Communication from the Commission to the Council and the European Parliament - Accomplishing a sustainable agricultural model for Europe through the reformed CAP - The tobacco, olive oil, cotton and sugar sectors {SEC(2003) 1022} {SEC(2003) 1023}
Date: 2003-09-23
Institutions: European Commission
Subjects: cotton, olive oil, reform of the CAP, sugar, sustainable agriculture, tobacco

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 23.9.2003
COM(2003) 554 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL
AND THE EUROPEAN PARLIAMENT

accomplishing a sustainable agricultural model for Europe through the reformed CAP –
the tobacco, olive oil, cotton and sugar sectors

{SEC(2003) 1022}
{SEC(2003) 1023}

EXPLANATORY MEMORANDUM

Since  1992,  the  common  agricultural  policy  (CAP)  has  been  immersed  in  a  fundamental
reform  process,  aimed  at  moving  away  from  a  policy  of  price  and  production  support  to  a
more comprehensive  policy of farmer income support. The last step  in  this  process  was  the
decision  reached  at  the  Luxembourg  Council  on  26  June  2003  regarding  the  2003  CAP
reform, with the introduction of the single farm payment scheme.

The  Luxembourg  Council  also  invited  the  Commission  to  submit  in  autumn  2003  a
communication on the reform of the common market organisations for olive oil, tobacco and
cotton that would be based on the principles  of the June CAP reform. This  Communication
meets  the  commitment  made  by  the  Commission  in  Luxembourg,  while  legal  texts  of  the
reform proposal for the three sectors involved will follow in November.

With  the  Luxembourg  decision,  decoupling  of  direct  producer  support  becomes  the  core
element of CAP direct payments, although the possibility of coupling part of support is kept
mainly as a response to member states concerns related to the risk of production abandonment
in more marginal areas.

The present Communication follows the same basic approach as the June reform of the CAP.
The largest  part of  support for the three sectors is decoupled, based  on historical  references
for  the  2000-2002  period,  and  is  integrated  into  the  legal  framework  of  the  single  farm
payment.

Thus the fundamental objectives of CAP reform are met by:
(cid:1)  establishing  a  long-term  policy  perspective  for  these  sectors,  in  line  with  their  present
budgetary envelope, the ceiling of Heading 1 of the current financial perspectives and the
new  framework  for  agricultural  expenditure  agreed  at  the  Brussels  European  Council  in
October 2002;

(cid:1)  promoting the objectives and the approach of the June 2003 CAP reform, namely enhanced
competitiveness,  stronger  market-orientation,  improved  environmental  respect,  stabilised
incomes and a higher regard for the situation of producers in LFA;

(cid:1)  giving  priority  to  producer  income  and  not  product  support  through  the  transfer  of  a
significant  part  of  the  current  production-linked  direct  payments  to  the  single  farm
payment scheme, as from 1 January 2005;

(cid:1)  subjecting these payments, as is the case with  all CAP  direct payments, to  the respect of
the statutory EU environmental and food safety standards, through cross-compliance, and
rules of  good agricultural and environmental condition,  as well  as  to  the  modulation  and
financial discipline mechanisms.

In  addition,  the  Communication  reflects  the  Commission’s  conclusions,  based  on  the
Commission’s Extended Impact Assessment of the EU tobacco sector, regarding a sustainable
policy-approach for the sector, in the context of the EU strategy for sustainable development,
agreed at the Göteborg European Council in June 2001.

The common main aim as regards tobacco, olive and cotton growing is to support sustainable
development in the sector, achieved by reorienting the support to reward healthy, high-quality
products and practices, and developing alternative sources of income and economic activity.

2

However, in developing its proposals, the Commission had to take account of the fact that the
tobacco, olive oil and cotton sectors are characterised by a concentration of their production in
regions  notably  lagging  behind  in  their  economic  development.  In  addition,  with  all  three
sectors showing differences in the present market regimes and in the problems and long-term
priorities they face, different solutions are also envisaged in the proposed coupled part of their
support.

For  tobacco,  the  overall  aim  is  to  allow  producers  to  adjust  to  a  situation  where  product
support would be phased-out. Thus the move towards full decoupling, and the shift of part of
the present support into measures that assist producers to adjust. For olive oil, where potential
risks  are  mainly  associated  to  the  abandonment  of  olive-groves  in  marginal  areas  with
consequent negative environmental impact, the coupled part of support is aimed to guarantee
that the cost of maintenance of olive trees is covered, while the production decision is left to
producers.  Finally  in  cotton,  overall  orientation  is  towards  a  mix  of  non  trade-distorting
(green  box)  and  less  trade-distorting  (blue  box)  forms  of  support  that  minimise  the  already
marginal impact of EU cotton on world markets.

Finally, taking account of the potential impact of decoupling on these sectors, in particular the
risk of production abandonment and  the  competitiveness  of  rural  areas,  the  proposals  either
earmark  part  of  the  sector  expenditure  as  an  area  payment  and/or  transfer  part  of  it  to  a
restructuring envelope.

The Communication also fulfils the Commission commitment to report to the Council in 2003
on the EU sugar regime and its prospects, as laid down in Article 50(2) of Council Regulation
(EC)  No  1260/2001.  The  complexity  of  the  sector  and  the  various  challenges  it  faces,  both
domestically  and  internationally,  as  well  as  the  potential  impact  of  various  options,  are
documented in the accompanying Extended Impact Assessment of the sugar sector.

The sugar sector is characterised, among others, by the fact that it has never until now been
fundamentally  reformed.  As  a  result,  the  Council  and  Parliament  have  not  been  given  the
opportunity to conduct a political debate on the possible policy approaches available for this
sector.

This  Communication  seeks,  in  a  similar  way  to  that  followed  in  the  lead  up  to  the  latest
reform to the milk sector, to open a first discussion on three reform policy options identified
for the EU sugar regime, before proceeding to a formal proposal, and invites the Council, the
Parliament and the stakeholders to actively participate in this debate.

Notwithstanding the different implications of the various options that could be envisaged, it is
nonetheless  evident  that  any  reform  of  the  sector  would  have  to  follow  the  fundamental
principles of the CAP reform initiated in other sectors, i.e. bridging the gap between domestic
and  world  market  prices  and  shifting  support  from  product  to  producer.  In  addition  such  a
reform would need to closely examine its effect in the international  context, especially  with
respect  to  the  impact  it  may  have  on  developing  countries  in  general  and  ACP  countries
benefiting from the Sugar Protocol in particular.

3

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL
AND THE EUROPEAN PARLIAMENT

accomplishing a sustainable agricultural model for Europe through the reformed CAP -
the tobacco, olive oil, cotton and sugar sectors

1. 

INTRODUCTION

Ever  since  1992,  the  common  agricultural  policy  (CAP)  has  been  immersed  in  a
fundamental  reform  process,  aimed  at  moving  away  from  a  policy  of  price  and
production support to a more comprehensive  policy  of farmer  income  support. The
last  step  in  this  process  was  the  decision  reached  at  the  Luxembourg  Council  on
26 June 2003 regarding the 2003 CAP reform.

The  central  feature  of  the  CAP  of  the  future  will  be  the  single  farm  payment,
applicable from 2005, which cuts the link between eligibility for direct payments and
the  production  decision.  This  key  shift  in  policy,  which  will  increase  the  transfer
efficiency  of  the  direct  payment  as  an  income  support  mechanism  significantly,
should lead to an improvement in the income situation of farmers.  In  this  way,  the
June  2003 CAP  reform effectively rounds  off  for  the  major  agricultural  sectors  the
move away from product support towards producer support, begun in 1992.

In the lead up to the adoption of the June 2003 CAP reform, attention was focussed,
not  only  in  Council  but  also  in  the  European  Parliament,  the  Economic  and  Social
Committee  and  the  Committee  of  the  Regions,  on  the  risk  in  specific  areas  of
production  disruption  and  abandonment  from  decoupling.  This  perceived  threat  to
the  agricultural  sector  was  the  principal  motive  for  allowing  Member  States  some
degree of production-linked payment to be kept.

On the other hand, the widespread support for the reform to be accompanied by an
increase  in the financial  resources  for  the  CAP’s  second  pillar  through  compulsory
modulation  and  an  extension  in  the  scope  of  its  measures,  reflected  a  broad
consensus in the EU on the need to improve the sustainability and competitiveness of
rural economies.

It was with these two broad caveats that the Council reached a political agreement on
the June 2003 CAP reform, accompanied by the following declaration:

"The Council notes that the Commission will submit next autumn a communication
on the reform of the common market organisations for olive oil, tobacco and cotton,
and will follow it by legal proposals.

As in its July 2002 communication, the Commission will provide a long-term policy
perspective  for  these  sectors  in  line  with  their  present  budgetary  envelope  and  the
new framework for agricultural expenditure agreed at the Brussels European Council
in October 2002. The reform of these sectors will be based on the objectives and the
approach of the current 2003 CAP reform."

Indeed, such a declaration confirmed the Commission’s view, indicated in both July
2002 and January 2003, that the more sectors included in the single farm payment,
the greater the economic and administrative benefits, in terms of simplification, will

4

be. However, independently of the engagements made at the time of the agreement of
the  June  2003  CAP  reform,  specific  circumstances  prevail  concerning  the  tobacco
cotton and olive oil regimes.

Regarding  the  tobacco  sector  in  particular,  the  future  of  the  common  market
organisation was last touched upon at the Göteborg European Council in June 2001,
in the context of the EU strategy for sustainable development.

Though the Council withheld from adopting any specific conclusions on tobacco, it
was  evident  from  the  discussions,  and  the  context  in  which  they  took  place,  that
certain reservations existed about the sustainability of the EU tobacco sector.

Doubts were voiced about the social justification for production-related payments for
tobacco  growers,  the  apparent  contradiction  between  those  aids  and  public  health
concerns about tobacco consumption. The current support to tobacco growing is not
consistent  with  public  health  policies,  which  are  among  the  priorities  of  the  EU
sustainable development strategy. Under these conditions, the long-term viability of
tobacco-growing as an economic activity was put into question. However, there was
also  awareness  that,  in  order  to  avoid  social  breakdown  in  those  rural  areas  with  a
great  dependency  on  tobacco  growing,  alternative  sources  of  income  for  tobacco
producers  and  tobacco-growing  regions  would  be  necessary,  in  the  event  of  any
major reform.

The Commission’s response at the time was to strengthen its commitment to finding
a sustainable policy-approach for the tobacco regime, based on an assessment of the
economic, social and environmental aspects of the sector. Thus, in May 2002, in its
Legislative  and  Work  Programme  for  2003,  the  Commission  decided  to  subject  its
policy  reflections  on  the  tobacco  sector  to  an  Extended  Impact  Assessment1,  in
accordance with its 'Sustainable and inclusive economy priority'.

As far as the olive oil sector is concerned, a clear deadline has already been set for
the  expiry  of  the  current  aid  scheme  through  Article  5  of  Council  Regulation
No 136/66/EEC. 
the  present
communication  to  meet  the  obligation,  laid  down  in  Article  3(2)  of  Council
Regulation (EC) No 1638/98, to carry out the following:

the  Commission  considers 

this  context, 

In 

"On  a  proposal  from  the  Commission  to  be  presented  in  2003,  the  Council  shall
decide on the common organisation of the market in oils and fats which is to replace,
as from 1 November 2004, the one established by Regulation No 136/66/EEC."

The EU cotton regime, which dates from Greek accession in 1981, was last modified
in  2001,  with  the  aim  of  strengthening  the  price  reduction  mechanism,  in  order  to
tighten  budget  discipline  and  limit  the  total  area  dedicated  to  intensive  cotton
production, associated with environmental  problems.  Member  States  also  agreed  to
undertake  appropriate  environmental  measures  in  relation  to  agricultural  land
dedicated  to  cotton  production.  In  the  meantime,  the  Commission  has  noted  that,
despite the adoption of these new measures, the necessary reduction in surface area
has  not  taken  place  and  there  are  signs  that  such  a  reduction  will  be  difficult  to
achieve. For that reason, the Commission believes that the Council, in its concluding
remarks to the CAP reform decision in Luxembourg in June this year, has provided a
valuable  opportunity  for  a  re-appraisal  of  the  current  arrangements  in  the  cotton

1

SEC(2003) 1023 presenting the Extended Impact Assessment of the Tobacco Sector.

5

                                                
sector, with a view to introducing a more effective and sustainable policy orientation
for cotton in the EU.

The sugar sector is singular in having so far stayed out of the 1992 reform process,
which  has  essentially  consisted  of  increasing  competitiveness  by  compensating
institutional  price  cuts  with  direct  income  payments.  Instead,  the  current  sugar
common  market  organisation  has  been  founded  on  the  basis  of  a  repartition  of  the
production  capacity  across  the  entire  Community,  through  the  maintenance  of
national  production  quotas  and  high  internal  prices.  With  the  last  step  towards
competitiveness  now  completed  by  the  June  2003  CAP  reform,  the  Commission
believes that the role of the repartition principle in the current EU sugar regime must
be  carefully  reconsidered,  in  order  to  follow  the  CAP  objectives  of  more  market
orientation  and  economically,  environmentally  and  socially  sustainable  agricultural
production.

In  2001,  after  extending  the  duration  of  the  current  regime  for  sugar  by  five  years
until  30  June  2006,  the  Council  also  placed  the  following  obligations  on  the
Commission,  as  found  in  Article  50(2)  of  Council  Regulation  (EC)  No  1260/2001,
which reads:

"On the basis of Commission studies on the market situation, all aspects of the quota
system,  prices,  relations  within  the  trade  and  an  analysis  of  the  increase  in
competition  resulting  from  the  European  Union's  international  commitments,  the
Commission  shall  submit  a  report  at  the  beginning  of  2003,  together  with  any
appropriate proposals."

With  sugar,  the  Commission’s  method,  in  a  similar  way  to  tobacco,  has  been  to
subject  the  regime  to  an  in-depth  assessment  of  the  economic,  social  and
environmental  factors  at  stake.  For  that  reason,  the  Commission  also  undertook  to
carry out an Extended Impact Assessment2 on the sugar sector in its Legislative and
Work  Programme  for  2003,  published  in  May  2002.  Together  with  that  impact
assessment,  the  Commission  considers  that  the  present  communication  fulfils  the
engagement to report on the EU sugar regime and its prospects.

In  the  light  of  these  various  commitments,  the  remainder  of  this  communication
gives, in the  first  instance, a description of the overall outlook for  each of  the  four
sectors concerned, including the conclusions to be drawn from the Extended Impact
Assessments carried out for the tobacco and sugar sectors, as well as from working
documents  made  available  for  these  sectors3.  This  is  followed  by  a  presentation  of
the Commission’s proposal for reform of the tobacco, olive oil and cotton sectors, in
line  with  the  orientation  given  by  the  Council,  and  a  closing  chapter  on  budgetary
aspects of the proposals.

For sugar, however, being aware of the fact that the Council and Parliament have not
been  given  the  opportunity  to  conduct  a  political  debate  on  the  subject,  the
Commission has adopted a two-phase approach. Based on the information provided
in  the  sugar  Extended  Impact  Assessment,  which  describes  the  available  reform
policy options, the Commission wishes first to open discussion on the future of the
EU sugar regime, in a similar way to that followed in the lead up to the latest reform
to the milk sector, before proceeding to a formal proposal.

2

3

SEC(2003) 1022 presenting the Extended Impact Assessment of the Sugar Sector.
http://europa.eu.int/comm/agriculture/capreform/com554/index_en.htm.

6

                                                
2. 

OVERALL OUTLOOK FOR THE SECTORS CONCERNED

2.1. 

Tobacco

Tobacco production represents only 0,4 % of the EU agricultural output.  In the last
decade, there has been a decreasing trend in the volumes of world  and  EU tobacco
production.  With  348 013  tonnes,  corresponding  to  5,4 %  of  world  production,  the
EU is the fifth world producer, behind China (38 %), Brazil (9 %), India (8 %), and
USA (7 %). Greece and Italy cover more than 75 % of EU raw tobacco production.

tobacco 

Production  of 
the  EU  shows  a  remarkably  high  geographical
concentration. Seven regions concentrate about 70 %  of total  holdings, 63 %  of the
areas  under  tobacco  and  57 %  of  total  gross  income.  In  some  districts,  tobacco
production accounts for more than 50 % of regional agricultural production.

in 

The area  under  tobacco  in  the  EU  has  been  decreasing  at  a  rate  of  2,6 %  per  year,
while the EU average yield has risen from 2 to 2,7 tonnes per hectare in the 1990s.
The total number of farms with tobacco in the EU was 79 510 in 2000, following a
ten year decline of 3,6 % per year. The average area per holding has increased from
1,4 ha in 1990 to 1,6 ha in 2000.

The  tobacco  sector  employs  an  important  quantity  of  labour  force,  that  is  126 070
annual  working  units  (AWU),  or  212 960  persons,  corresponding  to  2,4 %  of  total
AWU  employed  in  the  EU  agricultural  sector.  Labour  demand  for  raw  tobacco
production is highly seasonal and  the share  of part-time  employment is remarkably
high. Family labour force is about 80 % of total labour force employed in the sector.

A  key  feature  of  tobacco  holdings  is  that  they  are  extremely  heterogeneous  across
regions and farms. In particular, a noteworthy dichotomy persists between few large
farms,  which  are  more  capital-intensive  and  concentrate  production  on  the  best
varieties, and many small farms, which are  typically of small  size,  labour-intensive
and less integrated with markets.

Problems  of  restructuring  are  still  particularly  acute  in  some  areas  where  tobacco
production  plays  a  very  important  economic  and  social  role.  There,  pulling  out
workers from the sector too rapidly could perhaps cause major social imbalances and
rural depopulation if adequate measures to create off-farm employment were not put
in place.

Over the last decade, there has been a reorientation towards the production of high-
quality varieties, an increasing specialisation per variety at farm  and  regional level,
and  prices  of  EU-produced  raw  tobacco  at  international  and  domestic  level  have
increased. On the other side, the market price of raw tobacco is too low to cover the
production  costs  and  positive  margins  are  currently  allowed  only  by  CAP  direct
payments.  Yet,  these  account  for  more  than  75 %  of  total  receipts  farmers  obtain
from  this  crop.  Overall,  tobacco  activity  in  the  EU,  while  exhibiting  a  high
dependency  on  public  support,  is  characterised  by  a  structural  low  level  of  income
per  labour  unit  employed,  which,  however,  on  a  per  hectare  basis,  is  very  much
higher compared to other agricultural sectors.

The EU has a top position in world trade of raw and processed tobacco, both on the
export  and  import  side.  In  particular,  the  EU  is  an  importer  of  raw  tobacco  and  a
major exporter of cigarettes and other processed products.

7

The  1992  reform  of  tobacco  common  market  organisation  (CMO)  abolished
intervention  and  export  refunds,  introduced  production  quotas  as  well  as  stricter
controls. Following later refinements of the 1992 legislation, support to producers is
currently  provided  through  a  premium  system,  linked  to  quantity  of  production,
modulated on the basis of quality criteria and subject to individual production quotas
for  each  group  of  tobacco  varieties.  The  tobacco  CMO  also  relies  on  measures  to
convert  production,  through  a  quota  buy-back  programme  and  a  Community
Tobacco Fund. CAP expenditure for tobacco was € 973 million in  2001, that is, an
average  of  about  € 7 700  per  tobacco  AWU  or  € 7 800  per  ha,  which  took  a  2,3 %
share of the 2001 EAGGF Guarantee budget.

2.2. 

Olive oil

The olive sector is a key element of the EU model of agriculture. In 1998/99, the area
under olive groves in the EU was approximately 5,4 million hectares, that is, about
4 %  of  the  utilisable  agricultural  area,  of  which  44,5 %  were  in  Spain,  26,3 %  in
Italy, 18,8 % in Greece, 9,7 % in Portugal and 0,7 % in France. The sector involves
about 2,5 million producers, roughly one third of all EU farmers, and is an important
source  of  employment  and  economic  activity  in  the  main  producer  areas,  most  of
which,  with  the  notable  exception  of  Tuscany  in  Italy  and  Catalonia  in  Spain,  are
located in Objective 1 regions of the EU-15. Furthermore, olive production offers the
advantage  of  providing  seasonal  employment  in  winter,  complementary  with  other
agricultural  activities,  and  provides  significant  off-farm  employment  in  the
associated milling and processing industry.

The  size  of  specialised  olive  holdings  in  the  EU  is  relatively  small  but  diverse,
ranging from an average of 13,5 ha in Spain to 3,2 ha in Greece. Olive oil processing
structures  tend  to  reflect  the  mix  of  traditional  olive  groves  and  more  intensively
managed,  modern  plantations,  found  across 
the  producing  Member  States.
Consequently,  the  association  that  olive  production  has  enjoyed  with  positive
landscape  features and environmental impacts in the  areas where  it  is practised has
started  to  be  questioned.  Traditional  olive  groves  are  valued  for  their  role  in
combating desertification and promoting biodiversity. Abandonment of production in
such holdings brings increased risks of fire and erosion. On the other hand, criticism
is  more  frequently  directed  towards  the  negative  impacts  of  intensive  plantations,
through 
increased  dependence  on  phytosanitary  products,  monoculture
techniques and water resources for irrigation.

the 

The EU  dominates world production, with  harvests that have  steadily  grown  in  the
nineties, especially in Spain, to a record of 2,46 million tonnes of virgin olive oil in
2001/02. Olive production, however, is noted for its fluctuations, determined by the
biological production cycle and susceptibility to weather variations. Tunisia, Turkey,
Syria  and  Morocco  are  the  other  main  olive  oil  producers.  They  account  for  about
20 %  of  total  world  production.  While  production  in  other  regions  of  the  world  is
currently negligible in comparison to that in the Mediterranean basin, some countries
without an olive oil tradition appear to be willing to invest in this sector.

Historically,  olive  oil  consumption  tended  to  be  high  only  in  traditional  producer
countries.  While  olive  oil  still  only  represents  about  3 %  of  total  world  oil
consumption, since 1995/96 demand has risen at a rate of about 6 % per year, in the
light of olive oil’s positive image in terms of healthfulness and quality. Apart from
the EU, main markets for olive oil are the United States of America, Japan, Canada,
Australia and Brazil.

8

Thus, trade has become an important feature of the olive oil market in the EU, which
has  doubled  its  exports,  in  the  last  ten  years  to  almost  324 000  tonnes  in  2001/02,
mostly in bottled form. Imports, on the other hand, mainly destined to Italy, remained
relatively stable, with the exception of the poor production years in Tunisia, the main
importer to the EU.

In  turn,  the  growing  production  of  olive  oil  on  the  EU  market  has  given  rise  to  a
decrease in producer prices during the nineties. Several projections of production and
consumption point to a fragile balance for the world olive oil market, which will face
appreciable surpluses if world production increases faster than demand.

The  current  common  market  organisation  for  olive  oil,  originally  created  in  1966,
relies on production aid, as the principal measure of support to the sector. The former
intervention system was replaced by a private storage mechanism, as an instrument
for  crisis  management,  and  consumption  aids  were  abolished  in  1998.  Production
aid,  at  a  rate  of  € 1 322,5  per  tonne,  is  granted  to  all  producers  on  the  basis  of  the
quantity of olive oil actually produced and the table olive equivalent, subject to the
National  Guaranteed  Quantity  (NGQ),  currently  totalling  1,78  million  tonnes.
Mechanisms  regulating  the  amount  of  aid  granted  to  producers,  in  the  case  where
Member States over- or undershoot their NGQs have been put in place.

Intervention  buying-in  has  been  replaced  by  a  private  storage  aid  scheme.  Export
refunds  have  been  set  at  a  zero  level  since  1998  without  negative  impact.  A
production  refund  is  granted  for  olive  oil  in  vegetable  and  fish  preserves.  In  2001,
further emphasis was given to control and quality aspects, most notably through the
'EU  Quality  Strategy  for  Olive  Oil',  which  established  product  and  marketing
standards for the sector.

2.3. 

Cotton

The  cotton  sector,  despite  being  of  limited  significance  to  the  EU  as  a  whole,
contributing  only  0,5 %  to  the  final  agricultural  output,  has  strong  regional
importance. Greece, with 79,4 % of the total EU production of 1,55 million tonnes of
unginned  (raw)  cotton,  receives  9,0 %  of  its  final  agricultural  output  from  cotton
while in Spain, the other main EU producer, cotton contributes 1,5 %. Production in
other Member States (only in Portugal) is less than 1 500 tonnes.

Within the main producer Member States, there are even stronger distribution effects.
After  reaching  a  maximum  land  area  under  cotton  of  440 000 ha  in  1995,  the  vast
majority  of  today’s  380 000 ha  of  land  devoted  to  cotton  production  in  Greece  is
located  in  three  regions:  Thessaly,  Macedonia-Thrace  and  Sterea  Ellada.  In  Spain,
production  is  concentrated  in  Andalusia,  mainly  in  the  provinces  of  Seville  and
Cordoba. The total area under cotton cultivation in Spain, after reaching a maximum
of 135 000 ha in 1988, has decreased at around 90 000 ha.

Cotton holdings in these regions are characterised by their large number (71 600 in
Greece and 7 600 in Spain) and small size (Greece, 4,9 ha and Spain 12,0 ha). On the
other hand, Greek cotton holdings are noted for their higher degree of specialisation,
the  Thessaly  region  having  evolved  towards  almost  exclusive  dedication  to  cotton
cropping. Indeed, despite  its vital  role  in  many  local rural economies, the  tendency
towards  monoculture in cotton production  has  been  one  of  the  strongest  sources  of
criticism  in  recent  years.  Combined  with  the  heavy  dependence  of  cotton  on
irrigation  and  fertiliser  inputs,  cotton  production  is  widely  associated  with  low

9

biodiversity  and  soil  impoverishment.  Intensive  use  of  phytosanitary  products,
especially  insecticides,  and  leaf  defoliants  to  assist  with  harvest,  are  techniques,
which  are  pointed  to  as  examples  of  the  most  negative  environmental  impacts  of
agriculture.  For 
the  negative
environmental  impacts  of  cotton  production  have  been  made  by  Member  States  in
2001.

that  reason,  specific  commitments 

to  reduce 

Most cotton producers in the two main producing Member States belong to producer
organisations,  which  have  a  management  and  co-ordination  role.  At  the  processing
level, a mixture of private enterprises and co-operatives assure the conversion of raw
to usable cotton through the ginning process, by which the cotton fibres are separated
from  the  cotton seed. Spain, with almost  half of its  22 plants run  by co-operatives,
shows a certain over-capacity for ginning compared to its production level, while the
ginning  capacity  in  Greece  is  more  in  balance  with  production  and  a  lower
proportion of plants are running by co-operatives (20 out of a total of 75).

Trade in the sector is generally referred to in terms of ginned cotton. As a producer,
the EU is a minor player on the international scene, contributing only about 2,5 % to
total world production. The latter, now at 19,9 million tonnes, practically doubled in
the  last  forty  years,  mostly  due  to  yield  improvements.  The  chief  producing
countries, having retained their relative importance for the last two decades, remain
China (22,6 %), the USA (20,1 %), India (13,1 %) and Pakistan (9,0 %).

The  EU,  with  708 000  tonnes  of  imports  and  227 000  tonnes  of  exported  ginned
cotton,  is  the  major  net  importer  on  the  world  scene.  China  alternates  between  net
import and export, depending on the state of its own harvest. Brazil and South-east
Asia  are  also  significant  importers  of  cotton  for  their  manufacturing  industries,
having little or  no production themselves,  though Brazil  has  appeared recently as  a
new producer country, of about 800 000 tonnes of cotton over the last few years.

World cotton exports are undoubtedly dominated by the USA, which currently takes
about  1,8  million  tonnes,  that  is,  30 %  of  world  trade  of  6,0  million  tonnes.
Uzbekistan,  Africa  (CFA  area  countries)  and  Australia,  each  with  around
800 000 tonnes traded, are the only other major exporters on the world scene.

The  largest  consumers  of  cotton  in  the  world  are  those  with  established
manufacturing industries. China consumes 25,4 % of the world’s cotton, followed by
India,  the  USA  and  Pakistan,  the  latter  consuming  about  9,0 %.  The  EU’s
consumption of around 1,0 million tonnes of ginned cotton (5,4 % of the world level)
is mostly centred in Italy, Portugal and Germany.

The fact that the EU is a marginal producer of cotton4 implies that the impact of EU
production  on  the  evolution  of  world  market  prices  has  been  negligible.  This  is
further  strengthened  by  the  fact  that  the  EU,  for  this  sector,  does  not  use  export
subsidies and provide for duty free access. Though policies of both other developed
and  developing  countries  have  had  a  significant  effect  on  cotton  prices,  the  main
factor contributing to the price decline is more a result of increased competition with
synthetics in the fibre market.

The  cotton  common  market  organisation  dates  from  the  time  of  the  accession  of
Greece into the European Community in 1981. The current regime is centred based

4

Press release on cotton: 15.09.2003, IP/03/1244.

10

                                                
on  a  direct  aid  per  tonne  of  unginned  cotton,  subject  to  a  National  Guaranteed
Quantity (NGQ) for each Member State. The level of the aid, granted to processors,
who  pay  a  minimal  price  to  producers,  is  fixed  periodically  on  the  basis  of  the
difference  in  a  "guide  price"  and  the  world  price.  Since  1995/96,  the  "guide  price"
has been fixed at € 1 063 per tonne, with a minimal price of € 1 009,9 per tonne. The
NGQ  is  fixed  at  782 000 tonnes  for  Greece,  249 000 tonnes  for  Spain  and
1 500 tonnes for other Member States. Adjustments can be made to the amount of aid
paid out if production over- or undershoots the guaranteed quantities.

2.4. 

Sugar

Sugar beet covers  1,8  million hectares throughout the  EU-15,  accounting for 1,4 %
of the Utilised Agricultural Area, and provides 1,6 to 1,8 % of the EU's agricultural
output. It is grown on more than 230 000 farms along with other arable crops, such
as  cereals.  Generally,  holdings  with  sugar  beet  are  larger  than  average,  in  terms  of
both  area  and  economic  indicators.  The  overall  agricultural  area  for  holdings  with
sugar  beet  (70  hectares,  of  which  8  are  dedicated  to  sugar  beet)  is  greater  than  the
average  for  all  farms  (20  hectares).  Holdings  with  sugar  beet  also  achieve  a  better
income. It is estimated that the net value added per Annual Working Unit (AWU) is
1,7 times higher for holdings with sugar beet than for all farms5.

The EU-15 sugar production oscillates between 15 and 18 million tonnes, in refined
equivalents.  With  the  ten  new  Member  States,  areas  under  sugar  beet  are  likely  to
increase by 30 % and sugar production by 15 %.  In the EU-15, there are 135 sugar
processing plants and 6 refineries.

Sugar  is  produced  in  all  Member  States  of  the  EU-15  with  the  exception  of
Luxembourg.  However,  the  productivity  of  sugar  production  varies  significantly
across Member States. Germany and France account for more than half of the EU-15
sugar production, followed by the United Kingdom and Italy (8 % each). Among the
ten  new  Member  States,  six  are  manufacturing  sugar  for  a  total  of  about  3  million
tonnes, with Poland accounting for two thirds.

The  EU-15  both  imports  and  exports  sugar,  but  in  net  terms  it  is  an  exporter.  On
average  for  the  marketing  years  1999/2000  to  2001/02,  exports  amounted  to
5,3 million  tonnes  versus  1,8  million  tonnes  for  imports.  Net  exports  represent  on
average 20 % of sugar production and 2 to 3,5 % of the EU-15 exports of agri-food
products, according to the Uruguay Round definition.

The  EU  is  a  key  player  on  world  sugar  markets.  The  share  of  the  EU-15  in  world
total amounts to 13 % for production,  12 %  for consumption, 15 % for  exports and
5 %  for  imports.  Its  share  in  world  production,  consumption  and  exports  has
declined, whereas Southern  Hemisphere countries  have  steadily  gained  importance.
While  the  EU  has  been  the  leading  world  producer  for  several  decades,  Brazil  and
India have disputed the first rank from  1996  onwards,  both  accounting  for  15 %  of
world supply. India has also outpaced the EU-15 in terms of consumption.

Although  leading  sugar  producing  countries  are  also  main  users,  sugar  is  a  widely
traded  commodity.  On  average  international  trade,  close  to  40  million  tonnes,

5

Based  on  figures  from  the  Farm  Accountancy  Data  Network  comparing  income  indicators  for  farms
with sugar beet and average for all holdings (except those with horticulture) from 1998 to 2000.

11

                                                
represents  about  30 %  of  world  production,  which  totals  120  million  tonnes,  in
refined equivalent. Brazil now dominates exports, with a share as high as one fourth
of world exports.

International  prices  for  sugar  are  of  significant  importance  and  are  extremely
volatile, following an erratic path. After the historical peaks of 1974 and 1981, over
the nineties monthly  world  prices  for  raw  sugar  have  fluctuated  between  € 280  per
tonne  in  March  1990  and  € 110  per  tonne  in  April  1999.  Since  1995,  prices  have
been  on  a  decreasing  trend.  This  is  mainly  explained  by  an  overall  excess  of
production over consumption, as measured by the rise in the stocks to use rate. From
their low point in 1999/2000, as a result of a shortfall in production in several leading
suppliers,  prices  improved  over  the  marketing  year  2000/01,  reaching  an  average
€ 240 per tonne. By the following  year they had declined again to € 180 per tonne.
The average for the first quarter 2003 is even lower, down to € 170 per tonne.

There are several reasons explaining price volatility. Exchange rate fluctuations can
increase  or  decrease  the  price  volatility  of  sugar  for  a  certain  currency.  The  steady
growth in consumption is a  fundamental  driving force in the sugar market, but  this
has  not  necessarily  translated  into  sustained  import  demand.  The  increase  in
consumption  is  much  sharper  in  developing  countries  than  in  others  and  sugar
imports  are  dependent  on  macro-economic  factors.  Production  is  not  particularly
responsive to changes in world market prices due to the protected internal prices in
many  countries,  the  perennial  nature  of  sugar  cane,  which  represents  75 %  of  the
total  areas  under  sugar  production,  and  the  long  time  horizon  for  investments  in
sugar  manufacture.  By  contrast,  supply  is  particularly  sensitive  to  weather  and
revisions in production estimates often cause significant adjustments in international
prices.  Moreover,  sugar  exports  are  concentrated  in  a  limited  number  of  countries
that  are  also  leading  producers.  Brazil,  the  EU-15,  Australia,  Thailand  and  Cuba
achieve 70 % of world exports.  Finally, both supply  and demand are  influenced by
the various policy instruments used by governments.

Within  the  EU-15,  the  sugar  sector  benefits  from  a  system  that  combines  border
protection,  supply  control  and  support  prices.  The  intervention  price  for  sugar  is
currently  set  at  € 631,9  per  tonne  for  refined  sugar  or  € 523,7  per  tonne  for  raw
sugar.  Compared  to  international  reference  prices  for  recent  years  the  EU  market
price has been two to three times higher.

Volatility makes it difficult to provide a solid forecast on world sugar prices. Several
analysts  estimate  that  prices  will  remain  on  a  decreasing  trend  over  the  short
(2003/04  marketing  year)  and  medium  term.  In  its  2003  agricultural  outlook,  the
OECD forecasts a price of € 170 per tonne for 2008/09 for raw sugar. Compared to
the  average  for  the  reference  period  (1997/98  to  2001/02),  this  represents  a  13 %
drop. According to the OECD, this projected low level is mainly due to "increasing
sugar  supplies  and  exports  form  low  cost  producers  as  well  as  continuing  high
support  and  protection  in  many  OECD  countries".  In  global  terms,  consumption  is
projected to increase at a slightly quicker rate than supply, most of the growth taking
place  in  non-OECD  countries.  However,  the  burden  of  stocks  is  expected  to  keep
prices low over the medium term.

12

3. 

PROPOSED REFORMS AND THEIR LIKELY IMPACTS

3.1. 

General considerations

In its assessment of the needs for reform in the tobacco, olive oil and cotton sectors,
the Commission had recourse to the following elements of consideration:

– 

– 

– 

the clear request from Council for a reform of the sectors concerned "based on
the objectives and the approach of the 2003 CAP reform";

similarities  between  the  sectors,  in  terms  of  certain  structural  and  production
characteristics, and their policies, which make them suitable for the June 2003
CAP reform approach;

specific features of each sector, in particular, the risk of production disruption
and  abandonment  of  olive  groves  and  the  need  to  improve  the  sustainability
and competitiveness of rural economies.

The  Commission  believes  that  a  reform  based  on  the  June  2003  CAP  reform
objectives  of  enhanced  competitiveness,  stronger  market-orientation,  improved
environmental  respect,  stabilised  incomes  and  a  higher  regard  for  the  situation  of
producers in LFA, should aim to achieve the following objectives:
(cid:1)  establishing  a  long-term  policy  perspective  for  these  sectors,  in  line  with  their
present  budgetary  envelope,  the  ceiling  of  Heading  1  of  the  current  financial
perspectives  and  the  new  framework  for  agricultural  expenditure  agreed  at  the
Brussels European Council in October 2002;

(cid:1)  promoting the objectives and the approach of the June 2003 CAP reform, namely
enhanced  competitiveness,  stronger  market-orientation,  improved  environmental
respect,  stabilised  incomes  and  a  higher  regard  for  the  situation  of  producers  in
LFA;

(cid:1)  giving priority to producer income and not product support through the transfer of
a  significant  part  of  the  current  production-linked  direct  payments  to  the  single
farm payment scheme, as from 1 January 2005;

(cid:1)  subjecting  these  payments,  as  is  the  case  with  all  CAP  direct  payments,  to  the
respect  of  the  statutory  EU  environmental  and  food  safety  standards,  through
cross-compliance, and rules of good agricultural and environmental condition, as
well as to the modulation and financial discipline mechanisms.

Producers in the tobacco and olive oil sectors already receive a payment linked to the
level of production, subject to Maximum Guaranteed Quantities. In the cotton sector,
the  payment  per  tonne  of  unginned  cotton,  also  subject  to  a  Maximum  Guaranteed
Quantity, is calculated on the basis of the difference in the EU "guide price" and the
world price and granted to the ginner, who pays a minimum price to the producer.

Bearing  in  mind  that  no  price  cuts  are  deemed  necessary  and  that  direct  payments
already  exist  in  the  three  sectors  in  question,  the  Commission  considers  that
translation of those payments into the single farm payment scheme would not present
major difficulties.

However,  all  three  sectors  have  tended  to  concentrate  their  production  in  regions,
which are notably lagging behind in their economic  development and  all are input-
intensive,  in  terms  of  labour  or  capital  inputs,  generating  significant  off-farm
employment through the importance of their associated processing industries.

13

It is  this  fact,  which  has  prompted  the  Commission,  within the  context  of  the  June
2003 CAP reform approach, to pay attention to the potential impact of decoupling on
these regionally important sectors, in particular the risk of production abandonment
and  the  competitiveness  of  rural  areas,  in  which  their  production  is  traditionally
located. In accordance with the CAP reform of June 2003, Outermost regions and the
Aegean  Islands  should  benefit  from  a  special  treatment  as  regards  production
support.  The  direct  payments  in  those  regions  will  not  be  integrated  in  the  single
farm payment.

3.2. 

Tobacco

The Commission’s principal conclusion,  from the Extended  Impact  Assessment  for
the tobacco sector, was that a step-wise decoupling of the existing tobacco premium,
accompanied  by  a  phasing  out  of  the  Tobacco  Fund  and  the  setting  up,  within  the
second pillar of the CAP, of a financial envelope for restructuring tobacco producing
areas, would provide the most sustainable policy for the tobacco sector in the future.
Under this schema, tobacco quotas  would need to be kept as a  means of fixing the
envelope  of  that  part  of  the  tobacco  premium  not  yet  decoupled.  Consequently,
during the transitional period, any production taking place outside of quota would not
receive the corresponding coupled premium remaining to be paid. At the end of this
process,  the  current  tobacco  common  market  organisation  would  no  longer  be  of
application.

This  option  was  found  to  balance  adequately  the  need  to  break  the  link  between
supporting individual producer incomes and the growing of tobacco, while providing
funding  for  a  re-orientation  of  the  sector  towards  alternative  sources  of  income.
Furthermore,  since  at  present  about  one  third  of  the  current  tobacco  premium  is
needed  to  cover  variable  production  costs,  the  progressive  implementation  of  the
reform  was  preferred,  in  order  to  avoid  a  disruptive  effect  on  production  and  local
economies  and  to  allow  the  market  price  to  adjust  to  the  new  conditions.  That
implementation will last three years.

The  proposed  reform  would  begin  with  the  transfer  of  all  or  part  of  the  current
tobacco premium into entitlements for the single farm payment. While, as shown in
Table  1,  this  transfer  would  be  complete  for  a  producer’s  first  3,5 tonnes  of
production, for the following tranche between 3,5 tonnes up to 10 tonnes, only 80 %
of the current tobacco premium would be incorporated into the single farm payment.
The remaining 20 % would feed the proposed restructuring envelope.

14

Table 1 – Summary of the Tobacco Reform Proposal

1st STEP

Level of payment, by tranche of production:

Current payment

Transferred to single
farm payment

Restructuring
envelope

0 – 3,5 tonnes
3,5 – 10 tonnes
+ 10 tonnes

2nd STEP

Level of payment, by tranche of production:

0 – 3,5 tonnes
3.5 – 10 tonnes
 + 10 tonnes

3rd STEP

Level of payment, by tranche of production:

0
0
2/3

completely
4/5
1/6

none
1/5
1/6

Current payment

Transferred to single
farm payment

Restructuring
envelope

0
0
1/3

completely
4/5
1/3

none
1/5
1/3

Current payment

Transferred to single
farm payment

Restructuring
envelope

0 – 3,5 tonnes
3,5 – 10 tonnes
+ 10 tonnes

0
0
0

completely
4/5
1/3

none
1/5
2/3

When  implementing  the  reform  for  larger  tobacco  farms,  the  current  tobacco
premium, corresponding to the tranche above 10 tonnes, would be decreased by one
third  at  each  one-year  step.  In  order  to  avoid  any  major  changes  in  income  at
agricultural  holding  level,  one  third  of  this  tranche’s  tobacco  premium  would  be
converted into single farm payment entitlements, the remainder being transferred to
the restructuring envelope.

Equity and efficiency considerations have guided the fixing of the rates of transfer to
the  restructuring  envelope,  which  would  be  used  to  speed-up  the  re-conversion
process  in  tobacco-producing  regions.  The  restructuring  envelope  will  switch
funding  to  the  rural  development  measures,  foreseen  in  the  rural  development
regulation  ((Council  Regulation  (EC)  No  1257/1999).  This  could  include  more
beneficiaries,  more  measures,  or  even  an  increased  aid  intensity  of  existing  rural
development measures.

With full implementation, this reform process would re-distribute more than 70 % of
the  current  tobacco  premium  to  the  single  farm  payment  and  at  least  20 %  to  the
restructuring  envelope.  This  re-distribution  would  correspond  to  an  allocation,  on
average,  of  € 6 900  per  family  Annual  Working  Unit  (AWU),  through  the  single
farm payment.

With  a  step-wise  implementation,  the  reform  would  be  expected  to  bring  better
market  orientation  and  income  growth  for  producers,  in  addition  to  the  positive
impact  on  producer  income  development  from  the  increased  transfer  efficiency  of
decoupled payments, especially for small holdings, who will receive earlier a larger
part of their income as a single farm payment.

During the three year phasing-out period of the current tobacco regime, the Tobacco
Fund will continue to be used to support anti-smoking information campaigns. The
Commission is committed to continue support for anti-smoking activities despite the
diminishing subsidy during this period.

15

In the short-term, the cultivation of less-profitable tobacco varieties in the EU would
be expected to cease. Furthermore, the transfer of the current tobacco premium into
the  single  farm  payment  would  undoubtedly  encourage  producers,  who  are  not
currently  covering  their  variable  production  costs  or  who  could  shift  production  to
crops  generating  higher income  per hectare, to reconvert to  another land  use  in  the
short-term.

It is projected that the resulting slack in EU tobacco production would be taken up by
larger and more professionalised demand- and/or quality-driven tobacco holdings, at
an EU price, which would align with world levels prices, according to the varieties
produced.

Acting  together  with  the  gradual  introduction  of  the  single  farm  payment  amongst
tobacco  growers,  the  restructuring  envelope  would  promote  further  the  shift  in
production  to  more  rationally  structured  holdings,  improving  the  rate  of  income
transfer to holdings producing tobacco during the reference period and encouraging a
re-conversion within the local labour market in tobacco-growing areas.

3.3. 

Olive oil

The Commission considers that the long-term needs of the EU olive oil sector would
be best served by a reform, based on the orientation given by the Council at the time
of the agreement over the June 2003 CAP Reform.

It is proposed that the existing production-linked payments in the olive oil sector be
converted into direct income support, through the creation of new entitlements to the
single  farm  payment  for  farmers,  in  addition  to  those  arising  from  the  June  2003
CAP Reform. There are three major benefits to be obtained from including the olive
oil sector in the single farm payment.

Firstly, under the single farm payment scheme, the olive oil sector may be expected
to achieve better market orientation and enhanced  competitiveness.  While  the olive
oil sector already enjoys a positive trade dynamic and has made conscious efforts to
keep in touch with consumer trends through its Quality Strategy, the challenges for
the future, should world production levels outstrip consumption, can only be met by
a sector, which is responsive to the trends in world market demands.

Secondly,  adhesion  to  the  single  farm  payment  results  in  more  stable  income  for
farmers, due to the higher transfer efficiency of support, and enables low input olive
oil producing regions to maintain their overall level of income support.

Lastly,  the  positive  association  already  enjoyed  by  the  olive  oil  sector,  in  terms  of
transparency,  consumer  confidence  and  the  provision  of  environmental  and
landscape  benefits  to  society,  would  be  enhanced  by  its  inclusion  in  an  EU
agriculture sector moving in the same direction. Any tendencies within the olive oil
sector, which are arguably leading to an erosion of its positive image, particularly in
environmental  issues,  would  be  given  greater  exposure  under  the  proposed  reform
arrangements.

However,  the  Commission  considers  that  a  complete  conversion  of  current
production-linked  payments  in  the  olive  sector  to  the  single  farm  payment  could
bring  problems  to  certain  traditional  producer  regions  of  the  EU  and  to  low-output
olive  groves.  There  exists  a  significant  risk  of  widespread  disruption  to  olive  tree
maintenance in these cases, which could in turn lead to degradation of land cover and

16

landscape or  negative  social impacts. This  problem  is  heightened  where  such  areas
manifest a high dependency on the olive sector in their local economies.

For  these  reasons,  the  Commission  concluded  that  a  reform  proposal,  which
completely broke the link between support payment and olive trees, in terms of the
permanence  of  existing  olive  groves  in  sensitive  areas,  could  fail  to  respect  the
concerns  expressed  by  the  Council  and  the  Parliament,  concerning  the  risk  of
production abandonment and the need to provide sustainability of rural economies.

Consequently,  the  Commission  proposes  that  60 %  of  the  production-linked
payments  in  the  olive  oil  sector,  for  the  reference  period,  should  be  converted  into
entitlements to the single farm payment for holdings larger than 0,3 ha. For reasons
of  simplification  in  the  implementation  of  the  policy,  smaller  holdings  would  have
their payments completely decoupled.

Member  States  would  retain  40 %  of  the  payments  in  the  olive  oil  sector,  for  the
reference period, as national envelopes, for the granting to producers of an additional
olive grove payment, calculated  on  a  per hectare  or  per  tree  basis.  This  payment is
not  linked  to  production  but  is  intended  for  maintaining  the  olive  trees,  preserving
the soil and the environment while taking into consideration the local traditions and
culture. The purpose of this additional payment would be to ensure the permanence
of  olive  trees  in  marginal  areas  or  low-output  olive  groves  by  contributing
significantly to the maintenance cost of olive  groves  in those areas. Member  States
will  identify  those  zones  according  to  objective  sustainable  development  criteria,
within  a  common  EU  framework.  This  should  include  landscape  preservation,
environmental, social and cultural concerns.

The calculation of the reference hectares for the single farm payment, as well as the
area  or  number  of 
trees  for  olive  grove  payments,  would  be  based  on
IACS-compatible, geographical information system (GIS) data. Areas of olive trees
planted after 1 May 1998, except those included in approved new planting schemes,
will be excluded from the single farm and olive grove payment schemes.

Concerning olive oil market policy, the Commission proposes that the current private
storage  measures should  be  kept  intact,  as  a  safety  net  mechanism,  but  the  refunds
relating both to export and to manufacture of certain preserved food, which no longer
serve a purpose, should be repealed.

Finally, in relation to the Olive Oil Quality Strategy, the Commission proposes that,
to support the sector during the adaptation to the evolving market conditions, existing
quality and traceability measures should be reinforced. Activities eligible for support
should  be  broadened  to  include  monitoring  of  olive  oil  quality  in  pluri-annual
programmes  and  reinforcing  activities  at  national,  EU  and  international  level.  The
extra necessary funding would come from the Member State national envelopes for
the olive grove payment.

Regarding  control  aspects,  it  is  proposed  that  the  financing  of  the  present  olive  oil
control  agencies  will  be  suppressed  beyond  1  November  2005.  Control  of  the  new
area payment will be made through IACS, supported by GIS. For simplification, the
olive grove payment will not be allocated below € 50 per aid claim. As far as quality
measures are  concerned, control over the  activity programmes will  be  strengthened
through, among others, new evaluation and control obligations.

17

It  is  proposed  that,  in  order  to  enforce  the  single  farm  payment  as  from  1  January
2005, the reform of the olive oil sector would apply as from 1 November 2004.

3.4. 

Cotton

The Commission  has reached the conclusion that,  on  balance,  the  economic,  social
and  environmental  benefits  of  a  reform  to  the  EU  cotton  sector,  based  on  the  June
2003 Reform approach, would far outweigh the disadvantages.

For  that  reason,  the  Commission  proposes  to  transfer  the  part  of  the  EAGGF
expenditure for cotton, which was destined to producer support during the reference
period,  into  the  funding  of  two  producer  income  support  measures,  namely,  the
single farm payment scheme and a new production aid, granted as an area payment.
With regard to the latter, the Commission considers that such a production-linked aid
would also respond to the objective of the Cotton Protocols in the Acts of Accession
of  Greece  and  of  Spain  and  Portugal  to  support  the  production  of  cotton  in  the
regions concerned.

It  is  proposed  that  60 %  of  that  producer-support  expenditure,  per  Member  State,
would  be  transferred  to  the  single  farm  payment  scheme,  in  the  form  of  new
entitlements.  In  doing  so,  improvements  may  be  expected  in  terms  of  the
responsiveness of the cotton producers to future market evolutions and requirements.
The  inclusion  of  the  cotton  sector  in  the  single  farm  payment  would  also  bring  to
cotton producers the benefits of more stable producer incomes.

In  the  context  of  the  conflicting  association  between  the  cotton  sector  and
environmental  degradation,  it  is  important  to  note  that  the  June  2003  CAP  reform
approach  brings  coherence  and  transparency,  with  regard  to  the  application  of  EU
legislation covering production standards. Given the newly agreed cross-compliance
arrangements  for  all  CAP  expenditure,  entry  into  the  single  farm  payment  scheme
would  allow  cotton  producers  to  benefit  from  the  same  rights  as  other  farmers,  in
terms of freedom to make more extensive, switch or diversify their production.

Finally, the Commission believes that, in addition to the significant decrease in trade
distorting subsidies already proposed by the EU in the Doha Development Agenda,
such  a  reform  could  help  alleviate  the  rather  complex  problem  of  the  level  of  the
world market price for cotton by shifting support away from the current “deficiency
payment” mechanism, towards a mix of blue and green box measures.

Nevertheless,  in  view  of  the  appreciable  risk  of  production  disruption,  the
Commission proposes that  Member States will retain 40 % of the  producer-support
expenditure,  during  the  reference  period,  as  national  envelopes,  for  the  granting  to
producers of the  new  area payment per hectare of cotton, in zones suitable for  that
crop.

The level of the new area payment has been fixed in order to allow cotton production
to continue, on a reduced area than at present, with a gross margin similar to that of
competing  crops.  The  combined  effect  of  subjecting  both  the  single  farm  and  area
payment  to  cross-compliance  criteria,  will  lead  to  more  environmentally-friendly
cotton production in an income-neutral manner.

The new area payment will be subject to a maximum area of 425 360 ha (340 000 ha
in  Greece,  85 000 ha  in  Spain  and  360 ha  in  Portugal).  The  maximum  areas  are
designed according to the rates of past developments in cotton areas and correspond

18

to 11 % less than the areas in the reference period for Greece and 5 % for Spain. The
level  of  the  area  payment  will  be  proportionately  reduced  in  the  event  of  payment
claims exceeding the maximum area of a Member State.

The area payment would be  granted  on the basis  of specific  criteria,  relating  to the
participation  of  producers  in  an  inter-branch  organisation.  Each  inter-branch
organisation  would  be  approved  by  Member  States,  covering  an  area  of,  where
practicable,  at  least  20 000 ha,  and  be  subject  to  controls,  which  could  lead  to  the
application of financial penalties or  to  the withdrawal of  approval  for all  or part of
the area allocated.

Half of the area payment envelope could be differentiated according to inter-branch
scales, rewarding production deliveries in quality and quantity  terms. The  activities
of  each  inter-branch  organisation  would  be  financed  by  its  members  and  by  a
Community grant of € 10 per hectare. Total support should be around € 4,5 million,
which will be included in Member State national envelopes.

The  balance  between  the  total  market  expenditure  for  cotton  and  the  two  producer
income  support  measures,  of  around  € 100 million,  would  be 
in
restructuring  envelope  for  cotton  areas.  This  amount  would  be  shared  between
Member  States  according  to  the  average  area  eligible  for  aid  over  the  reference
period.  This  envelope  would  become  an  additional  financial  instrument  within  the
second pillar of the CAP and will fund rural development measures, foreseen in the
rural development  regulation  (Council  Regulation  (EC)  No  1257/1999).  This  could
include  more  beneficiaries,  more  measures,  or  even  an  increased  aid  intensity  of
existing rural development measures.

included 

3.5. 

 Sugar

Following  the  introduction  of  production  quotas  in  Member  States,  the  common
market  organisation  for  sugar  has  developed  along  essentially  different  lines  from
those other sectors that have been involved in the CAP reform process. The decision
to impose sugar quotas was a political choice, made to ensure a spread of production
over the entire Community, rather than to encourage  economic specialisation in the
most competitive regions of the EU.

This high price support in the current sugar regime permits producers located in the
less competitive  regions  of  the EU,  which  do  not  have  a  comparative  advantage  in
sugar beet production, to cover at least their production costs. Internal market prices
were  maintained  through  high  intervention  prices,  accompanied  by  the  necessary
border protection.

This  policy  has  offered  a  number  of  advantages  over  the  years.  Firstly,  a  secure,
stable and high quality supply of sugar has been assured on the internal market, even
though  that  result  may  have  been  reached  with  other  types  of  less  distorting
mechanisms  and  an  higher  transfer  efficiency.  From  the  point  of  view  of  EU
producers,  the  regime  offers  stability  at  relatively  high  prices,  which  in  turn
maintains  producer  incomes.  Furthermore,  the  main  countries  benefiting  from
preferential market access and currently exporting sugar into the EU, tend to express,
on balance, their satisfaction with a regime that offers their own operators favourable
prices  for  stable  quantities  traded.  However,  for  a  number  of  reasons,  this  policy
approach  has  come  under  growing  pressure  and  its  inherent  disadvantages  have
become increasingly apparent.

19

The  principal  criticism  of  the  sugar  regime  is  the  assertion  that  it  encourages  the
production  of  a  substantial  quantity  of  sugar  in  the  EU  at  non-competitive  prices.
Subsequently,  taking  account  of  the  EU’s  sugar  import  commitments,  EU  sugar
surplus to domestic requirements must be disposed of on the international market, at
the  prevailing  world  price.  Using  such  arguments,  the  external  impact  of  the  EU
sugar regime has been criticised for creating distortion to free trade and hinders the
growth of primary industry in some developing countries.

Within the EU, the high price has been guaranteed to EU producers at the expense of
consumers  and  processors.  Not  only  is  the  EU  intervention  price  at  a  level  much
higher than the world market price, but the EU market price has remained above the
intervention  price.  Further, since  it  is  based  on  quotas  allocated  per  Member  State,
the CMO inherently leads to low market integration and favours market partitioning.
The  price  incentive  to  producers  to  cultivate  sugar  beet  by  means  of  pushing  up
yields, is criticised by environmental groups, which also express concerns about the
lack of coherence between the sugar policy and sustainable development objectives.

A  number  of  drivers  of  change  to  the  EU  sugar  policy,  in  various  stages  of
development, can be identified.

Firstly, there is the question  of  the  coherence between the current sugar policy and
the new orientations for EU agriculture, taken by the June 2003 reform to the CAP,
which  itself  has  been  based  on  the  objectives  of  the  EU  Sustainable  Development
Strategy. In this context, the importance of the repartition of the production capacity,
currently built into the sugar quota regime, must be weighed up against the need to
move towards a more competitive and sustainable sugar sector.

Secondly,  with  the  EU’s  unilateral  import  concessions  awarded  to  the  Least
Developed Countries through the Everything But Arms initiative (EBA), and to the
Balkan countries, the EU’s sugar market could face substantial imbalance, as early as
2007.  This  market  imbalance  would  bring  severe  disruption  and  decline  to  the
industry in many parts of the EU.

Lastly, on the international scene, the legal action against the EU sugar regime must
be seen against the backdrop of the ongoing Doha Development Round. Even though
the  final  outcomes  of  those  multi-lateral  negotiations  are  not  yet  known,  the  basic
features of the new environment of the EU sugar economy are already in place and
sufficiently clear for their impact to be assessed. Furthermore, independently  of the
option to be considered, the EU  export regime will have to be brought in line  with
the outcome of the agreement under the ongoing DDA round in the WTO.

Taken together, these evolutions alter the conditions that prevailed when the balance
between  the  various  interests  and  concerns  was  originally  struck  years  ago.  The
Commission  believes  that  the  current  sugar  regime  must  now  be  carefully
reconsidered,  in  order  to  renew  an  agreement  on  a  sustainable  and  long  term  EU
sugar policy. Considering the heavy and long-term investment required in the sugar
industry, the Commission also believes that any further delay in this decision would
be harmful to the sector, whether in the EU or in the developing countries.

Any option leading to a reduction in the internal market price will have a significant
impact  on  the  countries  benefiting  from  the  Sugar  Protocol  under  the  EU-ACP
Cotonou Convention. The Commission will evaluate the impact of the reform for the
ACP  countries  benefiting  from  the  Sugar  Protocol  and  will  draw  therefrom  the

20

appropriate conclusions, taking into account the difficulties that may be encountered
by the countries concerned.

The  Commission  proposed  three  possible  policy  orientations  for  the  EU  sugar
regime,  which have been  analysed  in  the  Extended  Impact  Assessment,  taking  into
account the effects of the internal and external constraints placed on  the sector  and
the  ongoing  dispute  currently  before  the  WTO.  Furthermore,  these  policy  options
will have to be considered in the light of the recently approved Community policy on
bio-fuels and of the impact for ACP and other third countries.

As a reference scenario for the alternative options, the Commission has first looked
at the consequences of an extension of the present regime beyond 2006. This would
consist of keeping intact the current common market organisation, based on flexible
quotas  and  price  intervention.  The  EU  market  would  be  open  to  import  quantities,
according to the various international commitments already agreed or  agreed  in the
future.  Custom  duties,  internal  prices  and  production  quotas  would  be  reduced.  To
put the effects of this scenario in context, though there is little difference in the final
outcome, the Extended Impact Assessment also addressed the hypothetical impact of
any request by the EBA countries to implement  that agreement through  an orderly,
agreed system on deliveries.

The second scenario evaluated was that of a reduction in the EU internal price. Once
the  levels  of  imports  and  production  have  stabilised,  production  quotas  would  be
phased out. In this scenario, the internal market price is allowed to adjust itself to the
price of those imports. However, in view of the fact that lowering the level of the EU
internal price, which was found to come to an equilibrium value of around € 450 per
tonne, makes the EU market less attractive for the least competitive sugar producing
countries,  the  impact  of  this  policy  option  on  the  world  trade  patterns  was  given
particular  attention.  To  smoothen  for  the  effects  of  the  reduction  in  the  EU  sugar
prices,  this  scenario  also  looked  at  the  possibility  of  introducing  the  single  farm
payment into the sugar sector, in line with  the  June  2003 CAP  reform. Finally,  the
impact of this scenario on  the  revenue  from sugar for countries  currently  exporting
sugar to the EU has been assessed.

The  third  option  for  reform  represents  a  complete  liberalisation  from  the  current
regime. This means that the domestic EU  price support system would be abolished
and  production  quotas  would  be  abandoned.  Consequently,  under  this  option,  the
impact  on  the  EU  sugar  market,  of  the  complete  removal  of  import  tariffs  and
quantitative  restrictions  to  imports,  has  been  assessed.  As  with  the  price  reduction
scenario,  the  possible  introduction  of  income  support  for  EU  producers,  as  well  as
the impacts of liberalisation on world trade and the implications for the revenue from
sugar of countries currently exporting sugar to the EU, have been assessed.

21

Table 2 – Summary of the Impacts of the Policy Options for the Sugar Sector

Advantages

Disadvantages

e (cid:1)  Production and producer incomes  are  maintained  in  the
m
majority  of  regions,  though  the  level  of  both  gradually
i
decreases
g
e
r

(cid:1)  Budget cost of the regime progressively decreases
(cid:1)  Current  preferences 

to  ACP/EBA  countries  are

maintained

(cid:1)  Restructuring  and  improved  in  competitiveness  of  the

sector are facilitated

(cid:1)  Ensures a better balance between supply and demand in
the  EU  market  and  reduces  production  surpluses  and
world market distortion

(cid:1)  Distortions  in  competition  and  inequalities  between

producers are lessened

(cid:1)  Consumer prices for sugar come down
(cid:1)  Diversification in the market for sweeteners takes place
(cid:1)  Budget cost of the regime is reduced
(cid:1)  Competitive LDCs/ACP producers maintain preferential

access

(cid:1)  Competitiveness  of  the  sector  is  improved  in  the

medium- to long-term

(cid:1)  World market distortions are reduced
(cid:1)  Export refunds are suppressed
(cid:1)  Budget  cost  of  the  regime  is  reduced  to  the  cost  of

compensation

(cid:1)  The common market organisation for sugar is simplified
(cid:1) 

low  cost 

Increased  market  opportunities 
competitive producers

for 

/

t
n
e
r
r
u
c

f
o
n
o
i
s
n
e
t
x
E

e
s
a
e
r
c
e
d
e
c
i
r
P

n
o
i
t
a
s
i
l
a
r
e
b
i
L

(cid:1)  Restructuring  and  improved  competitiveness

of the sector is delayed

(cid:1)  Non-restricted  quantities  of  imports,  under
preferential  agreements,  at  non-competitive
prices, are attracted to the EU market

(cid:1)  Maintenance of EU production is threatened
(cid:1)  Distortions  in  competition  and  inequalities

between producers remain

(cid:1)  The sugar CMO remains complex
(cid:1)  No environmental improvement is achieved
(cid:1)  Dependence 
the  EU  market 
countries 

in
is
developing 
uncompetitive 
maintained  therefore  delaying  the  necessary
restructuring

from 

(cid:1)  Revenue falls for the ACP countries benefiting
least
the  sugar  protocol  and 
from 
competitive might even stop exports
to 

introduce
restructuring  and/or  reconversion  measures  is
raised

(cid:1)  The  question  of 

the  need 

the 

(cid:1)  Price stability is no longer assured
(cid:1)  A 

the  EU  sugar 

large  part  of 
irreversibly disappears

industry

(cid:1)  Producer  incomes  fall  with  significant  effects

on certain rural communities

(cid:1)  Revenue falls for the ACP countries benefiting
the  sugar  protocol  and  most  will

from 
probably be uncompetitive

(cid:1)  The  question  of 

the  need 

introduce
restructuring  and/or  reconversion  measures  is
raised, 
those  affected  ACP
countries

including  for 

to 

(cid:1)  Production  of  sweeteners 
competitive and disappears

is  no 

longer

(cid:1)  Profitability of sugar refineries is threatened
(cid:1)  There is a risk of reduced crop rotation

4. 

BUDGET ASPECTS

Consistent  with  the  objectives  and  approach  of  the  June  2003  CAP  Reform,  the
overall  expenditures  resulting  from  the  proposals  for  tobacco,  olive  oil  and  cotton
will  be  in  line  with  recent  historic  expenditures  on  the  premia  and  aids  under  the
existing regimes for these sectors.

The reform will also respect the new framework for agricultural expenditure, agreed
at the Brussels European Council in October 2002. In addition, the transfer foreseen
to  strengthen  rural  development  measures  will  take  place  within  the  overall
Agriculture Heading 1 ceiling.

22

 
 
 
 
The proposals are therefore budgetary neutral compared to past expenditure because
the  reforms  are  based  on  historical  reference  (average  2000-2002)  and  avoid  a
redistribution of funds between Member States. The annual costs remain within the
status  quo  expenditure  scenarios  for  these  sectors  established  by  the  Commission
when,  at  the  time  of  the  CAP  Reform  proposals  of  January  2003,  it  presented
expenditure forecasts for the CAP for the period to 2013.

With regard to the sugar sector, projected budgetary costs of the different options are
given  in  the  accompanying  Extended  Impact  Assessment.  While  extending  the
current  regime  represents  some  savings,  the  overall  costs  of  the  other  two  options
depends on the level of compensation granted.

23