Special Report No 5/2002 on extensification premium and payment schemes in the common organisation of the market for beef and veal, together with the Commission's replies
Date: 2002-07-17
Institutions: European Court of Auditors
Subjects: agricultural guidance, aid system, aid to agriculture, beef, extensive farming, payment

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I

(Information)

COURT OF AUDITORS

SPECIAL REPORT No 5/2002

on extensification premium and payment schemes in the common organisation of the market for
beef and veal, together with the Commission’s replies

(pursuant to Article 248(4), second subparagraph, of the EC Treaty)

(2002/C 290/01)

CONTENTS

Paragraph

Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Regulatory background to the extensification payment scheme (EPS)

. . . . . . . . . . . .

What is extensification? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The link between extensification and beef production . . . . . . . . . . . . . . . . . . . . . . . .

The proportion of specialised beef production has increased in the EU . . . . . . . . . . .

Court’s audit objectives and approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

DESIGN OF THE EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Agenda 2000 reforms made significant changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

But stocking density is still a rough and ready way of identifying extensive farming
practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

And the scheme does not provide an incentive for producers to reduce stocking density

EPS and other schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

IMPLEMENTATION OF THE EPS IN THE MEMBER STATES VISITED . . . . . . . . . . . . . . . . . . . .

Weaknesses in the cattle databases caused problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Targeting of EPS inspections could be improved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EPS bovine inspection methods vary between Member States . . . . . . . . . . . . . . . . . . . . . .

I-VII

1-12

1-9

1-4

5

6

7-9

10-12

13

14-21

14-16

17-18

19-20

21

22-33

22-24

25-27

28

There are some anomalies in EPS implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29-33

Forage rape is treated as forage crop for EPS in Scotland, but not in England . . . . . .

29

Forage area in the alpine pastures (Almen) is overstated in Austria . . . . . . . . . . . . . .

30-32

Eligible French producers were paid EPS without requesting it expressly . . . . . . . . . .

33

3

4

4

4

5

5

5

6

6

9

9

10

10

10

10

10

11

11

12

12

12

12

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Paragraph

Page

COMMISSION’S INFORMATION ON IMPACT OF EPS IS INSUFFICIENT . . . . . . . . . . . . . . . . .

34

IMPACT OF THE EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35-45

EPS is one of the measures providing income support for extensive producers . . . . . . . . .

36

EPS does little to encourage intensive farmers to use more extensive methods . . . . . . . . .

37-39

And EPS did little to encourage additional extensive farming, although it benefits hold-
ings already farming extensively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUSION AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

40-45

46-53

46-52

53

Table 1: Amount of extensification premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Table 2: Expenditure on beef and veal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Table 3: Comparison of cattle receiving special beef, suckler cow and extensification premiums

— Application years 1999 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Table 4: Results of examination of sample of producer claims for EPS in the Member States

visited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Illustration 1: Total EPS expenditure 1994 to 2000: 4 039,4 Mio EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Illustration 2: Evolution of the EPS expenditure in the EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Illustration 3: Average percentage of eligible cattle entitled to EPS 1994 to 1999 . . . . . . . . . . . . . . . . . . . . . . . .

The Commission’s replies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13

13

13

13

14

16

16

16

4

7

8

15

8

9

14

18

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SUMMARY

I.
The Court has examined the extensification payment scheme (1) (EPS), a direct beef payment scheme
under the common organisation of the market for beef and veal aimed at encouraging extensive beef produc-
tion in an environmentally sustainable way and reducing surplus production (see paragraphs 2 and 4). The
aims of the audit were to consider the extent to which the EPS has encouraged extensive cattle production in
the EU, and to examine the implementation of the scheme as reformed under Agenda 2000 (see paragraphs 10
to 12).

II.
Two thirds of the EU’s beef is produced from dairy herds (although this proportion is reducing gradu-
ally — see paragraphs 6 and 7) which are normally not eligible for the EPS, and which tend to be more inten-
sively reared than specialised beef suckler cow herds. EPS expenditure totalled 4 039,4 million euro between
1994 and 2000, and benefited in particular the Member States that have significant suckler cow herds (see
paragraph 41).

A weakness of the EPS was dealt with by the Agenda 2000 reform, when the actual number of bovine
III.
animals was taken into account for the calculation of the stocking density (see paragraph 3), and a require-
ment for pastureland was introduced (see paragraphs 14 (b) to 18). Stocking density is only a rough and ready
basis for distinguishing between intensive and extensive farming practice (see paragraphs 17 to 20).

IV.
EPS co-exists with area based agri-environmental and rural development schemes (see paragraph 21),
and the stocking density requirements for the main livestock schemes are being reduced to levels similar to the
those required by the EPS when the two-tier system is applied (see paragraph 20).

V.
Implementation of the scheme was problematic in all the Member States visited (see paragraphs 22 to
28). There were weaknesses in inspection procedures and the bovine identification and registration systems,
and some problems in the definition and measurement of forage areas (see paragraphs 29 to 32). Some farm-
ers were paid EPS without expressly requesting it (see paragraph 33).

VI.
The Commission has insufficient information on the impact of the EPS (see paragraph 34 and 35).
While the EPS acts as an income support to extensive beef farmers, its impact on extensive cattle production
is limited. It does little to encourage intensive farmers to use more extensive methods, and did little to encour-
age additional extensive farming (see paragraphs 36 to 45).

The Court recommends that the Commission assesses the effectiveness and the efficiciency of EPS and
VII.
its consistency with other schemes such as agri-environmental and compensatory schemes. Consideration
should be given to amending regulations concerning risk assessment and inspection weaknesses (see para-
graph 53).

(1) Known as the ‘extensification premium scheme’ before 1 January 2000.

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INTRODUCTION

Background

Regulatory background to the extensification payment
scheme (EPS)

Since the Agenda 2000 reforms introduced from 1 Janu-
1.
ary 2000, the common organisation of the market for beef and
veal (1) provides increased direct aids to farmers to compensate
for income loss due to price cuts and reduced market support
from storage operations, export refunds, and import controls.
The direct aids are comprised of a special premium for producers
of bulls and steers, a premium for maintaining suckler cow herds
(that is for cattle bred and kept specially for their meat), slaughter
premium for all types of bovine animals, and additional payments
in the form of either headage and/or area payments (2) (the latter

two aids were introduced by Agenda 2000). An additional exten-
sification payment may be paid for cattle already receiving the
‘special premium’ and the ‘suckler cow premium’.

The extensification premium scheme was introduced by
2.
the 1992 common agricultural policy (CAP) reform (3), with the
aim of compensating specialised beef farmers for the competitive
advantage enjoyed by intensive and semi-intensive beef produc-
ers as a result of the drop in cereals prices (see paragraph 4). It
sought to take account of the stocking density (SD) of the hold-
ings, that is the forage capacity of each holding in relation to the
number and species of animals held, in order to determine eligi-
bility for the scheme. The extensification premium was paid if the
producer maintained below a certain level the SD of animals
claimed for the special premium and suckler cow premium. The
scheme has been amended twice, to increase the amount of the
additional payments, and to introduce two-tier SD limits in order
to enhance the effectiveness of the EPS by paying higher amounts
where lower SD were maintained (see Table 1).

Table 1

Amount of extensification premium

Regulation

Application year

Amount of EPS

EPS stocking
density / ha

SBP/SCP stocking
density/ha

Regulation (EEC)
No 2066/92

Regulation (EC)
No 2417/95

Regulation (EC)
No 2222/96

Regulation (EC)
No 1254/99

Regulation (EC)
No 1254/1999

1993

1995

1997

Single threshold:
2000 onwards

Two-tier system

2000 and 2001

Regulation (EC)
No 1512/2001 for
SBP/SCP from 2002

2002

2003

ECU 30

ECU 36,23

ECU 36
ECU 52

EUR 100

EUR 33
EUR 66

EUR 40
EUR 80

EUR 40
EUR 80

< 1,4

< 1,4

< 1,4
< 1

< 1,4

< 2 (reduced to 1,8 by
2003)

< 2 and > 1,6
< 1,6

< 1,8 and > 1,4
< 1,4

< 1,8 and > 1,4
< 1,4

< 2

< 1,9

< 1,8

(1) Council Regulation (EC) No 1254/1999 of 17 May 1999 on the com-
mon organisation of the market in beef and veal (OJ L 160, 26.6.1999).
(2) There is also a ‘deseasonalisation premium’ which may be granted for
animals slaughtered out of season, but expenditure is not significant
and benefits a limited number of Member States.

(3) Council Regulation (EEC) No 805/68 of 27 June 1968 on the com-
mon organisation of the market in beef and veal (OJ L 148, 28.6.1968),
as amended by Council Regulations (EEC) No 2066/92 of 30 June
1992 (OJ L 215, 30.7.1992), and (EC) No 2417/95 of 13 October 1995
(OJ L 248, 14.10.1995) and (EC) No 2222/96 of 18 November 1996
(OJ L 296, 21.11.1996).

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The SD takes account of the number of animals with refer-
3.
ence to the forage area (1) available to support those animals. The
number of animals is calculated in terms of ‘livestock units’ (LUs).
Currently, bulls, cows and other cattle over two years count as 1
LU; cattle from six months to two years count for 0,6 LU and
sheep and goats for 0,15 LU each. The current maximum SD of 2
LUs per hectare for eligibility for the beef premiums schemes was
derived with reference to the maximum acceptable 170 kg N/ha
from organic sources as laid down in the Nitrate Directive

4.
While detailed objectives of the EPS are not clearly identi-
fied in the relevant Regulations, the EPS is one of a series of mea-
sures with the objective of reducing surplus beef production and
encouraging environmentally sustainable agricultural production
and food quality (2), and more specifically, by combating a rising
trend towards intensification and encouraging extensive beef pro-
duction (3). Production control objectives were added in 1996 (4),
and environmental objectives under the Agenda 2000 reforms (5).
In common with other CAP support schemes, the EPS has a gen-
eral objective of supporting farm income. The Court in its 1996
Annual Report (6) pointed out that the method of calculating the
SD took account only of animals for which bovine premiums
were claimed, and recommended that all animals on farm should
be taken into account. The Agenda 2000 reform of the scheme,
now known as the extensification payments scheme (EPS) (7), cor-
rected this weakness, by taking all cattle and certain sheep and
goats on farm into account, and by introducing more stringent
eligibility conditions from 1 January 2000 (see paragraphs 14 to
16). The extensification supplement is separate from the extensi-
fication subsidies available under the agri-environmental mea-
sures, which were the subject of the Court’s Special Report on
Greening the CAP (8).

(1) Forage area is the area of a holding which is available throughout the
year for rearing animals. For EPS purposes, 50 % of the forage area
should comprise pasture land, which following local farming prac-
tices is recognised as being destined for grazing animals, the rest of
the area being made up of land used for growing fodder crops.
(2) The development and the future of the CAP: reflection paper of the

Commission (COM(91) 100 final, 1.2.1991).

(3) Preamble to Regulation (EEC) No 2066/92 amending Regulation

(EEC) No 805/68.

(4) Preamble to Regulation (EC) No 2222/96 amending Regulation (EEC)

No 805/68.

(5) Preamble Regulation (EC) No 1254/1999.
(6) Annual Report concerning the financial year 1996, paragraph 4.44

(OJ C 348, 18.11.1997).

(7) Council Regulation (EC) No 1254/1999. Commission Regulation
(EC) No 2342/1999 of 28 October 1999 laying down detailed rules
for the application of Council Regulation (EC) No 1254/1999 on the
common organisation of the market in beef and veal as regards pre-
mium schemes (OJ L 281, 4.11.1999).

(8) Special Report No 14/2000 on Greening the CAP covers the environ-
mental aspects of all CAP schemes. The section ‘The post-1992 envi-
ronmental impact of common organisations of markets’, paragraphs 19
to 26 and 92, covers the livestock schemes (OJ C 353, 8.12.2000).

What is extensification?

5.
The terms ‘extensive farming’ and ‘extensification’ are not
defined in the relevant legislation. Extensive cattle farming is gen-
erally considered as farming where the livestock are supported by
the land on which they are kept, as opposed to intensive farming,
where the animals are usually under shelter for most or all of their
lives and are fed with bought in feed. The current CMO in beef
and veal applies this by setting SD limits (i.e. the maximum num-
ber of animals that should be kept for each hectare of forage land
available (see Table 1), and by specifying that at least 50 % of the
forage land should be available for grazing animals (see para-
graph 14 (b)).

The link between extensification and beef production

Only a third of the EU’s beef comes from specialised beef
6.
production (i.e. suckler cow herds — cattle belonging to a meat
breed and kept for meat production), although this proportion is
increasing (9) (see paragraph 7). The rest originates from the dairy
herd. Dairy cows are not eligible for the main beef subsidies (suck-
ler cow premium or special premium), nor the extensification
premium (see paragraph 45 for the exceptions), and are normally
reared more intensively than other cattle in order to produce suf-
ficient milk. This tendency for intensification in the dairy sector
is confirmed by a 1999 study (10) on herbivore farming systems
in the EU carried out on behalf of the Commission, which found,
inter alia, that 40 % of specialised dairy holdings in the EU had
stocking densities greater than 2 LUs per hectare, as compared
with 23 % for specialised beef holdings. Although there are varia-
tions between the Member States, the concentration of suckler
cows in relation to the available grassland does not generally
exceed one animal per hectare.

The proportion of specialised beef production has increased
in the EU

7.
Between 1995 and 1999 average beef prices fell in the EU
by about 8 % (11), and the EU cattle population dropped slightly,

(9) Source: Commission CAP 2000 working document, April 1997, ‘Situ-

ation and outlook — beef sector’.

(10) Institut National de la Recherche Agronomique (INRA): ‘Typologie
des systèmes d’élevage dans l’Union européenne — Étude réalisée à
partir du Réseau d’Information Comptable Agricole (RICA), Rapport
final, mai 1999.’, Table 6.4.

(11) Prices vary according to category of animal, Member State, by season.
For example, between week 8/1995 and week 8/1999, the EU aver-
age price for deadweight young bulls (quality class A R3) fell from
312,85 euro to 288,529 euro per 100 kg, and for steers (class C R3)
from 298,419 euro to 274,058 euro. The BSE crises of 1996 and
2000 also led to temporary steep falls in prices.
Source for prices: EU market situation for bovine live cattle and car-
cases, DG AGRI, 1 March 2001.

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with the reduction in male cattle and dairy cows being offset by a
small increase in the number of suckler cows (1). Thus the propor-
tion of the EU’s beef production coming from specialist suckler
cow herds has increased while between 1990 and 2000 the per-
centage of dairy cows in the total EU cow population decreased
from 73 % to 63 % (1).

8.
The number of animals receiving the basic suckler cow
and special premiums between 1995 and 1999 was stable, with
about a third of the animals getting the premiums. The number
of these cattle also receiving the extensification premium went up
slightly. While the situation varied across the EU, in the Member
States except Spain there was a drop or very small increase in total
cattle population.

9.
In Spain, by contrast, the cattle population increased by
almost 14 % (796 000 animals). Spanish producers traditionally
fall into two distinct categories — they either breed cattle or fin-
ish (fatten) them nearer the metropolitan areas where they are
consumed. However, the EU beef premiums structure has been
one of the factors contributing to the development of ‘integrated’
farms which aim to keep the maximum value added within the
production units, by both breeding and fattening the animals (2).

(a)

the extent that extensive producers were discouraged from
intensifying their production; and

(b)

the extent that intensive producers were encouraged to exten-
sify their production.

While the impact of EPS in meeting its objectives of environmen-
tal protection was considered under the Court’s Special Report on
Greening the CAP, other objectives of food quality and produc-
tion control issues were not directly considered by the Court, as
these are affected by all the beef and veal measures.

Audit missions were carried out to the Commission and
12.
to five Member States (Spain, France, Ireland, Austria, the United
Kingdom). As well as carrying out a review of management pro-
cedures in the Member States or regions concerned, the auditors
accompanied the authorities on 15 inspections on the spot at
beneficiaries’ holdings and examined the claim files of 30 EPS
beneficiaries in each country/region over the period 1993 to
2000, to assess the impact of the EPS on their activities.

The Court’s audit objectives and approach

10.
While the main recommendation of the Court’s 1996
Annual Report regarding extensification had been implemented
by the Agenda 2000 reforms (see paragraph 4), the Court decided
in 2000 to re-examine the issue of encouraging extensification, in
view of the increased expenditure for EPS introduced by the
reforms. The Court’s audit objectives were to review the imple-
mentation of the reformed EPS in the Member States visited, and
to consider the extent to which the EPS encouraged extensive
cattle production in the EU. The role of EPS in supporting beef
producer incomes was also considered.

11.
As the Commission has not specified detailed, measur-
able objectives, the Court examined whether extensification was
encouraged by EPS, by referring to:

FINANCIAL INFORMATION

13.
Expenditure on EPS for 2000 (reporting year 2001) was
913,8 million euro (3) (see Table 2 for the evolution of total expen-
diture on beef and veal since 1994, including EPS). France, fol-
lowed by the United Kingdom, Ireland and Spain, between them
represent over 80 % of expenditure on EPS. Between 1999 (the
last year before the Agenda 2000 reform of the EPS) and 2000
there was a decrease in the number of animals receiving both the
basic premiums (suckler cow premium or special premium) (4),
and the EPS (see Table 3). Although the situation varies from one
Member State to another, and the long term effects of the reform
on the numbers qualifying for EPS are not yet clear (see Illustra-
tion 1 for EPS expenditure since 1994 by Member State, and see
Illustration 2 for the evolution of EPS expenditure).

(1) Source: Eurostat’s New Cronos database.
(2) Source: Ministry of Agriculture, Fisheries and Food, Spain.

(3) Source: Commission document on EAGGF Guarantee expenditure

2001, budget item B1-2 1 2 5.

(4) Between 1999 and 2000, the total number of animals receiving the
special and suckler cow premium decreased by 517 870 heads —
there was a sharp decrease of 590 120 heads receiving suckler cow
premium contrasted by a slight increase of 72 250 heads receiving
the special premium.

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Table 2

Expenditure on beef and veal

Budget

(Mio EUR)

1994

1995

1996

1997

1998

1999

2000

2001

2002

1. Export refunds

1 708

1 761

1 559

1 499

774

595

661

363

488

2. Storage operations

– 209

– 216

621

750

145

– 37

– 83

326

522

(NB: since 1996, all storage operations are due to BSE)

3. Other schemes:

3.1. Normal direct aid schemes

Extensification premium

Suckler cow premium

Additional suckler cow premiums

Special beef premiums

Deseasonalisation premium

Slaughter premium

Supplementary payments

Subtotal

3.2. Direct aids linked to BSE:

Measures introduced following the first BSE crisis:

UK over thirty-month scheme

Compensation for loss of revenue

Calf processing scheme

Calf early marketing scheme

Herd slaughter schemes

Calf culling schemes

Subtotal

Measures introduced following the second BSE crisis:

Purchase for destruction scheme

Special purchase scheme

Subtotal

Total direct aids linked to BSE:

Other

438

507

569

706

714

715

914

891

1 009

1 469

1 466

1 589

1 595

1 566

1 705

1 880

51

56

63

63

63

72

97

1 407

1 239

1 341

1 297

1 299

1 530

1 788

389

841

45

657

32

43

957

25

23

39

45

24

3

0

494

148

1 964

2 472

3 457

3 368

3 745

3 693

3 646

4 862

1 184

322

6 162

369

495

122

56

38

155

815

24

1

52

243

219

292

246

390

96

116

42

76

36

11

8

21

0

55

75

1 047

1 079

498

342

322

301

465

0

3

0

4

1 047

1 079

498

342

322

4

– 20

– 2

– 15

– 7

202

11

212

513

– 9

466

466

931

– 8

3. Total other schemes

1 967

2 476

4 507

4 427

4 241

4 020

3 961

5 366

7 085

Total expenditure for beef and veal CMO

3 467

4 021

6 687

6 675

5 161

4 579

4 540

6 054

8 095

Extensification as % of normal direct aids schemes

19,8 % 17,7 % 14,7 % 16,9 % 18,9 % 19,3 % 19,6 % 18,8 %

14,5 %

NB: Expenditure for extensification started in 1994.
Source: DG AGRI evolution of EAGGF expenditure, 1994 to 2001; budget 2002.

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Comparison of cattle receiving special beef, suckler cow and extensification premiums — Application years 1999 and 2000 (1)

Table 3

Total animals receiving suckler cow and special beef premium

Member State

1999

2000

Animals

% receiving EPS

Animals

Of which receiving EPS

Belgium

Denmark

Germany

Greece

Spain

France

Ireland

Italy

Luxembourg

Netherlands

Austria

Portugal

Finland

Sweden

618 438

256 333

2 165 739

278 691

1 945 841

5 672 397

3 020 016

896 606

35 344

139 632

506 281

432 097

204 807

346 592

United Kingdom

3 880 281

Total

20 399 095

(1) Payment years 2000 and 2001.
Source: DG AGRI. D2 working documents.

(a)

27,7

25,0

43,9

53,9

93,6

81,1

75,0

45,9

84,5

19,6

62,1

67,6

69,9

94,0

80,7

72,1

622 907

289 024

1 590 370

275 880

1 783 746

5 675 847

3 061 415

701 982

35 319

147 513

590 240

437 587

209 498

396 253

59 385

80 093

444 844

187 206

1 229 177

3 868 380

2 402 305

219 546

17 259

11 042

231 859

272 865

117 741

269 442

4 063 642

3 088 541

19 881 223

12 499 685

Change between 1999 and
2000

(a)-(b)

– 18,2

2,7

– 15,9

14,0

– 24,7

– 12,9

3,5

– 14,6

– 35,6

– 12,1

– 22,8

– 5,2

– 13,7

– 26,0

– 4,7

– 9,2

%

(b)

9,5

27,7

28,0

67,9

68,9

68,2

78,5

31,3

48,9

7,5

39,3

62,4

56,2

68,0

76,0

62,9

Illustration 1

Total EPS expenditure 1994 to 2000: 4 039,4 Mio EUR

Source: Financial reports of EAGGF — Guarantee Section.

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Illustration 2

Evolution of the EPS expenditure in the EU

NB:

the increase from 1997 to 1998 is due to the introduction of a high EPS rate for compliance with a low stocking density threshhold.

Source: Financial reports of EAGGF — Guarantee Section.

DESIGN OF THE EPS

Agenda 2000 reforms made significant changes

14.

The main changes introduced from 1 January 2000 were:

(a)

to take account of all bovines (1) on the holding (see para-
graph 4);

(b) at least 50 % of the declared forage area, as defined in
Articles 12 and 13 of Council Regulation (EC) No 1254/1999,
should be pasture available for grazing animals (2), including
land mown for hay or for silage;

(c)

land eligible for arable area aid can no longer be counted as
forage area for the EPS, although it still may count as forage
area for the main suckler cow and special beef premium
schemes.

15.
The standard method for calculating the SD is to take the
number of animals present on the producer’s holding at certain
‘census dates’ into account for the calculation of animal LUs. There

is also a simplified system, whereby producers undertake to main-
tain the number of animals below the given stocking density at all
times. Greece, Spain, Ireland and the United Kingdom all opted to
allow a simplified system, as it reduces the administrative burden
for both the authorities and the extensive producers who are
unlikely to exceed the SD requirements (see paragraph 44).

16.
In addition, Member States can either apply a single low
SD threshold for EPS eligibility, or a two-tier system with differ-
ent amounts being paid for each SD threshold (3) (see Table 1). Six
Member States (Germany, Greece, Spain, Austria, Portugal and
Sweden) opted to apply only one threshold, and to pay a higher
EPS subsidy to those producers that have a lower SD. The other
Member States opted for a two-tier system with lower EPS pay-
ments (4). The authorities in Spain and Austria informed the Court
that they chose only one SD threshold in order to allow produc-
ers to benefit from a higher additional payment, as most beef pro-
ducers in these countries would have no problems in meeting the
lower SD. The authorities in France, Ireland and the United King-
dom informed the Court that they chose the two-tier system
because it would allow producers to reduce their production over
a number of years and/or because it allows more producers to
benefit.

(1) Cattle over six months old.
(2) Council Regulation (EC) No 1254/1999, Chapter 1 ‘Direct payments’,
section 1 ‘Premiums’, subsection 6 ‘Extensification payment’, Article 13.

(3) Council Regulation (EC) No 1254/1999.
(4) Source: DG AGRI.

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But stocking density is still a rough and ready way of
identifying extensive farming practices

17.
Including cattle, sheep and goats in the EPS SD calcula-
tion allows a rough distinction to be made between intensive and
extensive producers, especially as many cattle producers in the
LFAs tend to have mixed sheep and cattle holdings. Whereas all
cattle (1) physically present on the holding count towards the SD
calculation, only sheep and/or goats for which premiums have
been claimed are taken into account for the SD of the holding of
the owner of the quota, regardless of where these animals are
physically present. As premiums on sheep and goats are only paid
on female animals over one year old, all male animals and lambs
less than one year old are excluded from the SD calculation.

18.
According to Council Regulation (EC) No 1254/1999,
50 % of the forage area declared must be pasture, defined as
‘grassland, which following the local farming practices is recogn-
ised as being destined for grazing bovine animals and/or sheep’ (2)
(see paragraph 14((b)). Thus land declared as forage area for EPS
may not necessarily be used for grazing bovines — even though
EPS is paid on bovines, and not on sheep.

And the scheme does not provide an incentive for producers
to reduce stocking density

19.
SD limits fixed by the regulation aim to restrict intensive
beef production (3). However, making EPS payments on a headage
basis encourages producers who have not yet come close to the
SD limits to maximise their production within these limits and
hence their subsidy revenue (see paragraphs 37 to 44). In the case
of the United Kingdom this finding is supported by the results of
a broad survey carried out by its Countryside Commission (4).

20.
For the main livestock schemes (suckler cow and special
beef premium), which the producer already has to receive in order
to be eligible for EPS, a SD of 2 LUs is applied on the number of
animals claimed (5). Following the BSE crisis which started in
autumn 2000, one of the measures introduced by the Council in
2001 to reduce future beef production, was to encourage further

(1) Over six months old.
(2) Council Regulation (EC) No 1254/1999, Chapter 1 ‘Direct payments’,
section 1 ‘Premiums’, subsection 6 ‘Extensification payment’,
Article 13(3) (c).

(3) Recital 13 of Council Regulation (EC) No 1254/1999.
(4) Final report of the Countryside Commission, March 1998, volume 1,

‘Conclusion and recommendations’, paragraph 4.3.2.

(5) Council Regulation (EC) No 1254/1999, Chapter 1 ‘Direct payments’,
section 1 ‘Premiums’, subsection 5 ‘Stocking density’, Article 12(2)(a).

extensification by introducing more stringent SD requirements
for the main livestock schemes. The SD requirement of a maxi-
mum of 2 LUs per hectare is reduced to 1,9 LUs in 2002 and to
1,8 LUs from 2003 (6). This reduces the SD requirements for the
main beef schemes to levels similar to those required by the EPS
(see Table 1). From 2003, the limits of 1,8 LUs per ha will be the
same when the two-tier system is applied (see paragraph 16) (7),
and the differences between the SD calculations for the main
scheme and the additional EPS II will be the forage area (see para-
graphs 14(b) and 18) and the number of animals taken into
account for the SD calculation (see paragraphs 15 and 17).

EPS and other schemes

21.
Extensive beef and mixed livestock farming often takes
place in areas of the EU where land quality, natural handicaps and
climate allow little choice for other agricultural alternatives. In
addition to direct beef and sheep premiums, livestock producers
in these areas may also be eligible for EU-funded area-based agri-
environmental schemes and compensatory allowances for less
favoured areas, which are often implemented by different organi-
sations from those managing the EPS. Eligibility for these schemes
is conditional upon good farming practice and respect of stock-
ing density limits which are calculated differently to take account
of specific scheme requirements. Thus extensive beef farmers can
be compensated in a number of ways for keeping a reduced num-
ber of animals on their land — with the headage-based EPS and
with the area-based aid paid under environmental and compensa-
tory schemes.

IMPLEMENTATION OF THE EPS IN THE MEMBER STATES
VISITED

Weaknesses in the cattle databases caused problems

22.
The bovine identification and registration databases (8)
were scheduled for completion by 1 January 2000. They may be

(6) Council Regulation (EC) No 1512/2001 of 23 July 2001 amending
Regulation (EC) No 1254/1999 on the common organisation of the
market in beef and veal, recital 5, and Article 1(9) (OJ L 201, 26.7.2001,
p. 1).

(7) The two-tier system is applied in nine Member States: Belgium, Den-
mark, France, Ireland, Italy, Luxembourg, Netherlands, Finland and
the United Kingdom.

(8) As required by Article 3(b) of Regulation (EC) No 820/97 of 21 April
1997 establishing a system for the identification and registration of
bovine animals and regarding the labelling of beef and beef products
(OJ L 117, 7.5.1997).

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used by Member States to determine the number of LUs, on con-
dition that the database offers, to the satisfaction of the Member
State, adequate assurances as to the accuracy of the data. Other-
wise, Member States have to determine LUs by information pro-
vided from each producer on census dates (1).

forms often contained errors — 12 of the sample of 30 produc-
ers’ files (40 %) examined for Saône-et-Loire contained errors,
although the exercise was less problematic in Vendée, with two of
the 30 forms containing errors (4).

23.
While not a regulatory requirement, the use of the cattle
databases facilitates the calculation of LUs and SDs. At the time
of the audit visits (November 2000 to July 2001), only Austria
could use its cattle database successfully for this. In Spain, Ireland
and the United Kingdom, the databases did not include all cattle,
and the SD for standard scheme claimants was calculated on the
basis of information provided by them on given census dates
throughout the year. While the information in the cattle databases
could be used for on the spot checks in Austria and the United
Kingdom, this was not the case in Spain and Ireland.

24.
In France, the authorities used the national bovine iden-
tification and registration system to calculate the LUs for EPS eli-
gibility, although there were operational problems and problems
with the accuracy of the data (2). Forms with the relevant infor-
mation on the presence of cattle on their holdings for the year
2000 were only sent to bovine producers to confirm in May 2001,
and resulted in 20 % of the EPS payments for suckler cows and
100 % of the EPS for male beef cattle being made after the regula-
tory deadline of 30 June 2001 (3). Only in five of the 95 depart-
ments were the forms addressed correctly to holdings with cattle
— in 19 departments, over 25 % of the forms were incorrectly
addressed, and the rate exceeded 40 % in eight of these depart-
ments. In Saône-et-Loire, forms were sent to 13 513 cattle hold-
ers, whereas there are only 6 045 cattle holdings. Moreover, the

Targeting of EPS inspections could be improved

25.
Paying agencies are required to carry out on-the-spot
checks on at least 10 % of livestock aid applications and 5 % of
area aid applications selected on the basis of a risk analysis and
an element of representativeness of the aid applications submit-
ted (5).

26.
In all the Member States visited, the animal inspections
and the area aid inspections for extensification purposes were car-
ried out separately, sometimes by different services, on the basis
of separate risk assessments. During the EPS livestock inspections
that the auditors accompanied, a systematic examination of for-
age area and land use by the inspectors was only performed in
Spain and on some inspections in the United Kingdom.

27.
Except in Ireland and France, the risk assessments for live-
stock and area aid inspections considered specific risk factors to
include farmers close to the EPS SD threshold, as these are the
holdings most at risk of being ineligible for EPS (if the inspection
finds that forage area is overdeclared slightly or animals are
underdeclared slightly). In Ireland, no such risk factor was built in
for EPS livestock inspections, and in France, there was no such
risk factor for EPS related area aid inspections.

EPS bovine inspection methods vary between Member States

(1) Article 32(3) of Regulation (EC) No2342/1999 OJ L 281, 4.11.1999).
(2) The 2001 accounts of the paying agencies concerned were qualified
by their certifying body, due to errors in the cattle identification sys-
tem and the integrated administrative and control system (IACS), and
to absence of follow up to anomalies identified by cross-checks. Con-
cerning the EPS in particular, the certifying body identified that there
was significant control risk due to procedures implemented. Source:
2001 reports of the ‘Commission de certification des comptes des
organismes payeurs des dépenses financées par le FEOGA-Garantie’
(CCCOP) for the ‘Office interprofessionnel des viandes’ (Ofival) and
‘Services déconcentrés de l’Etat’ (SDE).

(3) Due to mitigating circumstances, the Commission extended the dead-
line for EPS payments for France to 31 July 2001. The correction for
late payment of EPS totalled 0,29 million euro, representing 0,1 % of
the total EPS expenditure in France.

28.
Member States have some discretion over how the checks
and inspections required under the integrated administration and

(4) The Court has estimated that the errors reported by the certifying
body total 6,5 million euro for Ofival, (of which 0,82 million relates
specifically to the EPS), and are due mostly to problems with the cattle
identification and registration system.

(5) Commission Regulation (EEC) No 3887/92 of 23 December 1992
laying down detailed rules for applying the integrated administration
and control system for certain Community aid schemes, Article 6(3)
as modified (OJ L 391, 31.12.1992).

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control system (IACS) Regulation are carried out (1). While inspec-
tion methods can and do vary from one Member State to another,
the results are not entirely satisfactory. The following examples
demonstrate that the efficiency and efficacy of inspections in most
Member States visited could be improved by establishing best
practice, and thus ensuring that producers across the EU are
treated equitably:

(a)

(b)

(c)

the EPS inspections in Ireland, Spain, and France (since 2001)
are carried out with inspections of the main livestock schemes.
The United Kingdom has introduced a more effective inte-
grated approach covering all bovine schemes, including physi-
cal and documentary checks;

in Ireland, LUs for EPS purposes are reconciled with the pro-
ducers’ livestock records at given dates, but physical inspec-
tions of animals and documentary controls are limited only
to those animals on which the main scheme payments have
been claimed. Listings from the cattle database are not used
(see paragraph 23), nor is a full animal count carried out and
reconciled with the running totals on the holding’s animal
register;

in France, there were no checks that notification deadlines
had been respected, nor were underlying documents verified.
The inspections did not check all the bovine herd nor verify
their physical locations. As regard the area aid inspections,
the service responsible for forage area inspections (2) did not
adequately verify forage for EPS purposes nor for the calcula-
tion of the SDs;

(d)

in France and Spain, the producers were not required to gather
all their animals together, and eartags were checked from a
distance, using binoculars as necessary. This did not guaran-
tee that the animals concerned were correctly identified.

There are some anomalies in EPS implementation

Forage rape is treated as forage crop for EPS in Scotland, but
not in England

29.
Areas qualifying for area aid are not eligible as forage
area (3). Using this criterion, the English authorities have excluded

(1) Member States must comply with Commission Regulation (EEC)
No 3887/92 of 23 December 1992, laying down detailed rules for
applying the IACS system (OJ L 391, 31.12.1992 as modified), replaced
by Commission Regulation (EC) No 2419/2001 from 1 January 2001
(OJ L 327, 12.12.2001). In addition to the IACS controls on the pre-
miums paid, Member States also have to check that the Community
provisions concerning bovine registration and identification are com-
plied with as well as other requirements under health and sanitary
legislation.

(2) ONIC — Office national interprofessionnel des céréales.
(3) Article 12(2)(b) of Regulation (EC) No 1254/1999.

areas sown with forage rape (which does not qualify for area aid)
from forage area for EPS purposes, whereas it is accepted as a for-
age crop in Scotland. Farmers in the two countries are therefore
being treated inconsistently. The United Kingdom authorities have
asked the Commission for guidance. In its reply the Commission
states clearly that the current legislation does not make a distinc-
tion between different types of rape seed, and thus all rape seed
should be excluded as forage for EPS purposes.

Forage area in the alpine pastures (Almen) is overstated in
Austria

30.
Every year, over 50 % of bovine holdings send their cattle
(over 300 000 cattle) to the Almen (alpine pastures) in the sum-
mer for grazing. Austria has almost 10 000 alpine pastures cover-
ing a total area of 1,6 million ha, of which 50 % is considered as
forage and accounts for approximately a third of Austria’s forage
area. The carrying capacity of the alpine pastures is much lower
than for other pasture land. Most of the alpine pastures are pub-
licly owned, and allocated to individual farmers by the Alm admin-
istrator (Almbewirtschafter).

While the total alpine pasture area is based on the land
31.
register, producers declare their part of the forage area based on
the Alm administrator’s estimates of the forage area. Since 1998,
the regional authorities in Austria have been using aerial photog-
raphy to determine the actual forage area. However, the Austrian
paying agency has not obtained this information, and could there-
fore not use it to compare declared forage area for the alpine pas-
tures with the actual forage area as established by the photo-
graphs.

32.
Of the 554 on-the-spot controls carried out by the Aus-
trian authorities in 2000, photographs were available for 185
alpine pastures at the time of inspection. Comparison of the
declared forage area of 43 200 ha with the forage area as estab-
lished using the photographs indicated actual forage area of only
26 167 ha, an overstatement of 61 %. This difference results from
the fact that the Alm authorities had provided substantial overes-
timates of the area of alpine grazing on the basis of information
contained in the land register. Aerial photography began to be
introduced in 1998, bringing to light this problem, but had only
been applied in some areas of Austria, such as the Salzburg region
in the 2001 application year. In Bundesland Salzburg forage area
declared for the year 2000 was overstated by 52 % and 33 % for
two randomly chosen alpine pastures, and if the actual forage area
is used instead of the declared area, five of the 11 holdings exam-
ined by the Court would no longer be eligible for the EPS.

Eligible French producers were paid EPS without requesting
it expressly

33.
From 2000, all producers wishing to get the additional
EPS are required to indicate this on their area aid application
forms. This requirement was not respected in France, where EPS

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was paid to all eligible producers provided that they had returned
details confirming cattle on their holdings during 2000.

to keep them in business (2), and without these would otherwise
make larger losses or no profit.

EPS does little to encourage intensive farmers to use more
extensive methods

The impact of the EPS on extensive cattle production can
37.
be considered from two vantage points, namely, the extent to
which it has maintained current extensive production practices,
or the extent to which it has encouraged intensive farmers to
switch to less intensive methods. In practice, other factors apart
from the EPS influence producers’ decisions. For example the cost
and availability of lands and buildings, natural conditions, other
grants, agricultural prices, consumer demand, the impact of BSE
and other animal diseases, and export opportunities are all impor-
tant.

38.
The EPS is only paid to farmers who already qualify for
the suckler cow premium or the special beef premium — and
who for these schemes already have to respect maximum stock-
ing density requirements that would exclude highly intensive pro-
ducers.

EPS only provides an incentive to those farmers that have
39.
stocking rates close to or above the limits to reduce their SD
(either by reducing the number of animals or by increasing for-
age area), as this would result in higher subsidies overall. Some
producers have been able to increase their stocking rates within
the regulatory limits and benefit from the EPS.

COMMISSION’S INFORMATION ON IMPACT OF EPS IS
INSUFFICIENT

34.
In order to allow it to monitor whether the scheme is
being implemented correctly, and whether the scheme is meeting
its objectives, the Commission needs adequate and timely man-
agement information at its disposal. The beef market manage-
ment division of the Directorate-General for Agriculture has infor-
mation on the animals that receive support under the main
livestock schemes and how many of them also receive EPS. Coupled
with other information, mainly from the clearance-of-accounts
procedure, the Commission has adequate information on whether
the scheme is being implemented correctly. However, the Com-
mission has not yet systematically collected information to assess
the impact of the EPS on extensive farming practices, nor has it
set clear objectives and measurable performance indicators for
this.

IMPACT OF THE EPS

Apart from analysis undertaken in the context of Agenda
35.
2000 reform, there have been no evaluations of the EPS or the
beef livestock schemes (1), nor do the Commission services have
copies of evaluations and studies carried out by the Member States
in this respect.

EPS is one of the measures providing income support for
extensive producers

36.
The EPS is one of a series of measures which provide
income support to extensive beef producers. In 2001, EPS budget
costs accounted for some 19 % (914 million euro) of total budget
expenditure for direct aid schemes (4 862 million euro — see
Table 2) to cattle farmers. Together, these are a significant part of
producers’ incomes and encourage them to continue farming
activities and stay in areas that might otherwise be abandoned.
For example, in France and the United Kingdom, which together
accounted for over half of EPS expenditure (see Illustration 1),
many beef producers are dependent on the direct beef subsidies

(1) The Directorate-General for Agriculture is planning an evaluation of

the beef market for 2004/2005.

(2)

In France: ‘La réforme (Agenda 2000) renforce le rôle des aides directes
dans la formation du revenu des exploitations agricoles … Cette
dépendance à l’egard des aides est plus importante pour les exploita-
tions bovine-viande (133 % du résultat) et les aides directes représen-
tent plus de 150 % du résultat courant dans près d’une unité par deux.’
Source: INRA ‘Le compromis de Berlin (Agenda 2000) — conséquences
pour l’agriculture française, analyse des simulations à partir du RICA,
Avril 1999.’
In the United Kingdom: While beef direct subsidies represented 39 %
of net farm income (NFI) on average for all farm types in 1999/2000,
they represented between -504 % (that is, the subsidy revenue was
almost five times greater than the net loss) and 270 % of NFI for farm-
ers in uplands and less favoured areas specialising in beef or mixed
livestock farming. In the five years 1995 to 2000, direct livestock sub-
sidies increased in importance as a percentage of revenue for livestock
farmers in the LFAs, from 33 % to 45 %, with EPS making up between
a fifth and a quarter of these beef subsidies. Source: analysis of income
from farming, farm business subsidy data from DEFRA.

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And EPS did little to encourage additional extensive farming,
although it benefits holdings already farming extensively

main beef premiums. These weaknesses were addressed by Agenda
2000 reforms (see paragraph 4).

As already found by the Court (1), the major weakness
40.
with the EPS (before the Agenda 2000 reforms) was that it did not
take genuine SD into account for eligibility criteria. Beef produc-
ers were therefore able to benefit from higher animal subsidies
either by excluding a number of animals from their special beef
and suckler cow claims in order to achieve a lower theoretical SD,
and therefore getting the extensification premium on all their
claimed cattle, or by limiting their claims to 15 animals, as small
producers are not required to meet the SD requirements to get the

41.
Over 65 % of EU cattle on which either the special beef
premium, or suckler cow premium was paid during 1994 to 2000
also qualified for the EPS (see Illustration 3). In France, Ireland and
the United Kingdom, which have two thirds of the EU’s suckler
cow herd and where such farming was traditionally extensive, the
proportion of these cattle receiving EPS was higher: France (80 %),
Ireland (75 %), United Kingdom (76 %). (2) During the same period
less than 5 % of the EPS payments were in Member States where
intensive beef rearing is more prevalent (in order of financial
importance: Italy, Belgium, Denmark, Netherlands).

Average percentage of eligible cattle entitled to EPS 1994 to 1999

Illustration 3

Source: Commission Working document, Beef Premiums: Additional amount for extensive holdings.

(1) Annual Report of the Court of Auditors concerning the financial year

1996, Chapter 4, paragraphs 4.40 to 4.44.

(2) Source: DG AGRI for expenditure and proportion of cattle receiving
EPS; Eurostat cattle surveys for importance of suckler cow herd.

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The auditors’ examination of a sample of EPS claimants
42.
in each Member State visited found that the EPS had little impact
on the production decisions taken by producers (see paragraph 43
and Table 4.) (1) In addition, the number of cattle eligible for EPS
under the new regime in the application year 2000 diminished by
9,2 % (see Table 3).

43.
The examination of a sample of EPS beneficiaries in the
Member States visited showed that 83 % of the EPS claimants in
the period 1995 to 1999 were already practising extensive farm-
ing as defined in the current (post 2000) EPS legislation (see
Table 4). With the exception of Vendée in France, which has inten-
sive and semi-intensive production systems, between 81 % and
100 % of the recipients of EPS in the period 1995 to 1999 would

also have been eligible had the stricter post-Agenda 2000 condi-
tions been applied in that period. Again with the exception of
Vendée, where the new stricter rules will exclude producers who
received the EPS in the past by making changes in stocking rates
on paper, and where intensive producers are unlikely to switch to
more extensive production, between 89 % and 97 % of the pro-
ducers claiming EPS in 2000 were eligible to receive it. Most of
the claimants would easily meet the SD requirements, and indeed
in some cases could increase their stocking rates and still get the
EPS. This confirms that the majority of producers who practice
extensive farming as defined within the confines of the current
legislation will continue to benefit from the EPS. Furthermore,
most of the producers that the auditors met on the spot stated
that they were unlikely to change their production methods as a
result of the reformed EPS.

Results of examination of sample of producer claims for EPS in the Member States visited

Table 4

Member States

Region

Sample

Of which
claiming
EPS I in
1995 to
1999

Eligible for
EPS I in
1995 to
1999

%

Eligible for
EPS in 1995
to 1999
under cur-
rent strict
conditions

Austria

France

Ireland

Spain

United
Kingdom

(a)

Salzburg

Saône-et-Loire

Vendée

Ireland

Andalucia

Carlisle

Scotland

(b)

33

30

30

31

30

33

34

(c)

33

30

27

27

25

33

31

(d)

31

30

22

23

25

31

31

Total

221

206

193

Source: Court of Auditors’ examination of producers’ files.

(e)=(d)/(c)

94

100

81

85

100

94

100

94

(t)

31

27

11

24

24

28

25

170

As % of
claimants
eligible for
EPS I 1995
to 1999

(g)=(t)/(d)

100

90

50

104

96

90

81

88

Of which
claiming
EPS II in
2000

Eligible for
EPS II in
2000

%

(h)

33

30

27

27

30

28

26

(l)

32

28

11

24

28

27

25

201

175

(j)=(l)/(h)

97

93

41

89

93

96

96

87

(1)

In the United Kingdom, this was confirmed by the United Kingdom
Countryside Research Unit’s broader-based examination of the impact
of the 1992 Mac Sharry reforms on the British countryside. Source:
Final report of the Countryside Commission, March 1998, on the
effects of the 1992 reform of the common agricultural policy on the
countryside of Great Britan, volume 1 project overview and summary
findings, and volume 1, executive summary, the beef sector p. xiv.,

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Moreover, 89 % of claimants in Spain, 43 % in Ireland
44.
and 44 % in the United Kingdom (52 % in Scotland, 40 % in
England) opt to claim EPS under the simplified scheme, whereby
they undertake to keep their stocking rates below a certain level
at all times — indicating that these were most likely to be exten-
sive farmers.

The coexistence of EPS and the agri-environmental
48.
schemes and compensatory allowances results in extensive farm-
ers being compensated by several aid schemes (see paragraph 21),
and the stocking density requirements of the main beef schemes
are approaching that of the extensification payment scheme when
the two-tier EPS system is applied (see paragraph 20).

45.
In Austria and Finland, producers may be eligible for EPS
on their dairy cows (1). In Austria, since most extensive holdings
are located in the mountainous areas and traditionally have dairy
cattle, most holdings will see their EPS subsidy increase due to
increases in number of eligible animals, without needing to change
their herd composition or alter their production practices. Aus-
tria’s EPS expenditure more than doubled between 1999 and
2000, from 15,5 million euro to 37,98 million euro, with 15,1
million euro due to EPS paid on dairy cows (2). Although mixed
dairy and meat holdings are also a common feature in upland less
favoured areas where grass-based production systems dominate,
in other regions of the EU, Austria and Finland are the only Mem-
ber States singled out for this advantage.

49.
Problems with the cattle registration and identification
systems complicated EPS administration of the scheme for all
Member States visited except Austria (see paragraphs 22 to 24).

50.
There were weaknesses in the risk analyses used to target
inspections in Ireland and France (paragraph 27), and weaknesses
in the performance of inspections in all Member States visited (see
paragraph 28).

CONCLUSION AND RECOMMENDATIONS

Conclusion

46.
The fact that under the original extensification premium
scheme only bovines claimed under the main beef premium
schemes were taken into account meant that some producers
were eligible for the premium by changing their beef premium
scheme applications, rather than by moving to or maintaining
extensive farming practices. The reformed extensification pay-
ment scheme dealt this with (see paragraphs 4 and 14) by taking
actual cattle on farm into account for calculating stocking density.

47.
However, the SD is still an approximate calculation, as the
actual number of sheep and goats on the holding is not consid-
ered (see paragraph 17); land that can only be used for sheep graz-
ing is treated as eligible forage area (see paragraph 18); and farm-
ers benefit most when maximising their production (see
paragraph 19).

51.
There were problems in the measurement of certain for-
age areas (alpine pastures) in Austria; in the definition of forage
area (forage rape) in the United Kingdom (paragraphs 29 to 32),
and in the administration of the scheme in France, where eligible
producers were paid EPS without making an express request to
receive it (see paragraph 33).

52.
While the Commission has information to administer the
EPS, apart from the analysis carried out in the context of Agenda
2000, it does not have sufficient information to assess its impact
(see paragraph 34), and no evaluations have been performed (see
paragraph 35). The scheme has had little impact on farming
methods in terms of discouraging intensive farming (see para-
graphs 37 to 39) or encouraging extensification (see paragraphs 40
to 45), but is an important source of income and helps extensive
farmers stay in business (see paragraph 36).

Recommendations

53.

The Commission should:

(a) assess the effectiveness and efficiency of the EPS scheme as
income support, taking into account other direct aids from
which EPS beneficiaries may also benefit;

(1) Council Regulation (EC) No 1254/1999, Article 13(4).
(2)

In Austria, an additional 150 552 dairy cows were eligible for the EPS,
resulting in additional expenditure of 15,1 million euro. In Finland,
EPS was paid on 170 308 dairy cows, resulting in additional expen-
diture of 10,5 million euro.

(b) define clear, non-conflicting objectives for the EPS scheme,
and design support measures targeting more efficiently on
encouraging extensification;

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(c) assess consistency of the EPS scheme with other schemes
such as the agrienvironmental schemes and compensatory
schemes mentioned in paragraph 48;

(e) address inspection weaknesses by promoting integrated on
the spot controls in all the Member States for all premiums
received by each final beneficiary;

(d) consider how to address the design weaknesses and compli-

cations referred to in paragraph 47;

(f)

amend the risk assessment requirements for livestock and
area aid inspections in order to build in specific risk factors
to choose producers close to the EPS SD threshold.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 17 and 18 July 2002.

For the Court of Auditors

Juan Manuel FABRA VALLÉS

President

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THE COMMISSION’S REPLIES

SUMMARY

As regards bovine production methods, the Council has set out two complementary instruments
I to III.
with a view to discouraging the intensification of production and encouraging the extensification. In both
cases, the concept of stocking density remains the best tool as it is based on a measurable relation between
animals and available area necessary for feeding them. The stocking density applied in order to limit the num-
ber of animals receiving the ‘basic’ premiums is the instrument corresponding to the first aspect (discourag-
ing) of the issue. The stocking density applied for the purpose of the extensification payment corresponds to
the second aspect (encouraging) of the same issue.

The Commission undertook an analysis for the purpose of the proposals for the Agenda 2000 reform.

The Commission considers the impact of the extensification payment as resulting from the additional financial
support provided to producers even if these producers already apply extensive production methods. The pre-
mium encourages extensive farmers to continue their extensive production.

IV.
Even if the levels of the stocking density tend to become closer after the amendment to Regulation (EC)
No 1254/1999 adopted in July 2001 the modalities for calculating the stocking density differ in the livestock
units and in the area considered as a forage area. The stocking density for the ‘basic’ premiums limits the
number of animals eligible to the premiums and leads to a reduction in the number of premiums granted. The
stocking density for the extensification payment works as a trigger for a top-up payment to the ‘basic’ premi-
ums.

V.
The difficulties of implementation with the scheme which are stressed by the Court are adequately fol-
lowed up by the Commission and are considered to be the normal difficulties encountered when a new aid
regime is established. The problems are addressed within the framework of the normal procedures (clearance
of accounts, legal interpretation; for more details see points 29 to 33).

VI.

The scheme is in the start-up phase and will be assessed in 2004.

The Commission considers that providing producers (even if already engaged in extensive production methods
or not) with the extensification payment allows them to produce a different quality of bovine meat correspond-
ing to higher consumer expectations. Given the difficulties in the bovine market resulting from successive
sanitary crisis, the Commission considers that without such specific support, extensive producers would have
been encouraged to abandon this way of producing beef.

VII.
The Commission has planned and will carry out the assessment of the common organisation of the
market in beef and veal in 2004/2005 and will analyse the impact of the various instruments planned in this
sector, particularly the new extensification premium introduced by Agenda 2000.

The measures introduced by the rural development plans for the period 2000 to 2006 will also be assessed,
particularly from the point of view of their consistency with market measures.

Commission Regulation (EC) No 2419/2001 highlighted as from 1 January 2002 the specific risk factor
involved, and also introduced or reinforced a series of on-the-spot control procedures and a sanctions regime.

In the framework of the mid-term review of the Agenda 2000, the Commission intends to bring forward
proposals which go further in defining the respective roles of instruments both in the first and second pillar
of the CAP in this area.

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INTRODUCTION

10.
Discouraging the intensification of production and
encouraging its extensification are two complementary instru-
ments set out by the Regulation as regards bovine production
methods. In both cases, the concept of stocking density remains
the best tool as it is based on a relation between animals and avail-
able area necessary for feeding them. The stocking density applied
in order to limit the number of animals receiving the ‘basic’ pre-
miums is the instrument corresponding to the ‘discouraging’
aspect of the issue. The stocking density applied for the purpose
of the extensification payment corresponds to the ‘encouraging’
aspect.

11.
By setting out the two instruments affecting intensive or
extensive beef production methods, the Council referred to two
objectives: firstly, to limit animal premiums by taking into account
the forage capacity of the holding in relation to the number of
animals held on it in order to discourage the trend towards the
intensification of production; secondly, to strengthen incentives
to extensify production by granting an additional amount to the
‘basic’ premiums.

The Commission considers the impact of the extensification pay-
ment as resulting from the additional financial support provided
to producers even if these producers are already applying exten-
sive production methods. The scheme encourages them to con-
tinue their extensive production methods. In the framework of
the evaluation of the beef CMO, the Commission will evaluate
any specified detailed impact achieved.

DESIGN OF THE EPS

16.
The introduction of a two-tier density limit is aimed at
giving more flexibility to Member States in applying the extensi-
fication incentive and at allowing producers to remain extensive.
A large number of producers in a large part of the Member States
would have been unable to respect with ease a single threshold
system. A realistic choice has been made between the setting out
of a unique and stricter system benefiting a potentially small
number of producers and the laying down of an optional one
applicable to a higher number of producers.

17.
The new extensification premium arrangements, intro-
duced by Agenda 2000, marked a significant improvement from
the point of view of taking into account all the animals actually
present on the holding. However, because of the existing regula-
tions on identification, only sheep for which a premium had been
claimed could be taken into account. Thus, taking account of all
the sheep and/or goats present would have been extremely com-
plicated to administer and very difficult to monitor. New advances
are expected in the field of sheep/goat identification, however,
which very soon will be the subject of a Commission proposal.

In more general terms, this question was examined as part of the
study carried out for the mid-term review of Agenda 2000 adopted
by the Commission on 10 July 2002. New measures will be pro-
posed in this context.

18.
A possible restriction of the forage area based on a sepa-
ration of the pasture area according to the animal species grazing
on it would be difficult to implement from a management and
control point of view.

The stocking density laid down in Article 12 of Council
19.
Regulation (EC) No 1254/1999 is aimed at discouraging the trend
towards the intensification of the production by limiting animal
‘premiums’ on the basis of the relation between forage capacity of
the holding and number of animals. Thus, it is aimed at restrict-
ing financial compensation of income to producers engaged in
intensive production since it limits the number of animals for
which a premium is paid.

The question raised by the Court is examined in the study carried
out for the purposes of the proposal for a mid-term review of
Agenda 2000, which is intended partly to limit the obligation to
produce in order to benefit from premiums, and partly to rein-
force cross-compliance.

Even if the levels of the stocking density tend to become
20.
closer after the amendment to Regulation (EC) No 1254/1999
introduced in July 2001, the modalities for calculating the stock-
ing density differ in the livestock units and in the area considered
as forage area. The stocking density laid down in Article 12 of
Regulation (EC) No 1254/1999 limits the number of animals eli-
gible to the basic premiums and leads to a reduction of the num-
ber of premiums granted. The stocking density laid down in
Article 13 as regards the extensification payment is used as a trig-
ger for a top-up payment to the ‘basic’ premiums.

21.
Motivations and justifications for agri-environmental
schemes and compensatory allowances are fundamentally differ-
ent from direct premiums for beef and sheep:

— agri-environment schemes remunerate environmental efforts
of the farmers beyond good farming practice. Premiums are
calculated on the basis of cost incurred, income forgone, and
include in certain cases an incentive element. The commit-
ments are made on a voluntary basis,

— compensatory allowances granted in the framework of the
less-favoured areas scheme aim at compensation for farm-
ing in areas with natural handicaps or with environmental
restrictions. The level of the allowance reflects these handi-
caps and takes into account practices in the area concerned,
i.e. the entire livestock husbandry of a holding, the type of
production in the holding, as well as all earnings such as
overcompensation should be avoided (principle of propor-
tionality, Article 15(1) of Regulation (EC) No 1257/1999),

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— consistency between agri-environmental measures, compen-
satory allowances and the EPS and the exclusion of double
funding for the same obligations (in the case in question the
keeping of a reduced number of animals) are ensured by
clear provisions in Article 37(3) of Regulation (EC)
No 1257/99 and Article 35 of Regulation (EC) No 445/2002
(implementing rules for Regulation (EC) No 1257/99) fur-
ther specifies this consistency aspect and addresses explicitly
the extensification payment under Article 13 of Regulation
(EC) No 1254/99.

Consistency is also a consequence of the fact that the implement-
ing bodies in the Member States are using the same control tools
for the various measures.

As regards the environmental objectives of the different measures,
there can be a certain overlap between EPS introduced with the
Agenda 2000 and measures under the second pillar of the CAP
(agri-environment).

In the framework of the mid-term review of Agenda 2000, how-
ever, the Commission intends to bring forward proposals which
go further in defining the respective roles of instruments both in
the first and second pillar of the CAP in this area.

IMPLEMENTATION OF THE EPS IN THE MEMBER STATES
VISITED

From a general point of view, the direct payments scheme
22.
established by the Agenda 2000 is based on the normal function-
ing of a computerised database laid down in Regulation (EC)
No 1760/2000 on identification and registration of bovine ani-
mals. In reality, some Member States have not been able to set up
such a computerised database in time. As a consequence, simpli-
fied solutions for the management of direct payments are not
applicable everywhere.

Regulation (EC) No 1254/1999 gives the possibility to Member
States to use such a database in this context on the conditions that
the database offers, to the satisfaction of the Member State,
adequate assurances as to the accuracy of the data it contains for
the purpose of the extensification payment scheme. Firstly, it is
for the Member State to evaluate to what extent the available data-
base allows it to respect this requirement.

23.
Member States are not obliged to use this database as a
control tool. The computerised database is indeed one of the
methods to be used, at the choice of the Member State, to count
the animals according to Article 32(3) of Regulation (EC) No 2342/
1999.

noted the problem and action is being evaluated as a part of the
ongoing clearance of accounts procedure.

The Commission’s services have decided not to apply the penal-
ties provided for in Article 4 of Regulation (EC) No 296/96 in
view of the difficulties referred to by the French authorities. These
difficulties are due partly to the changes in the conditions for
granting premiums under Agenda 2000 and partly to the fact that
a new computer system took longer to develop than originally
expected.

The Commission’s services conducted on-the-spot audit missions
on extensification payments in France. The related clearance of
accounts procedure is continuing.

The Commission’s services have regularly urged Member
26.
States to better integrate their controls. Indeed, although provided
by the previous IACS Regulation (EEC) No 3887/92, the new
Regulation (EC) No 2419/2001 even further facilitates this arrange-
ment. It is, of course, for Member States themselves to rearrange
their organisational procedures as appropriate. In the event that
this absence could create a risk to the Fund, appropriate action
should be taken under the clearance of accounts procedure.

27, 50 and 53(f).
As a consequence of the Commission’s ser-
vices’ audit findings, the new IACS Regulation (EC) No 2419/2001
explicitly requires the risk analysis suggested by the Court.

In respect of Ireland and France, the Commission services made
written recommendations for such a risk analysis factor already
in 1999.

28.
IACS Regulations lay down the control requirements. It
is one of the prime roles of the Commission services to establish
and encourage best practice. In the cases of France, Spain and the
United Kingdom, as well as several other Member States, the clear-
ance of accounts procedure begun with on-the-spot audits in
2000 and 2001, is continuing.

29.
The specific problem raised by the Court in respect of the
United Kingdom will be followed up in the clearance of accounts
procedure.

30 to 32 and 51.
The Court’s findings on the extensification
premium in Austria are the subject of an ongoing enquiry under
the clearance of accounts procedure.

33.
The fact that certain French eligible producers were paid
EPS without requesting it expressly is in contradiction with
Article 32(1) of Commission Regulation (EC) No 2342/1999.

As regards accuracy of the data relating to calculation of
24.
livestock units in France, the Commission services have already

The Commission services are including the Court’s remark in the
ongoing clearance of accounts procedure.

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COMMISSION’S INFORMATION ON IMPACT OF EPS IS
INSUFFICIENT

34 and 35.
The information provided by Member States
according to Article 46 of Regulation (EC) No 2342/1999 cumu-
lated over a number of years will be used by the Commission to
measure its impact. The experience acquired up to now is too
short to carry out this exercise (only payments for year 2000 are
known at this moment).

The question raised by the Court is examined in the study
47.
carried out for the purposes of the proposal for a mid-term review
of Agenda 2000 which is intended partly to limit the obligation
to produce in order to benefit from premiums and partly to rein-
force cross-compliance.

48.
As already stated under point 21, the motivations and
justifications for agri-environmental schemes and compensatory
allowances are fundamentally different from the EPS direct pre-
miums. Clear legal provisions ensure consistency between these
schemes and the exclusion of double funding.

IMPACT OF EPS

The Commission has planned and will carry out an
35.
evaluation of the market in beef and veal in 2004/2005 and will
study the impact of the various instruments planned in this sec-
tor, particularly the new extensification premium scheme intro-
duced by Agenda 2000.

39 to 43.
The Commission considers it as a positive impact
of the extensification payment, that producers, even already
engaged in extensive production, may continue to produce a dif-
ferent quality of bovine meat corresponding to consumer expec-
tations by receiving an additional support allowing them to com-
pensate higher production costs.

The stocking density requirements, though tending to become
closer, remain different as the modalities for calculating the stock-
ing density differ in relation to the livestock units and the forage
area.

The direct-payments scheme established by the Agenda
49.
2000 is based on the normal functioning of a computerised data-
base laid down in Regulation (EC) No 1760/2000 on identifica-
tion and registration of bovine animals. Some Member States
have not been able to set up such a computerised database in
time. It is for the Member State to evaluate which limit in the
available database allows it to respect the regulatory requirements.

Given the negative evolution on the bovine meat market due to
successive sanitary crises, the Commission considers that without
such specific support, extensive producers would have been driven
to abandon this way of producing beef.

50.
As a consequence of the Commission’s services’ audit
findings, the new IACS regulation explicitly requires the risk
analysis suggested by the Court.

The Commission points out that the scheme is in its start-up stage
and an evaluation will be carried out in 2004.

45.
The Council agreed on the principle to grant the exten-
sification payment for dairy cows to producers where the hold-
ing is located in Member States and ‘more than 50 % of milk pro-
duction takes place in mountain areas within the meaning of
Regulation (EC) No 1257/1999’. On this basis, the Commission
had to decide in 1999 which Member States in fact met these con-
ditions. Following the examination by the Commission of the
situation in each Member State, considering the criteria set out by
the Council, only Austria and Finland were found as meeting
these requirements.

The Commission services will take into account the Court’s com-
ments on individual Member States’ implementing systems in its
clearance of accounts procedure.

As regards the problems concerning Austria, a clearance
51.
of accounts procedure is ongoing. With respect to the problems
related to the United Kingdom, the Commission has refused the
interpretation of the Member State concerned. As for France, the
Commission services are including the Court’s remark in the
ongoing clearance of accounts procedure.

CONCLUSION AND RECOMMENDATIONS

46.
By defining new and stricter conditions for granting the
extensification payment, the Agenda 2000 reform introduced a
larger differentiation between the common stocking density and
the stocking density for the purpose of the extensification pay-
ment.

Extensive production methods generally imply higher
52.
costs for producers. This higher cost derives mainly from the need
to have at one’s disposal, by buying or renting it, a larger area
available for feeding animals. The crop of this area is not sold
directly but is used as an intermediary means of production. This
cost does not exist in the same proportion for a more intensive
producer, as the purchase of cereal-based feedingstuffs is less
expensive. By compensating the extensive producer for this addi-
tional cost and specific effort to produce bovine meat of a specific
quality, the extensification scheme works as an incentive as defined
by the Council.

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From a market point of view, as it is based on a longer process of
rearing animals than a more intensive production, extensive pro-
duction is an element in favour of maintaining regularity and
equilibrium on the market. This is particularly the case in Member
States where extensive beef production is traditionally employed
and availability of land coexist.

Taken as a whole, the questions raised by the Court are
examined in the study carried out for the purposes of
the proposal for a mid-term review of Agenda 2000
which is intended partly to limit the obligation to pro-
duce in order to benefit from premiums and partly to
reinforce cross-compliance.

The scheme is in its start-up stage and the Commission has
planned and will carry out the assessment of the common organi-
sation of the market in beef and veal in 2004/2005 and will anal-
yse the impact of the various instruments planned in this sector,
particularly the new extensification premium introduced by
Agenda 2000.

53.

(a) to (d) The Commission has planned and will carry out the
assessment of the common organisation of the market
in beef and veal in 2004/2005 and will analyse the
impact of the various instruments planned in this sec-
tor, particularly the new extensification premium intro-
duced by Agenda 2000.

(e) The Commission has for several years promoted an integrated
approach to on-the-spot controls, which was highlighted by
its own integrated audits of agricultural expenditure con-
ducted in 1998 and 1999. Although provided for in Regula-
tion (EEC) No 3887/92, amended by Regulation (EC) No 1678/
98, as from 1 January 1999, integrated on-the-spot checks
became a regulatory requirement, where appropriate, with
the introduction of the new IACS regulation as from 1 Janu-
ary 2002.

(f) The Commission has already recommended to several of the
Member States, visited by the Court, that their risk analysis
should incorporate specific risk factors to select producers
close to their stocking density threshold. These recommenda-
tions were further reinforced as from 1 January 2002 by Art
19(1)(f) of the new IACS regulation, which introduced the
new factor ‘those farmers who are either just above or below
ceilings or limits relevant for the granting of aids’.