Report from the Commission to the Council on greek requests in the cotton sector
Date: 1998-02-10
Institutions: European Commission
Subjects: EU aid, Greece, aid system, cotton, producer organisation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels,  10.02.1998 

COM(1998)  10  final 

REPORT  FROM THE COMMISSION  TO THE COUNCIL 

ON GREEK REQUESTS 

IN THE COTTON SECTOR 

1. 

INTRODUCTION 

In  a  declaration  on  the  operation  of  the  cotton  aid  scheme  adopted  at  the  Council 
meeting of June  1997, the Council, at the request  of the Greek  delegation,  asked the 
Commission to submit a report on aid arrangements in the cotton sector by the end of 
the year, with special reference to the four  suggestions put  forward  by Greece, which 
involved: 

-  direct payment of Community aid to producers, 

-  régionalisation of penalties, 

-  basing  the  payment  of  advances  on  estimated  production  increased  by  a  safety 

margin of 7.5% 

- 

legal  provision  for  revising  production  estimates  in  the  course  of  the  marketing 
year. 

It should be made quite clear that this report has been drawn up solely in response to 
that  request;  it  does  not  in  any  way  replace  the  report  provided  for  in  Council 
Regulation (EC) No  1553/95 on the system of aid for cotton, which is to be sent to the 
Council  and  the  European  Parliament  before  the  beginning  of  the  1999/2000 
marketing year. 

Consequently,  this  report  drafted  at  the  request  of  the  Greek  delegation  cannot  be 
regarded as an investigation of the economy of the sector in general. It consists  in an 
their  advantages  and 
in-depth  examination  of 
disadvantages,  on the assumption  that  all the other  detailed  arrangements  for  the  aid 
scheme remain unchanged. This investigation is not at this stage accompanied by  any 
proposal for changes to legislation. 

four  suggestions,  with 

the 

The suggestions for changes have been assessed in the light of the need to maintain or, 
if  possible,  reinforce  control  measures  and  their  effectiveness, 
in  response  to 
observations  made  earlier by the  Court  of Auditors  in  its  annual  reports.1  The  Court 
noted  serious weaknesses  in the control  aspects  of the  CMO  for  cotton,  and  pointed 
out  that  both  the  Council  and  Parliament  had  urged  the  Commission  to  see  that 
effective  control measures were introduced. 

2. 

THE PRESENT SYSTEM 

The Greek  delegation's  suggestions relate  specifically  to  the  identity  of  the  recipient 
of aid, the stabilising mechanism,  and,  for  the last two points, the  system  of  advance 
payment  of grants  and consequently  also the system  of payment  of the balance.  The 
present situation can be summarised as follows. 

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OJNoC309,16.11.1993,p. 1. 
OJNo C 340,17.11.1996,p. 1. 

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2.1 

Aid scheme and prices 

Cotton  does  not  appear  in  Annex  II  to  the  Treaty,  but  Protocol  4  to  the  Act  of 
Accession  of  Greece  explicitly  recognises  the  specifically  agricultural  character  of 
cotton  production  and  introduces  production  aid.  It  was  subsequently  amended  and 
expanded by Protocol  14 to the Act of Accession of Spain and Portugal. 

One of the  essential  structures  of the  arrangements  for  aid  to  cotton  is  based  on  the 
well-known  "deficiency  payment"  system.  Aid  equal  to  the  difference  between  a 
guide price fixed by the Council and a world market price determined  at  least  once a 
month  by  the  Commission  is  granted  to  ginning  firms,  which  are  required  in 
exchange to pay a minimum price to producers. Thus while the purpose of the aid is to 
provide income  support  for producers, its operation  is based  on payments  to ginners. 
Moreover,  the  aid  is  granted  for  quantities  of  unginned  cotton,  although  these 
quantities are adjusted  as a function  of the fibre yield of ginnning. 

The guide price and the minimum price for  unginned  cotton  of  standard  quality  have 
been  fixed,  for  a  period  ending  with  the  1999/2000  marketing  year  at  the  latest,  at 
ECU  106-30/100 kg  and  ECU 100-99/100 kg  respectively.  These  institutional  prices 
relate  to  relate  to  cotton  of  fair,  sound  and  merchantable  quality,  having  a  10  % 
moisture  content  and  3  %  impurity  content  and  the  necessary  characteristics  to 
produce,  after  ginning,  32  %  grade  5  fibres  (white  middling)  of  28  mm  length (1-
3/32"). 

The marketing year runs from 1 September to 31 August. 

2.2 

Stabiliser mechanism 

In March  1995  the  Commission,  acting  upon  its  undertaking  at  the  December  1993 
Council meeting "to reflect  on the specific  problems of the cotton sector in a spirit of 
fair management", sent the Council a comprehensive report on the operation of the aid 
system, and in particular the stabiliser mechanism. 

In  order  to  solve  the  problems  linked  to  the  fact  that  increased  production  in  one 
producer  Member  State  led  to  identical  penalties  in  both,  the  Council  introduced  a 
system  of  guaranteed  national  quantities  (GNQs)  from  the  1995/96  marketing  year 
onwards, with the aim of making sure that producers in each Member  State take steps 
to  respond  to  overshoots  themselves.  To  offset  this,  the  abatement  cut-off  was 
removed,  as  was  the  possibility  of  carrying  over  part  of  the  abatement  from  one 
marketing year to the next. 

For an abatement to be applied, two conditions must be met: 

I. 

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actual  Community  production  must  exceed  the  guaranteed  maximum 
quantity (GMQ) of 1 031 000 tonnes; 

this  Community  production  must  include  actual  production  in  Spam 
exceeding  the GNQ of 249 000 tonnes, or  in  Greece  exceeding  the  GNQ  of 
782 000 tonnes. 

Moreover, when the  abatement  is applied  to only one Member  State, it  is based,  not 
on that Member  State's overshoot of its own GNQ, but on the Community  overshoot 
ofGMQ. 

The abatement involves reducing the guide price by a percentage equal to half of that 
by which the reference quantity is exceeded. 

2.3 

Advance payments and balances 

One  of  the  aims  of  the  reform  introduced  from  the  1995/96  marketing  year  was  to 
apply  penalties  in  a  single  marketing  year  to  the  producers  responsible  for 
overshooting in that year. It was therefore essential to provide for a system of payment 
to combine advance payments on grants in the course of the year and settlement of the 
balance at the end of the same year. 

2.3.1  Advances 

Calculation of advances 

Before  the beginning of the marketing year, the Commission,  in accordance with  the 
Management  Committee  procedure,  estimates  production  for  each  Member  State 
concerned. In view of Council Regulation  (EC) No  1554/95  laying down the  general 
rules for the system of aid for cotton, the estimated  levels of production  are increased 
by  a  15%  safety  margin  for  the  calculation  of  a provisional  abatement,  through  the 
theoretical operation of the stabilisers. 

Depending  on  the  variable  levels  of  market  prices,  the  amounts  of  the  advances 
granted in the course of the marketing year result from the following  calculation: 

Guide price 

- Provisional abatement 
- World price 

= Advance 

As the present system provides for production to be estimated  once only,  provisional 
abatements  are  constant  throughout  the  marketing  year,  but  different  as  between 
Member States, depending on how far each has overshot its own GNQ. Consequently, 
for the same world price, the advance may not be the same in both Member States. 

The  15% mcftasfc  m estimated production provides a safety  net to  ensure  that  by  the 
end  of  the  year  the  advances  granted  do  not  exceed  the  aid  finally  due.  This 
percentage was fixed, from the second year of application  of the reform  (1996/97)  in 
the  light  of  past  figures  for  the  previous  nine  marketing  years,  relating  to  the 
discrepancy  observed between production  forecasts  before  the beginning  of  the  year 
and actual output recorded at the end (see Annex I). The figures show that a margin of 
15% is neither arbitrary nor excessive. 

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As  soon  as  the  unginned  cotton  enters  the  ginning  plant  (is  taken  into  supervised 
storage)  and  from  16  October  following  the  beginning  of  the  marketing  year,  the 
Member  States  will,  on  application  from  the  ginners,  grant  an  advance  on  aid  on 
condition security of at least  110% of the amount of the advance is lodged.  When the 
cotton is taken  into supervised  storage, the ginner can indicate that  the  aid  on  which 
the  advance  is to be  granted  corresponds  to that  for  the day  of  entry  into  supervised 
storage  (subsidy  of  the  day)  or  to  that  for  a  later  date  (post-fixing).  The  security  is 
forfeit  up to an amount equal to that by which the advance exceeds the aid  eventually 
granted. 

The  ginning  period  during  which  quantities  of  unginned  cotton  can  be  taken  into 
supervised  storage  and  weighed  ends  on  31  March.  However,  from  the  present 
marketing year (1997/98), the Member State has the option of setting an earlier date if 
this  does  not  interfere  with  commercial  operations  in  the  sector.  In  that  case,  the 
Member  State  adopts  the  new  time  limit  at  the  latest  30  days  before  it  comes  into 
force, and informs the Commission thereof immediately. 

The  monthly  breakdown  of  quantities  taken  into  supervised  storage  in  recent 
marketing  years  will  be  found  in  Annex II. Two points  should  be  borne  in  mind:  it 
takes  longer  in  Greece  than  in  Spain  to  dispose  of  the  harvest,  and  the  most  active 
period  is  usually  in  October  and  November.  On  average,  quantities  taken  into 
supervised  storage up  till  the  end  of  October  and  the  end  of November  respectively 
represent, as a percentage of the total quantity for the period as a whole, 43% and 66% 
in Greece, and 77% and 96% in Spain. 

The  period  during  which  operators  can  apply  for  advances  on  aid  also  ends  on  31 
March but unlike the ginning period it cannot be shortened by the Member States. 

2.3.2  Balance 

At the  end  of the marketing  year, the level  of the  final  abatement  applicable  to  each 
Member  State  is  determined  on  the  basis  of  each  Member  State's  final  production, 
established at the latest before the end of June. 

For each period  for  which  a world  market  price  for  unginned  cotton  has  been  fixed, 
aid is calculated as follows: 

Guide price 
- Final reduction in guide price (final  abatement) 
- World price 

= Aid 

However, the amounts of aid thus calculated can be increased, pursuant to Article 2(4) 
of Council Regulation  (EC) No  1553/95, if the following  three conditions  are met  at 
the end of the marketing year: 

- 

the  weighted  average  of  the  world  market  price  is  greater  than  ECU 30.2  per 
100 kg 

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total budgetary expenditure is less than ECU 770 million, 

-  actual production in the Member State exceeds its GNQ.2 

Definitive amounts of aid are therefore obtained as follows: 

Aid 
+ Increase in aid 

= Definitive amount of aid 

The balance to be paid to ginners at the end of the marketing year thus corresponds to 
the  difference  between  the  level  of  definitive  aid  and  the  amount  of  advances.  The 
balance is different  as between the Member  States, but  is in fact  constant  throughout 
the  marketing  year,  and  does  not  depend  on  the  period  for  which  a  level  of  world 
prices has been fixed. It can be obtained as follows: 

Definitive  abatement 
- Provisional abatement 
+ Increase in aid 

The  balances  paid  in  the  1996/97  marketing  year  following  full  application  of  the 
mechanism described above were as follows: 

ECU 32.315 /100 kg in Greece, 

ECU 0.744/100 kg in Spain. 

Consequently,  the  balance  paid  to  Greek  ginners  was  significant,  corresponding  to 
about 50% of the aid due, because actual output in Greece was considerably  less than 
originally  forecast  (-24%).  The  balance  paid  to  Spanish  ginners,  on  the  other  hand, 
was  quite  small,  because  actual  output  in  Spain  was  13.6%  higher  than  forecast,  a 
figure very close to the  15% safety margin applied to forward  estimates of production. 

2.4 

Actors in the cotton sector 

The main actors involved in the agricultural production of cotton in the strict sense are 
the  producer  organisations  and  the  ginning  firms.  A  brief  survey  of  these  two 
categories  is  sufficient  for  present  purposes,  leaving  aside  the  description  of  the 
textiles industry downstream, mainly spinners and weavers. 

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The increase may not raise aid above the level of the two  ceilings specified  in 
the aforesaid  Regulation, i.e. aid without the application  of the  abatement  and 
aid  resulting  from  an  increase  in  the  GNQs  (270 000  tonnes  for  Spain  and 
850 000 tonnes for Greece). 

2,4*1  Producer groups 

During the 1980s, the Community encouraged the formation of producer groups in the 
cotton sector.  Start-up aid and investment  aid was provided, mainly  for the  purchase 
of harvesting machinery. 

At  present,  harvesting  machines  are  generally  available,  in  both  Greece  and  Spain. 
Producer groups still have the job of managing this stock of equipment; but  they  no 
longer  seem  very  active  in  terms  of  concentration  and  adjustment  of  supply  by 
producers. However, it must be recognised that these functions can be fulfilled  by the 
industry  downstream  (co-operatives  and others).  In  Spain,  producer  groups  are  not 
very highly organised, and indeed only involve  12% of producers. 

2.4.2  Ginning firms 

In Greece,  of  a total  of  some  90 firms, co-operatives  represent  about  a  third of the 
number and 40% of ginning capacity at present. There is no particular problem in the 
sector as a whole, in view of the level of total output. 

In Spain, co-operatives  also represent about a third of the total  of eighteen firms. In 
the sector as a whole, there is some spare ginning capacity in relation to the supply of 
cotton, especially in recent years (1993/94 to 1995/96), when persistent drought was a 
major factor  in  limiting  supply.  However,  if the  increase  in  areas  sown  recorded  in 
1996/97  and  1997/98  continues,  there  are  grounds  for  hoping  for  a  better  balance 
between supply and demand. 

2.4.3 

Financial relations between ginners and producers 

Aid  is  granted  only  to  ginning firms applying  for  it,  and having  lodged  a  contract 
providing  for  payment  to  the  producer  of  a  price  at  least  equal  to  the  minimum 
institutional price. Among  other things, the contract must  include  a clause  providing 
that, should the abatement  and aid increase mechanisms be applied,  the  agreed  price 
will be adjusted as a function  of the effect  of the two mechanisms  on the  aid  finally 
granted. 

When unginned  cotton  is  taken into  supervised  storage,  the  ginner  makes  an  initial 
payment  to  the  producer,  taking  account,  of  course,  of  the  advances  received. 
Consequently,  where  prices  are  concerned,  the  ginners  pass  on  to  producers  the 
burden  of  uncertainty  about  the  aid  that  will  finally  be  granted  at  the  end  of  the 
marketing  year.  Once  they  have  collected  the  balance  at  the  end  of  the  year,  the 
ginners  make  the  second  payment  to  the  producers,  which  should  enable  them  to 
ensure an overall payment corresponding to the minimum price, as provided for in the 
rules. 

This two-stage  payment  of producers  is  a precautionary  measure  for  the  ginners.  If 
they were to make a single payment, it might turn out at the end  of the year  to  have 
been too high, but it would probably be difficult  to recover  the overpayment.  At  the 
same time, the advances on aid that exceeded the amount of aid finally  due would  be 
recovered from the  110% security.  Moreover,  it  should be  noted  that  for  the  period 

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from 1 September to  15 October unginned cotton taken into supervised storage cannot 
immediately qualify  for an advance. 

The  system  of  paying  Community  grants  to  ginners  in  two  stages,  an  advance 
followed by the balance, has not had the same effect  on behaviour in the cotton  sector 
in the two Member States. 

In  Greece,  ginners  have  in  fact  paid  producers  in  two  stages;  the  producers, 
dissatisfied  with the first payment, have held on to the harvest  of unginned  cotton  in 
the hope of better prices later in the year. This has affected  the disposal of the harvest, 
and thus the rate  at which cotton is taken  into  supervised  storage. Consequently,  the 
period of ginning in the strict sense has also been  affected. 

In  Spain,  the  situation  is  different  in  view  of  the  surplus  capacity  in  the  ginning 
industry  in  relation  to  the  supply  from  producers.  Against  a  background  of 
competition,  the  ginners  made  a  single  payment  to  producers,  for  the  1996/97 
marketing year  at all events, which  later turned  out to be much  higher  than the final 
minimum price. 

3. 

DIRECT PAYMENT TO PRODUCERS 

3.1 

Greece's request and the reasons behind it 

While  maintaining  the principle  of deficiency  payments,  and  the  grant  of  aid  on  the 
basis  of  the  quantity  produced,  Greece  would  like  to  see  the  aid  paid  direct  to  the 
producers  through  the  agency  of  producer  groups,  of  which  there  are  very  few  at 
present, but which could number about 300 to 400 to cover total output. 

With such new arrangements  for  granting Community financing, which  already  exist 
for  certain CMOs  such  as tobacco, the principle  of the minimum price  for  producers 
could be maintained, this price being paid by the groups. 

Besides collecting Community aid and paying member producers the minimum price, 
the  producer  groups  would  choose  one  of  the  following  alternatives  for  marketing 
fibre. 

a) 

Marketing by producer groups 

Under this  alternative, producer  groups would  own the fibre and would  therefore  be 
responsible  for  marketing  it.  In  this  situation,  the  groups  could  own  ginning  plants 
(possibly setting up a co-operative) or lease plant from the ginners, or subcontract the 
ginning of the cotton on their own account. 

In  the  last  two  cases,  the  consideration  paid  to  the  ginners  by  the  producer  groups 
would consist  either in a flat-rate  amount  applied to the quantity  ginned  (similar  to a 
jobbing contract) or in a financial sum to cover the hire of the ginning plant. 

This  alternative  would  considerably  weaken  the  importance  of  private  ginners,  who 
would become merely intermediaries with no commercial  function.  As  for  individual 

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producers, their situation would be unchanged. In the short term, the Greek  authorities 
consider  that  this  alternative  could  concern  40%  of  total  production  through  the 
intermediary of co-operatives. That is the reason for suggesting the second alternative. 

B)  Marketing by ginners 

Under this alternative, the ginners own the fibre and remain responsible for  marketing 
it,  as in the present  situation.  However,  instead  of paying  the minimum  price,  as  at 
present,  they  would  undertake  to  pay  the  producer  organisations  an  amount 
corresponding  to  the  difference  between  the minimum  price  and  the  aid.  The  Greek 
authorities  would  like this  to  be  laid  down  as  a  legal  requirement  in  a  Community 
regulation. 

One of the effects  of changing the recipient of the aid would be to weaken the position 
of the ginning firms against the producers when negotiating contracts and prices. The 
Greek authorities would like to see a two-stage process, where alternatives (a) and (b) 
would  co-exist  in the first stage, until eventually  all output  could be  absorbed  under 
alternative (a), whereupon alternative (b) would be withdrawn. 

3.2 

Analysis of the proposed changes 

Marketing of the fibre by the producer groups should lead to the following  advantages 
for producers: 

- 

it would provide an incentive to improve the structures of producer groups; 

-  producers  who  are  direct recipients  of  aid  should  feel  more  responsibility  for  the 

level of total output, and thus for the penalties for overshooting the GNQ; 

-  direct payment  of the Community  grant  without  going  through  the  ginners  could 

speed up payment of the minimum price to producers; 

-  any profits  from  managing the  aid  could be passed  on by the producer  groups  to 

their members. 

However, if producer groups are to market fibre, they will have to take  responsibility 
for applying not only for supervised storage, but also, and especially, for advances and 
for aid, which means dealing with post-fixing,  since they will be the recipients of the 
aid. Moreover, the groups will also be subject to the constraint of lodging security  for 
the advances they collect. 

The  problems  of  managing  applications  for  supervised  storage  are  exclusively 
practical  matters  of  administration  or  shortage  of  infrastructure  for  weighing  the 
cotton.  However,  the  management  of  advances  and  aid  (especially  post-fixing)  is  a 
sensitive matter, since it requires not only a good knowledge of the world  market  but 
also,  in  certain  cases,  correct  anticipation  of  world  prices.  To  lodge  security, 
moreover, bank facilities  are required. The structure of producer groups in Greece and 
especially in Spain does not seem suitable, as they operate  at present, to  enable  most 
of them to deal with these problems and co:.isîrdï:;.iS h  the ne?x f iture. 

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These  arrangements  would  mean  that  production  of  unginned  cotton  would  be 
monitored by the producer  groups, since it is at this stage that cotton would  be  taken 
into supervised  storage: there would  then be  300 to 400 checkpoints,  instead  of  only 
90 at present. However,  ginned cotton would need to be checked at the ginning stage, 
and this check on the quantity of fibres would remain essential since the aid is granted 
for  unginned  cotton  taken  into  supervised  storage,  adjusted  for  the  fibre  yield  from 
ginning.  Except  for  the  producer  groups  constituted  as  ginning  co-operatives,  these 
twofold  checks  at  two  different  stages  of  processing  would  clearly  be  more 
complicated than the present system. 

If the producer  groups were to market the ginned  cotton (alternative  (a)), they would 
be responsible  for negotiating  sales contracts  for their fibre on the world market,  and 
thus for finding potential customers. 

If  the  combination  and  addition  of  the  two  mechanisms  (applying  for  aid  and 
negotiating fibre sales contracts on the world market) did not result in a price equal to 
95% of the guide price, the producer groups would be unable to pay their members the 
minimum price without endangering their financial viability. 

If the ginners were to retain responsibility for marketing the fibre on the world market 
(alternative  (b)),  it  seems  inconsistent  to  grant  to  producer  groups  aid  that  depends 
closely on fluctuations  of world prices, which the producer groups do not have to cope 
with. 

Moreover,  this  alternative  would  involve  including  a  requirement  in  a  Community 
regulation  for  the  ginner to pay the producer  group  a certain price, corresponding  to 
the difference  between the minimum price and the aid. This would mean  imposing  a 
financial constraint  on  an  operator  that  did  not  receive  a  Community  grant.  From  a 
legal  point  of  view,  this  requirement  could  be  imposed  provided  the  ginner  still 
remained involved in the operation of the aid scheme. 

The ginning process would still be a necessary condition for the granting of aid, since 
the quantity of unginned cotton eligible for aid would still be determined  as a  function 
of the fibre yield of ginning. Moreover, the ginner would  still have the possibility  of 
purchasing  unginned  Community  cotton  at  a price  close  to  the  world  market  price, 
which would not be possible without a Community aid scheme. 

From  a practical  point  of view, however,  this requirement  would  encounter  a  major 
problem,  since  the  difference  between  the  minimum  price  and  the  amount  of  aid 
varies throughout the marketing year. Consequently, the ginners would have to make 
continual  adjustments  to  the  price  paid  to  the  producer  groups,  which  seems  very 
complicated, especially when aid is post-fixed. 

To determine the yield of ginning in such a system, the fibre produced by the  ginners 
would  have  to  be  monitored.  For  the  same  reasons  as  those  mentioned  above  in 
connection with financial constraints, there is no obstacle from the legal point of view 
to imposing such monitoring on an operator that does not receive a Community grant. 

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Under  such  a  system,  it  is  difficult  to  ensure  monitoring  or  to  impose  penalties  in 
cases  of failure to comply with Community regulations.  One idea might  be  to  provide 
for national  sanctions,  or  the  introduction  of  a principle  of  approval  of  firms,  which 
would then entail the possibility of withdrawing  approval. 

Against  a background of monitoring  and sanctions, ginners could turn to the  purchase 
of raw unginned cotton from outside the Community. 

3.3 

Conclusions 

In the light of the arguments, alternative (a), involving  marketing of  ginned  cotton  by 
the  producer  groups,  could  be  advisable  in  some  cases,  but  alternative  (b)  does  not 
seem feasible. 

Some  producer  groups  set  up  as  ginning  co-operatives  receive  aid  under  the  present 
arrangements  in  the  way  described  as  option  (a)  in  that,  as  part  of  the  co-operative 
sector,  they market the fibre at present.  In this capacity,  the co-operative  receives  the 
aid, and consequently passes the minimum price on to its members. 

However, it is unlikely that all the producer groups (and especially those  still to be  set 
up)  will  have  adequate  expertise  to  manage  not  only  the  system  of  applications  for 
supervised  storage,  but  also  that of  applications  for  advances  and  aid,  and  the  actual 
sale  of  fibre  on  the  world  market.  Not  all  producer  groups  will  be  able  to  join  the 
alternative  (a)  scheme  fully  and immediately;  some  may  reach  a sufficient  degree  of 
organisation, but there is a risk that for others the financial attractions of being  a direct 
recipient  of aid may take precedence over the establishment  of  adequate  and  efficient 
infrastructure. 

In Spain, the present  low percentage  of producers who  are members  of  groups  would 
also  be  a  handicap  for  the  establishment  of  this  two-fold  structure  favoured  by  the 
Greek authorities. 

On balance,  it is  suggested  that the present  arrangements  for  channelling  aid  through 
ginning undertakings  as provided for in Protocol  4  should be  maintained,  to  facilitate 
management  and monitoring  of  the  scheme.  In this  framework,  Article  7  of  Council 
Regulation  (EC)  No  1554/95  could  be  adapted.  This  Article  provides  at  present  that 
where  a  cotton  ginning  undertaking  carries  out  ginning  on  behalf  of  an  individual 
producer  or  a  group  of  producers  it  must  submit  a  statement  giving  details  of  the 
conditions under which the ginning is carried out and how the  aid  is passed  on  to  the 
producers.  The reference  is to  aid, not to the minimum  price.  The  new  Council  rules 
could  specify  that,  where  aid  is  passed  on  to  a producer  group,  that  group  must  pay 
individual  producers  the minimum  price to  ensure  compliance  with  the  requirements 
for minimum prices referred to in the Protocol. 

When the general operation of the cotton aid scheme is reviewed  at  a later  stage,  with 
the  possibility  of  more  substantial  changes  than  those  under  consideration  in  this 
report, one  option to consider will  be  that of  fixed  aid (per hectare  or  per  tonne)  paid 
direct  to  the  producer  without  going  through  the  intermediary  c*" the  groups.  This 
ooticn  in  the  form  in  operation  at present  in  the  tobacco  and  cl:'ve  oil  sectors  would 

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eliminate  the  concept  of  minimum  price,  and  all  the  problems  related  to  the 
management of applications for aid, especially post-fixed  aid. However, it might make 
producers' incomes highly variable, because of the volatility of the world price. 

4. 

R É G I O N A L I S A T I ON  OF  P E N A L T I ES 

4.1 

Greece's request and the reasons behind it 

Initially,  Greece  had  asked  for  provision  for  sharing  out  the  present  guaranteed 
national quantity between the various producer regions. 

Greece also wanted  a clause  similar to that  granted to  Germany  in the framework of 
arrangements  for  oilseed  crops,  where  the  sanction  applicable  at  national  level  and 
resulting from the stabiliser mechanism can be adjusted,  at the request of the Member 
State concerned, to individual regions. 

The  purpose  was  to  allow  differentiated  regional  penalties  as  long  as  they  were 
weighted to correspond to the overall national penalty. In this way, producers  outside 
the traditional regions of production can be discouraged, while those in the traditional 
regions, where major investment has been made in the past, can be supported. Another 
purpose  was  to  encourage  the  rotation  of  crops,  and  thus  better  environmental 
management of water reserves and better soil conservation. 

As  this  first  option  could  lead  to  major  penalties  for  certain  regions,  the  Greek 
authorities  substantially  changed  their  demands,  and  are  now  asking  for  individual 
production quotas to be fixed for each producer. 

Under these new arrangements, production  equivalent  to the quota would  be  eligible 
for full  aid, without any sanction, while production above the quota would receive no 
aid and would be remunerated on the free market. 

Individual  quotas  would  be  fixed  in  the  light  of  various  criteria  such  as  the  area 
covered and the level of regional investment. They would be revised annually. 

Logically, the sum of individual quotas should correspond  to the guaranteed  national 
quantity  allocated  to  Greece  at  present  (782 000  tonnes).  The  Greek  authorities 
consider that this quantity should be increased, however. 

4.2 

Analysis of the proposed changes 

4.2.1  Original proposal 

If Greece's total GNQ were to be allocated between the regions, this would mean, as a 
function  of the  extent  of  overshoot,  varying  levels  of  abatement  from  one  region  to 
another, varying levels of aid, and consequently  varying levels of minimum prices. It 
would  therefore  be  essential  to  provide  for  different  levels  of  advances  on  grants 
depending on forward estimates of production. 

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There  would  need  to  be  a  regional  breakdown  of  the  budgetary  redistribution 
mechanism that operates when expenditure is below ECU 770 million. 

These  constraints  would  make  the  aid  scheme  complicated  to  manage.  The  reason 
they  exist  is  that  regional  references  relate  to  levels  of  output  rather  than  to  area. 
Moreover, a system of regional allocation as a function  of levels of output might lead 
to transfers of production from one region to another. 

4.2.2  New proposal 

A  system  of  individual  quotas  involves  the  same  risk  of  transfer  of production,  but 
between producers rather than between regions. Moreover, problems  similar to  those 
besetting  milk  quotas  or  durum  wheat  quotas  would  probably  arise:  cumbersome 
management for individuals, and complex control procedures. 

The aid scheme  for  durum wheat provided  for  individual  entitlement  related  to  area. 
Because  of  the  major  problems  in  applying  the  arrangements,  the  Council  recently 
decided to repeal the system of individual entitlement by area, and to replace it with a 
system based on a guaranteed maximum area (GMA). 

The problem of consistency arises when quotas are applied to individual producers but 
aid is granted  to producer  groups; the problem  of controls  also  arises, in view  of the 
clear  risk  of  transfer  of  production  between  producers  in  the  same  group,  or  even 
between groups. 

Annual reviews of individual quotas on the basis of allocation criteria that are not, at 
this stage, very clearly defined only add a further  complication. 

Individual  allocation  of  production  would  mean  having  two  categories  of  cotton: 
grant-aided  cotton and non-grant-aided  cotton, at the level of the producer  and at the 
level  of  the  ginner.  It  would  not  be  easy  to  monitor  the  system,  and  each  operator 
would need to keep separate accounts for the two categories of cotton. Moreover,  the 
present  system  of  adjusting  quantities  of  eligible  unginned  cotton  up  or  down  as  a 
function  of  the  fibre  yield  of  ginning  would  no  longer  be  efficient  in  certain  cases, 
since the upward  adjustment  could not be applied when it led to a quantity in  excess 
of the quota granted. 

These  arrangements  with  two  categories  of  cotton,  one  eligible  for  full  aid  with  no 
sanction,  and  the  other  without  any  aid,  also  imply  a  considerable  change  in  the 
scheme,  since  it  would  no  longer  be  necessary  to  estimate  production  or  to  pay 
advances and balances. 

4.3 

Conclusions 

The initial option involving regional  allocation of the GNQ leads lo  complications  in 
the  management  and  control  of  the  aid  scheme.  It  would  inevitably  give  rise  to 
differing  levels of support and remuneration from one region to another. It might  also 
lead to the transfer of production between regions. 

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In the  light  of the arguments  set out above, the option of individual  quotas  allocated 
annually  can  be  rejected  completely;  it  would  increase  the  complexity  of  control 
measures,  thus  weakening  their  effectiveness,  against  the  wishes  of  the  Court  of 
Auditors, the Council and Parliament. 

A simpler way of avoiding the expansion of cotton-growing  throughout  Greece could 
be partially based on the present model for durum wheat. This would involve  defining 
areas of traditional  production,  where the aid  scheme would  be  fully  applicable,  and 
other areas where no support would be provided. 

If such a scheme were to be adopted,  it  should be based  on stricter  controls  of  areas 
sown to cotton and of area declarations  accompanying the cotton  supplied  to  ginning 
undertakings.  Complications  would  therefore  be  introduced  whatever  solution  was 
adopted. The introduction of these provisions would mean adjusting the basic rules. 

To  allow  some régionalisation while  avoiding  the undesirable  transfer  of  production 
between  regions,  the  solution  would  be  to  adapt  support  as  a  function  of  area. 
However,  this  alternative  does  not  correspond  to  the  model  which  the  Greek 
authorities  would  like;  moreover,  it  cannot  be  adopted  without  changing  the  basic 
principles of the present scheme. 

In  Spain,  the  concept  of  régionalisation  of penalties  clearly  does  not  have  the  same 
implications,  since  Spanish  cotton  production  is  concentrated  in  Andalusia,  which 
usually accounts for 95% of output. 

5. 

ESTIMATED  PRODUCTION 

The  Greek  authorities  take  the  view,  with  reason,  that  their  third  and  fourth 
suggestions  are no longer relevant  in view of their new request  for régionalisation of 
sanctions (individual  quotas). This is because the abatement  and consequent  sanction 
would  no  longer  apply,  which  would  preclude  the  need  to  estimate  production  as  a 
basis for calculating advances. 

We  do  nevertheless  consider  the  last  two  points,  which  are  difficult  to  deal  with 
separately, since they relate to the detailed rules for paying advances. 

5.1 

Greece's request and the reasons behind it 

Greece's  original  suggestion  was  to  allow  more  flexibility  in  the  two  parameters 
influencing  the  calculation  of  advances. This  involved  providing  a  legal  framework 
for  revising  the  estimated  production  in  the  course  of  the  year,  and  reducing  the 
percentage for the safety margin added to estimated production from 15% to 7.5%. 

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Greece  suggested  revising  the  production  estimates  at  the  latest  during  the  last  ten 
days  of  October,  with  the  possibility,  where  necessary,  of  revising  the  figures 
upwards. 

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The main purpose is to obtain, during the course of the marketing year, an estimate as 
close as possible to actual final output, so as to grant aid recipients prior remuneration 
as close as possible to their definitive  entitlement. 

5.2 

Analysis of the proposed changes 

Revising  estimates  of  production  during  the  course  of  the  year  (if  it  revises  the 
original  figures  downwards)  and  applying  a  smaller  margin  of  safety  (7.5%) 
contributes  to  reducing  the  difference  between  the  provisional  and  the  definitive 
abatement.  Advances  are  thus  larger  in  the  course  of  the  marketing  year,  and  the 
balance to be paid at the end is smaller. 

This means that recipients of advances can pass on the payment of the minimum  price 
to  producers  more  rapidly,  especially  if  the  recipients  are  producer  groups,  as 
suggested by the Greek authorities. 

However, if the safety margin added to the first estimation, made before  the beginning 
of the year, is only 7.5%, the budgetary risk is appreciable, since the advances granted 
might turn out to be higher than aid finally due. 

Ginning activity is in full  swing by the end of October, and revised  estimates of final 
production would still be fairly unreliable. A safety margin of only 7.5% would  entail 
an  unacceptable  budgetary  risk.  The  15% margin  should  be  retained,  even  for  the 
revised estimate, which would reduce the impact of the revision on the new advances. 

Under these arrangements, aid recipients would receive: 

-  from  16 October, an advance linked to the initial estimate of production,  increased 
by a safety  margin  of  15% (estimate made before  the beginning  of  the  marketing 
year), 

-  from  early  November,  a  further  advance  (not  much  higher)  based  on  the  revised 
estimate  of  production,  still  with  a  15%  safety  margin  and  including  a  small 
retroactive component linked to the earlier advance, 

- 

the balance at the end of the marketing year. 

However,  this  series  of payments  of  different  amounts  is  a  source  of  complications 
that is very likely to  lead to  administrative  errors for  the  sake of what  in  most  cases 
will be a very small adjustment to the advance. 

5.3 

Conclusions 

To  reduce  the  budgetary  risk  to  a  minimum,  it  might  be  advisable  to  calculate 
advances in two stages: 

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in the first stage, the initial estimate of production made before the beginning of the 
marketing year could be kept, with the safety margin of  15% 

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in the second stage, the estimate could be revised at the end of November, i.e. well 
into the period during which the bulk of the cotton is taken into supervised  storage; 
as this estimate would be more reliable, a smaller safety margin could be applied. 

By  postponing  the  revised  estimate  of  production  until  the  end  of  November,  the 
conditions  of  remuneration  of  operators  are  improved  both  in  Greece  and  Spain, 
without risk for  the  budget.  The  complications  resulting from the  payment  of  two 
advances still remain, however. 

To  avoid  the  payment  of  several  advances,  with  all  the  resulting  administrative 
complications, it would be better to pay one advance from 16 December, instead of 16 
October as at present,  on the basis of the estimate of production made  at  the  end  of 
November increased by a safety margin of less than 15%. 

These  changes  would  require  amendment  of  Council  Regulation  (EC)  No  1554/95 
laying down the general rules for the system of aid for cotton. 

6. 

GENERAL CONCLUSIONS 

The main purpose of this report is to enable the Council to grasp the  implications  of 
the four changes suggested by the Greek authorities, in relation to the present  system, 
with all the other present arrangements for the cotton aid scheme remaining constant. 

Other changes to the scheme might be considered with a view to involving producers 
more directly in the granting of Community aid. However, any such changes would be 
radical, implying  an approach based  on flat-rate  aid (per hectare or per  tonne);  they 
would  substantially  increase  the variability  of  incomes  dependent  on  market  prices, 
and imply tighter controls of the quality and quantity of output. Such options could be 
considered  when  the  general  operation  of  the  scheme  is  reviewed;  a  report  on  the 
scheme as a whole is to be sent to the Council and to Parliament by 1  August  1999. 

For the granting of aid to producer groups, their present structure in both  Greece and 
Spain  does  not  seem  likely  to  enable  most  of  them  to  cope  immediately  with  the 
constraints  that  inevitably  fall  on  the  recipient  of  aid  in  terms  of  management  of 
taking into supervised storage, advances and aid itself. 

Under  the  alternative  where  ginners  would  be  responsible  for  marketing  the  fibre 
downstream of receipt of aid by the producer groups, there would be a corresponding 
obligation  to pay a certain price to the producer group. This alternative  is  not  to be 
recommended,  since  it  would  raise  problems  of  control  and  sanctions,  but  also  of 
consistency in relation to the basic principle of the deficiency payment. 

Encouragement  could  be  given  to  the  other  alternative,  where  the  producer  groups 
themselves would be responsible for marketing the fibre (in Greece this is already  the 
case for producer groups set up as ginning co-operatives). There is already  a rule that 
cotton  ginning  undertakings  which  carry  out  ginning  on  behalf  of  an  individual 
producer or a group of producers with them must pass aid on to the producers, and in 
that case it should be reinforced.  In order to comply with the requirements  concerning 
minimiim  prices  laid  down  by  the  Protocol,  the  new  Council  Regulation  could 

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introduce an obligation for producer groups to pay a minimum price to their members. 
In those  conditions,  producer  groups  would  avoid  all  the  constraints  related  to  the 
management  of aid by the ginners. Moreover, producer groups  carrying  out  ginning 
themselves would, as at present, continue to collect and manage the aid. 

The  introduction  of  a  system  of  individual  quotas  to  maintain  cultivation  in  the 
traditional  production  areas  creates  a  number  of  monitoring  and  management 
problems  that  cannot  be  solved  in  a manner  compatible  with  the  principles  of  the 
present  aid  scheme.  Régionalisation  of  the  present  guaranteed  national  quantity 
implies  multiple  levels  of  aid,  and  thus  the  problem  of  controlling  the  transfer  of 
production between regions. However, one possibility that could be considered, based 
on  the  principle  at  present  applied  for  durum  wheat,  would  be  for  a  Council 
Regulation to fix areas that are not traditional production areas, where the aid scheme 
would not apply. 

As to the rules for the payment of advances, an improvement in production  estimates 
requires revised  estimates  at a time  when  the main period  of  entry  into  supervised 
storage is usually well advanced (that is, towards the end of November). In this case, a 
safety margin of less than  15% could be applied to the revised  estimate  to calculate 
the  advance  on  aid  without  creating  budgetary  risk.  Moreover,  to  avoid  the 
coexistence  of  several  advances,  and  the  resulting  administrative  complications, 
postponement  for  two  months  of  the  actual  payment  of  advances  should  be 
considered.  These  changes  involve  amending  the  general  rules  laid  down  by  the 
Council. 

The conclusions of this report can therefore be summarised as follows: 

-  aid  should  continue  to  be  granted to  the  ginning  undertaking,  whether  a private 
undertaking or an association, and the possibilities  for paying the minimum  price 
when ginning is carried out on behalf of producer groups should be made explicit; 

-  the introduction of individual production quotas would not be a good idea, but the 
possibility of geographical concentration of eligibility for aid should be considered; 

- 

it might be possible to consider a single advance payment calculated on the basis of 
a better estimate of production, which could then be increased by a margin smaller 
than the present 15%. 

In the light of  the Council's  discussions  of this report, the  above  suggestions  could 
lead  to  proposals  for  legislation  applicable  to  the  forthcoming  marketing  year 
1998/99.  They  do  not,  in  themselves,  involve  any  extra  expenditure  for  the 
Community budget. 

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ISSN 0254-1475 

COM(98) 10 final 

DOCUMENTS 

EN 

03  10  17 

Catalogue  number  :  CB-CO-98-006-EN-C 

ISBN  92-78-30059-4 

Office  for Official  Publications of the European  Communities 

L-2985 Luxembourg