation  for unprocessed dried grapes and figs, OJ N° L 72, 13.  3.  1985.  () Commission Regulation (EEC) N° 626/85 of 12 March 1985 on the purchasing, selling and storage of  unprocessed dried grapes and figs by storage agencies, OJ N° L 72, 13.  3.  1985.  () Commission Regulation (EEC) N° 626/85 of 12 March 1985 on the purchasing, selling and storage of  unprocessed dried grapes and figs by storage agencies, OJ N° L 72, 13.  3.  1985.  () Commission Regulation (EEC) N° 3205/85 of 15 November 1985 on the sale by way of invitation to  tender of unprocessed dried grapes for specific uses, OJ N° L 303, 16.  11.  1985.  () Commission Regulation (EEC) N° 1562/85 of 7 June 1985 laying down detailed rules for the  application of measures to encourage the processing of oranges and the marketing of products  processed from lemons, OJ N° L 152, 11.  6.  1985.  () Special Report N° 4/87 on Community Wine Distillation Measures, OJ N° C 297, 6.  11.  1987.  () Commission Regulation (EEC) N° 2448/77 of 8 November 1977 laying down conditions for the  disposal of oranges withdrawn from the market to the processing industry and amending Regulation  (EEC) N° 1687/76, OJ N° L 285, 9.  11.  1977.  () Commission Regulation (EEC) N° 713/87 of 12 March 1987 amending Regulation (EEC) N° 2448/77 in  respect of conditions for the disposal of oranges withdrawn from the market to the processing  industry, OJ N° L 70, 13.  3.  1987.  () Council Regulation (EEC) N° 2511/69 of 9 December 1969, laying down special measures for  improving the production and marketing of Community citrus fruit, OJ N° L 318, 18.  12.  1969.  () OJ N° C 336, 15.  12.  1987.  () Council Regulation (EEC) N° 1319/85 of 23 May 1985 on the reinforcement of supervision of the  application of Community rules on fruit and vegetables, OJ N° L 137, 27.  5.  1985.  () Council Regulation (EEC) N° 426/86 of 24 February 1986 on the common organization of the market  in products processed from fruit and vegetables, OJ N° L 49, 27.  2.  1986.  () Council Regulation (EEC) N° 1277/84 of 8 May 1984 laying down general rules for the system of  production aid for processed fruit and vegetables, OJ N° L 123, 9.  5.  1984.  () Council Regulation (EEC) N° 1035/77 of 17 May 1977 laying down special measures to encourage the  marketing of products processed from lemons, OJ N° L 125, 19.  5.  1977.  () For example, Commission Regulation (EEC) N° 1996/87 of 7 July 1987 fixing until the end of the  1987/88 marketing year the minimum purchase price for lemons delivered to the industry and the  amount of financial compensation payable after their processing, OJ N° L 188, 8.  7.  1987, p. 27.  () Council Regulation (EEC) N° 987/84 of 31 March 1984 amending Regulation (EEC) N° 2601/69 laying  down special measures to encourage the processing of certain varieties of oranges, OJ N° L 103, 16.   4.  1984.  () Council Regulation (EEC) N° 2601/69 of 18 December 1969 laying down special measures to  encourage the processing of certain varieties of oranges, OJ N° L 324, 27.  12.  1969.  () Council Regulation (EEC) N° 2601/69 of 18 December 1969 laying down special measures to  encourage the processing of certain varieties of oranges, OJ N° L 324, 27.  12.  1969.  () Council Regulation (EEC) N° 1353/86 of 6 May 1986 amending Regulation (EEC) N° 1035/77 laying  down special measures to encourage the marketing of products processed from lemons, OJ N° L 119, 8.   5.  1986.  () Commission Regulation (EEC) N° 1562/85 of 7 June 1985 laying down detailed rules for the  application of measures to encourage the processing of oranges and the marketing of products  processed from lemons, OJ N° L 152, 11.  6.  1985.  () Council Regulation (EEC) N° 989/84 of 31 March 1984 introducing a system of guarantee thresholds  for certain processed fruit and vegetable products, OJ N° L 103, 16.  4.  1984.  () Council Regulation (EEC) N° 777/85 of 26 March 1985 on the granting, for the 1985/86 to 1989/90  wine years, of permanent abandonment premiums in respect of certain areas under vines, OJ N° L 88,  28.  3.  1985. ANNEX IPRODUCTION AND BUDGETARY EXPENDITUREProduction1. Table 5 sets out the total  harvest and the quantities withdrawn from the market for those products eligible for withdrawal for  the marketing years 1982/83 to 1986/87. During this period production has remained relatively  stable at a level of between 29,1 million tonnes and 30,8 million tonnes while market withdrawals  have varied between 1,2 million tonnes and 2,9 million tonnes. Lower production does not  necessarily mean lower withdrawals as was shown during the 1986/87 marketing year when production,  at a four year low of 29,1 million tonnes, resulted in an historically high level of withdrawals of  2,9 million tonnes (10  % of production). Other factors besides increased production which can  precipitate market withdrawals include the availability of processing outlets, variations in export  sales, competition from imports, changing consumer tastes and climatological factors affecting the  speed of ripening. The high level of withdrawals during the 1986/87 marketing year resulted from a  combination of several of the above factors but in particular from reduced demand from the  processing industries for tomatoes and citrus fruit. In the case of tomatoes this was due to the  imposition of production quotas in the previous year while in the case of citrus fruit it was due  to dissatisfaction with the level of aid available. 2. Production and withdrawal statistics by Member State are shown in Table 6. Italy is by far the  largest producer of fruit and vegetables eligible for withdrawal, accounting for between 48  % and  56  % of Community production during the periods indicated. The proportion of production withdrawn  from the market during the marketing years 1985/86 and 1986/87 at 10,8  % and 13,1  % respectively,  was also higher in Italy than in any other Member State. In fact, of the 2,9 million tonnes of  production withdrawn during the 1986/87 marketing year, 1,9 milllion tonnes were withdrawn in  Italy. 3. Table 7 shows the production of processed fruit and vegetables broken down by product and by  Member State for the marketing years 1982/83 to 1986/87. The vast bulk of processed oranges,  lemons, tomatoes and pears are of Italian origin. However, Greece was also a substantial producer  of dried figs and grapes, processed tomatoes, peaches and oranges. These production figures are  reflected in the EAGGF amounts expended shown in Table 10. Budgetary Expenditure4. Community expenditure on fruit and vegetables averaged 1  125  Mio ECU per  annum between 1982 and 1987. Inter-year comparisons are difficult due to changes in the budgetary  rules but it can be seen from Table 8 that total expenditure, has increased from 914,3  Mio ECU in  1982 to a peak of 1  454,6  Mio ECU in 1984 before falling again to the 1987 level of 967,1  Mio  ECU (1  120,9  Mio ECU on a twelve month basis). Important variations have also occurred on certain  budget lines including expenditure on market withdrawals (item 1501) which has fluctuated widely  over the period but whose 1987 level of 417,3  Mio ECU (475,9  Mio ECU on a 12 month basis) was  more than twice the 1982 level of 192,1  Mio ECU. In contrast production aid for tomato based  products (item 1511) has shown a marked decline from a peak of 556,0  Mio ECU in 1984 to 209,7  Mio  ECU (261,5  Mio ECU on a 12 month basis) in 1987 resulting mainly from the imposition of quotas in  that market. Production aid for fruit based products (item 1512) at 149,7  Mio ECU (185,2  Mio ECU  on a 12 month basis) has also declined recently due mainly to falling expenditure on dried fruit.  It can be seen that expenditure on the fresh market is increasing whereas expenditure on the  processed market is decreasing. >TABLE>>TABLE>>TABLE>>TABLE>>TABLE>>TABLE  POSITION>5. Expenditure on withdrawals (item 1501) for the 1982/83 to 1986/87 marketing years is  analysed by product in Table 9. It can be seen that the most costly products are the citrus fruit  group (oranges, lemons and mandarins) which together accounted for 290,2  Mio ECU or 59  % of  expenditure in 1986/87, followed by apples, peaches and tomatoes. Significant year to year  variations in expenditure for some products - notably citrus fruit - can be explained principally  by the cyclical nature of production and the availability of processing outlets. 6. Table 10 sets out the EAGGF expenditure on processed fruit for 1983 to 1987. Most expenditure on  the production of citrus juice and the processing of tomatoes and fruit in syrup takes place in  Italy, whereas Greece expends most on the processing of dried fruit, due mainly to payments in  respect of dried grapes. However expenditure on dried figs and grapes (about 85  % of which relates  to dried grapes), has fallen substantially. The high amounts in 1984 and 1985 compared to the 1986  and 1987 figures are due in part to a special disposal for animal feed and distillation of 76  000  tonnes of dried grapes and 6  500 tonnes of dried figs from 1 November 1984 and to the fact that  from the 1984/85 marketing year the rates of aid, expressed in ECU have decreased by about  one-third. Other rates of aid have remained fairly stable except for peaches in syrup where,  following trade negotiations with the USA authorities the rate of aid expressed in ECU was  decreased by 25  % from the 1986/87 marketing year. No aid was paid on cherries from the 1987/88  marketing year. ANNEX IISETTING THE WITHDRAWAL PRICE FOR FRESH FRUIT AND VEGETABLES1. Intervention  prices are pitched at a level which is considerably below normal market prices. The wide disparity  derives from the fact that the aid system is only intended to prevent a total collapse in  producers' incomes during periods of low prices - it is not intended to provide guaranteed income  support over extended periods of excess supply. 2. The basic regulation in fact provides two levels of market intervention: (a)intervention by way of withdrawal from the market by the producer organizations themselves at a  price determined by them (the withdrawal price). This price will usually be higher than the  buying-in price described below; (b)buying in by the intervention agencies at a standard price (the buying-in price). Since the buying-in price is lower than the withdrawal price, buying in is designed as a safety net  to meet the situation where, for example, producers have not formed organizations, and withdrawals  are therefore not possible. The margin between the two prices (10  %) is designed to encourage the  formation of producer organizations. 3. For the products listed in paragraph 3.3 of this Report the Council fixes each year a basic  price and a buying-in price. Basic prices originally represented the average price level in  Community markets during a defined period but they are now adjusted annually by the Council taking  into account such factors as the need to support farmers' incomes, to stabilize market prices and  to consider the interests of consumers. They serve simply as a reference point for the buying-in  prices which are fixed by Council regulations at varying proportions of the basic prices (e.g.  cauliflowers, tomatoes, aubergines - 40  % to 45  %; apples and pears - 50  % to 55  %; citrus  fruit - 60  % to 70  %). The buying-in prices are further varied according to quality, variety,  etc. so as to favour marketable varieties and higher qualities. 4. Buying in by the intervention agencies which was last operated in Greece in 1981 is no longer  necessary due to the extensive network of producer organizations now in existence; withdrawal  prices are in fact the only relevant support prices. As already mentioned, these prices are  determined by the organizations themselves, but, for the produce eligible for Community aid (those  referred to in paragraph 3) they normally correspond to the maximum level of the aid, i.e., the  buying-in price plus 10  % of the basic price. The producers receive from their producer  organizations an indemnity which may not exceed an amount resulting from the application of the  withdrawal price to the quantities withdrawn. The financial compensation granted to producer  organizations conducting market withdrawals is therefore equal to the total of indemnities so paid,  less any receipts from disposals of the produce. 5. Recently a system of intervention thresholds has been introduced which will have the effect of  reducing, for certain produce, the level of Community support if the quantities withdrawn exceed  certain levels. The system applies to tomatoes, mandarins and clementines, as from 1987/88, and to  oranges, lemons, satsumas, nectarines and peaches from 1988/1989. If withdrawals exceed the levels  fixed, the rate of support on the excess is reduced progressively, subject to a maximum of 20  %. 6. In the two years since its introduction the scheme has not been called into effect due to the  fact that intervention has remained below the threshold levels. COMMISSION REPLY1. INTRODUCTION General observationsFruit and vegetable  production accounts for about 14  % of total agricultural output in the Community. Over the last  three years budgetary expenditure in the sector, which includes both fresh and processed products,  has averaged about 1  000 million ECU, which is equivalent to approximately 4  % of total EAGGF  Guarantee Section expenditure. This expenditure is used to stabilize the market, either by seeking to cut production when  necessary or by channelling Community production towards new outlets in line with market  requirements and stiffer competition. The observations made by the Court of Auditors are mainly focused on citrus fruit and on producers'  organizations concentrated in certain well-defined regions of the Community. The Commission's view  is that most producers' organizations for all the products covered by the market organization for  fruit and vegetables function adequately. These organizations fulfil the role required of them in  so far as they act as market regulators, as regards both products subject to the price and  intervention arrangements and other products, without giving rise in so doing to expenditure for  the EAGGF Guarantee Section in respect of the latter. As regards intervention in respect of citrus fruit, in January 1989 the Commission proposed to the  Council a set of measures intended to solve the problem of fresh products for which no outlet can  be found by sending surplus production for processing. For this purpose, provision is made for the withdrawal price to be fixed at a level equal to the  minimum price paid to producers for oranges delivered for processing. To achieve this, the  Commission proposes lowering the withdrawal prices set according to variety, size or presentation.  The proposal includes a single minimum producer price for all the different varieties sent for  processing and provision for the system of aid for processing to be extended to include mandarins  for three years. The proposal also includes provision for the minimum price to be fixed at the same  level as the withdrawal price. Clementines and satsumas will be covered by the same system in order  to avoid withdrawals. The Commission takes the view that these proposals provide an adequate response to the main  observations made by the Court of Auditors and that they will allow better management of budget  appropriations intended to cover difficulties in disposing of the products in question. 1.5. The Commission would refer to its replies at point 7: 'Conclusions`. 3. ADMINISTRATION OF THE WITHDRAWAL SYSTEM FOR FRESH FRUIT AND VEGETABLES  Rules for granting financial compensationActivating the system3.6. The Commission would point  out that the auction system is used in certain regions of the southern Member States. In addition,  systems set up in other regions to keep all operators informed of price quotations ensure adequate  market transparency. Disposal of withdrawn fruit3.9     3.10. In the Commission's view it would not be advisable to  make explicit provision for destruction to be included in the choice of methods for disposing of  withdrawn products. Observations related to the administration of the withdrawal systemRecognition and monitoring of  producer organizations3.13. The Commission considers that the role played by the producer  organizations is vital to the proper functioning of the market organization in so far as their  chief activity is that of marketing the produce of their members. It is also possible, in the  context of a common agricultural policy intended to create a new market equilibrium, that producer  organizations might be called upon to play a more important role in the modernization of marketing  methods and conversion of their members' holdings. It is the Commission's opinion that there should be greater scope at Community level for keeping  track of the activities of these organizations. It has undertaken an in-depth study, in particular  as regards the possibilities for introducing more comprehensive rules for producer organizations,  designed in themselves to prevent fraud and to be easy to monitor. 3.14     3.15. As a result of an inspection by the Commission auditors in Sicily in 1988 an  extended enquiry in the fruit and vegetables sector is currently taking place in Italy. This  inquiry will include the procedures for recognition of producers' organizations, and their  subsequent supervision. In addition the Commission services are currently reviewing the procedures  employed in a number of other Member States to ensure that Community regulations are respected. Supervision of destruction operations3.17     13.19. See also the answer to point 3.9. Since the  products in question are perishable, disposal must take place within a short period following  withdrawal. Therefore, either they perish of their own accord, or they are destroyed by the  operators. The use of withdrawn products, including their destruction, is monitored in all Member  States except for the Netherlands. However, given the nature of the producer organizations in the  Netherlands, as pointed out by the Court of Auditors itself, it would be remarkable if they were to  place on the market, in order to destabilize it, products which they themselves had withdrawn from  the market in order to stabilize it. However, the Commission will endeavour to secure further  guarantees on this point. Cash proceeds from sale of withdrawn produce3.20. Given that receipts from sales of produce for  animal feed in 1987 in Italy represented less than 0,02  % of the gross amount declared by that  Member State for withdrawals from the market, audit priority was given to other aspects of the  measure. During the systems audit in this sector the Commission will carry out the necessary  checks. Timing of financial compensation3.22. This matter will be taken into account in the context of the  measures currently being examined with a view to improving the performance of the producer  organizations (see the replies to points 3.12 and 3.13). However, it should be pointed out that  this practice has no negative financial consequences for the EAGGF. 4. THE ADMINISTRATION OF THE AID SYSTEM FOR PROCESSED FRUIT Fruit in  syrupGeneral observations4.5. The Commission can confirm that during the last quarter of 1988 the  Italian authorities, within the framework of Article 3 of Regulation (EEC) N° 283/72, communicated  17 new cases of irregularities in the processed fruit and vegetable sector, involving an estimated  amount of approximately 40 million ECU. Control visitsChecks on input and output4.9. The Commission is aware of the difficulties involved  in checking products processed from fruit and vegetables. The physical presence of inspectors at  processing establishments on a day-to-day basis could improve the control system. However, it would  be necessary to prevent the execution of such checks from hindering the normal activity of the  processing factories, which often work on a continuous production basis. Nevertheless, the minimum quality requirements laid down in the Community rules for products  eligible for production aid oblige the processor to record the results of the daily verifications  in a register. In addition, where the processing of tomatoes is concerned, the methods provided for  in Article 15 of Regulation (EEC) N° 1764/86 are applied, in conjunction with other methods where  necessary, to determine eligibility for production aid. 4.10. Under the current system Member States are obliged to refuse to pay the aid if the finished  products do not satisfy the minimum quality requirements. However, in making the rules more  stringent in this area the Commission will take account of the comments made by the Court of  Auditors. Processed tomatoes4.14. The Commission has repeatedly asked Italy to notify it of the results of  the enquiry to which the Court of Auditors refers. The Italian authorities have always claimed that  the results were not available. At the beginning of December 1988, the Commission services  instructed Italy to communicate the results of the enquiry by a set deadline. The Italian authorities informed the Commission that the enquiry revealed fraud amounting to about  9 million ECU at one of the processing undertakings inspected; results from the inspection of the  other undertaking are not yet available. The Commission services are actively pursuing this  dossier. Dried grapesApproval and monitoring of storage agencies4.18     4.24. The Commission is aware  that the storage of dried grapes is in some cases carried out by agencies which often fulfil all  three functions: producer, storage agency, processor. Community rules [in particular Regulation (EEC) N° 626/85] require either the storage agency or the  Member State to observe certain minimum conditions regarding the purchase, management and sale of  dried grapes in storage. When reviewing these rules, the Commission will not fail to take into  account the observations made, especially by providing for stricter discipline in approving storage  agencies. 4.22. At the two storage agencies for dried grapes and figs in Greece visited by Commission  auditors in 1988 it was noted that losses were recorded following stocktakings but that these had  been within the 1  % limit. Sales for animal feed4.25     4.26. The Commission does not consider it advisable to lay down an  exhaustive list of denaturing methods. Sale by invitation to tender for animal feed [Regulation  (EEC) N° 3205/85] should be done in such a way that the denatured product can no longer find its  way back into normal distribution channels for human consumption. It is in the interests of the  producer Member State to ensure that denaturing takes place under the best conditions, since dried  grapes for human consumption are for the most part consumed outside Greece. It is useful to point out that stricter national standards have recently been submitted to the  Commission. The actual impact of these standards on the tendering system has already become  apparent, since the notice of invitation to tender states that the tenderer must furnish detailed  documentary evidence proving that his profession is linked to the specific use of the product. Citrus fruit4.28. The Court's observation on this point, when taken in conjunction with its  comment concerning point 4.9, clearly shows how difficult it is to reconcile the physical presence  of inspectors with the processing itself. In its proposal to the Council, the Commission proposed  that the withdrawal price be fixed solely for Class II products presented loose, irrespective of  variety and size. In addition a single minimum price has been fixed for all varieties delivered for  processing (see the replies to points 6.4 and 6.13). Such a proposal should facilitate control. 5. MARKET MANAGEMENT - FRESH FRUIT WITHDRAWALS Control of the basis for  commencement of withdrawals5.1. See replies to points 3.12     3.13. End-use of withdrawn produceProcessing5.6. The measures concerning stabilizers adopted by the  Council in recent years or currently before that institution in the context of the price proposals  are designed both to reduce the quantities of fresh products for which no outlet can be found and  to encourage recourse to processing. The Commission's new proposals seek to provide incentives to use quantities of fresh produce for  which no outlet can be found by encouraging these products to be sent for processing without first  being withdrawn from the market, since the mechanism previously introduced for this purpose had no  effect. See also the reply to point 6.12. Destruction5.8. It should be pointed out that the withdrawl price and financial compensation  systems are intended to remove part of the produce from the marketing channels, and thereby prevent  any drastic drop in prices caused by a glut, while guaranteeing compensation, at a low level in  comparison with normal market prices, for producers unable to sell their products for human  consumption. Priority between withdrawals and processing5.11     5.12. Among the related measures accompanying  the 1989/1990 price proposals, the Commission has proposed that the minimum price to industry  should be fixed at the same level as the withdrawal price for all the varieties of orange which may  at present be delivered for processing into juice. To this end, provision is made for a single  withdrawal price (see reply to point 4.28). Exclusion of mandarins from processing aid5.14. Also among the related measures accompanying the  1989/1990 price proposals, the Commission has proposed that mandarins, satsumas and clementines be  eligible for a system of aid for processing into juice for a period of three years. Reconversion plan5.15     5.17. The Commission is aware of the slowness with which Regulation  (EEC) N° 2511/69 has been implemented in Italy, particularly as regards the varietal conversion of  mandarins, the results of which, after a number of years, are very limited. However, the situation  seems to have improved in recent years and in Corsica it appears that the programme is being  implemented at a satisfactory rate. The Commission will take account of the Court's recommendation  on the need for a qualitative assessment of reconversion. Quality control5.18. The Commission implemented Regulation (EEC) N° 1319/85 at the beginning of  1988. The 1987 budgetary allocation for that purpose was indeed extremely limited. However, these  appropriations have since become progressively bigger and reached 125  000 ECU for 1988 and 400   000 ECU for 1989. Since January 1988, eight missions have been carried out in different Member  States. However, the expected results regarding the recruitment of inspectors have not been  attained, because the Commission has had to give priority to other tasks. The Commission is fully aware of the increasingly important role which must be played by Community  controls in order to ensure that Community rules are applied in a uniform manner in all Member  States and that infringements are detected. 6. MARKET MANAGEMENT - PROCESSED FRUIT Fixing the aidFruit in syrup and dried  fruitPrices of competing products6.3     6.4. Regarding the third country prices which are taken  into account for the purpose of calculating Community production aid for certain processed fruit  and vegetables, Council Regulation (EEC) N° 1277/84 specifies that those prices are to be  determined from free-at-frontier prices on importation into the Community. It should be remembered  that, as regards the third country prices, the level of the aid calculated each year is based on  the difference between the free-at-frontier prices recorded during two different periods. In  addition, if the third country price inclusive of customs duties were to be taken as a basis, the  prices of Community products would have to be taken into consideration at the importer-wholesale  stage (on the wholesale maket) rather than at the ex-factory stage. Lemons6.5. In view of the new situation regarding lemons (see reply to points 6.14  -  6.15) the  Commission will assess whether it is necessary to review certain elements in the calculation of the  aid. Oranges6.6     6.7. The Commission is aware of the need to safeguard the competitiveness of the  processing industry. In its price proposals, it therefore points out that the problems raised by  fluctuations, often considerable, in the prices of products imported from non-Community countries  must be looked at. Until that happens, the mechanism used to calculate the financial compensation  paid to processors can continue to function under current conditions. Since the system was introduced, the quantity of products sent for processing has increased  regularly, except in 1987/1988, when the extremely poor harvest made processing and withdrawal  almost impossible. Monthly increases in aid for dried grapes6.8     6.10. The price fixed in advance for the grapes  from the previous marketing year is set in such a way that sales of the new crop are not affected. Sales at the end of the marketing year are subject to monthly increases, but there are no other  available grapes for the processor to use. Therefore, the price fixed in advance must take account of the deterioration in the quality of  grapes over time, and the need to sell them as quickly as possible to ensure that disposal of the  new crop is not disturbed. Nevetheless, the Commission will study the Court's comments to determine whether the difference  between the price of grapes bought at the end of the marketing year and the price fixed in advance  should be reduced. Conclusions on aid calculation6.11. See the replies to points 6.6  -  6.7. Orange processing6.12     6.13. The Commission takes the view that the price proposals and related  measures from 1989/1990 will facilitate the disposal of surplus citrus fruit for processing into  juice. The measures in question include: - fixing the minimum price to industry at the same level as the withdrawal price for all varieties  of orange which may at present be delivered for processing into juice; - fixing a withdrawal price for oranges, mandarins, clementines and satsumas solely for Class II  products presented loose, irrespective of variety and size; - granting aid for processing into juice, in respect of mandarins, clementines and satsumas, for a  period of three years. Lemon processingClosed market in Italy6.14     6.15. Italy has recently relaxed its ban on  imports. There is therefore no reason to retain the limit imposed on the amount of aid granted to  Italian processors (only 40  % of exported juice is eligible). The Commission has proposed that the  Council delete those provisions which currently limit processing aid for lemons. Quality criteria6.16. The Commission has taken care to specify the quality of products that can be  delivered for processing. To do this it took the criteria that had been laid down for marketing  those products fresh. Tolerances were fixed for Class III which correspond to those also permitted  for Classes I and II in Regulation (EEC) N° 379/71, which lays down quality standards for citrus  fruit similar to those laid down by the competent international bodies (OECD and ECE). Dried grapesGuarantee threshold and product quality6.17     6.20. As stated in the explanatory  memorandum to the 1989/1990 price proposals [vol. I - COM(89) 40 final], the Commission will submit  a report to the Council at the earliest opportunity together with proposals for regulations which  should deal with most of the Court's observations, namely: - a drop in the guarantee threshold for currants; - improvements in quality; - the possibility of increasing the percentage withheld from processing according to the size of  the crop; - a variable monthly scale for the payments to be made to producers, depending on the period when  the grapes were purchased. 7. SUMMARY - CONCLUSIONS Regarding the specific comments of the Court of  Auditors, the Commission would refer to its replies to the different points to which the Court also  refers. The Commission has examined the difficulties pointed out by the Court of Auditors, with a view to  correcting certain of their effects. Proposals have been transmitted to the Council in this  connection. There has been an in-depth investigation into the possibilities of introducing rules for producers'  organizations, which would be designed in particular to improve their scope for action, in  accordance with the objectives of the Regulation. The possible end uses for products withdrawn from the market have been extended constantly since  the market organization was set up. However, there is a limit to how far they can be extended and  experience has shown that the uses for withdrawn fruit and vegetables are limited by the very  nature of the products. The aim of the measures concerning stabilizers adopted by the Council in  recent years or currently at the proposal stage is both to reduce the quantities for which there is  no outlet on the market for fresh products and, for the remaining quantities, to encourage recourse  to processing without prior withdrawal. The following measures have therefore been proposed in the  1989/1990 price proposals and related measures: - the minimum price to industry should be fixed at the same level as the withdrawal price for all  varieties of oranges which may at present be delivered for processing into juice; - the withdrawal price for oranges, mandarins, clementines and satsumas should be fixed solely for  Class II products presented loose, irrespective of variety and size; - for a period of three years, mandarins, satsumas and clementines should be eligible for aid for  processing into juice; - the full amount of processing aid for lemons should be granted. Since Italy has liberalized its imports of lemon juice, the new situation might prompt the  Commission to re-examine certain elements involved in calculation of the aid. After analysing the  situation with the supplier countries in question, the Commission will also study the problems  which arise when calculating processing aid for oranges as a result of the fluctuations, sometimes  considerable, in the price of products imported from non-Community countries. The Commission sets great store by the growing importance of Community controls. Within the  framework of Regulation (EEC) N° 1319/85, eight inspection missions have been carried out in  different Member States since January 1988 (see the reply to point 5.18). As regards the arrangements for dried grapes, a report accompanied by proposals for regulations  will be sent to the Council at the earliest opportunity, and will certainly take account of the  observations made by the Court of Auditors. In any case, all the necessary steps will be taken to  ensure that the measures envisaged can be implemented from the 1989/1990 marketing year.