Communication from the Commission to the Council and the European Parliament - Mid-Term Review of the Common Agricultural Policy
Date: 2002-07-10
Institutions: European Commission
Subjects: EU policy, State aid, agri-environmental plan, agricultural expenditure, common agricultural policy, common organisation of markets, rural development, sustainable agriculture, sustainable development

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 10.7.2002
COM(2002) 394 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL
AND THE EUROPEAN PARLIAMENT

Mid-Term Review of the Common Agricultural Policy

EXPLANATORY MEMORANDUM

The present Communication stems from the mandate of the European Council of Berlin to the
Commission  to  submit  a  Midterm  Review  (MTR)  of  the  Agenda  2000,  putting  it  into  the
wider context of the recent public debate about the Common Agricultural Policy (CAP) and
its future.

This  debate  has  demonstrated  that  while  views  on  what  EU  citizens  expect  from  the  CAP
differ, both supporters and critics of the CAP can broadly agree on the set of objectives that
agricultural and rural development policy should promote.

These  objectives  essentially  remain  today  the  same  as  those  established  in  Berlin  and
enhanced  in  the  European  Summit  of  Göteborg.  These  objectives,  which  have  to  be  met
within the budgetary framework also agreed in Berlin, are:

– 

– 

– 

– 

– 

– 

a competitive agricultural sector;

production methods that support environmentally  friendly, quality products that  the
public wants;

a fair standard of living and income stability for the agricultural community;

diversity  in  forms  of  agriculture,  maintaining  visual  amenities  and  supporting  rural
communities;

simplicity  in  agricultural  policy  and  the  sharing  of  responsibilities  among
Commission and member-states;

justification  of  support  through  the  provision  of  services  that  the  public  expects
farmers to provide.

Yet significant differences exist as to how to best achieve these objectives. To understand this
these differences it is crucial to take account of the difficulty of simultaneously enhancing the
competitiveness  of  EU  agriculture  and  rural  areas  while  responding  to  the  higher  costs
resulting from the requirements of promoting higher environmental, food safety, food quality
or animal welfare standards.

The  Communication  rejects  the  notion  that  EU  agriculture  can  promote  the  objectives
expected  from  our  citizens  by  abolishing  or  renationalising  support.  But  it  also  rejects  the
notion  that  EU  agriculture  should  limit  itself  to  a  passive  role  of  observing  developments
without a forward looking policy response.

Instead, the Communication actively responds to the concerns that EU citizens express about
the effectiveness of the CAP. It focuses the MTR on the pertinent policy question of how to
best support EU agriculture and rural areas. Aiming at the improvement of coherence in CAP
policy instruments, it proposes a set of substantial adjustments to achieve the following:

Enhance the competitiveness of EU agriculture by setting intervention as a real safety net
measure,  allowing  EU  producers  to  respond  to  market  signals  while  protecting  them  from
extreme price fluctuations. To achieve this, the proposed market measures include:

1. 

In the cereal sector, a series of measures in order to bring to a close the process of
reform  initiated  in  1992  and  continued  in  1999.  These  include  a  final  5%  cut  in
intervention  price  (based  on  the  Agenda  2000 model),  the  abolition  of  the  monthly

2

increments for the cereal intervention price and rye intervention, and the adjustment
of  the  Community  border  protection  system  in  accordance  with  the  international
rights and obligations of the EU.

2. 

Further measures in the crop sector include:

(a) 

(b) 

the decrease in the level of the specific additional payment to durum wheat and
the introduction of a quality premium;

the  decrease  of  the  rice  intervention  price  to  world  market  levels  and  the
compensation of producers with direct aid;

(c) 

adjustments in the dried fodder, protein crop and nuts sectors.

3. 

4. 

In the beef sector, a major simplification of the system of direct payments in order to
better link producers to consumer demand for better quality and safety.

Moreover,  four  alternative  options  for  the  future  of  support  in  the  dairy  sector  are
presented for discussion.

Promote a market oriented, sustainable agriculture by completing the shift from product
to producer support with the introduction of a decoupled system of payments per farm, based
on  historical  references  and  conditional  upon  cross-compliance  to  environmental,  animal
welfare and food quality criteria.

Strengthen rural development by transferring funds from the first to the second pillar of the
CAP  via  the  introduction  of  an  EU-wide  system  of  compulsory  dynamic  modulation  and
expanding the scope of currently available instruments for rural development to promote food
quality, meet higher standards and foster animal welfare.

The proposed adjustments in CAP policy measures allow maximum flexibility in production
decisions  and  significantly  simplify  the  manner  by  which  support  is  provided  to  producers
while  guaranteeing  their  income  stability.  They  also  promote  a  substantial  simplification  in
the CAP, facilitate the enlargement process and help to better defend the CAP in the WTO.

This MTR has been clearly  designed  so as to respect the  objectives and  overall  agricultural
and budgetary framework agreed by the Berlin Council.  It aims at enhancing the efficiency,
sustainability  and  subsidiarity  of  the  CAP,  simplifying  its  administration  while  taking  into
account the need to preserve farming incomes in a less trade distorting way and respecting at
the same time trends in consumer choices and public opinion more generally.

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Table of Contents

1.

1.1.

1.2.

2.

2.1.

2.2.

2.3.

2.4.

2.5.

2.6.

2.7.

2.8.

2.9.

3.

3.1.

3.2.

3.3.

The common agricultural policy – an evolving policy ............................................ 5

Introduction.................................................................................................................. 5

Achievements and gaps................................................................................................ 5

Towards a more sustainable common agricultural policy ................................... 11

The aims of the Mid-Term Review............................................................................ 11

The outlook for the markets ....................................................................................... 12

Stabilising markets and improving common market organisations ........................... 13

Achieving simpler and more sustainable direct support ............................................ 18

A better balance of support for sustainable agriculture and rural development ........ 22

Consolidating and strengthening Rural Development ............................................... 24

Budget ........................................................................................................................ 25

State aid...................................................................................................................... 26

Next steps................................................................................................................... 26

Likely effects of proposals ....................................................................................... 26

Internal effects............................................................................................................ 26

External effects .......................................................................................................... 28

Financial impact ......................................................................................................... 28

Annex: The development of agricultural expenditure 2000 – 2006 .................................. 29

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1. 

THE COMMON AGRICULTURAL POLICY – AN EVOLVING POLICY

1.1. 

Introduction

In  1999  the  European  Council  in  Berlin  agreed  the  Agenda  2000  reform  of  the  common
agricultural  policy  (CAP),  a  new  and  important  step  in  the  reform  process.  Agenda  2000
represented  a  deepening  and  an  extension  of  the  1992  reform  for  market  policy  and  the
consolidation of rural development as the second pillar of the common agricultural policy.

Agenda 2000 explicitly established  economic, social, and environmental goals within a new
reformulated  set  of  objectives  for  the  common  agricultural  policy  consistent  with  the
requirements  of  the  Amsterdam  Treaty.  This  had  the  aim  of  giving  concrete  form  to  a
European  Model  of  Agriculture  and  preserving  the  diversity  of  farming  systems  spread
throughout  Europe,  including  regions  with  specific  problems,  in  the  years  ahead.  These
objectives  involve  more  market  orientation  and  increased  competitiveness,  food  safety  and
quality,  stabilisation  of  agricultural  incomes,  integration  of  environmental  concerns  into
agricultural  policy,  developing  the  vitality  of  rural  areas,  simplification  and  strengthened
decentralisation.

These objectives are in line with the Sustainable Development Strategy (SDS) agreed by the
European  Council  in  Göteborg  in  2001,  which  requires  that  economic,  social  and
environmental effects of all policies should be examined in a co-ordinated way and taken into
account in decision-making.

The mid-term review provides the EU with the opportunity to examine its agricultural policies
and  ensure  that  they  better  meet  the  objectives  established  in  Agenda  2000  and  Göteborg.
Further policy developments should also continue the process of adapting key policies to the
internal  and  external  objectives  of  sustainable  developmentcalled  for  in  the  Commission
communication 
on  Sustainable  Development”
(COM(2002) 82),  particularly  in  view  of  the  upcoming  World  Summit  on  Sustainable
Development in Johannesburg in September 2002. Such  a  process  addresses concerns about
the balance of global production and consumption patterns, while ensuring the livelihood of
European rural communities.

partnership 

“Towards 

global 

a 

1.2. 

Achievements and gaps

There  is  no  doubt  that  much  has  been  achieved  in  the  reform  process  since  1992.  Market
balances have been improved and agricultural incomes have developed favourably. A sound
basis  for  enlargement  and  the  current  WTO  negotiations  has  been  established.  Yet  in  many
areas, gaps remain between the objectives set in Agenda 2000 for the CAP, and its capacity to
deliver the outcomes expected by society. European citizens generally see their concerns and
expectations reflected in the objectives agreed in Agenda 2000. Yet they are less confident as
to whether current policies meet these objectives fully, especially in the context of emerging
new challenges for EU agriculture.

Economic viability

Market orientation – adapting to new opportunities

In order to help European agriculture take advantage of expected world market developments,
Agenda 2000 sought to improve market orientation and the competitiveness of EU agriculture

5

on both domestic and external markets. Price support was reduced further for cereals and beef
and direct payments in these sectors were increased  and reorganised to compensate farmers,
with  oilseed  payments  progressively  aligned  on  those  for  cereals.  A  similar  reform  was
decided for the milk sector from 2005 onwards.

Reductions  in  cereals  institutional  prices  have  further  improved  the  prospects  for  both
domestic use and exports. This has helped the EU to  maintain  its  position  as  a major world
exporter  and  cereal  stocks  have  shrunk  to  low  levels  with  the  exception  of  rye.  Domestic
prices are now close to world market prices and prospects appear positive, once again with the
exception  of  rye.  However,  considerable  uncertainties  remain,  as  volatility  in  price
developments and exchange rates could constrain export opportunities in certain years. More
generally, EU cereals production is likely to face increased pressure from traditional and new
competitors, particularly in feed markets.

Before the beef crisis, intervention stocks had also reached zero in this sector, and the stocks
taken into intervention during the crisis are expected to disappear much faster in the coming
years than was anticipated initially. In this respect, market management mechanisms agreed in
Agenda  2000  appear  to  have  been  sufficiently  flexible  to  facilitate  the  recovery  of  the  beef
market.  But  in  the  beef  sector  effective  support  price  levels  remain  high  in  comparison  to
world  market  prices,  although  intervention  buying  has  now  been  set  at  a  safety  net  level.
Direct  payments  in  the  beef  sector  are  paid  per  head  of  animal  and  still  set  incentives  to
produce up to the payment ceiling. In contrast, support levels in the cereals sector are much
closer  to  world  market  price  levels  and  direct  payments  are  already  more  decoupled  from
production.

Agenda 2000 also anticipated that lower institutional prices would encourage greater market
price  differentiation  between  lower  cost  and  higher  value  added  products  and  a  greater
orientation  of  farmers  towards  market  signals.  However,  while  in  many  sectors  market
intervention  is  increasingly  limited  to  a  safety  net  role  and  production  incentives  have  been
considerably  reduced  in  the  shift  from  price  support  to  direct  payments,  these  payments
remain partly linked to certain types of production or use of production factors. This makes it
difficult  for  farmers  to  adapt  to  new  conditions  and  opportunities,  while  maintaining  their
level  of  income.  Further  steps  are  therefore  necessary  to  improve  the  market  orientation  of
European farming.

Food safety and food quality – more integration into the CAP

Prices are only  one  aspect of  market  orientation  and  competitiveness.  Food  safety  and  food
quality  are  at  least  as  important.  There  are  growing  public  concerns  about  both  the  way  in
which  food  is  produced  and  the  way  in  which  agriculture  is  supported.  It  is  a  fundamental
obligation to guarantee the safety of food to consumers both within and outside the EU, and
this therefore must be a continuous top priority for the CAP. Without food safety there is no
market.

Quality promotion is another key aspect of the new direction in agriculture. Consumers also
increasingly associate quality with factors not inherent in the product, including, in particular,
the conditions under which it has been produced. However, there remains a gap between the
preference  for  quality  that  consumers  express  and  the  way  they  behave  in  the  marketplace.
Guaranteeing  that  production  meets  consumer  wishes  in  terms  of  quality  is  therefore  a
dynamic process between consumers and producers, in which agricultural policy could play a
greater role. A shift to higher quality production, particularly where this requires specialised
expertise, also offers benefits to farmers in terms of income and work quality.

6

Considerable efforts have already been made to ensure better food safety (testing of animals,
traceability, removal of  specified  risk  materials,  maximum  residue  levels  for  pesticide,  etc.)
However, policy instruments available to support food safety and quality within the common
agricultural  policy  remain  limited.  Incentives  and  signals  sent  to  farmers  have  to  be  in  line
with the objectives of safety and quality,  as they have  to be  in line  with  environmental  and
animal  health  and  welfare  requirements.  There  is  a  broad  consensus  that  more  can  be  done
within the policy to meet these objectives.

Social balance

Farm incomes – direct payments continue to be necessary

Ensuring  a  fair  standard  of  living  for  the  agricultural  community  and  contributing  to  the
stability of farm incomes remain key objectives for the CAP. Agenda 2000 therefore foresaw
further  compensation  of  farmers  for  price  cuts,  in  order  to  avoid  a  significant  loss  of  farm
income and a threat to the economic and social stability of the farming community.

At the level of EU-15 per capita agricultural incomes have developed quite favourably since
the  beginning  of  the  reform  process.  However,  this  favourable  development  hides  the
increased  importance  of  direct  payments  in  farm  income  as  well  as  considerable  variations
between countries, regions and sectors.

Since  market  revenues  alone  are  not  enough  to  ensure  an  acceptable  standard  of  living  for
many  farm  households,  direct  payments  continue  to  play  a  central  role  in  ensuring  a  fair
standard of living and stability of income for the agricultural community.

Structural development and perspectives for the future

As with the 1992 reform, direct payments under Agenda 2000 have provided a cushion which
has allowed the farm sector to adjust to  a more market oriented  environment without major
social or environmental disruptions. Since the mid-1990s  the  strong  decrease  in  agricultural
employment  experienced  in  earlier  years  has  slowed  down  considerably.  Although  the  rate
rose  in  1999  and  2000,  the  annual  reduction  in  2001  was  again  lower  than  any  year  since
1993. This general trend is, in part, certainly explainable by the income stabilising effect of
direct payments.

As  in  the  period  preceding  the  1992  reform,  the  long-term  trend  towards  a  reduction  in  the
number of holdings, combined with a general stability in utilised agricultural area over the last
years,  has  seen  average  farm  sizes  grow.  This  has  been  accompanied  by  increased
specialisation into livestock and cereals farming from mixed farming as well as by a notable
increase  in  permanent  crops  in  some  countries.  The  economic  benefits  of  specialisation,
particularly when associated with the concentration of production in certain regions, have to
be  balanced  with  the  resulting  long-term  environmental  pressures.  In  most  countries  the
amount  of  tenant  farmed  land  has  increased  in  the  period.  Although  effects  have  been  very
variable between countries, these trends have reflected pressures on traditional production and
mixed  farming  methods.  These  methods  are  often  associated  with  high  nature  value
agricultural systems and landscapes and traditional products. Many of these farms will need
more  targeted  support  to  adapt  to  the  opportunities  offered  by  more  open  markets  and
consumer demand for quality products.

7

The balance of income support – gaps remain due to the low take-up of modulation

Agenda  2000  saw  questions  of  differentiation  and  redistribution  of  income  support  among
farmers  gaining  importance,  not  least  from  the  point  of  view  of  social  cohesion.  Many
commentators have observed that a minority of farmers enjoys the benefits of the majority of
direct  payments.  The  direct  payments  of  the  1992  reform  have  lost  their  compensatory
character over time and  have  become  income payments,  raising the  question  of whether the
distribution of direct support is optimal.

Larger  farms  are  generally  expected  to  adapt  more  easily  to  new  conditions  through
investment  and  economies  of  scale.  The  direct  payments  of  the  1992  and  Agenda  2000
reforms  leave  little  scope  to  target  farming  systems  facing  particular  social  problems  of
adaptation  and  restructuring.  Here,  the  imbalance  between  direct  payments  and  rural
development is of particular concern, since rural development provides greater flexibility for
Member States to target resources on specific handicaps and pursue longer term strategies of
income diversification.

Agenda  2000  put  in  place  a  specific  voluntary  mechanism,  modulation,  to  address  these
problems by addressing concerns relating to the social distribution of direct aid and the need
to  reinforce  rural  development.  However,  to  date  only  a  limited  number  of  countries  have
shown interest in this optional approach, and at a level considerably lower than that permitted
maximum.  There  would  appear  to  be  a  number  of  reasons  given  by  Member  States  (both
those  implementing  and  those  not  implementing  modulation)  for  the  low  level  of  take-up.
These include the effects on competition of a voluntary approach, problems with cofinancing,
the limitation of scope, the complexity and administrative burden of the scheme, as well as its
small contribution to economic and social cohesion.

Environmental integration and animal health and welfare concerns

Environment – getting the incentives right, increasing compliance

The reforms undertaken as part of the Agenda 2000 package represent another significant step
forward  in  putting  the  integration  of  environmental  goals  into  practice.  Member  states  are
obliged to undertake appropriate  environmental measures.  In  fulfilling  their  obligation,  they
their  disposal:  agri-environmental  measures,  environmental
have  several  options  at 
legislation, and specific environmental requirements. The latter two options can be enforced
by  reducing  direct  payments  granted  under  the  first  pillar  of  the  CAP  in  the  case  of  non-
compliance.

The  application  of  these  measures  by  Member  States  should  enable  them  to  improve  the
balance  between  agriculture  and  the  environment,  eliminating  damaging  features  of
agriculture  and  improving  its  performance  as  a  sector  in  harmony  with  the  environment.
There  remains,  however,  considerable  scope  for  further  improvement.  Implementation  of
statutory  requirements  remains  uneven,  and  to  date  little  use  has  been  made  of  cross-
compliance mechanisms, with some reporting difficulties. National envelopes in the livestock
sector have tended to focus on direct support rather than on promoting more environmentally
friendly  types  of  farming.  Some  Member  States,  farmers  and  environmental  groups  have
signalled  that  there  is  considerable  scope  to  further  expand  agri-environmental  programmes
within rural development programmes to meet local needs.

Within  the  market  regimes  the  scale  of  support  still  provided  through  prices  and  product
specific  payments  may  discourage  farmers  from  more  environmental  friendly  production

8

methods. In certain areas, the linkage of direct payments to production or production factors
such as headage encourages many farmers to maintain production intensity above that which
would  be  chosen  without  support,  leading  in  some  areas  to  production  which  would  not
otherwise take place.

Animal health and welfare – Promoting animal husbandry

The  European  Union  has  introduced  much  important  legislation  concerning  minimum
standards for the keeping, transport and slaughtering of animals in recent years. The Treaty of
Amsterdam,  in  force  since  1  May  1999,  lays  out  new  ground  rules  for  the  actions  of  the
European  Union  on  animal  health  and  welfare  in  a  special  "Protocol  on  the  Protection  and
Welfare  of  Animals".  However,  many  citizens  rightly  remain  concerned  that  more  can  be
done  to  ensure  coherence  with  animal  health  and  welfare  objectives.  At  the  same  time,
farmers  express  disquiet  about  the  cost  that  additional  animal  health  and  welfare  standards
bring.  The  further  promotion  of  good  animal  husbandry  must  therefore  ensure  that  services
provided by farmers beyond good farming practice are adequately remunerated.

Rural Development

The future of the agricultural sector is closely linked to a balanced development of rural areas,
which  account  for  80 %  of  European  territory.  Agricultural  and  rural  policies  have  an
important role to play in promoting territorial, economic and social cohesion in the EU. In this
respect,  rural  development  has  an  increasingly  important  part  to  play.  Alongside  market
measures and the elements of a competitive European agriculture, rural development offers, in
particular,  a  specific  territorial  dimension  to  address  the  varied  needs  of  the  rural  world,
together  with  the  expectations  of  today’s  society  as  regards  quality,  food  safety  and  the
environment.

The Agenda 2000 reform implied a considerable overhauling, streamlining and consolidation
of rural development policy in a single legal framework. It is now applicable in all rural areas
of the Union and has become the second pillar of the CAP, accompanying and complementing
changes  in  market  and  price  policy.  The  objectives  of  integrated  rural  development  enjoy
much  support  among  farmers  and  the  wider  community.  It  has  provided  the  basis  for  new
ways  of  tackling  problems  facing  rural  areas,  through  measures  such  as  the  Leader+
Community  Initiative.  The  new  framework  has  improved  the  scope  for  targeted  policies
focusing  on  investments  in  competitiveness,  rural  viability,  quality  of  life  and  sustainable
agriculture.

Meeting increased needs and new opportunities

However,  implementation  will  be  limited  as  long  as  resources  are  not  commensurate  with
needs.  Only  16 %  of  total  EAAGF  (guarantee  and  guidance)  expenditure  on  agricultural
policy  and  only  10 %  of  EAAGF-Guarantee  expenditure  are  currently  used  for  rural
development.  Improving  the  competitiveness  of  rural  areas  and  creating  new  income  and
employment opportunities for farmers and their families, on-farm and off-farm, remain major
aims for the future, as employment possibilities in agriculture itself fall away. Rural areas are
multifunctional,  and  farmers  should  be  encouraged  to  exploit  all  opportunities  for  rural
entrepreneurs.  More  resources  for  rural  development  would  allow  a  greater  focus  on  these
types of activity.

Moreover,  a  number  of  Member  States  have  highlighted  that  current  measures  do  not  offer
sufficient scope to target new needs and opportunities in rural areas such as the promotion of

9

food  quality,  support  for  local  and  traditional  production,  meeting  demanding  standards  or
improvement  of  certification  as  well  as  those  arising  from  the  Sustainable  Development
Strategy.

Economic and Social Cohesion – the need for more rural development

The  Second  Report  on  Economic  and  Social  Cohesion  (COM(2001) 24  final)  concluded  in
2001 that although recent changes in the CAP implies that it benefits some cohesion countries
more than before, its contribution to territorial cohesion remains very variable and depends on
regional systems of agricultural production. The second pillar of the CAP, rural development
policy, needs to be on a quite different scale, especially in those parts of Europe most affected
by the continuing changes in agricultural policies.

Improving implementation

Simplification and decentralisation – effectively targeting needs

In  Agenda  2000  and  following  decisions,  the  Commission  has  taken  a  number  of  steps  to
promote  further  simplification  of  agricultural  legislation  and  its  implementation.  The  Small
Farmers  Scheme  represents  an  important  precedent  for  reducing  the  administrative  burden.
However,  the  range  of  mechanisms  within  the  common  market  organisations  continues  to
create  many  complex  obligations  for  farmers  and  difficult  control  and  monitoring
responsibilities  for  Member  States  and  the  Commission.  This  complexity  is  a  brake  on
initiative and may discourage entry into the farming profession. In some sectors such as beef,
farmers  are  eligible  for  several  premia  with  different  requirements  in  addition  to
environmental,  food  safety  and  animal  health  and  welfare  legislation.  Considerable
simplification could be achieved if checks at the level of a farm could be brought together into
a more integrated framework.

Simpler conditions on payments with less market related procedures would enable farmers to
spend  more  time  on  making  their  business  successful  and  meeting  their  statutory
requirements. It would also allow Member States to concentrate on checking environmental,
food  safety  and  animal  health  and  welfare  requirements.  Greater  decentralisation,
particularly, through  the  reinforcement  of  the  Second  Pillar,  would  allow  Member  States  to
better target local needs, and bring agricultural policy closer to consumers.

Budgetary stabilisation – sound management

Agricultural policy expenditure must be justified by the products and services which society
at  large  expects  farmers  and  rural  areas  to  provide.  A  common  agricultural  policy  that
encourages surpluses, which then have to be disposed of - again at considerable costs – is no
longer acceptable or sustainable. Public expenditure must yield something in return - whether
it is food quality, the preservation of the environment and animal welfare, landscapes, cultural
heritage, or enhancing social balance and equity.

Agenda 2000 brought an additional element of budgetary stabilisation to the objectives of the
common  agricultural  policy.  In  managing  the  budget  and  agricultural  markets,  the
Commission has taken the necessary steps to ensure that expenditure has remained well below
the ceilings set in Berlin, even in the context of particular difficulties linked to the crisis in the
beef market. Budget stabilisation will remain a key objective over the coming years.

10

2. 

TOWARDS A MORE SUSTAINABLE COMMON AGRICULTURAL POLICY

2.1. 

The aims of the Mid-Term Review

The first task of the mid-term review is a stocktaking and improvement of the Agenda 2000
reform process, as requested by the European Council. The Commission was invited:

– 

– 

– 

– 

to examine the development of the cereals and oilseeds markets and to report on the
situation;

to monitor the beef market situation;

to present a report about the future of the milk quota system with the aim of allowing
the present quota arrangements to run out after 2006;

and to submit an account on the development of agricultural expenditure.

The European Council requested the Commission to make proposals for the adjustment of the
common market organisations, where appropriate, in order to ensure that the objectives of the
Agenda 2000 reform could be fully realised. The Agricultural Council further requested in its
submission  to  the  Göteborg  European  Council  that  the  Commission  should  include  in  the
reviews in 2002-2003 the effects on environment and sustainable development.

But beyond this task, the mid-term review also provides a unique opportunity to achieve the
objectives  set  in  Berlin  and  Göteborg,  and  to  respond  to  the  high  expectations  of  European
citizens  with  respect  to  agriculture  and  agricultural  policy.  To  fully  deliver  Sustainable
Agriculture  and  Rural  Development  a  number  of  adjustments  to  policy  instruments  in  line
with the objectives of Agenda 2000 are necessary:

– 

– 

– 

– 

– 

– 

– 

Common  market  organisations  should  be  adjusted  to  reinforce  the  role  of
intervention  as  a  safety  net  without  compromising  the  potential  for  European
agriculture to benefit from positive trends on world markets.

Agricultural production must be more orientated to the products and services that the
public wants and not to artificially created price incentives or product-specific aids.
Direct income payments should not steer the production decisions of farmers.

Food safety must be fully integrated into the CAP through cross-compliance.

Support  and  stabilisation  of  agricultural  incomes  remains  an  essential  objective.
Direct  payments  must  therefore  continue  to  play  their  role  in  promoting  a  fair
standard of living for the agricultural community.

Traditional and high nature value farming systems require more targeted support to
adapt to opportunities offered by more market orientation and consumer demand for
quality products.

Further  steps  are  necessary  to  help  meet  society’s  expectations  in  the  field  of
environment  to  reinforce  compliance,  reduce  negative  pressures  of  support
mechanisms,  and  strengthen  the  provision  of  services.  Animal  health  and  welfare
concerns must be fully integrated within the CAP.

Support  between  the  two  pillars  of  the  CAP  must  achieve  a  better  balance  to  meet
society’s  expectations  of  a  policy  that  promotes  food  quality,  sustainability,  and

11

value for money through reinforced  rural development programmes.  This  improved
balance must promote a more socially acceptable allocation of support and contribute
to  cohesion.  The  scope  of  rural  development  must  be  extended  to  meet  new  needs
and  opportunities,  particularly  in  the  field  of  employment  and  sustainable
development.

– 

– 

Budgetary stabilisation must remain a guiding principle for implementation.

Finally, further reform steps should help towards simpler agricultural legislation and
implementation  mechanisms.  It  is  necessary  to  work  out  clearly  what  must  be
decided  together  at  European  level  and  what  should  remain  the  competence  of
Member States.

2.2. 

The outlook for the markets

This section is based on the medium term prospects for agricultural markets published in June
2002  by  DG  Agriculture.  Such  an  outlook  is  always  subject  to  a  degree  of  uncertainty,
particularly as regards world prices and exchange rate trends. At present, these uncertainties
are increased by the new US farm bill, which through higher loan rates and target prices for
US cereals implies a downward pressure on the level of world prices.

Cereals

On  the  whole,  the  market  prospects  for  cereals  appear  positive.  The  expected  moderate
recovery in world cereal prices, a favourable currency environment and the implementation of
the Agenda 2000 reform should contribute to the overall balance of EU cereal markets, with
the  notable  exception  of  rye.  This  would  set  the  stage  for  a  sustained  recovery  in  cereal
exports.  By  2009/10  public  intervention  stocks  will  be  limited  to  rye  (roughly  double  its
annual production).

Oilseeds

According to the most recent outlook by the leading institutes, price developments would also
appear to be positive for rapeseed and sunflower seed. This development would be driven by
increasing  demand  for  vegetable  oils.  EU  oilseeds  area  for  food  purposes  is  projected  to
increase from its present levels and reach some 4.7 million ha in 2009/10 while production is
expected to grow to 13,5 million t. While the market is driven by oil demand, oilmeals would
continue  to  be  marketed  at  relatively  low  prices  due  to  downward  pressure  from  soybean
prices.

Rice

In  the  rice  sector,  the  market  situation  is  characterised  by  considerable  public  intervention
stocks  of  around  a  quarter  of  annual  production.  A  further  deterioration  of  the  market
imbalance can be expected from the implementation of the Everything but Arms Initiative. By
2009/10, total public rice stocks in the EU are expected to reach an unsustainable level.

Beef

In  the  beef  sector,  since  the  beginning  of  the  second  BSE  crisis  in  October  2000,  new
measures have been taken in order to reduce the growing surplus of supply over demand and
to reassure consumers concerning the increased safety standard of EU beef meat. As a result,
although  intervention  stocks  grew  rapidly  and  reached  around  0.26 million  t  by  mid

12

December 2001, the market has showed signs of recovery since March 2001 and beef prices
have continued to improve. Net production is estimated to increase in 2002 and 2003, as beef
production returns to more normal conditions. Beef and veal production is therefore estimated
to increase up to 7.7 million t. in 2004 and then remain close to this level in following years.
Public stocks are expected to fall to zero by 2005 with exports recovering to around 600 000 t.

Dairy

Several  factors  have  contributed  to  a  short-term  deterioration  of  the  dairy  market.  These
include  increased  milk  deliveries  as  a  result  of  high  prices  last  year  and  favourable  spring
conditions and increasing  international  competition  due,  in  particular,  to  heavy  selling  from
skimmed milk powder (SMP) intervention in the United States. However, in the medium term
overall developments in dairy markets would appear to be quite favourable. Domestic demand
for  cheese  is  projected  to  rise,  though  at  rates  below  the  recent  long-term  trend.  The  same
holds  for  fresh  dairy  products,  where  expected  growth  rates  are  even  stronger.  Production
responses in both sectors would lead to an increased demand for raw milk, which due to the
quota  regime  would  then  no  longer  be  available  for  the  production  of  bulk  products,  in
particular SMP and butter. Domestic demand for SMP is projected to fall, due to a reduction
in animal feed use, and so would production. In the case of butter too, internal consumption
and  production  would  decrease,  although  here  the  reduction  in  consumption  would  only  be
quite small.

The  increased  absorption  of  raw  milk  for  the  production  of  cheese  and  fresh  milk  products
would improve the overall market balance, also as far as SMP and butter are concerned. As a
consequence, subsidised exports are expected to decrease and less export refunds and internal
consumption aids would be necessary. Despite the projected increase in raw milk production,
broadly in line with quota increase, the farm gate prices for raw milk are expected to remain
firmer than the corresponding 15 % drop in intervention prices for butter and SMP.

2.3. 

Stabilising markets and improving common market organisations

Cereals

Completing the reform process

In the view of the Commission, the measures proposed in this communication are a necessary
final step in the reform process in the sector, which started in 1992. This will guarantee that
the  full  benefits  in  terms  of  internal  and  external  competitiveness  are  felt  over  the  coming
years.

Market mechanisms in the cereals sector

In Agenda 2000, it was agreed that in the cereals sector a decision upon a final reduction in
the  intervention  price  to  be  applied  from  2002/03  onwards  would  be  taken  in  the  light  of
market  developments.  For  the  EU  as  one  of  the  major  users  and  exporters  of  cereals  in  the
world, it is important that prices on the internal market are as far as possible in line with those
on world markets, maintaining EU exports without reliance on export subsidies.

Even if the world outlook for wheat, maize and barley are generally positive, past experience
clearly  demonstrates  there  can  be  strong  fluctuations  from  one  year  to  another,  and  even
within a given marketing year, constraining the scope for exports. The Commission therefore
continues  to  believe  that  it  is  necessary  to  establish  intervention  as  a  real  safety  net,  to  be
rarely  triggered, through the  final 5 %  reduction  (of the 20 %  proposed in Agenda  2000) of

13

the  intervention  price  from  EUR  101.31  to  EUR  95.35  from  2004/05.  This  will  be
compensated as provided for in Agenda 2000.

In addition to the final steps of support price reduction, the Commission proposes to consider
the  abolition  of  the  monthly  increment.  This  would  imply  a  major  simplification  of  market
management and would help to improve market fluidity over the year.

Recent market developments have  given rise to problems in the practical implementation of
the cereals and rice border protection system. The Commission intends therefore to undertake
steps in this context to negotiate a change and a simplification of the EU’s border protection
for cereals  and rice  which, in current  circumstances,  functions  unsatisfactorily  and  does  not
meet its objectives.

Rye

Unless measures are taken, the particularly unbalanced situation in the rye market will lead to
a dramatic build up of stocks which have very limited outlets on the world market. Given the
limited scope for export, the Commission therefore proposes to abolish intervention for rye, a
step  which,  in  parallel  to  the  5%  drop  in  the  intervention  price  for  cereals,  would  enable
balance to be maintained in coarse grain markets. Although in the short-term a fall in the price
of  rye  is  expected,  medium  term  prospects  for  cereals  on  domestic  and  external  markets
would lead to an improvement in the rye market balance as well.

Durum wheat

As  far  as  durum  wheat  is  concerned,  the  Court  of  Auditors  has  argued  that  the  level  of  the
specific  additional  payment  could  not  be  justified  on  economic  grounds  and  represented  an
overcompensation  of  producers.  This  analysis  was  confirmed  by  an  evaluation  study  of  the
sector  undertaken  by  independent  experts,  which  also  highlighted  a  number  of  quality
problems. The Commission therefore proposes to reduce the current specific supplement for
durum wheat to 250 EUR/ha in traditional areas and to abolish the special aid in established
areas. These changes will be phased in over three years.

In order to promote quality, it is further proposed to introduce a specific premium paid per ton
of durum wheat sold to the processing industry within the framework of a contract specifying
quality  criteria.  Minimum  requirements  would  be  established  at  the  EU  level.  This  high
quality premium is proposed at 15 EUR/t and would be available to producers meeting these
criteria  throughout  the  EU  from  the  first  year  of  implementation.  Overall,  these  measures
maintain a balance of support between durum wheat producers in traditional and other areas.

Oilseeds

As regards oilseeds, it was decided in the context of the Agenda 2000 reform to abolish the
specific  support  regime  and  to  bring  the  direct  payments  for  oilseeds  down  to  the  level  of
cereal  payments.  The  Berlin  European  Council  requested  the  Commission  to  follow  the
market  closely  and  submit  a  report  within  two  years  of  the  application  of  the  new
arrangement,  making  appropriate  proposals  should  the  production  potential  deteriorate
seriously.  In  accordance  with  the  mandate  of  the  Council,  the  Commission  has  based  its
assessment on the medium-term outlook and the evaluation of the oilseeds support regime.

Although the Commission accepts that there has been a short-term decline in oilseed area, no
serious  deterioration  of  the  EU’s  production  potential  is  likely  to  occur  in  the  foreseeable
future.  The  proposed  reduction  of  intervention  price  guarantees  for  cereals  would  be  a

14

favourable  element  in  this  context.  No  specific  measure  is  therefore  envisaged  and  the
Commission does not  see,  at  this  stage, the need for  any  additional report. However, it will
continue to follow market developments closely.

Following the ban of meat and bone-meals and given a large availability of relatively  cheap
oil-meals on the world market, net imports of oilmeals and oilseeds in the EU have increased
from  around  32  million  t  in  1999  to  around  36  million  t  in  2001  (expressed  in  meal
equivalent).  This  increase  concerns  almost  exclusively  imports  of  soybeans  and  soya-meal,
which  are  particularly  well  suited  to  replace  meat  and  bone  meal.  At  the  same  time,  the
current proposals will allow producers to respond to a more favourable  environment  for  the
production  of  other  oil  crops  and  the  EU  is  expected  to  continue  to  be  a  net  exporter  of
vegetable oils.

Altogether,  these  developments  and  forecasts  would  appear  to  indicate  that  there  is  no
problem  of  protein  supply  in  the  EU  after  the  meat  and  bone  meal  ban  and  that  additional
demand  in  the  EU  has  not  and  will  not  lead  to  market  imbalances  with  significant  price
increases.  Any  additional  demand,  if  it  should  occur  at  all,  is  likely  to  be  largely  covered
through  additional  imports  of  soya-meal  due  to  its  high  suitability.  However,  the  quantities
necessary  would  appear  to  be  quite  limited  and,  depending  on  price  relations,  part  of  the
additional protein requirement could be provided by cereals.

Rice

In order to stabilise rice markets in view of long-term prospects and the implementation of the
Everything  But  Arms  initiative,  the  Commission  proposes  a  one  step  reduction  of  the
intervention price by 50% to a basic price of 150 EUR/t for 2004/05 in line with world prices.
A private storage  scheme will  be introduced which  will  be  triggered when  the  market  price
falls  below  the  basic  price.  Safety  net  intervention  will  be  established  at  120 EUR/t.  The
global  price  reduction  will  be  compensated  at  a  rate  of  88%,  equivalent  to  the  total  cereals
compensation  over  the  1992  and  Agenda  2000  reforms.  This  leads  to  compensation  of
177 EUR/t, including the existing payment of 52 EUR/t. Of this, 102 EUR/t multiplied by the
1995 reform yield would become an income payment paid per farm. The remaining 75 EUR/t
multiplied by the 1995 reform yield would be paid as a crop specific aid reflecting the role of
rice production in traditional production areas. The maximum guaranteed areas (MGA) would
be reduced to the 1999-2001 average or the current MGA, whichever is lower.

Dried fodder

Significant criticism has been directed at  the  dried  fodder  regime  including  comments  from
the Court of Auditors in its report “Greening the CAP”. In its reply to the Court of Auditors,
the Commission  committed itself  to  ascertain  whether  a  further  reform  should  be  proposed,
not  excluding  the  possibility  of  abandoning  the  scheme.  Although  the  final  product  is  a
natural  product  of  high  feed  value  and  a  source  of  plant  protein,  the  way  in  which  it  is
produced,  with  high  inputs  of  fossil  fuel  for  dehydration  and  the  use  of  irrigation  in  some
Member States, raises concern and criticism.

The  Commission  therefore  proposes  to  replace  the  current  arrangements  with  an  income
support envelope for farmers of EUR 160 million. This envelope will be distributed between
Member States in proportion  to  national  guaranteed  quantities  for  dehydrated  and  sun-dried
fodder.  Producer  entitlements  will  be  based  on  the  quantities  delivered  to  the  industry  in  a
historical reference period. In order to ensure a transition for the industry a simplified single

15

support scheme for dehydrated and sun-dried fodder with a reduced payment of 33 EUR/t will
be maintained and the respective national guaranteed quantities will be merged.

Nuts

In  view  of  the  important  part  played  by  traditional  nut  production  in  protecting  and
maintaining  the  environmental,  social  and  rural  balance  in  a  number  of  regions,  the
Commission suggests maintaining and simplifying the support arrangements for this sector. It
is  therefore  proposed  to  replace  existing  arrangements  by  an  annual  flat  rate  payment  of
100 EUR/ha. This can be topped up by up to an annual maximum of 109 EUR/ha by Member
States. The maximum guaranteed area will be 800 000 ha.

Beef

In Berlin, the intervention price for beef was reduced by 20 % and replaced by a basic price
for  private  storage,  fixed  at  2 224  EUR/t.  Under  the  reform  producers  also  benefited  from
safety  net  intervention  when  the  average  market  price  for  bulls  or  steers  is  less  than
1 560 EUR/t. The European Council of March 1999 asked the Commission to follow closely
the beef market and to take relevant measures, if needed.

Following the  recent  BSE  and  Foot  and  Mouth  Disease  crises,  beef  markets  have  entered  a
phase  of  recovery  of  consumption,  production  and  exports.  The  measures  adopted  by  the
Council  and  the  Commission  in  2000  and  2001  helped  to  rebalance  EU  beef  supply  and
demand. Thus, market management mechanisms agreed in Agenda 2000 appear to have been
sufficiently  robust  and  flexible  to  facilitate  the  recovery  of  the  beef  market.  However,
concerns remain that the current arrangements for direct payments in the sector remain quite
complicated and provide incentives towards intensification generating consumer concerns and
a potential fragility in the recovery.

Although much has already been done in favor of extensive beef production, in particular the
re-design of the extensification premium under Agenda 2000, on the whole, the CMO is still
characterized by policy instruments which have not discouraged intensive production systems
as much as intended. These include  headage  payments, stocking density  based on requested
premia  and  not  necessarily  on  the  real  number  of  animals,  exemption  from  the  stocking
density limit up to 15 livestock units ("small producers"), and the derogation to the headage
limit of 90 animals per holding. Even if suckler cow headage premia are higher than those for
steers  and  young  bulls,  analysis  shows  that  on  a  per  hectare  basis  intensive  production
systems (e.g. young bulls) receive higher direct support.

The  Commission  therefore  proposes  the  decoupling  of  headage  payments  and  their
replacement with a single income payment per farm based on historical entitlements. Together
with  reinforced  cross-compliance  conditions  including  land  management  obligations,  this
should  reduce  pressures  towards  intensive  production  and  help  achieve  a  more  balanced
market situation. No other specific beef measure appears necessary at this stage for market or
environmental reasons.

However,  even  after  reform beef exports continue to rely quite  heavily  on  export  subsidies,
although  small  quantities  are  exported  without  refunds.  Around  a  sixth  of  these  subsidised
exports  are  live  animals.  The  way  in  which  these  take  place  has  raised  increasing  concerns
about the respect of animal health and welfare standards. The Commission therefore intends
to reinforce the conditions and controls under which exports subsidies for live animals can be
granted.

16

For  the  EU  as  a  whole  about  two  thirds  of  beef  meat  originates,  directly  or  indirectly  from
dairy  herds.  This  strong  link  with  the  beef  sector  means  that  meat  of  dairy  cattle  origin
contributes a further 10% to total agricultural output. In this context, the evolution of the dairy
common market organisation is of particular significance for the beef sector.

Dairy

The Commission prepared its Agenda 2000 proposals with the overall objective of addressing
the  uncertain  prospects  for  the  sector  while  leaving  options  for  future  development  open.
Market prices were to be lowered through a reduction in intervention support prices of 15 %,
in four steps from 2000 with compensation paid to farmers, while quotas were to be increased
by 2 %. However, the Berlin European Council of March 1999 delayed the entry into force of
the main elements of the reform until the marketing year 2005/06 and introduced the reform
over  three  years.  Quota  would  be  increased,  from  a  1999/2000  reference  year,  by  around
2.4 %.  The  Council  undertook  to  conduct  a  mid-term  review  on  the  basis  of  a  Commission
report, with the aim of allowing the present quota arrangements to run out after 2006.

The report is mainly of a technical nature and accompanies this communication as a working
document of the Commission. Only a few key  aspects  are highlighted  here. To  prepare  this
report,  the  Commission  services  commissioned  a  study  with  the  support  of  an  econometric
model carried out by  experts from  the  “Institut  National  de  la  Recherche  Agricole”  (INRA,
France) and the University of Wageningen (Netherlands).

Altogether,  the  analysis  and  projections  by  the  experts  would  appear  to  indicate  that  the
support price reductions and limited quota increases decided in the Agenda 2000 reform will
clearly have beneficial effects towards the end of the period. Market balance should improve
and intervention stocks are expected to fluctuate at low levels. Reliance on export refunds and
internal  consumption  aids  would  be  reduced  significantly.  Direct  payments  are  expected  to
adequately compensate producer revenues for the price reductions. In this sense, the Agenda
2000 reform can be seen to have forestalled to a considerable degree  the  Court  of  Auditors'
requirement  for  "a  fundamental  reform  of  the  dairy  sector  aiming  at  achieving  equilibrium
between  overall  milk  production  and  unsubsidised  internal  consumption  plus  potential
unsubsidised exports while ensuring a fair standard of living for dairy farmers and  allowing
the quota regime to expire".

Due to the decision in Berlin to delay implementation of the reform decisions, the full benefits
of  the  reform  will  not  be  felt  before  2008  and  the  following  years.  The  question  has  been
raised whether it would not be worthwhile  considering an  earlier implementation.  A second
question  is  whether  the  reduction  of  intervention  prices  for  butter  (with  domestic  market
prices  more  than  double  world  levels)  should  not  be  proportionately  greater  than  that  for
skimmed milk powder (closer to world prices). The Commission has examined a number of
options for the development of the dairy sector. These are summarised below:

17

OPTIONS FOR 2008-2015

ADVANTAGES

DISADVANTAGES

1. CONTINUATION OF
AGENDA 2000

Simple maintenance of the
Agenda 2000 measures until
2015 (status quo)

(cid:1)  Long-term market balance is assured.

(cid:1) 

Intervention stocks do not reappear

(cid:1)  Expenditure  on  export  refunds,  consumption  aids

falls considerably

(cid:1)  Exports  virtually  disappear  for  butter  and
reach significantly lower levels for cheese

(cid:1)  The  economic  relief  generated  by 

the
Agenda  2000  is  exhausted  and  the  sector
remains locked in by quota

2. REPEATING THE
AGENDA 2000
APPROACH

Further increase in quotas
(+3%) and lowering of
intervention prices (-15%
butter and –5% SMP)

(cid:1)  Beef market balance is improved

(cid:1)  Long-term market balance is assured

(cid:1) 

Intervention stocks do not reappear

(cid:1)  Export  refunds  and  aids  to  consumption  are  much

less necessary

(cid:1)  Unsubsidised 

exports 

increase 

appreciably,

especially in higher value products such as cheese

(cid:1)  Considerable increase in EU budgetary costs

through increased direct payments

(cid:1)  Continued quotas with associated economic
inefficiencies, although to a lesser extent
than under option 1.

(cid:1)  Quota trading between Member States would
only give limited, short-term economic
benefits

Improved  response  to  market  signals  rather  than
support mechanisms

(cid:1) 

(cid:1) 

3. INTRODUCING A
TWO-TIER QUOTA
REGIME

Reduction of EU quota by
5% to establish domestic
"A" quota. Export quota "C"
is unlimited. Export refund
and disposal aids eliminated.

Internal market balance is assured by a restrictive
domestic quota policy

(cid:1)  A  serious  question  mark  over  WTO

compatibility

(cid:1)  EU export capacity is restored

(cid:1)  More  exhaustive  administration  and  control

(cid:1)  Export refunds and aids to consumption are

eliminated

(cid:1) 

Intervention and storage costs are heavily reduced

of quotas necessary

(cid:1)  A greater burden of these controls would fall

on the economic actors themselves

4. REMOVAL OF
QUOTAS

(cid:1)  The economic burden on potentially efficient

farmers is removed.

Quota regime abolished
from 2008. Intervention
support cut by further 25%
to safety net mechanism.

(cid:1)  Artificial market support measures are eliminated

(cid:1)  Consumer prices reflect the cost of producing milk

in the EU by the most efficient means

(cid:1)  A self-sustaining, unsubsidised export capacity is

achieved

(cid:1) 

Increased  transparency  and  simplified  EU  milk
sector

(cid:1)  Prices fall to a very great extent and are not
fully  compensated  for,  in  terms  of  sector
income, 
increased  market
opportunities for the cheap milk.

the 

by 

(cid:1)  The potential structural impacts on

individual producers and the regional
distribution of milk production are difficult
to assess and could be appreciable.

A key conclusion that can be drawn from the analysis of these options is that the prospects for
the  EU  milk  sector  are  generally  positive  in  terms  of  market  balance  and  producer  price
levels. However, fixed quotas lead to an increasing shortfall in milk supplies on the internal
market. As a result, EU exports of high value products to growing world markets will suffer.
In  contrast,  under  a  more  competitive  milk  regime,  the  loss  of  EU  export  capacity  in  milk
products could be avoided.

2.4. 

Achieving simpler and more sustainable direct support

One of the objectives of the process of CAP reform since 1992 has been to focus on shifting
support for agriculture from the product to the producer. During the 1992 and 1999 reforms,
this  shift  was  achieved  through  the  reduction  of  support  prices  and  the  introduction  of
partially  decoupled  direct  payments  in  cereals,  oilseeds  and  protein  sectors  and  in  the  beef
sector.

Despite  initial  concerns,  the  positive  impact  of  this  process  in  promoting  greater  market
orientation  and  competitiveness,  stabilising  agriculture  incomes  and  reducing  negative
environmental incentives is evident. But while many within the EU advocate full decoupling,
some question whether such an additional step is necessary.

18

Decoupling comes with benefits and risks that need to be weighed carefully. It is the natural
conclusion  of  the  shift  of  support  from  product  to  producer,  whose  advantages  can  only  be
exploited (and its risks better dealt with) if it is allowed to reach its full potential.

To  fulfil  this,  it  is  essential  that  decoupling  is  not  used  as  a  means  of  achieving  other
objectives that should be dealt with through more appropriate policy instruments. This might
occur, for example, in the case of a sometimes suggested generalised area payment in current
Member  States,  which  would  mix  the  objectives  of  decoupling  with  those  of  income
redistribution.

In  order  to  achieve  the  proper  balance  in  maximising  the  benefits  of  decoupling,  the
Commission  proposes  to  accomplish  the  final  step  in  the  shift  of  support  from  product  to
producer by introducing a system of a single income payment per farm. Such a system would
integrate  all  existing  direct  payments  a  producer  receives  from  various  schemes  into  this
single payment, determined on the basis of historical references.

With  this  move,  once  fully  implemented,  a  major  simplification  in  the  support  of  EU
producers will be achieved in a manner that is neutral with respect to payments to producers.
This will improve the overall market orientation of agriculture, and will allow farmers to fully
benefit  from  market  opportunities  in  supplying  the  products  that  consumers  demand.
Furthermore,  the  transfer  efficiency  of  the  direct  payment  as  an  income  aid  will  increase
significantly,  which  should  lead  to  an  improvement  in  the  income  situation  of  farmers.
Finally,  decoupling  will  contribute  to  environmental  integration  by  removing  production
specific incentives, which potentially damage the environment.

In  addition  to  achieving  major  internal  objectives,  the  approach  also  provides  benefits  in
meeting external challenges. First, it will facilitate the integration of the new Member States
into  the  common  agricultural  policy.  Second,  it  will  provide  a  major  advantage  within  the
WTO, since the Green Box compatibility of the scheme will help secure these payments in an
international context.

Such an approach may also bring some risks, since it could lead in certain areas to changes in
production with a knock-on effect on the processing industry and in some cases abandonment
of land. But the more targeted policy instruments envisaged herewith provide Member States
the necessary flexibility to reduce these risks. On balance, the Commission is convinced that
the benefits of such an approach outweigh the risks.

Decoupling of direct aids – establishment of a farm income payment

The  Commission  therefore  proposes  introducing  a  single  decoupled  income  payment  per
farm.  This  payment,  based  on  historical  payments  adjusted  to  take  into  account  the  full
implementation  of  Agenda  2000,  will  cover  as  many  sectors  as  possible.  Farms  under  this
scheme  will  have  complete  farming  flexibility  increasing  market  orientation,  but  payments
will  be  conditional  on  compliance  with  statutory  environmental,  food  safety,  and  animal
health and welfare standards (Cross compliance).

Scope of the scheme

In a first stage, the scheme will cover all products included in the COP regime as well as grain
legumes,  starch  potatoes,  beef  and  sheep.  The  revised  payments  for  rice,  durum  wheat  and
dried fodder will be also be integrated into the scheme. The milk sector will be integrated on
implementation  of  the  Agenda  2000  decisions.  Other  sectors  scheduled  for  reform  (sugar,

19

olive  oil  and  some  fruit  and  vegetables,  etc.)  could  follow  later.  The  more  sectors  that  are
included, the greater the administrative benefits in terms of simplification.

For  the  products  concerned,  the  new  scheme  will  replace  all  existing  (or  newly  introduced)
direct payments to producers with a number of exceptions. These include the specific quality
premia  for  durum  wheat,  a  new  stand-alone  protein  crop  supplement  of  55.57  EUR/ha
(9.5 EUR/t multiplied by the EU average reference yield of 5.85 t/ha for those regions where
proteins  are  grown)  replacing  the  existing  arrangements,  the  crop  specific  payment  for  rice
and  the  area  payment  for  nuts.  These  limited  and  exceptional  crop  specific  aids  have  been
maintained  in  order  to  avoid  the  loss  of  positive  benefits  of  a  certain  level  of  supply,
particularly  in  traditional  production  areas.  Crop-specific  aids  in  the  sectors  covered  by  the
mid-term review have, in all cases, been simplified as part of the revision process.

Although the new scheme will not cover all sectors at this stage, farmers receiving the new
decoupled  farm  payment  will  have  flexibility  to  farm  all  products  on  their  land  including
those  which  are  still  under  coupled  support  except  if  these  productions  have  been
exceptionally  and  explicitly  excluded.  Of  course,  the  rules  of  the  coupled  market  support
regimes will apply (e.g. production quotas, planting rights, etc.). At this stage, cultivation of
fruit and vegetables would not be eligible for support under the new scheme.

Establishment and transfer of payment entitlements

The decoupled farm income payment will be established at the farm level. The overall amount
to which a farm is entitled will be split into parts (payment entitlements) in order to facilitate a
partial  transfer  of  the  payment  when  only  part  of  a  farm  is  sold  or  leased.  Such  transfers
would need to meet a certain number of obligations:

– 

– 

– 

– 

to ensure that agricultural land throughout the EU is maintained in good agricultural
condition and continues to be managed in accordance with mandatory environmental
standards;

to avoid speculative transfers of payment entitlements leading to the accumulation of
payment rights without a corresponding agricultural basis;

to ensure that the total level of support and entitlements do not exceed current levels
at an EU, national and where applicable regional level;

and to conserve the WTO-Green Box compatibility of the payments.

It is proposed, for this purpose, to divide the overall amount of the payment by the number of
eligible  hectares  of  the  farm  concerned.  This  would  give  a  number  of  payment  rights  of  a
certain amount, which could then be transferred between  farms together with the transfer of
land. The Commission will provide further details in the context of the legislative proposals.

However,  in  order  to  allow  sufficient  flexibility  to  respond  to  specific  situations,  Member
States would have the option to establish different approaches. These include the possibility to
define a certain balance between individual payment entitlements (e.g. individual amounts per
hectare)  and  regional  or  national  averages.  In  any  case,  however,  the  rules  and  criteria
established  by  Member  States  would  have  to  meet  the  general  obligations  outlined  above.
Member states will notify the solutions for which they opt to the European Commission.

20

Reinforcement  of  environmental,  food  safety,  animal  health  and  welfare  and
occupational safety standards

The full granting  of  the decoupled  farm  income  payment  and  other  direct  payments  will  be
conditional  on  the  respect  of  certain  number  of  statutory  environmental,  food  safety  and
animal health and welfare standards, as well as occupational safety requirements for farmers.
The focus of cross-compliance requirements for all coupled and decoupled aids to farmers is
on  supporting  the  enforcement  of  “good  farming  practices”  defined  as  encompassing
mandatory standards. Although cross-compliance must reflect  regional differences, avoiding
distortion of competition requires a level playing field ensured through basic implementation
criteria. Member states should define and enforce standards, following a common framework
providing basic implementation criteria. The Commission will launch in the next months the
work to establish such a framework.

Cross-compliance will be applied as a whole-farm approach with conditions attached to both
used  and  unused  agricultural  land  including  the  possibility,  where  Member  States  consider
this necessary, to apply conditions to prevent the conversion of pasture land to arable land. On
used  and  unused  land,  cross-compliance  will  involve  the  respect  of  statutory  management
requirements and the obligation to maintain land in good agricultural condition. A whole farm
approach follows directly from the logic of decoupling and will emphasise the main purpose
of cross-compliance: to support the implementation of environmental, food safety and animal
health  and welfare legislation.  In  the  case  of  non-respect  of  cross-compliance  requirements,
direct payments should be reduced while maintaining proportionality with respect to the risk
or damage concerned.

Farm auditing

In  order  to  meet  society’s  expectations  and  to  help  farmers  meet  the  standards  of  modern,
high quality agriculture, the Commission considers that it is necessary to establish and support
a Community wide system of farm auditing for commercial farms, to be defined by Member
States  on  the  basis  of  economic  size.  Farm  audits  help  farmers  become  aware  of  material
flows and on-farm processes relating to environment, food safety, animal health and welfare
and occupational safety standards. The knowledge that producers are actively managing these
processes will be  an essential element in regaining full consumer confidence. Many farmers
and farming organisations accept the necessity of improving transparency and awareness with
respect  to  on-farm  processes.  Support  for  farm  audits  will  be  available  under  rural
development.

The introduction of farm audits for all commercial farms is a general objective to be pursued.
As a first step, the Commission proposes that a system of farm auditing will be mandatory as
a  part  of  cross-compliance  requirements  for  producers  receiving  more  than  EUR 5 000  per
year in direct payments. This will generate greater transparency, increase farmers’ awareness
and help with the smooth phasing-in of cross-compliance. Other farmers will be able to enter
the system on a voluntary basis.

Environmental set-aside

In  order  to  maintain  the  supply  control  benefits  of  set-aside,  while  reinforcing  its
environmental benefits under the new decoupled system of support, the Commission proposes
introducing  compulsory  long-term  set-aside  (10  years)  on  arable  land.  The  replacement  of
rotational  set-aside  by  long-term  environmental  set-aside  will  increase  its  benefits  in  many
regions  while  simplifying  administration  and  control,  particularly  in  the  framework  of

21

decoupling. Farmers would be obliged to put an amount of arable land equivalent to current
compulsory set-aside on their holding into long-term non-rotational set-aside as an element of
cross-compliance requirements they have to meet in order to receive direct payments.

Support for energy crops – a carbon credit

Under the Commission proposals the current set-aside arrangements will be replaced by long-
term  environmental  set-aside.  Currently,  support  for  energy  crops  is  provided  through  the
possibility  to  grow  industrial  crops  on  set-aside  land.  Energy  crops  account  for  the  largest
amount  of  non-food  production  on  set-aside  land.  They  will  be  of  increasing  importance
should  biofuel  incorporation  become  compulsory  as  foreseen  in  the  Commission’s  recent
Communication. However, the new set-aside arrangements would no longer lend themselves
to the production of energy crops.

The Commission therefore proposes replacing  the  existing  arrangements  for  non-food  crops
with a carbon credit, a non-crop specific aid for energy crops with the objective of achieving
carbon  dioxide  substitution.  Such  an  aid  would  complement  investment  and  establishment
measures  under  the  second  pillar.  The  aid  level  will  be  45  EUR/ha  of  energy  crops  with  a
maximum  guaranteed  area  of  1.5  million  hectares  and  would  be  paid  to  producers  entering
into  a  contract  with  a  processor.  The  area  allocation  between  Member  States  will  take  into
account historical  energy  crop  production  on  set-aside  and  C02  commitment  burden  sharing
arrangements. The  arrangements will be reviewed five  years after its entry  into  force taking
into account the implementation of the EU biofuels initiative.

2.5. 

A better balance of support for sustainable agriculture and rural development

A better balance of support between market policy and rural development will increase both
the  social  acceptability  of  the  common  agricultural  policy  and  the  possibility  to  address
consumer, environmental and animal welfare concerns within the second pillar. Furthermore,
although  the  shift  to  decoupled  direct  payments  will  reduce  incentives  within  policy
instruments  towards  environmentally  damaging  production,  it  may  also  create  pressures
towards  abandonment  in  some  marginal  areas.  The  importance  of  instruments  designed  to
promote  sustainable  agriculture  throughout  the  EU  such  as  agri-environment  and  less
favoured  area  payments,  as  well  as  other  measures  within  the  second  pillar  is  therefore
significantly increased. For this reason, it is equally necessary to ensure that Member States
are able to make full use of these instruments in the future. The Commission will monitor the
situation accordingly.

Dynamic modulation

In  order  to  achieve  a  better  balance  between  policy  tools  with  the  objective  of  further
promoting  sustainable  agriculture  and  rural  development,  the  Commission  proposes
introducing  a  system  of  dynamic  modulation  on  a  compulsory  basis  for  all  Member  States.
Under  this  system,  which  makes  compulsory  for  all  Member  States  the  current  optional
arrangements, all direct payments will be reduced progressively in arithmetic steps of 3 % per
year  to  reach  20%,  the  maximum  agreed  in  Agenda  2000.  This  covers  both  coupled  and
decoupled payments.

The  new  compulsory  system  will  replace  the  current  optional  arrangements  from  2004
onwards.  Appropriate  transitional  arrangements  will  be  proposed  for  those  Member  States
currently applying modulation on an optional basis.

22

Modulation  can  also  contribute  to  the  objective  of  correcting  the  allocation  of  funds,  in
addition  to  improving  the  balance  of  expenditure  between  markets  and  rural  development.
Smaller farms are generally more labour intensive, less prosperous and receive less support.
Larger farms are more capable of adapting to new technologies and achieving economies of
scale. At the same time, adjustment costs are often born by employees in larger employment
intensive  farms.  It  is  therefore  proposed  to  introduce  a  franchise  dependent  on  the
employment  situation  on  each  farm.  For  up  to  2  (full  time)  annual  work  units  (AWU),  the
franchise will be EUR 5 000. This will ensure that the majority of farms will not be subject to
modulation. For each additionally employed AWU an additional EUR 3 000 may be granted
on an optional basis by Member States. Although such a franchise would fully exempt from
modulation around three quarters of the farms in Europe, these would account for less than a
fifth of direct payments paid to farmers.

After the application of the franchise and modulation the maximum sum paid to a farm will be
EUR 300 000.  Direct  aids beyond  this amount (and  the  franchise)  will  be  capped  and  made
available for transfer to the second pillar in the Member State concerned.

Currently,  Member  States  which  modulate  direct  payments  on  an  optional  basis  keep  the
“savings”  in  their  accounts  and  have  to  spend  them  again  for  additional  rural  development
activities  within a certain  time span (3  years). This approach is unorthodox in budget terms
and could not be extended to a Community wide system with transfers of important amounts.
The  Commission  therefore  proposes  replacing  the  current  system  by  more  appropriate
arrangements.  It  will  make  an  ex-ante  estimate  of  the  amounts  made  available  under
modulation  and  capping  in  budget  years  2005  and  2006  and  propose  reducing  the  ceiling
under  heading  1a  accordingly.  A  corresponding  amount  would  be  proposed  for  transfer  to
heading 1b. The financial perspectives would be modified according to the procedure foreseen
under article 20 of the Interinstitutional Agreement on Budgetary discipline.

The amounts saved by modulation in this way each year will be distributed to Member States
on the basis of agricultural area, agricultural employment and a prosperity criterion, to target
specific rural needs. Such a key reflects the important role of agriculture in land use and land
management  in  rural  areas.  This  will  allow  some  redistribution  from  intensive  cereal  and
livestock producing countries to poorer and more extensive/mountainous countries, bringing
positive  environmental  and  cohesion  effects.  The  savings  from  capping  will  be  distributed
according to the amount capped in each Member State.

The  additional  EAGGF  Guarantee  funding  for  rural  development  generated  by  dynamic
modulation will amount to around EUR 500-600 million in 2005 according to first estimates,
and  will  increase  annually  by  an  equivalent  amount  with  each  3 %  increase  in  dynamic
modulation.

Member  states  may  use  this  additional  funding  to  reinforce  their  rural  development
programmes. They may wish to allocate such additional resources within their programmes on
the  basis  of  needs  identified  within  the  framework  of  the  mid-term  evaluation  of  rural
development programmes and taking into account the possibilities offered under the new rural
development  measures  which  the  Commission  is  now  proposing.  Member  states  will  be
permitted to allocate the modulation money to any of the rural development measures which
are  eligible  to  be  included  in  their  rural  development  programming  financed  under  the
EAGGF-Guarantee  section.  They  may  use  the  additional  funds  to  increase  the  level  of
Community co-financing within their programmes up to the regulatory ceilings, finance new
measures,  increase  the  scope  of  and/or  finance  additional  beneficiaries  under  existing
measures.

23

In  principle,  the  additional  funding  transferred  from  the  1st  pillar  to  the  2nd  pillar  will  not
impose  any  additional  budgetary  effort  by  Member  States  when  included  within  their  rural
development programming for 2005-06.

2.6. 

Consolidating and strengthening Rural Development

The Commission  proposes to consolidate  and strengthen  the  second  pillar  by  increasing  the
scope  of  the  accompanying  measures  and  widening  and  clarifying  the  scope  and  level  of
certain measures.

New accompanying measures

The four accompanying measures are financed inside and outside objective 1 regions by the
EAGGF  guarantee  section  and  currently  comprise  agri-environment,  less  favoured  areas,
afforestation  of  agricultural  land  and  early  retirement.  The  Commission  proposes  to  extend
the  scope  of  the  accompanying  measures  to  better  address  concerns  about  food  safety  and
quality, to help farmers to adapt to the introduction of demanding standards, and to promote
animal  welfare.  In  order  to  facilitate  the  introduction  of  these  measures,  appropriate
implementation  arrangements  may  be  necessary  to  ease  transition.  As  for  the  existing  four
accompanying  measures,  these  new  measures  will  be  targeted  primarily  at  farmer
beneficiaries.

First, a new food quality chapter will be added into the rural development regulation. It will
include:

– 

– 

Encouraging  farmers  to  participate  in  quality  assurance  and  certification  schemes
recognised  by  the  Member  State  or  the  EU  including  geographical  indications  and
designation  of  origin  and  organic  farming.  Incentives  will  be  offered  under  this
indent to farmers who, on a voluntary basis, produce  according to the requirements
of such schemes. The schemes concerned must be open to all producers who respect
the conditions specified. Aid will be paid on a flat rate basis per holding for a period
of maximum 5 years.

Support  for  producer  groups  for  the  promotion  activities  of  agricultural  products
designated  under  quality  assurance  and  certification  schemes  recognised  by  the
Member State or the EU including geographical indications and designation of origin
and organic farming. This will complement without overlapping marketing activities
funded under article 33 of the rural development regulation. In order to ensure there
is  no  scope  for  duplication  of  agricultural  promotion  activities  within  the  internal
market,  community  support  for  promotion  of  agricultural  products  within  the  first
pillar  will  from  2005  onwards  be  targeted  only  at  promotion  on  third  country
markets.

Second, the Commission proposes the introduction of a chapter “Meeting standards” to help
farmers to adapt to demanding standards based on Community legislation in the field of the
environment, food safety and animal welfare as well as implementing farm audits. This will
include:

– 

The  possibility  to  pay  temporary  and  degressive  aid  to  farmers  to  help  them
implement  demanding  standards  based  on  Community  legislation  in  the  fields  of
environment,  food  safety,  animal  welfare  and  occupational  safety  standards  and
which  will  become  part  of  good  farming  practice  or  required  minimum  standards.
Introduction and respect of such standards can entail additional costs and obligations

24

for farmers, and initially lead to loss of income. The aim of the measure would be to
encourage a more rapid and widespread adoption of such standards. In no case would
aid be payable where the non-application of standards is due to the non-respect by an
individual farmer of standards already incorporated in national legislation. Aid would
be payable in the form of a degressive annual compensatory payment for a period of
maximum of 5 years, up to a maximum of EUR 200 per ha in the first year.

– 

Support  for  farm  audits.  Farmers  would  receive  flat-rate  aid  to  help  them  meet  the
costs  of  such  audits,  which  would  identify  and  propose  improvements  in  current
performance  with regard to  statutory  environmental, food safety, animal health and
welfare  and  occupational  safety  standards.  In  particular,  this  will  help  farmers
prepare and implement the proposed introduction of cross-compliance requirements
for the receipt of direct payments. This will be complemented by existing provision
for training and demonstration projects.

Third, the Commission proposes to introduce into the agri-environment chapter the possibility
to  offer  animal  welfare  payments  for  efforts  that  go  beyond  a  mandatory  reference  level  in
line  with  agri-environment  schemes.  In  addition,  in  recognition  of  the  considerable
importance which the Commission attaches to  the further development of  agri-environment,
particularly in the light of the SDS, and animal welfare schemes, it is proposed to increase the
fixed co-financing rate for these measures by a further 10 points, to 85 % in areas covered by
Objective  1  and  60 %  in  other  areas.  These  changes  should  be  accompanied  by  actions  to
increase public awareness and promotion of agri-environmental schemes.

The  Commission  proposes  that  for  the  2005-06  period  the  inclusion  of  the  food  quality
chapter would be compulsory for Member States within their rural development programmes
(EAGGF-Guarantee), as the agri-environment chapter is already today and will continue to be
so after its extension to animal welfare.

Other technical adaptations to the Rural Development Regulation

The  Commission  proposes  to  make  certain  adaptations  of  non-accompanying  measures  to
complement  the  introduction  of  the  new  measures  outlined  above.  The  scope  of  marketing
activities under Article 33 will be clarified to include a specific reference to the eligibility of
the cost of setting up quality assurance and certification schemes. The scope of the indent of
Article  33  ‘setting-up  of  farm  relief  and  farm  management  services’  will  be  widened  to
include the costs of setting up farm auditing systems.

In  addition,  in  the  forestry  chapter  the  possibility  will  be  introduced  for  Member  States  to
submit  changes  to  their  forest  fire  protection  plans/classification  of  risk  areas  through  a
modification  of  rural  development  programmes.  This  adaptation  is  necessary  due  to  the
forthcoming repeal of Regulation (EEC) No 2158/92 at end 2002.

2.7. 

Budget

The Berlin European Council considered that the Agenda 2000 reform would be implemented
within a financial framework of EUR 40.5 billion excluding rural development and veterinary
measures in constant 1999 prices and asked the Commission to report to the Council in 2002
on the development of agricultural expenditure.

In  response  to  this  request,  the  Commission  has  examined  the  actual  and  prospective
development  of  agricultural  expenditure  for  the  period  2000-2006.  The  assumptions  at  the
basis of this examination and its results are contained in annex. These results indicate that on

25

the  basis  of  a  continuation  of  present  policies,  there  will  be  no  overshoot  of  the  annual
average of EUR 40.5 billion.

2.8. 

State aid

In  order  to  accelerate  the  implementation  of  new  state  aid  regimes,  the  Commission  is
examining the possibilities of adopting exemption regulations in the field of agriculture. For
example,  a  block  exemption  for  various  types  of  state  aid  would  avoid  ex-ante  notification
without  relaxing  the  substance  of  the  current  state  aid  guidelines.  The  Commission  has
already adopted several such exemption regulations outside of agriculture. Currently, the need
for  ex-ante  approval  from  the  Commission  necessarily  delays  any  plan  for  granting  new
agricultural  state  aid,  often  by  several  months.  The  new  approach  should  also  lead  to  a
reduction of the workload of the Commission, thus freeing the services to spend more time on
complaints and illegal state aids.

This  shall  be  done  at  Commission  level,  within  the  existing  legal  framework  for  state  aid
exemption  regulations,  as  adopted  by  the  Council.  For  the  state  aids  covered,  ex-ante
notification  and  authorisation  would  be  replaced  by  ex-post  reporting  and  monitoring.  This
will simplify and shorten the timeframe for the introduction of new state aid regimes. Thus,
Member  States  who  are  willing  to  provide  ex-post  reporting  would  be  able  to  provide
assistance  at  national  level  more  rapidly,  in  particular  where  such  assistance  is  needed  to
accompany reform measures in the agriculture sector. To guarantee the internal and external
sustainability of the policy the Commission will ensure that state aids will not undermine the
objectives of the CAP.

2.9. 

Next steps

After  consultation  with  the  Council,  the  Parliament  and  other  interested  parties,  the
Commission  will  bring  forward  legislative  proposals  in  autumn  2002.  For  the  sectors
scheduled  for  review  in  2003  (olive  oil,  sugar,  etc.)  the  Commission  will  bring  forward
proposals within the framework of the new farm income payment.

3. 

LIKELY EFFECTS OF PROPOSALS

3.1. 

Internal effects

The  proposed  adjustments  to  CAP  instruments  will  significantly  improve  the  capacity  of
agricultural  and  rural  development  policies  to  achieve  the  objectives  established  in  Agenda
2000. They will help close the gap between the expectations of farmers, consumers, taxpayers
and public authorities and the economic, social and environmental outcomes of the policies.

The farming sector

For the farming sector as a whole prospects should improve. Decoupling will allow farmers in
the sectors concerned to focus on products which give them the best return from the market
reflecting their skills, initiative and local agronomic conditions. It will also improve in many
cases,  the  efficiency  of  transfers  to  farmers,  and  should  help  them  improve  their  income
situation.  Dynamic  modulation  will  provide  the  means  for  additional  support  for  quality,
transitional help in meeting demanding statutory standards, as well as increasing the scope for
farmers  to  provide  environmental  services.  In  combination  with  the  proposed  changes  to
common  market  organisations,  this  will  fundamentally  improve  the  potential  for  long-term
sustainability in the sector. Farmers will be appropriately compensated for price reductions.

26

Dynamic  modulation  will  help  achieve  a  better  social  balance  of  support  within  the  sector,
without, in view of other measures, reducing the economic opportunities for larger farms. The
farm  income  payment  will  represent  a  fundamental  simplification  of  current  arrangements.
The majority of income support will now be made in the form of a single payment. Through
the  mechanism  of  the  farm  audit,  all  control  requirements  concerning  standards  covering
environmental,  food  safety,  animal  health  and  welfare  and  occupational  safety  for  farmers
will be combined in a single framework.

Consumers

For consumers, the proposals represent a major step forward in integrating food safety, food
quality  and  animal  health  and  welfare  concerns  into  the  CAP.  Decoupling  will  encourage
farmers to respond to market signals generated by consumer demand rather than by quantity
related policy incentives. The inclusion of food safety and animal health and welfare in cross-
compliance and their systematic monitoring through the farm audit framework will improve
transparency  and  give  consumers  greater  confidence.  The  reinforcement  of  the  scope  for
support for quality production and improved standards will help farmers to better respond to
consumer demand.

Taxpayers

For taxpayers, the proposed adjustments will ensure a better use of public resources. Within
the  framework  of  budgetary  stabilisation,  the  proposals  will  increase  the  efficiency  of
necessary income support to farmers, while at the same time improving market orientation. A
number of common market organisations will be adjusted to  improve  their  functioning. The
changes will considerably reduce the likelihood of the build-up of surpluses.

Citizens

The  proposals  will  help  address  citizens’  concerns.  Dynamic  modulation  will  allow  a  shift
towards the  increased  provision  of  public  goods  such  as  environmental  services  and  animal
welfare,  as  well  as  measures  focused  on  improving  the  competitiveness  of  the  sector.  The
proposed new set-aside arrangements will enhance environmental benefits. The reinforcement
of  cross-compliance  will  ensure  coherence  of  agricultural  policy  with  other  statutory
requirements.

Food industry

The  proposals  will  have  positive  effects  for  the  food  industry  by  reducing  the  costs  of  raw
materials in a number of sectors. Encouraging farmers to become more market orientated and
focused on quality production will  facilitate  the  access of processors  to  products  adapted  to
their needs. The benefits of consumer confidence in better safety and quality standards will be
felt throughout the food chain.

Administrations

For public administrations, the farm income payment and farm audit represent, once in place,
a  considerable  simplification  of  implementation  and  control  requirements  through  the
introduction of a single payment for the sectors concerned and a single control framework. In
addition, a considerable simplification of the state aid arrangements has been proposed.

A  small  number  of  highly  targeted  instruments  have  been  maintained  and  improved  in  the
first pillar, in order to avoid destabilisation of agricultural markets during the transition to the

27

decoupled system, particularly of specialised or traditional products. These include a new aid
for  energy  crops  to  replace  the  arrangements  under  set-aside,  and  crop  specific  aids  for
producers of protein crops, rice, nuts, and a quality supplement for durum wheat.

3.2. 

External effects

Although  these  adjustments  have  been  proposed  by  the  Commission  to  meet  internal  needs
and expectations, they will also help the EU adapt to external challenges.

The approach proposed by the Commission will enhance the integration of new members into
the Common Agricultural Policy. The proposed changes in common market organisations will
address market balance problems in EU-15 markets before enlargement. Decoupling will help
encourage  farmers  in  the  new  Member  States  to  improve  market  orientation,  rather  than
focusing production on policy incentives. The farm income payment will offer a considerable
simplification compared to existing arrangements. Dynamic modulation would not be applied
to farmers in the new Member States before they had reached the normal level of EU direct
payments.  In  addition,  it  has  already  been  proposed  to  increase  their  rural  development
allocation  compared  to  the  normal  EU  level.  The  proposed  changes  to  rural  development
measures  would  help  to  implement  EU  food  safety  and  quality  standards,  while  reinforced
cross  compliance  would  improve  consumer  confidence  in  production  in  the  new  Member
States.

The  approach  proposed  by  the  Commission  contributes  to  the  EU’s  strategic  goals  and
commitments  in  the  international  field  by  making  new  efforts  to  promote  sustainable
development  and  coherence.  In  particular,  by  reorienting  support  towards  more  extensive
agricultural  practices  and  minimally  trade-distorting  domestic  support,  it  is  expected  to
improve market opportunities for developing countries. However, the optimum impact on the
world  trading  environment  will  only  be  fully  realised  if  others  undertake  policy  reform  of
equal magnitude. We expect others to make comparable efforts in appropriate areas in such a
way that this could be translated into international commitments.

The direction of the EU is clear: reductions in production-distorting support and an increased
focus on food safety and quality, rural development, and environmental services for society at
large.  This  reflects  the  expectations  of  the  European  public  and  is  in  the  best  interests  of
European farmers.

3.3. 

Financial impact

A rough estimate of the measures proposed in this paper, compared to the updated baseline is
given in annex.

28

ANNEX: THE DEVELOPMENT OF AGRICULTURAL EXPENDITURE 2000 – 2006

Introduction

With a view to achieving the objective of stabilising agricultural expenditure in real terms and
beyond  the  reform  measures  decided  in  the  context  of  Agenda  2000,  the  Berlin  European
Council in  point  22  of its conclusions requested  the Commission  and the Council to  pursue
additional savings to ensure that total expenditure excluding rural development and veterinary
measures 
in  2000–2006  will  not  overshoot  an  average  annual  expenditure  of
EUR 40.5 billion. Therefore, the Commission was invited to report to the Council in 2002 on
the  development  of  agricultural  expenditure  accompanied,  if  necessary,  by  appropriate
proposals.

In  response  to  the  request  of  the  European  Council  the  development  of  actual  agricultural
expenditure  for  2000  and  2001  has  been  examined  and  updated  expenditure  forecasts  have
been  established  for  the  period  2002–2006  constituting  a  new  base  line  scenario  to  be
compared  with  the  financial  perspective  ceilings.  The  assumptions  at  the  basis  of  this  new
scenario and its results are presented below. It should be emphasised that individual forecast
amounts by sector are indicative and are in no way meant to represent expenditure objectives
or ceilings for each of the sectors concerned.

Methodology for the updated forecasts

The updating of the expenditure forecasts by sector for the period 2000–2006 has been carried
out on the following basis:

– 

– 

– 

actual expenditure in 2000 and 2001;

the appropriations entered in the 2002 budget and proposed in the Preliminary Draft
Budget (PDB) 2003;

forecasts established for the years 2004–2006.

The forecasts for 2004–2006 have been based on:

– 

– 

– 

an exchange rate of 1 EUR = 1 dollar;

the  most  recent  assessment  of  the  prospects  for  the  development  of  agricultural
markets  especially  concerning  arable  crops,  the  meat  sectors  and  milk  and  milk
products;

the  assumption  that  for  the  sectors  which  were  the  subject  of  the  Agenda  2000
reforms,  arable  base  areas  and  premium  rights  in  the  animal  sector  will  be  fully
utilised as from the 2004 financial year (2006 for the milk sector).

The  effects  of  legislative  decisions  adopted  after  Agenda  2000  and  which  have  modified
certain  common  market  organisations  or  other  regimes  have  also  been  taken  into  account
(sugar,  fruit  and  vegetables,  flax  and  hemp,  cotton,  tobacco,  olive  oil,  sheepmeat  and
goatmeat and the programmes for remote islands and regions, to mention the most important
changes).

For the sectors for which there are maximum guaranteed quantities, past experience indicates
that  in  general  these  are  fully  utilised  (notably  olive  oil,  dried  fodder,  grain  legumes,

29

processed fruit and vegetables). The maximum guaranteed quantities which have been fixed
therefore constitute the basis for the forecasts for these sectors.

For  the  sectors  subject  to  the  Agenda  2000  reforms  and  for  certain  other  sectors  where
important legislative changes have  been  decided  subsequently,  specific  comments  are  given
below.

Arable crops

The Agenda 2000 estimates were drawn up on the assumption that arable base areas would be
fully  utilised  and  that  high  world  prices  (in  dollars)  would  enable  exports  to  take  place
without or with very low refunds.

The first budgetary effects of the reform made themselves felt from the 2001 financial year.

Until  2002  per-hectare  aid  stayed  below  the  Agenda  2000  estimates  because  some  Member
States  underused  the  base  area.  The  2003  PDB  assumes  that  this  under-utilisation  will
continue. However, for the period 2004 to 2006 the estimates have been drawn up by applying
the per-hectare aid resulting from the use of historic reference yields to the whole of the base
area and include the expenditure on direct aid under the common organisation of the market in
flax and hemp which has recently been reformed.

Despite lower world prices than at the time of Agenda 2000, a EUR/dollar rate well under 1
made it possible to minimise export refunds and intervention costs, and expenditure on market
measures  for  2001  and  2002  therefore  stayed  below  the  level  envisaged  at  the  time  of  the
Berlin agreement.

From  2004  the  forecasts  of  expenditure  on  market  measures  diverge  from  those  at  Berlin.
Since world prices are expected to be lower than at the time of Agenda 2000 and the exchange
rate is assumed to be at parity, expenditure on market measures would be higher.

Sugar

Export  refunds  account  for  over  80 %  of  expenditure  under  this  market  organisation  and
expenditure  in  the  sector  is  consequently  greatly  influenced  by  movements  in  world  prices
and in the EUR/dollar parity.

A comparison between the expenditure forecasts currently being drawn up for 2003-2006 and
the Agenda 2000 ones calls for the following comments:

– 

– 

The  assumptions  concerning  the  world  price  level  and  the  EUR/dollar  parity  in
Agenda 2000 and those in  the present report  exert  a  contradictory  influence  on  the
level  of  appropriations  required.  The  assumptions  regarding  the  price  level  and  the
EUR/dollar parity therefore counterbalance one another.

The  significant  reduction  in  the  amount  of  appropriations  currently  considered
necessary compared with the Agenda 2000 forecast is due mainly to the abolition of
the  reimbursement  of  storage  costs  in  the  2001  reform  of  the  market  organisation
which is applicable from 2001/02.

30

Fibre plants

In July 2000 the Council reformed the common organisation of the market in flax and hemp.
From  2001/02  flax  and  hemp  for  fibre  production  have  been  included  in  the  arable  crop
scheme and the per-hectare aid received by growers has been reduced to the level of the aid
for arable crops (annual estimated cost of around EUR 40 million when the arrangements are
up  and  running,  which  should  be  added  to  the  aid  for  arable  crops  and  deducted  from  the
amounts for fibre crops).

The second part of the reform involves aid for processing straw, which is estimated at around
EUR  26  million  per  year  and  remains  charged  to  the  "Fibre  plants"  chapter.  The  forecast
expenditure should remain stable as the system is based on an MGQ and fixed aid per tonne.

For cotton the Council also decided, in April 2001, on a revision of the aid system applicable
from  2001/02.  The  principal  change  is  that  penalties  are  now  progressive  depending  on  the
amount of production, in order to reinforce the stabiliser mechanism.

Expenditure in the cotton sector, despite the stabiliser system, is still strongly influenced by
the world price level (in dollars) and the movement of the EUR/dollar rate. It fluctuated in the
period 2000–2002. More particularly in 2002, the increase in expenditure is due to a collapse
in world cotton prices compared to those used  for  Agenda  2000,  the  effect  of  which  is  still
significant despite an EUR/dollar rate of less than 1.

A slight recovery in the world price is forecast for 2003 and subsequently. Forecasts regarding
the quantities aided are the same as for Agenda 2000, i.e. around 1.5 million t.

Fruit and vegetables

For Agenda 2000, the financial cost was calculated on the basis of the financial estimate made
after  adoption  of  the  1996  reform.  This  estimate  included  a  substantial  amount  for  the
operational funds.

At  the  end  of  2000,  the  Council  adopted  a  mini-reform,  which  introduced  a  number  of
changes, in particular:

– 

– 

simplification of the system of financing the operational funds, for which the ceiling
on Community financial assistance was set at 4.1 %, and

rationalisation of the scheme for citrus fruits, peaches, pears and processed tomatoes.

The successive extensions of the scheme for nuts, which were adopted by the Council pending
a new proposal, have also been taken into account.

The budget estimates up to 2006 have been drawn up in the light of the new aids, thresholds
and ceilings fixed and taking into account the expiry of certain schemes (e.g.  for nuts). The
new  forecasts  are  appreciably  lower  than  for  Agenda  2000.  This  is  mainly  because  the
forecasts for producer organisations and withdrawals have been revised downwards and partly
because the forecasts for processed tomatoes indicate that expenditure will stabilise as a result
of the changes adopted at the end of 2000.

Wine sector

The  organisation of the market in  wine  was reformed under Agenda 2000  and  the  forecasts
take this into account from 2001, which was the first year in which the reform impacted the

31

budget.  The  reform  provided  for  the  gradual  reduction  and  eventual  disappearance  of  crisis
distillation  as  a  result  of  the  expected  stabilisation  of  the  sector.  It  included  expenditure  on
vineyard  restructuring  which  was  estimated  at  EUR  443  million  per  year  when  the  scheme
was up and running.

Expenditure  in  this  sector  remains  influenced  by  a  greater  use  of  crisis  distillation  than
forecast, as a result of relatively high production and a structural fall in consumption.

Milk

At the time of the Berlin decisions, it was forecast that annual expenditure in the milk sector
for  the  period  2000–2005  would  be  relatively  stable  and  then  increase  as  from  2006  as  a
consequence  of  the  introduction  of  the  direct  aid  system  agreed  in  the  context  of  Agenda
2000.

In reality, expenditure in the initial years of the period has been significantly below the Berlin
forecasts  due  to  internal  and  external  market  conditions  which  have  been  much  more
favourable  than  those  foreseen  at  the  time  of  Agenda  2000.  For  2000  and  2001,  sustained
demand  for  cheese  and  firm  internal  and  external  prices  especially  for  milk  powder  were
essential factors in permitting reductions in rates of export refund and of internal rates of aid
for skimmed milk and butter fat disposal measures.

The expenditure estimates for 2004–2006 are  based  on  the  recent medium-term forecasts of
the  development  of  supply  and  demand.  For  the  principal  milk  products,  these  forecasts
indicate a narrowing of the differences between supply and internal consumption compared to
those established at the time of Agenda 2000.

Beef and veal

The first years of the reform were influenced particularly by the BSE crisis, which erupted at
the end of 2000 and the foot-and-mouth outbreak in 2001 in the United Kingdom.

The Commission took a series of measures in 2000 to remedy the situation following the drop
in  consumption  and  in  exports  and  to  restore  balance  between  supply  and  demand  (special
purchase for destruction, adjustment of the public intervention scheme, etc).

In 2001  a plan  was presented to  the  Council  and  adopted  in  June  2001.  This  plan  aimed  to
create better market balance in the short and medium term.

Although the market was destabilised in 2000 and 2001, the crisis was not as bad as at first
feared and there has been a recovery. However, for the period 2001 to 2003, expenditure on
the beef and veal sector remains slightly above the amounts initially forecast despite the fact
that expenditure on direct premiums is lower because premium rights have been underused.

The estimates for 2004 to 2006 are based on

– 

– 

the medium-term outlook for supply and demand. Net production is expected  to be
down on  the  levels  forecast  at  the  time  of  Agenda  2000.  The  expected  recovery  in
consumption should enable intervention stocks to be disposed of,

full utilisation of the direct premium rights.

32

These estimates exceed the forecasts drawn up at the time of the Berlin agreement because the
extensification premium was applied at a higher level than expected and because the estimates
regarding export refunds at the time of Berlin were too optimistic.

Sheepmeat

The reform decided on in 2001 was based on an overall estimate of expenditure made at the
time of the Berlin agreement (taking into account 92 % utilisation of the premium rights).

Conclusions

As  shown  in  the  annexed  Table 1,  the  results  of  this  updating  exercise  indicate  that
expenditure  under  heading  1a  will  remain  within  the  corresponding  financial  perspective
ceilings  throughout  the  period  2000–2006.  Actual  expenditure  was  below  the  ceiling  by
nearly EUR 1.1 billion in 2000 and by  about EUR 2.3 billion in  2001.  The Budget for 2002
and  the  Preliminary  Draft  Budget  (PDB)  for  2003  envisage  that  the  margin  under  the
respective ceilings for these years will remain at around EUR 2.3 billion.

For  the  period  2004–2006,  and  on  the  basis  of  the  methodology  outlined  above,  the  annual
margin  under  the  ceilings  is  forecast  to  be  nearly  EUR 1 billion  in  2004  and  just  above
EUR 1 billion in 2005 and 2006.

As  regards  the  annual  average  amount  of  EUR 40.5 billion  in  1999  prices  specified  in
points 21 and 22 of the Berlin conclusions, the calculation shown in Table 2 indicates that this
amount will be respected since the comparable actual annual average expenditure is forecast
to be lower by about EUR 1.5 billion.

Budgetary impact of the proposals

Precise estimates of the budgetary impact of each of the measures outlined in the Mid-Term
Review  will  be  established  in  connection  with  the  presentation  of  the  formal  legislative
proposals.

However, even if estimates made at this stage can only be preliminary, the changes envisaged
for the individual sectors concerned and for the decoupling of direct aids are estimated to lead
to an overall annual saving of around EUR 0.2 billion compared to the base line expenditure
shown in Table 1.

This saving plus the forecast margin of about EUR 1 billion represents the necessary margin
to  provide  for  unforeseen  circumstances  (depreciation  of  the  dollar,  serious  animal  disease
outbreaks, etc) as well as to meet costs which could result from reform measures, which may
be prove necessary in sectors not covered by this Mid-Term Review.

33

TABLE 1
Expenditure and forecasts by sector for heading 1a
(New baseline – status quo without Mid-Term proposals)

2000

2001

Execution 5 Execution

2002
Budget

2003
PDB

2004
Forecasts

2005
Forecasts

2006
Forecasts

Million EUR

Arable crops

- direct aids
- other measures

Sugar
Olive oil

- direct aids
- other measures

Dried fodder and grain legumes

- direct aids
- other measures

Textileplants

- direct aids
- other measures
Fruit and vegetables

- direct aids
- other measures

Wine
Tobacco

- direct aids
- other measures
Milk and milk products

- direct aids
- other measures

Beef and veal
- direct aids
- other measures
Sheep and goatmeat

- direct aids
- other measures

Other agricultural products 1

- direct aids 2
- other measures

Fishery products
Control and prevention measures
Clearance of the accounts
Promotion measures
Other measures (agrimonetary
aids)

- direct aids
- other measures
Veterinary measures 3

Heading 1a total

- direct aids 4

16663,1
15174,0

1489,1

1910,2
2210,1
2156,2

53,9

381,3
68,7

312,6

991,4
105,7

885,7

1551,3
343,0

1208,3

765,5
989,4
984,9

4,5

2544,3
-

2544,3

4539,6
3646,1

893,5

1735,6
1733,9

1,7

1891,5
301,7

1589,8

23,0
77,4
-1077,9
58,7
933,1

948,0

-14,9

102,5

17466,2
16918,0

548,2

1497,1
2523,8
2468,8

55,0

374,8
69,2

305,6

826,3
59,8

766,5

1558,0
431,2

1126,8

1196,7
973,4
964,0

9,4

1906,6
-

1906,6

6054,0
4862,4

1191,6

1447,3
1449,3

-2,0

1328,3
279,8

1048,5

20,4
32,1
-569,7
48,9
469,8

480,6

-10,8

565,5

36290,0

37719,5

25462,2

27983,1

- other measures

10827,8

9736,4

17916
17486

430

1401
2366
2298

17764
17325

439

1339
2372
2317

18298
17541

757

1429
2384
2318

18178
17530

648

1429
2384
2318

18155
17530

625

1429
2384
2318

68

385
72

313

956
1

955

1650
430

1220

1392
983
970

13

1912
-

1912

8095
6162

1933

672
665

7,0

1424
293

1131

32
57
-500
79
271

271

0

570

55

383
72

311

831
1

830

1629
408

1221

1381
973
956

17

2112
-

2112

8369
7335

1034

1914
1910

4

1464
309

1154

29
48
-500
67
55

55

0

190

66

383
72

311

881
1

880

1620
410

1211

1381
973
944

29

2191
-

2191

8596
7858

738

1915
1910

5

1467
311

1156

30
48
-500
67
-

66

383
72

311

881
1

880

1618
413

1205

1381
973
944

29

2147
-

2147

8570
8067

503

1915
1910

5

1472
316

1156

30
48
-500
67
-

66

383
72

311

881
1

880

1617
417

1200

1381
973
944

29

2747
979

1768

8499
8067

432

1915
1910

5

1472
316

1156

30
48
-500
67
-

290

290

290

39660

28648

11013

40420

30688

9731

41452

31364

10088

41265

31571

9694

41770

32554

9217

Heading 1a ceiling

37352

40035

41992

42680

42408

42310

42834

Difference

-1062,0

-2315,5

-2332

-2260

-956

-1045

-1064

1

2

3

4

5

seeds, hops, rice, pigmeat, eggs, poultrymeat, apiculture, non-annex I products, food programs, remote
regions and islands
seeds, hops, rice, remote regions and islands
including from 2004, selective slaughter schemes (BSE)
direct aids corresponding to the list contained in the Annex to Regulation (EC) No 1259/1999
including EUR 29 million declared on appropriations carried over from 1999.

34

TABLE 2

Respect of the annual average of EUR 40 500 million (1999 prices)

2000

2001

2002

2003

2004

2005

2006

2000 - 2006

Average

1. Average ceiling

2.

'old' accompanying  measures  (EUR  2 760  million  in  current
prices)

3 = 1 - 2 Adjusted ceiling

(1999 prices)

40 500

2 552

37 948

4a. Expenditure  heading  1a  excluding  veterinary  in  current

36 188

37 154

39 091

40 230

41 162

40 975

41 480

prices

4b. Expenditure heading 1a excluding veterinary in 1999 prices

35 478

35 711

36 836

37 166

37 282

36 385

36 111

36 424

5 = 3 - 4b Difference

1 524

35