Special Report No 13/2003 concerning production aid for cotton together with the Commission's replies
Date: 2003-09-25
Institutions: European Court of Auditors
Subjects: EU control, aid system, cotton, financial management, production aid

9.12.2003

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SPECIAL REPORT No 13/2003

concerning production aid for cotton together with the Commission’s replies

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

(2003/C 298/02)

TABLE OF CONTENTS

Paragraph

Page

EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Cotton plant and production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Budgetary impact

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

The main features of the production aid scheme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Court’s audit

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

MANAGEMENT BY THE COMMISSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Concerns for budgetary discipline and the environment lead to a change to the stabiliser
mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stabiliser system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Difficulties in verifying the accuracy of the area declarations and in establishing eligible
quantities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The financial position of the ginners under the scheme has not been reviewed in the
light of changing circumstances, in particular increasing levels of production . . . . . . . . . .

Not all ginners differentiate on quality when purchasing cotton and the quality incentive
appears to be nothing more than a source of additional income . . . . . . . . . . . . . . . . . . . .

EVALUATION OF THE SYSTEMS OF CONTROL IN THE MEMBER STATES . . . . . . . . . . . . . . .

Absence of the application of risk criteria and poor quality of checking in Greece . . . . . .

CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Mechanism employed and its effect on Community expenditure . . . . . . . . . . . . . . . . . . . .

Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Promotion of quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Systems of control

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

I-XIII

1-23

4-6

7

8-19

20-23

24-42

24-27

28-31

32-35

36-38

39-42

43-47

44-47

48-57

49-54

55

56

57

RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

58-59

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

22

23

24

24

24

27

28

28

30

30

31

33

33

33

34

34

34

34

35

35

36

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EXECUTIVE SUMMARY

I.
This report contains the Court’s findings from a sound financial management audit of the production
aid scheme for cotton. This scheme had previously been audited in the early 1990s and the findings published
in the Court’s 1992 and 1995 annual reports.

The overall objective of the scheme is to support the production of cotton and to allow the producers
II.
concerned to earn a fair standard of living. The main producer Member States are Greece and Spain. A small
amount of production takes place in Portugal.

III.
The aid is granted to the ginners who have to pay a minimum price to the producers. It varies in
amount with market prices and on quantities produced. The mechanism used to determine the aid aims to
provide the ginners with a constant level of income sufficient to cover their operating costs and to allow EU
produced cotton to compete on price with the imported product. When selling the cotton to the ginners, the
producers receive an amount approximately two to three times greater than the commercial value of the cot-
ton sold.

IV.

The results of the Court’s audit are presented under two main headings:

— management by the Commission,

— evaluation of the systems of control operating in the main producer Member States.

V.
Since the establishment of the scheme in 1981, annual production of cotton in the EU has increased
from 0,3 million tonnes to 1,7 million tonnes. This increase reflects the fact that the aid for cotton production
is three to four times that paid for crops grown as an alternative. A comparison of the gross margins for cot-
ton and grain maize indicate a ratio of about 1,5 in favour of cotton. About a quarter of the increase in produc-
tion is due to the accession of Spain to the EEC in 1986.

In 1987 a stabiliser mechanism was introduced with the objective of reducing the support payable

VI.
when production exceeds the guaranteed maximum quantity.

VII.
In 2001, a reform of the production aid scheme took place and included a strengthening of the
stabiliser mechanism, the effect of which causes a sharp drop in the support payable when production exceeds
stated thresholds.

Higher than expected Greek production in 2001/02 led to an application to have certain production
VIII.
eliminated from the scheme. The examination of this application identified a number of issues regarding quan-
tities eligible for aid and the quantities which should be used to determine the penalty for production in excess
of the guaranteed quantities. Amending legislation followed which sets down criteria for establishing such
quantities because, if ineligible produced cotton goes undetected, all producers are penalised through a higher
penalty imposed by the stabiliser mechanism. One criterion for eligibility is that aid should only be paid on
quantities coming from areas declared to cotton production under IACS. In practice, the national authorities
in Greece, when deciding on eligible production are constrained by the weaknesses in IACS. Moreover, the
results of checks by the authorities to determine quantities to be excluded from production for the purposes
of applying the stabiliser mechanism are inconsistent with the results of checks on individual producers for
the purposes of verifying area declarations. In view of the weaknesses in IACS in Greece, the ability of the

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Commission to monitor the correct application of the stabiliser mechanism is diminished. The Commission
wished to introduce a reform of the present scheme to be effective from the marketing year commencing on
1 September 2003. This deadline has not been met and the Commission intends to present a proposal for the
reform of the aid scheme for cotton to the Council and to the European Parliament in the autumn of 2003.

IX.
In any year when the Community expenditure does not reach 770 million euro, the regulations provide
for an increase in the amount payable to the producers provided certain conditions are met. In three of the
seven years 1995/96 to 2001/02 an increase in support was paid to the producers under this provision. Fur-
thermore, this measure mitigates the effect of the stabiliser mechanism and could be viewed as a bonus pay-
able to the producers. Budget neutrality cannot be assured and expenditure in the other four years exceeded
770 million euro.

Within the Commission there is a lack of information on the negative impact which cotton production
X.
can have on the environment and there is no continuous monitoring of the environmental situation in the
regions within the Member States where cotton is produced.

The Commission is unaware of the effectiveness of the incentive given to the ginners to improve the
XI.
quality of the cotton produced. The amount paid appears to represent unnecessary expenditure and to be a
source of additional revenue, as it duplicates the revenue obtained from the market place when better quality
and increased yields are produced. In addition, the Commission has not reviewed the operating costs incurred
by the ginners and is thus unaware of whether the potential exists to reduce Community expenditure by alter-
ing the amount of aid paid to the ginners.

XII.
While the audit in Spain did not give rise to material observations, serious weaknesses were observed
in the checks undertaken by the Greek national authorities in relation to the area declarations submitted by
the producers. The effects of these weaknesses are compounded by the lack of progress in implementing the
IACS in Greece. For the marketing year 2001/02 the Greek authorities have estimated that about 10 % of the
land planted with cotton was either not declared under IACS or was declared as cultivated with another crop. In
such circumstances and, if not detected, producers receive aid twice for the same parcels of land, once on the
basis of the arable crop declaration and again on the basis of the actual production of cotton.

XIII.
The Court recommends that the Commission takes the opportunity of the proposed reform to
address weaknesses in the present regime (absence of budget neutrality, the attractiveness of the aid rate on
quantities produced and the impact of cotton production on the environment). In addition, and with regard to
the present scheme, the Court recommends that the Commission reviews the financial arrangements of the
ginners and examines the effectiveness of the incentive given to improve quality.

INTRODUCTION

1.
A production aid scheme for cotton was introduced with
the accession of Greece to the EEC (1), and applied for the first
time to cotton harvested in 1981. The scheme expanded when
Spain and Portugal joined the EEC in 1986.

2.
In 2001, the implementing measures for the scheme were
simplified and brought together in Council Regulation (EC)
No
(EC) No
1591/2001 (3), as amended (4), lays down the detailed rules for
applying the production aid scheme.

1051/2001 (2).

Commission

Regulation

(1) Protocol 4 of the Greek Act of Accession 1979 (OJ L 291, 19.11.1979

p. 174).

(2) Council Regulation (EC) No 1051/2001 of 22 May, 2001 (OJ L 148,

1.6.2001, p. 3).

(3) Commission Regulation (EC) No 1591/2001 of 2 August 2001

(OJ L 210, 3.8.2001, p. 10).

(4) Commission Regulation (EC) No 1486/2002 of 19 August 2002

(OJ L 223, 20.8.2002, p. 3).

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The overall objective of the scheme is to support the pro-
3.
duction of cotton in the regions of the Community where it is
important for the agricultural economy and which permits the
producers concerned to earn a fair standard of living (1).

ginners. Whilst ginners are obliged to pay the minimum price for
cotton of standard quality they are also free to offer more.

Cotton plant and production

4.
Cotton is planted in spring and harvested in the following
autumn. The raw cotton is delivered to ginning undertakings
where the fibres are separated from the seeds and waste material
by a process known as ginning. The marketing year runs from
1 September to 31 August.

5.
Within the EU, cotton is grown almost exclusively in
Greece and Spain. Annual production in the three marketing years
(1999/2000 to 2001/02) has averaged 1,6 million tonnes which
provides a yield of 0,51 million tonnes of ginned cotton. This
level of production meets about 47 % of EU internal needs. The
balance is made good by imports which enter the Community
duty and levy free.

6.
EU countries produce about 3 % of world output (esti-
mated at 19 million tonnes of ginned cotton) with the United
States of America, China and India being the largest producers.

Budgetary impact

7.
Aid for cotton production amounts to an average of
600 million euro for Greece and 200 million euro for Spain and
in total equates to almost 2 % of the EAGGF budget.

The main features of the production aid scheme

8.
The regulation (2) provides that cotton producers receive
an amount (the minimum price (3)) from the ginners greater than
the commercial value of the unginned cotton delivered to ginning
undertakings. This requirement is one of the conditions contained
in the written contract covering the purchase of the cotton by the

(1) Protocol 4 of the Greek Act of Accession 1979 (OJ L 291, 19.11.1979

p. 174).

(2) Council Regulation (EC) No 1051/2001 which replaced Regulations

(EEC) No 1964/87 and (EC) No 1554/95.

(3) Article 2 of Council Regulation (EC) No 1051/2001. The minimum
price is fixed by the Council and currently stands at 100,99 euro/
100 kg of unginned cotton.

9.
The aid paid to the ginners represents the difference or
deficiency between what is termed the guide price (4), (which is the
minimum price increased by 5 % (5)) and a value placed by the
Commission (6) on the unginned cotton acquired from the pro-
ducers. The regulation provides that the unginned cotton is val-
ued as a percentage of the market price of ginned cotton which is
a traded commodity and for which published prices exist.

10.
The amount of aid payable changes with movements in
the market prices for ginned cotton. When market prices are low,
the aid increases to compensate and vice versa. As a consequence,
revenue collected by the ginners from the sale of the ginned cot-
ton combined with the aid received remains largely constant for
any given level of production. This arrangement provides finan-
cial security for the ginners and allows EU produced cotton to
compete on price with imports.

11.
In any year when the aid does not reach 770 million euro,
the regulations (7) provide for an increase in the amount payable
when certain conditions are met (8). The increase in aid is limited
by the attached conditions and cannot bring total Community
expenditure beyond 770 million euro. This measure, which is
unique to the cotton regime, mitigates the effects of the stabiliser
mechanism when world market prices are relatively strong and
could be viewed as a bonus payable to producers. In three of the
seven years 1995/96 to 2001/02 an increase in the aid was paid
to the producers under this provision (see Table 1 for detail ). For
the three years in question (1995/96, 1997/98 and 2000/01), aid
paid under this provision amounted in total to 260 million euro.

With regard to environmental considerations, the regula-
12.
tions introduced in 2001 place obligations on the Member States
to determine measures for the cotton sector.

(4) Article 2 of Council Regulation (EC) No 1051/2001. The guide price
is also fixed by the Council and currently stands at 106,30 euro/
100 kg of unginned cotton.

(5) A 5 % differential between the minimum and guide price is paid to
the ginners to cover their costs in the administration of the scheme.

(6) Article 2 of Commission Regulation (EC) No 1591/2001.
(7) Article 8 of Council Regulation (EC) No 1051/2001.
(8) The conditions require that the stabiliser mechanism was applied, that
the weighted average price for unginned cotton used in the determi-
nation of the aid is greater than 302 euro per tonne, that producers
cannot receive, in total, more than the minimum price and that
increase in aid cannot exceed that payable if the guaranteed maxi-
mum quantity was increased to 1 120 million tonnes.

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Table 1

Amount received by producers

GREECE

Year

Minimum price/tonne
in euro

Penalty/tonne (1) in euro

Increase/tonne (2) in
euro

Net receipt/tonne in euro

1995/96
1996/97
1997/98
1998/99
1999/2000
2000/01
2001/02

1 010
1 010
1 010
1 010
1 010
1 010
1 010

79,73
0
46,63
0
0
69,09
0

792,09
911,14
850,41
718,74
623,07
745,31
593,30

297,64
98,86
206,22
291,26
386,93
333,78
416,70

SPAIN

Year

Minimum price/tonne
in euro

Penalty/tonne (1) in euro

Increase/tonne (2) in
euro

Net receipt/tonne in euro

1995/96
1996/97
1997/98
1998/99
1999/2000
2000/01
2001/02

1 010
1 010
1 010
1 010
1 010
1 010
1 010

0
109,49
278,51
189,21
342,29
110,55
188,15

0
0
46,63
0
0
49,96
0

1 010

900,51
778,12
820,79
667,71
949,41
821,85

(1) Penalty imposed for production in excess of guaranteed national quantity.
(2) Increase prompted by Community expenditure being less than 770 million euro.

13.
Primarily as a means of limiting Community expenditure,
but also as a means of discouraging increasing levels of produc-
tion, a stabiliser mechanism was introduced in 1987 which has
the effect of reducing the support payable on all production when
the guaranteed maximum quantity (GMQ) is exceeded (1).

14.
In 1995, the GMQ was increased to 1,031 million tonnes
and the guide price was proportionally reduced with a view to
keeping these changes budgetary neutral. Guaranteed national
quantities (GNQ) were allocated to the producer Member States (2).
From this point onwards the reduction in the aid rate following
overproduction is applied to the Member State in which the over-
production occurs.

15.
Following a strengthening of the stabiliser mechanism in
2001 (3), an accelerated reduction in the support payable occurs
when production in Spain and Greece exceeds 1,5 million tonnes.

(1) For each of the marketing years 1992/93 to 1994/95, the GMQ was

fixed at 701 000 tonnes.

(2) Article 2 of Council Regulation (EC) No 1553/95 of 29 June 1995
(OJ L 148, 30.6.1995, p. 45). GMQ was increased to 1 031 000 tonnes
and GNQs allocated to Spain, 249 000 tonnes and to Greece, 782 000
tonnes. When these quantities are exceeded, the guide price is reduced
by 50 % of the rate of overshoot of the GNQ.
(3) Article 7 of Council Regulation (EC) No 1051/2001.

The impact of the strengthened stabiliser is such that relatively
modest increases in production above this threshold causes a
sharp drop in the support payable for all production. No increase
was made to the maximum guaranteed quantity in 2001 and no
change was made to the procedure for determining the penalty
when production lies between 1,031 million tonnes and 1,5 mil-
lion tonnes. Diagram 1 demonstrates the impact of the stabiliser
mechanism and compares its impact before and after it was
strengthened.

16.
In every year since the introduction of the stabiliser mecha-
nism in 1987, production has exceeded the guaranteed maximum
quantities and the support received by the producers has been
reduced in consequence.

17.
While world market prices can be volatile, in general, the
minimum price of 101 euro/100 kg payable to the producers is
three to four times greater than the value of the unginned cotton
produced. After the application of the stabiliser mechanism, the
amount received by the producers drops to two to three times
that of the value of the unginned cotton. Collectively the amount
received by producers increases until production reaches 1,5 mil-
lion tonnes. Thereafter, the overall amount received falls because
the penalty imposed for overproduction outweighs the additional
amounts received from increased production (see Table 2 for
detail).

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Diagram 1 — STABILISER MECHANISM

Impact of stabiliser mechanism on Community expenditure
(value of unginned cotton = 250 euro/tonne) (1)

NB: The diagram demonstrates the aid payable for differing levels of production before and after the modification to the stabiliser mechanism in 2001.

For production increasing from 1,0 to 1,34 million tonnes, the stabiliser mechanism is effective at limiting the increase in expenditure.
Once production exceeds 1,34 million tonnes the stabiliser mechanism causes a decline in the total aid payable.
The decline in total aid payable is much more rapid following the modification introduced by Council Regulation (EC) No 1051/2001.

(1) A value of 250 euro has been used as this is the average of the values placed on the unginned cotton in the five marketing years 1997/98 to 2001/02.

Comparison of aid received by producers before and after stabiliser mechanism was strengthened

Table 2

Impact of stabiliser mechanism prior to strengthening introduced in 2001

A

B

C

D

Production
in 1 000 tonnes

Minimum price
A × 1 010
EUR 1 000

1 100
1 200
1 300
1 400
1 500
1 600
1 700

1 111 000
1 212 000
1 313 000
1 414 000
1 515 000
1 616 000
1 717 000

Penalty
EUR 1 000

39 171
104 599
180 336
266 392
362 595
469 251
586 223

Received by producers
B – C
EUR 1 000

1 071 829
1 107 401
1 132 664
1 147 608
1 152 405
1 146 749
1 130 777

Impact of strengthened stabiliser mechanism

A

B

C

D

Production
in 1 000 tonnes

Minimum price
A × 1 010
EUR 1 000

1 100
1 200
1 300
1 400
1 500
1 600
1 700

1 111 000
1 212 000
1 313 000
1 414 000
1 515 000
1 616 000
1 717 000

Penalty
EUR 1 000

39 171
104 599
180 336
266 392
362 595
563 135
820 780

Received by producers
B – C
EUR 1 000

1 071 829
1 107 401
1 132 664
1 147 608
1 152 405
1 052 865
896 220

NB: The collective amount received by the producers is maximised when production reaches 1,5 million tonnes.

E

Rate/tonne
D/A
EUR

974,39
922,83
871,28
819,72
768,27
716,72
665,16

E

Rate/tonne
D/A
EUR

974,39
922,83
871,28
819,72
768,27
658,04
527,19

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Comparison of aid payable when value of unginned cotton is 200, 250, 300 and 350 EUR/tonne.

Table 3

A

B

C

D

E

F

G

H

I

J

K

Production
tonnes

1 100
1 200
1 300
1 400
1 500
1 600
1 700

Guide price
A × 1 063
EUR 1 000

1 169 300
1 275 600
1 381 900
1 488 200
1 594 500
1 700 800
1 807 100

Penalty
EUR 1 000

Value
(A × 200)
EUR 1 000

Aid
(B – C – D)
EUR

Value
(A × 250)
EUR 1 000

Aid
(B – C – F)
tonnes

Value
(A × 300)
EUR 1 000

Aid
(B – C – H)
EUR 1 000

Value
(A × 350)
EUR 1 000

39 171
104 599
180 336
266 392
362 595
563 135
820 780

220 000
240 000
260 000
280 000
300 000
320 000
340 000

910 129
931 001
941 564
941 808
931 905
817 665
646 320

275 000
300 000
325 000
350 000
375 000
400 000
425 000

855 129
871 001
876 564
871 808
856 905
737 665
561 320

330 000
360 000
390 000
420 000
450 000
480 000
510 000

800 129
811 001
811 564
801 808
781 905
657 665
476 320

385 000
420 000
455 000
490 000
525 000
560 000
595 000

Aid
(B – C – J)
EUR

745 129
751 001
746 564
731 808
706 905
577 665
391 320

NB: For whatever the level of market price, it is in or around production of 1,3 million tonnes that Community expenditure begins to decline.

18.
As stated in paragraphs 9, 10 and 13, Community expen-
diture is determined with reference to the minimum price pay-
able by the ginners to the producers reduced by the application
of the stabiliser mechanism and by a valuation placed on the
unginned cotton acquired. Community expenditure begins to
decline when the additional aid payable from increased produc-
tion is outweighed by the escalation in the penalty for overpro-
duction combined with the increase in the total value placed on
the unginned cotton. This normally occurs when production is in
or around 1,3 million tonnes (see Table 3 for detail).

19.
Notwithstanding the fact that the scheme is production
based, all Community cotton growers are required to submit an
application under the integrated administration and control sys-
tem (IACS) (1) to declare the areas sown. Data from these applica-
tions are used to forecast production, to check the existence of
producers delivering to ginning undertakings and the reasonable-
ness of the quantities delivered.

The Court’s audit

Previous observations

cotton on which aid is paid when the yield of ginned cotton is less
than the 32 % standard (4). In such circumstances aid is paid on
that quantity of unginned cotton which, had it been of standard
quality, would have yielded the fibres produced. Linking quanti-
ties on which aid is paid to the yields obtained is designed to
remove the incentive to exaggerate or interfere with the weight of
the raw product.

The Court also criticised the failure of the stabiliser mecha-
21.
nism to discourage increasing levels of production. In the years
1995 onwards production has continued to increase.

Current audit

22.
In its current audit, which covered the years from 1999
to 2002, the Court undertook an assessment of the soundness of
the Commission’s management of production aid for cotton hav-
ing regard to the impact, both intended and unintended, of the
measure employed and rules laid down to govern the operation
of the scheme together with the monitoring of activities in the
Member States.

20.
The findings from the Court’s previous audits were pub-
lished in its 1992 (2) annual report and the results of a follow-up
audit were published in 1996 (3). The Court criticised the scheme’s
vulnerability to irregularity and weaknesses in controls, and the
inclusion of fictitious quantities on which aid was paid (in Greece).
This failure was addressed by amending legislation introduced in
1995 which provides for a reduction in the quantity of unginned

23.
Audit visits were undertaken to the Commission services,
to four of the main producer areas in Greece (5) and to Andalusia
in Spain. An evaluation of the control system operating in the
Member States was undertaken and included tests of compliance
with national and Community rules. Evidence was obtained from

(1) Council Regulation (EEC) No 3508/92 of 27 November 1992 (OJ L 355,

5.12.1992, p. 1).

(2) OJ C 309, 16.11.1993, p. 1.
(3) OJ C 340, 12.11.1996, p. 1.

(4) Article 3 of Council Regulation (EC) No 1051/2001, defines standard
quality of unginned cotton as that which contains 10 % moisture, 3 %
impurities and with characteristics capable of producing, after gin-
ning, 32 % grade 5 fibres 28 mm in length.
(5) Nomoi of Karditsa, Larisa, Rodopi and Evros.

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checking documentation and records, observation of the delivery
and ginning process together with the various checks undertaken
by inspectors present in the ginning mills, the analytical review of
data and interviews with the main stakeholders (officials from
Commission and national authorities and representatives of the
association of ginners and producer groups).

A comparison of the aid payable for market prices varying between
200 and 350 euro per tonne is provided in Table 3. In the years
1995/96 to 2001/02 the cost to the Community of supporting
cotton exceeded 770 million euro in 1996/97, 1998/99, 1999/
2000 and 2001/02 (see Table 4).

MANAGEMENT BY THE COMMISSION

Concerns for budgetary discipline and the environment lead
to a change to the stabiliser mechanism

24.
The production of cotton within the EU has increased
continuously until 2000. Annual production, which was 330 000
tonnes in 1982/83, rose to over 1,7 million tonnes (see Table 4).
This increase is a reflection of the relative attractiveness of the aid
for cotton when compared to the support offered for other crops,
the increase in production following the accession of Spain to the
EEC in 1986 and the enhancement of the maximum guaranteed
quantity in 1995. In addition, as the support is based on quanti-
ties produced, there exists an incentive for individual producers to
increase the amounts received under the scheme by maximising
production (1). The data contained in Table 5 demonstrates that
the aid for cotton is three to four times greater than that payable
for crops grown as an alternative. Furthermore, for the three years
1998 to 2000 a comparison was made of the margin over total
costs (2) achieved for cotton production with that achieved for
durum wheat and grain maize in two of the cotton growing
regions in Greece and in the main cotton growing region in
Spain. In both cases the margin for cotton is higher than for the
two other crops. If a comparison is made of the basis of gross
margins for cotton and grain maize, the results for 1999 to 2000
indicate a ratio of about 1,5 in favour of cotton.

While the application of the stabiliser mechanism limits
25.
Community expenditure in the face of increasing levels of pro-
duction, the amount of the aid is also determined by the value of
the unginned cotton acquired by the ginners. When market prices
remain low for an extended period of time, expenditure increases.

(1) This statement holds true until production reaches 1,5 million tonnes.
Thereafter, the overall amount received by the producers falls because
the penalty imposed for production in excess of guaranteed quanti-
ties outweighs the additional support received from increased pro-
duction.

(2) Margin over total costs is defined as total production and subsidies
less intermediate consumption (seed, fertiliser, crop protection, fuel,
water, upkeep, energy, contract work and other direct costs), deprecia-
tion, wages, rent and interest.

Also, the upward trend in production has led to concerns
26.
about the impact on the environment (3) from intensive farming
and the practice of monoculture (4) and the growing of cotton in
areas less suited to its production. Such concerns were voiced in
a proposal for a Council regulation (5), presented by the Commis-
sion in 1999 which identified a significant rise in areas sown and
output. The regulation adopted in 2001 requires the Member
States to take the environmental measures they consider suitable
and, before 31 December 2004, provide the Commission with a
report on the environmental situation in the cotton sector and of
the impact of the national measures adopted (6). When this infor-
mation is received and evaluated, the Commission will be able to
make more informed decisions about sustainable levels of pro-
duction.

Included in the 1999 Commission proposal was a revi-
27.
sion to the stabiliser mechanism which would have the impact of
making the support for cotton somewhat less attractive (7) and
reduce the amount of Community expenditure. This change was
sought to lessen the possibility of expenditure exceeding the refer-
ence amount of 770 million euro in those years when market
prices are low. The Council did not favour the proposal and,
instead, adopted a change to the stabiliser mechanism which
applies when production exceeds 1,5 million tonnes (8). If this
threshold is exceeded, the revision to the mechanism causes rates
of support to fall more sharply than previously. As production in
the three previous years had averaged 1,6 million tonnes, it was
likely that the revised stabiliser mechanism would be applied in
the first year of its coming into force.

(3) Cotton production uses water, chemicals (soil disinfectants, growth
regulators, herbicides, pesticides, defoliants), fertilisers and plastic
(mulching and containers for chemicals).

(4) The practice of monoculture, over time, can lead to soil exhaustion

and depletion of water stocks.

(5) COM/99/0492 final.
(6) Article 17 of Council Regulation (EC) No 1051/2001.
(7)

It proposed an enhancement in the reduction in the guide price from
50 % to 60 % of the rate of overshoot of the GNQs which was esti-
mated would reduce Community expenditure by an annual amount
of approximately 75 million euro.

(8) Article 7(4) of Council Regulation (EC) No 1051/2001. When produc-
tion exceeds 1,5 million tonnes (Greece 1 138 000 tonnes, Spain
362 000 tonnes), the reduction in the guide price of 50 % of the rate
of overshoot of the GNQs is increased by two percentage points for
each additional 20 000 tonnes produced (Greece 15 170 tonnes,
Spain 4 830 tonnes).

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Table 4

Expenditure on aid for cotton production since 1982.

Quantities eligible for aid (tonnes)

Expenditure (EUR million (*))

Greece

Spain

Italy

Portugal

EU (10, 12 or
15) (1)

Year

Greece

Spain

Italy

Portugal

333 162
428 453
481 246
561 540
667 779
600 448
805 856
886 919
709 871
719 449
760 685
985 676
1 191 400
1 364 798
927 650
1 085 482
1 210 900
1 350 677
1 272 873
1 273 103

1982/83
1983/84
1984/85
1985/86
284 550
1986/87
275 070
1987/88
383 619
1988/89
211 599
1989/90
281 838
1990/91
279 575
1991/92
223 932
1992/93
98 883
1993/94
143 249
1994/95
104 400
1995/96
300 221
1996/97
379 358
1997/98
337 567
1998/99
409 518
1999/2000
300 657
2000/01
2001/02
336 984
(1) The figures for the marketing years 1982 to 1986 (10 EU Member States).
The figures for the marketing years 1986 to 1994 (12 EU Member States).
The figures for the marketing years 1994 to 2001 (15 EU Member States).

—
1
—
99
147
73
0
612

99
29
32
—
—
—

(*) Million Ecu up to 1998.
Source: Commission DG Agri/C/200.

EU (10, 12
or 15) (1)

333 162
428 453
481 246
561 540
952 329
875 518
1 189 574
1 098 547
991 743
999 024
984 617
1 084 559
1 334 649
1 469 199
1 227 871
1 464 942
1 548 614
1 760 268
1 573 530
1 574 699

Table 5

124,7
106,2
151,1
355,0
468,1
358,2
434,9
398,0
313,4
499,1
570,1
602,6
603
671,4
603,3
590,9
675,5
640,1
544,9
571

199,5
164,1
207,0
95,0
124,4
186,5
167,8
60,5
72,5
76,2
191,5
179,1
220,4
213,5
190,2
233

0,1
0,01
0,1
—
—
—

124,7
106,2
151,1
355,0
667,6
522,3
642,0
493,0
437,9
685,6
737,9
663,1
675,5
747,6
794,7
770
895,9
853,9
735,1
804

—
—
—
—
—
—
—

(EUR/ha)

Comparison of the aid for cotton with that paid for alternative crops
AID PER HECTARE

Crop/Region

Cotton

Maize

Cereals (exclud-
ing maize)

Durum
wheat

Oilseeds

Protein
crops

Non-fibre
flax

Andalusia (irrigated)
Greece (region 1)

2 071
1 508

478
484

234
191

530
550

584
349

338
275

452
369

Source: Commission working paper, ‘The Cotton Sector in the European Union’ (Sec(2000)1630 of 5.10.2000).
NB:

(a) The table ignores costs of production.
(b) Higher profitability in Andalusia compared to Greece is a reflection of higher average yields in Spain.
(c) Average annual aid in the years 1995 to 1999.

Comparison of margins over total inputs for cotton as compared with durum wheat and grain maize

(EUR/ha)

Macedonia-Thrace

Cotton
Durum wheat
Grain maize

Thessaly

Cotton
Durum wheat
Grain maize

Andalusia

Cotton
Durum wheat
Grain maize
Source: Commission DG AGRI/G.3, March 2003.

1998
616
301
144
1998
445
341
15
1998
1 241
545
736

1999
572
192
119
1999
738
344
598
1999
1 132
488

2000
572
192
113
2000
989
387
191
2000
1 253
533
1 064

C 298/30

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Stabiliser system

28.
When production reaches the stated thresholds for imple-
menting the strengthened stabiliser mechanism (Greece 1 138 000
tonnes and Spain 362 000 tonnes), the minimum price payable
to the producer is reduced by 24 % (24,18 euro/100 kg). When
production reaches 1,7 million tonnes (an increase of 13 % over
the thresholds) the minimum price is reduced by 48 % (48,28
euro/100 kg) and when production reaches 1,840 million tonnes
(an increase of 23 % over the thresholds) the support payable to
the producer is reduced by 69 % (70,07 euro/100 kg). While mar-
ket prices do vary, it is in or around this level of penalisation that
the amount of the aid diminishes to nothing (1) and the amount
payable to the producer equates to the commercial value of the
cotton.

29.
In 2001/02 marketing year, which was the first year of
the application of the new Community and national rules, Greek
production reached 1,354 million tonnes which is 19 % greater
than the threshold for implementing the strengthened stabiliser
mechanism. The Greek authorities made application to the Com-
mission to have production totalling 206 362 tonnes regarded as
outside of the scheme and neither grant aided nor taken into con-
sideration when deciding the level of penalisation to apply to the
aid rate. This procedure was not covered by the regulations. The
Commission highlighted certain issues in the conception of the
regulations, namely:

(a)

there was an absence of precise rules on whether all produc-
tion or only that produced in accordance with Community
rules should be utilised to determine the impact of the sta-
biliser mechanism;

(b)

if, as had been the previous practice, all quantities of sound,
fair and merchantable quality produced were used to deter-
mine the amount of the penalty, the support received by the
producers would have been reduced by 58 % which is con-
siderably greater than the penalty applied in any previous
year (2); after the examination of the data provided by the
Greek authorities the Commission excluded 144 551 tonnes
from the scheme which resulted in a 41 % reduction in the
minimum price paid to the producers;

(d)

there was an absence of a specified time limit for comple-
tion of the on-the-spot checks of the area declarations sub-
mitted by cotton producers; such checks are ineffective if
they are not undertaken while the plant is still in the ground;
the findings from these checks are necessary in reaching a
conclusion as to the reliability of the data on areas declared
for cotton production and the probable yield individual
growers should produce and deliver
to the ginning
undertakings.

30.
These findings, identified by the Commission in this par-
ticular case, prompted the introduction of amending legislation in
August 2002, which defines the quantities eligible for aid and the
quantities to be included in the determination of the impact of the
stabiliser mechanism. Only cotton of fair, sound and merchant-
able quality, coming from areas declared under IACS and not
coming from areas excluded for environmental reasons can be eli-
gible for aid and used to determine the level of penalisation. These
rules were applied to the determination of the effect of the stabi-
liser mechanism on the aid rate for Greek production in 2001/02
and, as stated, resulted in a 41 % reduction in the minimum price
paid to the producers.

31.
In 2001, actual production in Greece was much greater
than that forecasted and a danger existed that the amounts paid
by way of advance would be higher than that finally determined
as due. When this possibility became apparent, the Greek paying
agency instructed the ginners to pay the commercial value only
for cotton delivered in excess of thresholds fixed for each pro-
ducer.

Difficulties in verifying the accuracy of the area declarations
and in establishing eligible quantities

(c)

the practice of including all production in deciding upon the
level of penalisation was at variance with the approach gen-
erally followed in other agricultural support schemes;

(1) Aid is the guide price of 106,3 euro reduced by the penalty (in this

(2)

example 70 euro) and the value of the unginned cotton.
In the four previous years the penalty applied caused, on average, a
reduction of 29 % in the minimum price paid to Greek producers.

Previously, aid had been paid on quantities entering the
32.
ginning mills in accordance with the rules laid down, one of which
was that the producer must have made a declaration of areas
sown with cotton. The 2002 amending legislation (introduced
because of the necessity to clarify eligibility requirements) specifi-
cally excludes cotton coming from an area not declared or com-
ing from an area restricted for environmental reasons from receiv-
ing aid. Such cotton cannot be identified with absolute precision
and national authorities will be obliged to make a decision as to
which quantities are accepted under the scheme and which should
be the subject of further checking.

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Official Journal of the European Union

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Over the years, national authorities have undertaken
33.
checks of coherence between the quantities delivered and areas
declared and obtained data on yields achieved. As there can be
many reasons why yields might vary, such as weather conditions,
farming practices and varieties sown, it is a matter for the national
authorities to make a judgment as to the yields which might rea-
sonably have been obtained from the areas declared. However,
weaknesses in IACS in Greece limits the reliability of the system
as a source of accurate and comprehensive information on which
to base judgments and as a tool for further checking. Further-
more, as it is impossible in practice to check the origin of all deliv-
eries to ginning mills, the risk exists that aid will be paid on quan-
tities cultivated on undeclared areas or from areas excluded for
environmental reasons. To the extent that ineligible produced cot-
ton goes undetected, it has the effect of penalising all bona fide
producers through the application of higher penalties.

cultivated with another crop. This had an impact of lowering the
penalty for overproduction and increasing the support to produc-
ers.

The financial position of the ginners under the scheme has
not been reviewed in the light of changing circumstances, in
particular increasing levels of production

34.
The regulations require that the national authorities verify
the accuracy of at least 5 % of the area declarations through the
use of on-the-spot inspections which compare the area planted
with cotton with that declared (1). Such checks will establish if
producers tested have submitted accurate declarations with regard
to areas declared. However, on-the-spot inspections may fail to
identify areas planted to cotton but not declared.

With regard to the on-the-spot inspections undertaken in
35.
2000, the Greek national authorities discovered only three dis-
crepancies in over 5 000 area declarations checked. In contrast,
extensive checking undertaken in the following year concluded
that about 10 % (44 000 hectares) of the total area cultivated was
either not declared under IACS or was declared as cultivated with
another crop. In that year (2001) 94 000 producers submitted
area declarations showing cotton cultivation on a total of 379 000
hectares. Given that the average area cultivated by each producer
was four hectares, it is likely that a substantial number did not
declare the full extent of the areas devoted to cotton in 2001. The
extensive checks carried out by Greece in 2001 provided the basis
for a regulation of the Commission to place a quantity of cotton
outside the scheme. This cotton came from areas not eligible for
aid pursuant to Article 17(3) of Council Regulation (EC) No 1051/
2001 (2) or from areas not declared under IACS or declared as

The regulation provides that (3), for the purpose of deter-
36.
mining the amount of the aid, the unginned cotton acquired by
the ginners is deemed to have a value of between 20,6 % to 24,4 %
of the internationally quoted price for ginned cotton. The mecha-
nism for determining how much aid is paid to the ginners is
designed in such a way as to provide the ginner with a trading
profit, sufficient to cover the cost of ginning of between 98,8 euro
and 125,4 euro/tonne (see Table 6 for detail).

37.
Prior to 1995, the Commission calculated the cost of gin-
ning and set the value of the unginned cotton at a level which
provided the ginners with funds sufficient to cover the operating
costs incurred by them. However, as this exercise proved cumber-
some and difficulties were experienced in getting sufficient and
reliable data, a simplified procedure was introduced (4) which
determines the value of the unginned cotton with reference to the
historical relationship between the market price of the ginned
cotton and the value determined by the Commission for the
unginned cotton.

38.
The cost of ginning may have changed with the passage
of time and with increased throughput but the Commission has
not reviewed the funding received by ginners against actual oper-
ating costs and is thus unaware of whether a potential exists to
reduce Community expenditure by altering the percentages
applied. None of the ginners interviewed during the audit expressed
dissatisfaction with the mechanism used to determine the value
of the unginned cotton.

(1) Article 13(1)(a) of Commission Regulation (EC) No 1591/2001.
(2) Article 17(3) of Council Regulation (EC) No 1051/2001 makes provi-
sion for Member States to restrict the areas eligible for production aid
for unginned cotton on the basis of objective criteria related to the
environment.

(3) Article 2(2) of Commission Regulation (EC) No 1591/2001.
(4) Article 3 of Council Regulation (EC) No 1554/1995 of 29 June 1995

(OJ L 148, 30.6.1995, p. 48).

Table 6

Funding received by ginners

A

B

C

D

E

F

G

H

I

J

K

L

M

For this table, the harvest is 1,5 million tonnes of unginned cotton, with a standard yield of 32 %, produces 480 000 tonnes of ginned cotton

Market value
ginned cotton
(euro/tonne)

Value of unginned
cotton
(euro/tonne)
(1)

Revenue cotton
sales
EUR 1 000
(A × 480 000)

Guide price
EUR 1 000
(2)

Value of unginned
cotton
EUR 1 000
(B × 1,5 mio)

Penalty
EUR 1 000
(3)

Aid
EUR 1 000
(D – (E + F))

Total
revenue
EUR 1 000
(C + G)

Paid to producers
EUR 1 000
(4)

Funds to ginners
EUR 1 000
(H – I)

Contribu-
tion to
administra-
tive costs
EUR 1 000
(5)

Trading
profit
EUR 1 000
(J – K)

Trading profit
euro/tonne

900

950

1 000

1 050

1 100

1 150

1 200

1 250

1 300

1 350

1 400

1 450

1 500

185,4

(20,6 %)

432 000

1 594 500

278 100

362 600

953 800

1 385 800

1 152 250

233 550

79 650

153 900

195,7

(20,6 %)

456 000

1 594 500

293 550

362 600

938 350

1 394 350

1 152 250

242 100

79 650

162 450

102,6

108,3

206

(20,6 %)

480 000

1 594 500

309 000

362 600

922 900

1 402 900

1 152 250

250 650

79 650

171 000

114

216,3

(20,6 %)

504 000

1 594 500

324 450

362 600

907 450

1 411 450

1 152 250

259 200

79 650

179 550

226,6

(20,6 %)

528 000

1 594 500

339 900

362 600

892 000

1 420 000

1 152 250

267 750

79 650

188 100

250,7

(21,8 %)

552 000

1 594 500

376 050

362 600

855 850

1 407 850

1 152 250

255 600

79 650

175 950

261,6

(21,8 %)

576 000

1 594 500

392 400

362 600

839 500

1 415 500

1 152 250

263 250

79 650

183 600

287,5

(23,0 %)

600 000

1 594 500

431 250

362 600

800 650

1 400 650

1 152 250

248 400

79 650

168 750

317,2

(24,4 %)

624 000

1 594 500

475 800

362 600

756 100

1 380 100

1 152 250

227 850

79 650

148 200

329,4

(24,4 %)

648 000

1 594 500

494 100

362 600

737 800

1 385 800

1 152 250

233 550

79 650

153 900

341,6

(24,4 %)

672 000

1 594 500

512 400

362 600

719 500

1 391 500

1 152 250

239 250

79 650

159 600

353,8

(24,4 %)

696 000

1 594 500

530 700

362 600

701 200

1 397 200

1 152 250

244 950

79 650

165 300

119,7

125,4

117,3

122,4

112,5

98,8

102,6

106,4

110,2

366

(24,4 %)

720 000

1 594 500

549 000

362 600

682 900

1 402 900

1 152 250

250 650

79 650

171 000

114

(1) Commission Regulation (EC) No 1591/2001, Article 2, provides that unginned cotton be valued as a percentage of the market value of ginned cotton.
(2) Guide price of 1 063 euro/tonne multiplied by 1,5 million tonnes.
(3) Abatement following the application of the stabiliser mechanism.
(4) Minimum price of euro 1 514 850 000 less penalty of euro 362 600 000. (Minimum price = 1 009,9 euro/tonne multiplied by 1,5 million tonnes = 1 514 850 000).
(5) An amount of 53,1 euro/tonne paid to ginners to cover the cost of administration.

C
2
9
8
/
3
2

E
N

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

o
f

t
h
e

E
u
r
o
p
e
a
n
U
n
o
n

i

.

.

9
1
2
2
0
0
3

9.12.2003

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Official Journal of the European Union

C 298/33

Not all ginners differentiate on quality when purchasing
cotton and the ‘quality incentive’ appears to be nothing more
than a source of additional income

EVALUATION OF THE SYSTEMS OF CONTROL IN THE
MEMBER STATES

The Community scheme recognises that varying quali-
39.
ties of cotton can be produced and stipulates that producers
should be paid according to the quality of the product delivered.

In Greece not all ginners pay the producers on the qual-
40.
ity of particular batches, preferring instead to offer the producers
a price equal to that which would be paid for cotton of above
average quality (1). This practice removes the incentive for pro-
ducers to apply cultivation and harvesting techniques which result
in the delivery of best quality cotton.

41.
In addition to the above, provision exists to pay aid to the
ginner on a quantity greater than that delivered when the quality
of the ginned cotton received in any year is higher than stan-
dard (2). The percentage increase in quantity is limited to
3,125 % (3) and is calculated when all ginning has been completed
and is based on the yields achieved for the year taken as a whole.
The Commission has no specific knowledge about the success or
otherwise of this provision in improving the quality of the cotton
produced. Furthermore, there is no requirement within the regu-
lation for the ginner to pass this additional revenue onto the pro-
ducers.

42.
While the wish to promote quality is laudable, the market
place, through increased revenues, already offers the incentive to
improve the quality and the quantity of the fibres produced. On
the basis of the evidence available, it appears that the incentive
paid to improve quality is little more than an additional source of
revenue for the ginners.

(1) Some ginners take the view that, as the unginned cotton is processed
in bulk, there is no incentive for them to measure the specific quality
characteristics of individual batches and to determine and pay the
producers slightly different amounts for each batch delivered.

(2) Article 15 of Council Regulation (EC) No 1051/2001.
(3)

In each year and for both producer Member States, the quantity on
which the aid is paid is increased by about 3 % which is close to the
maximum percentage applicable. If the average aid rate is taken as
500 euro/tonne, the amount paid to ginners under this provision is
in the region of 25 million euro per annum.

In the period between October 2001 and February 2002,
43.
the Court undertook a specific examination of aid for cotton in
connection with its obligation to provide a statement of assurance
on the 2001 financial statements of the Commission (4). Material
observations arose from the Court’s audit of the controls operat-
ing in Greece only.

Absence of the application of risk criteria and poor quality of
checking in Greece

44.
One key control is a check on the existence of producers
and the reasonableness of the quantities delivered utilising data
from the area declarations submitted by producers. The effective-
ness of this control relies on the correct application of IACS in the
Member States. Many deficiencies have been noted in its opera-
tion in Greece. Because these deficiencies continue, the findings
reported in the Court’s 2001 Annual Report are mentioned here-
after.

45.
In Greece, around 30 % of parcels declared use references
which are incompatible with the IACS references. This renders it
impossible to confirm the area of these parcels. In addition, com-
puterised systems allow multiple entry of reference numbers for
individual registration of parcels.

46.
Also, risk criteria were not used to select the sample for
checking and there were no clear comprehensive instructions as
to the timing and methodology to be applied to on-the-spot
checks of area declarations submitted by cotton producers and for
2000/2001 marketing year, very few discrepancies were reported
(0,05 % of the number examined). An error rate of 0,05 % con-
trasts with the results of the Court’s audit testing on the accuracy
of the area declarations for 2001/2002. In 16,7 % of the cotton
declarations checked, significant differences were found (exceed-
ing national tolerances) between the areas declared and those cul-
tivated with cotton. The error rate of 0,05 % is also inconsistent
with the results of checks by the authorities to identify quantities
to be excluded from production for the purposes of applying the
stabiliser mechanism.

47.
Because of the material difference between forecast and
actual production in 2001, the Greek authorities undertook inves-
tigations which concluded that about 10 % of the land sown to
cotton in 2001 was either not declared under IACS or was declared
as being cultivated with another crop. This finding is an indicator
that producers submit aid applications for arable crops for areas

(4) OJ C 295, 28.11.2002, p. 1.

C 298/34

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Official Journal of the European Union

9.12.2003

on which they produce cotton. In such circumstances and if not
detected, growers receive EU aid twice for the same parcels of
land, once on the basis of the arable crop declaration and again
on the basis of actual production of cotton. This situation illus-
trates the difficulties in monitoring EU aid payments when the
underlying integrated administration and control system (IACS)
has not been properly applied.

CONCLUSIONS

48.
In its previous audits, the Court criticised the scheme’s
vulnerability to irregularity and weaknesses in controls and the
inclusion of fictitious quantities (in Greece) on which aid was
paid. The Commission’s revision of the scheme in 1995 addressed
this failure (paragraph 20). However, other weaknesses exist in
the regime.

Mechanism employed and its effect on Community
expenditure

49.
The increase in cotton production over the last 20 years,
from 0,3 million tonnes to 1,7 million tonnes, reflects the rela-
tive attractiveness of the scheme compared to other crops; aid for
cotton is three to four times greater than that paid for crops grown
as an alternative. Comparison in terms of gross margins per hect-
are indicate a ratio of about 1,5 in favour of cotton. About a quar-
ter of the increase in production is due to the accession of Spain
to the EEC in 1986 (paragraph 24).

50.
A stabiliser mechanism introduced in 1987 has been
effective at reducing the support payable after production exceeds
guaranteed quantities. However, as movements in market prices
are also reflected in the aid rate, the Commission does not have
control over final expenditure and budget neutrality can never be
assured (paragraph 25).

after the payment of the minimum price to the producers reflect
the actual costs incurred by them and is thus unaware of whether
any potential exists to reduce Community expenditure (para-
graphs 36 and 37).

53.
Lack of clarity in the rules governing the operation of the
scheme led to the introduction of amending legislation in 2002
which defines quantities eligible for receiving aid and the quanti-
ties to be taken into account when determining the penalty for
overproduction (paragraphs 29 and 30).

54.
The amended rules state that aid may only be paid on
quantities coming from an area declared under IACS and not
from an area excluded for environmental reasons. Weaknesses in
the operation of IACS limits the ability of the Commission to
monitor the correct application of the stabiliser mechanism.
Checks on the origin for all deliveries to ginners is impossible in
practical terms. The results of controls undertaken by national
authorities in 2000 and 2001 demonstrate variations on the qual-
ity of work executed to verify the accuracy of the area declara-
tions and the eligibility to aid of quantities delivered to ginning
plants. To determine eligible quantities, national authorities will
be required to exercise judgment as to the probable yields of
unginned cotton coming from the areas declared. As there can be
many reasons why yields might vary, the ability of the Commis-
sion to monitor this aspect of the scheme has been weakened. To
the extent that ineligible produced cotton goes undetected, all
producers, without distinction, are penalised through a higher
reduction in the minimum price (paragraphs 32 to 34).

Environment

Cotton production can have a negative impact on the
55.
environment and the Member States concerned should determine
and adopt the measures they consider suitable to regulate the use
of land for cotton production. Currently no information is avail-
able on the application of this provision since it is not continu-
ously monitored by the Commission. Member States will, as
required by the regulations, provide the Commission with a report
on the environmental situation in the cotton sector and on the
impact of measures taken before 31 December 2004 (para-
graph 26).

51.
When market prices are low, the cost is borne by the
Community in the form of an increase in the aid rate payable. In
contrast, in those years when market prices and production levels
are high resulting in Community expenditure not reaching 770
million euro, additional support is paid to the producers. This
measure mitigates the effect of the stabiliser mechanism (para-
graphs 11 and 25).

Promotion of quality

52.
Community aid combined with sales revenue provide the
ginners with a constant level of income to cover their operating
and administrative costs. Since 1995, the Commission has not
reviewed the extent to which the funds remaining to the ginners

The scheme promotes the quality of cotton by allowing
56.
adjustments to be made to the amounts paid to the producers on
the basis of the quality of the product delivered. In Greece, not all
ginners pay differing amounts for differing qualities which removes
the incentive to produce best quality cotton. In addition, the
Commission is unaware of the effectiveness or otherwise of the

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C 298/35

quality incentive given to the ginners. This incentive duplicates
the additional revenue coming from the market place when bet-
ter quality and higher yields are achieved (paragraphs 39 to 42).

(a)

considers the incorporation of a mechanism which ensures
budget neutrality and which does not mitigate against the
impact of the stabiliser mechanism;

Systems of control

The Court’s examination of the checks undertaken in the
57.
Member States has revealed continuing serious weaknesses in
Greece, in particular those related to the checking of the areas
declared by cotton producers (paragraphs 43 to 47).

RECOMMENDATIONS

58.
The Court recommends that the Commission takes the
opportunity to address the weaknesses identified in the present
regime when formulating its reform proposals. In particular, the
Court recommends that the Commission

(b) has regard to the relative attractiveness of the aid for cotton

and the effect of the aid on quantities produced;

(c)

obtains data on the negative impact of cotton production on
the environment.

With regard to the present scheme the Court recom-

59.
mends that the Commission:

(a)

ensures that the controls operated in Member States for
establishing eligibility for aid are transparent, well-founded
and applied consistently;

(b)

reviews the financial arrangements for the ginners;

(c)

examines the effectiveness of the incentive offered to improve
the quality of the cotton produced.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 24 and 25 September 2003.

For the Court of Auditors

Juan Manuel FABRA VALLÉS

President

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THE COMMISSION’S REPLIES

EXECUTIVE SUMMARY

IX.
In the context of a deficiency payments scheme, expen-
diture depends by definition, at least partially, on world prices,
and consequently budget neutrality as mentioned by the Court
cannot be assured.

As an integral part of the stabiliser, this provision is a reduction
of the penalty in the level of support when the expenditure does
not reach EUR 770 million.

national environmental rules, the fact that some producers are
trying to circumvent them, and their underestimation of the
importance of the link between the quantities produced (the pur-
pose of the aid) and the land on which those quantities are grown.

XIII.
The Commission will take the weaknesses mentioned by
the Court into consideration when formulating the reform pro-
posals. In addition, it will also take account of the fact that the
present regime is highly complicated and not in line with the
recent evolution of the CAP.

X.
Since 2001, on the basis of Council Regulation (EC)
No 1051/2002, Member States have applied national environ-
mental provisions, which have been examined by the Commis-
sion.

INTRODUCTION

The follow-up of these national measures and the subsequent
report to be submitted by Member States before the end of 2004
should give the Commission additional information on the envi-
ronmental situation in the cotton sector.

11.
As an integral part of the stabiliser, this provision is a
reduction of the penalty in the level of support when expenditure
does not reach EUR 770 million.

The Commission considers that the fact that the yields in
XI.
ginned cotton are usually higher than the standard 32 % is an
indicator of the effectiveness of the provisions relating to the
improvement of quality.

17.
Both Community expenditure and the amount received
by producers are primarily dependent on the quantities produced.

The quality premiums on the world market prices for ginned cot-
ton are relatively modest and, considering the level of world prices
for ginned cotton, might not be a source of significant additional
revenue for ginners.

20.
The amending legislation introduced in 1995 included
several measures with a view to improving the management of
the scheme. Among these, the most relevant were:

The Commission has in the past tried to review the operating
costs incurred by ginners but discussions with the Member States
were inconclusive due to the high variability of the results. Con-
sequently, in the context of the 1995 reform, the Council decided
to determine the calculation of the world price of unginned cot-
ton on the basis of the historical ratio between the world price for
ginned cotton and that calculated for unginned cotton, which
took the ginning costs into account.

The Commission is well aware of the problems linked to
XII.
deficiencies in the IACS in Greece and in particular the land parcel
identification system and controls on it, and they are closely
monitored under the clearance of accounts procedure, for area aid
and the other aid schemes alike.

The same applies to the phenomenon of the under-declaration of
land under cotton in Greece. This phenomenon is the result not
only of the problems with the IACS in Greece, but also the new

— the division of the MGQ into guaranteed national quantities
so as to make producers in each Member State more account-
able for their production,

— the increase in the MGQ accompanied by a proportional
reduction in the guide and minimum prices with a view to
adapting these quantities to the recorded average produc-
tion, maintaining budget neutrality,

— the abolition of the special aid scheme for small producers

which did not serve its original purpose and,

— as the Court mentions, a provision linking eligible quanti-

ties to the yields obtained.

In 2001, a strengthening of the stabiliser mechanism introduced
an accelerated reduction in the support payable when production
exceeds 1,5 million tonnes. The impact of the strengthened sta-
biliser is such that relatively modest increases in production above
this threshold cause a sharp drop in the support payable for the
whole production.

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MANAGEMENT BY THE COMMISSION

24.
In 1995, the MGQ was increased and the guide price was
proportionally reduced with a view to keeping these changes bud-
getarily neutral.

25.
In the context of a deficiency payments scheme, the
expenditure depends by definition, at least partially, on world
prices.

Until 2000, the Commission had limited power to require
26.
detailed environmental provisions for cotton growing, as cotton
was included neither in the Annex to Council Regulation (EC)
No 1259/1999 nor in Council Regulation (EC) No 1257/1999.

The potential risks to the EAGGF of any inadequacies in on-the-
spot checks of land under cotton are allowed for in the clearance-
of-accounts procedure. Thus, financial corrections have already
been applied and will continue to be applied where necessary.

33 to 35.
The Court’s comments refer mainly to the weak-
nesses in the Greek control systems. These weaknesses are well
known by the Commission services. The potential risks to the
EAGGF of weaknesses in the IACS and the administration and
control system for cotton as implemented by Greece are allowed
for in the clearance of accounts procedure. Thus, financial cor-
rections have already been applied and will continue to be applied
where necessary.

Since 2001, on the basis of Council Regulation (EC) No 1051/
2001, Member States have applied national environmental provi-
sions, which have been examined by the Commission.

The Commission has also identified the potential risk arising from
the method for selecting applicants for direct premiums undergo-
ing on-the-spot checks in Greece. These risks are being analysed
under the current clearance of accounts procedures.

The follow-up of these national measures and the subsequent
report to be submitted by Member States before the end of 2004
should give the Commission additional information on the envi-
ronmental situation in the cotton sector.

28.
The penalties applied in each Member State due to the
stabiliser system depend almost exclusively on each Member
State’s production. Therefore, penalties are higher in the Member
State mainly responsible for overproduction.

After a detailed examination of the figures communi-
29.
cated by Greece as well as a legal assessment of the breakdown of
the 206 362 tonnes, the Commission took the following mea-
sures:

— 6 376 tonnes were not included in the scheme because they

were not of sound and fair merchantable quality;

— 61 811 tonnes were included in the actual production and

the remaining 138 175 tonnes were excluded.

(a)

Following the same line of interpretation of the legal
texts, clarification on the production eligible for aid and
on the production to be taken into account for the sta-
biliser mechanism was straightaway added to the legis-
lation so as to be in force as from the following market-
ing year, i.e. 2002/03.

(d)

Since the 2002/03 marketing year, the deadline for
completion of the on-the-spot checks on area declara-
tions has been fixed at 15 November, just before the
time of the revised production estimates.

36.
Due to the absence of international quotations for
unginned cotton, its price is calculated on the basis of interna-
tional prices of ginned cotton, taking into account the historical
relationship between the two. This relationship included ginning
costs, so consequently these are indirectly considered in the cal-
culation of the world price for unginned cotton.

38.
The Commission has, in the past, tried to review the
operating costs incurred by ginners but the discussions with the
Member States were inconclusive due to the high variability of the
results. Consequently, in the context of the 1995 reform, the
Council decided to determine the calculation of the world price
of unginned cotton on the basis of the historical ratio between the
world price for ginned cotton and that calculated for unginned
cotton, which took the ginning costs into account.

The aid scheme establishes that the price is to be adjusted
40.
according to the quality of the cotton delivered. This adjustment
is to be determined by agreement between parties on the basis of
the necessary samples taken at delivery and must concern each
batch of unginned cotton. This is an incentive for individual pro-
ducers to deliver better quality cotton.

The audits carried out by the Commission under the clearance of
accounts have not confirmed that the system in place is failing to
achieve the aim of providing an incentive to improve quality.

41.
Better quality unginned cotton allows for higher yields in
ginned cotton, but this can only be worked out after ginning. The
increase in eligible quantities due to this provision is limited to
3,125 %, but there is no limit to the reduction that can be applied

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Official Journal of the European Union

9.12.2003

to the eligible quantities in case of low yields due to poor quality
unginned cotton. The fact that the yields in ginned cotton are usu-
ally higher that the standard 32 % means that the quality of the
unginned cotton delivered is good on average. The incentive given
to ginners in this way allows them to pay the producers higher
prices than the minimum price, as is usually the case.

The quality premiums on the world market prices for
42.
ginned cotton are relatively modest and, considering the level of
world prices for ginned cotton, might not be a source of signifi-
cant additional income for the ginners.

EVALUATION OF THE SYSTEMS OF CONTROL IN THE
MEMBER STATES

45.
The Commission is well aware of the problem linked to
deficiencies in the IACS in Greece and in particular the land parcel
identification system (LPIS).

The resultant risks to the EAGGF are allowed for in the clearance-
of-accounts procedure, for area aid and the other aid schemes
alike. In the particular case of production aid for cotton, several
clearance procedures are currently in progress.

46.
The Commission fully recognises the serious failings
referred to by the Court as regards on-the-spot checks on land
parcels used for growing cotton. On the whole, they mirror the
findings regularly made by the Commission in its reports.

The land irregularly declared under the IACS as being
47.
under a crop other than cotton creates a risk for the area aid, and
account is taken of this in the clearance of accounts procedures.

The aspects relating to the common market organisation for cot-
ton are being analysed by the Commission under the current
clearance of accounts procedures.

As an integral part of the stabiliser this provision is a
51.
reduction of the penalty in the level of support when expenditure
does not reach EUR 770 million.

52.
The Commission has in the past tried to review the oper-
ating costs incurred by ginners but the discussions with the Mem-
ber States were inconclusive due to the high variability of the
results. Consequently, in the context of the 1995 reform, the
Council decided to determine the calculation of the world price
of unginned cotton on the basis of the historical ratio between the
world price for ginned cotton and that calculated for unginned
cotton, which took the ginning costs into account.

The Commission considers that the amended rules pro-
54.
duced in 2002 clarify the definition of eligible production and
does not think that its ability to manage the scheme has been
weakened. The weaknesses described by the Court concerning the
IACS and the control system for cotton in Greece are similar to
those already identified by the Commission in the framework of
the clearance of accounts. Financial corrections have been applied
and will continue to be applied where necessary.

55.
Until 2000, the Commission had limited power to require
detailed environmental provisions for cotton growing, as cotton
was included neither in the Annex to Council Regulation (EC)
No 1259/1999 nor in Council Regulation (EC) No 1257/1999.

Since 2001, on the basis of Council Regulation (EC) No 1051/
2001, Member States have applied national environmental provi-
sions, which have been examined by the Commission.

The follow-up of these national measures and the subsequent
report to be submitted by Member States before the end of 2004
should give the Commission additional information on the envi-
ronmental situation in the cotton sector.

CONCLUSIONS

50.
In the context of a deficiency payments scheme, expen-
diture depends by definition, at least partially, on world prices and
consequently budget neutrality as mentioned by the Court can-
not be assured. The reform of 2001 introduced a strengthening
of the stabiliser mechanism in order to increase accelerated sanc-
tions in the support payable when production exceeds the thresh-
old of 1 500 000 tonnes, which can result in sharp reductions in
expenditure in certain cases.

56.
The scheme provides for adjustments on the price, by
common consent between the ginner and the producer, depend-
ing on the quality of each batch of unginned cotton delivered.
This is an incentive for individual producers to apply agricultural
practice that will result in better-quality cotton. Better quality
unginned cotton allows for higher yields in ginned cotton, which
can only be worked out after ginning. The fact that the yields in
ginned cotton are usually higher than the standard 32 % means
that the quality of the unginned cotton delivered is good on aver-
age. The quality premiums on world market prices for ginned cot-
ton are relatively modest, so the incentive given to ginners allows
them to pay the producers higher prices than the minimum price,
which is usually the case.

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The audits carried out by the Commission under the clearance of
accounts have not formally confirmed that the system in place is
failing to achieve the aim of providing an incentive to improve
quality.

regime is highly complicated and not in line with
the recent evolution of the CAP.

(c)

The Commission already collects all information
coming to its attention.

57.
As indicated in paragraphs 42 to 46, the deficiencies
relating to declarations and checks on agricultural land in Greece
detected by the Court of Auditors were already identified by the
Commission in previous audits. The resultant risks are being
monitored closely and are allowed for under the clearance of
accounts procedure, for area aid and the other aid schemes, such
as production aid for cotton, alike.

RECOMMENDATIONS

59. (a) The Commission accepts the Court’s recommendation
and, as in the past, will continue to verify correct and
consistent application of controls.

(b) The Commission has in the past tried to review the oper-
ating costs incurred by ginners but the discussions with
the Member States were inconclusive due to the high
variability of the results.

58. (a) and (b). The Commission will take the weaknesses men-
tioned by the Court into consideration when for-
mulating the reform proposals. In addition, it
will also take account of the fact that the present

(c) The Commission considers that the fact that the yields in
ginned cotton are usually higher than the standard 32 %
is an indicator of the effectiveness of the provisions relat-
ing to quality improvement.