Communication from the Commission to the Council on risk and crisis management in agriculture {SEC(2005) 320}
Date: 2005-03-09
Institutions: European Commission
Subjects: agricultural situation, aid system, aid to agriculture, common agricultural policy, common organisation of markets, reform of the CAP

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 09.03.2005 
COM(2005) 74 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

on risk and crisis management in agriculture 

{SEC(2005) 320} 

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1. 

INTRODUCTION 

For  many  years  the  Common  Agricultural  Policy  (CAP)  addressed  the  objective  of 
securing  farm  incomes  through  a  series  of  market  and  price  stabilisation  measures. 
Successive  reforms  have  gradually  switched  support  from  market  and  price 
management  to  direct  payments,  which  from  2005  will  be  largely  decoupled.  Now 
that  CAP  reform  has  broken  the  link  between  direct  payments  and  the  type  and 
volume of production, farmers will be better able to adjust their production decisions 
to economic and agronomic criteria.  

The  decoupled  single  payment  scheme  will  continue  to  provide  a  significant  and 
stable contribution to farm income, although with notable differences according to the 
historical distribution of support between different sectors of agricultural production. 
Farmers will be able to be more market-orientated, while benefiting from this better 
targeted and more efficient income support. 

These  economic  and  social  aspects,  as  well  as  the  environmental  considerations 
incorporated in the new single payment scheme, will mean that the new CAP is more 
sustainable. It will, however, oblige farmers to take responsibility for managing those 
risks that were formerly absorbed by market and price support policies. At the same 
time,  EU  farmers  are  increasingly  exposed  to  competition  and  agricultural  price 
fluctuations, as a result of trade liberalisation.  

As  in  the  past,  the  business  of  farming  will  remain  vulnerable  to  specific  risks  and 
crises which are beyond the farmer’s control. While calculated risk-taking may bring 
positive results, it is appropriate for farmers to be armed against the possibly negative 
outcome  of  the  choices  they  make,  as  well  as  against  crises  provoked  by  natural 
disasters  and  other  unpredictable  events.  Within  the  context  of  CAP  reform,  new 
instruments – which will not slow down any necessary structural adjustment - could 
help farmers improve their capacity to manage risks and crises.  

This  Communication  examines these issues and considers what additional measures 
the CAP could introduce to support farmers, in respect of risk and crisis management. 
this 
The  options  put  forward  for  discussion  respond 
Communication  and  the  conclusions  of  the  December  2003  Agricultural  Council.  It 
should be emphasised that they would entail no additional expenditure. 

the  mandate  for 

to 

The  Communication  is  accompanied  by  a  Commission  Staff  Working  Document 
which  describes  the  risk  and  crisis  management  tools  already  available  to  EU 
agriculture.  

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2. 

BACKGROUND 

In  January  2001,  the  European  Commission  provided  a  first  analysis1  of  risk 
management  tools  for  EU  agriculture,  which  was  discussed  by  the  relevant  Council 
bodies  under  the  Swedish  Presidency  in  2001.  The  Spanish  Presidency  took  up  the 
issue  of  agricultural  insurance  as  a  risk  management  tool  in  arable  and  livestock 
farming with a memorandum in March 2002, followed by an international conference 
on “Agricultural insurance and income guarantees”, held in Madrid on 13 and 14 May 
2002.  A  Greek  Presidency  memorandum  on  natural  risks  and  insurance  in  the 
agricultural  sector  was  submitted  to  the  Council  in  May  2003  and  a  seminar  to 
examine possible responses to natural disasters in the agricultural sector was held in 
Thessaloniki on 6 June 2003. Most recently, on 15 and 16 December 2004, the Dutch 
Presidency  organised  a  conference  on  the  “Material  and  immaterial  costs  of 
eradication of animal diseases”. 

The  CAP  reform  decided  in  Luxembourg  in  June  2003  provides  for  a  modified 
system of farm income support to farmers, decoupled from production. The Council 
conclusions  on  this  reform  incorporated  a  Commission  declaration  “to  examine 
specific measures to address risks, crises and national disasters in agriculture” and 
“present a report, accompanied by appropriate proposals, to the Council before the 
end of 2004.”  

The  Commission  declaration  further  indicated  two  specific  issues  to  be  examined: 
“…the financing of these measures through the one percentage point of modulation 
directly  re-distributed  to  Member  States  as  well  as  the  inclusion,  in  each  common 
market organisation, of an article empowering the Commission to act, in the case of a 
Community-wide  crisis,  along  the  lines  established  for  such  cases  in  the  common 
market organisation for beef.” 

In December 2003, under the Italian Presidency, the conclusions of the Agricultural 
Council2 invited the Commission: 

(1) 

(2) 

to continue to lead the debate on risk management tools in agriculture and to 
provide an updated inventory of risk management tools available in Member 
States; 

to  examine  the  advantages  and  disadvantages  of  different  risk  management 
options  –  notwithstanding  the  agricultural  sector’s  own  responsibility. 
Possible  new  instruments  to  replace,  if  appropriate,  current  measures  should 
be  taken  into  account  and  examined  on  the  understanding  that  distortions  of 
competition must be avoided, WTO rules must be observed and the financing 
of  any  new  measures  must  be  in  keeping  with  the  financial  commitments 
already in place; 

(3) 

to  assess  the  opportunities  provided  by  the  Community  guidelines  for  State 
aids in the agricultural sector and if necessary to suggest adaptations. 

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“Risk Management Tools for EU Agriculture” – DG Agri Working Document: 
http://europa.eu.int/comm/agriculture/publi/insurance/index_en.htm 
OJ C 34, 7.2.2004, p. 2. 

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3. 

RISK AND CRISIS MANAGEMENT: OPTIONS 

Risk implies a situation which could have a variety of outcomes,  for  each  of which 
the  probability  can  be  estimated.  Although  risk-taking  is  often  a  pre-requisite  to 
making progress, a negative outcome could have serious economic consequences for 
a business.  

The  wide  range  of  risk  management  tools  available  is  described  in  a  Commission 
Staff  Working  Document  accompanying  this  Communication.  They  could  be 
developed further to help improve competitiveness and the economic sustainability of 
farm enterprises, especially those with a high proportion of debt capital, for example 
young farmers. However, these tools cannot and are not intended to offer the kind of 
guarantees  provided  by  the  former  CAP,  but  would  rather  help  the  farm  business 
withstand temporary shocks and improve its access to finance for the development of 
its activities. It is with this perspective that the development and availability of risk 
management instruments might usefully be encouraged. 

While  risk  may  be  associated  with  either  a  positive  or  a  negative  outcome,  the 
assumption is always made that a crisis has significant negative consequences. In this 
Communication a crisis is understood to be an unforeseen situation that endangers the 
viability of agricultural holdings, either at a localised level or across a whole sector of 
production.  

Several  crisis  management  instruments  are  available  or  have  recently  been 
established  to  provide  assistance  when  the  individual  capacity  to  cope  with 
substantial losses in assets and/or income, resulting from unforeseeable events, may 
be  insufficient.  These  instruments  are  described  in  the  Commission  Staff  Working 
Document  accompanying  this  Communication.  However,  most  of  these  instruments 
rely on ad hoc actions.  

In this context, and in accordance with the Commission’s commitment of June 2003, 
the question of generalising the beef crisis clause is addressed in section 3.1. 

The Commission has looked at a number of options for encouraging the development 
of risk management tools and providing an improved response in the event of crisis. 
The  use  of  modulation  funds  for  this  purpose  –  which  would  not  require  any 
additional Community expenditure - is discussed in detail in section 3.2.  

Finally, three options are described that, in combination or individually, could in time 
complete  or  partially  replace  Community  and  Member  States’  ad  hoc  emergency 
measures. These possible new measures are presented in section 3.3. 

3.1 

Generalising safety net provisions in the event of market crisis 

While CAP reform has decoupled income support for the main production sectors, a 
number of instruments remain to influence the market and price situation and address 
possible crises. These vary significantly between market organisations, according to 
the specific characteristics of each market and reflecting the evolution of the previous 
sector-specific approach.  

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As early as 1974 a general provision on crisis management was introduced into the 
beef  meat  CMO.  Article  38  of  the  Common  Market  Organisation3  for  beef  still 
states:  “(1)  When  a  substantial  rise  or  fall  in  prices  is  recorded  on  the  Community 
market  and  this  situation  is  likely  to  continue,  thereby  disturbing  or  threatening  to 
disturb the market, the necessary measures may be taken. (2) Detailed rules for the 
application of this Article shall be adopted by the Commission …”. 

A  similar  clause  has  never  been  adopted  for  other  CMOs,  since  other  instruments 
were considered to be sufficient. With CAP reform, safety net provisions in the event 
of crisis remain available in several sectors covered by the reform. For other sectors, 
(fruit  and  vegetables,  wine,  and  pigs  and  poultry)  there  is  today  no  justification  to 
introduce an additional general safety net provision. If required, specific needs could 
be looked at on a case by case basis in the context of the review of individual CMOs. 

More important, income stabilisation is now  largely  provided  by  the  new  system  of 
decoupled payments. With the introduction of the new single payment, most farmers 
have been guaranteed a secure basis for planning until 2013.  

CAP reform has broken the link between income support and the type and volume of 
production.  This  means  that  farmers  will  be  able  to  orientate  their  production 
according  to  economic  and  agronomic  criteria  without  losing  income  support.  The 
new system will allow them to better adapt their production in response to climatic or 
sanitary risks and according to market developments. 

The  Commission  therefore  does  not  intend  to  propose  the  general  introduction 
of  a  safety  net  clause  to  each  common  market  organisation.  The  Commission 
rather  invites  the  Council,  the  European  Parliament  and  other  EU  Institutions 
first  to  discuss  the  alternative  crisis  management  options  presented  in 
section 3.3. 

3.2 

Financing risk and crisis management measures through modulation 

A  key  purpose  of  this  communication  is  to  discuss  how  additional  risk  and  crisis 
management measures could be co-financed by one percentage point of modulation. 
Designed  as  a  mechanism  to  strengthen  the  second  pillar  of  the  CAP,  modulation 
reduces direct payments and shifts the funds saved into rural development. Under the 
2003  CAP  reform,  modulation  will  progressively  reduce  direct  payments  on  a 
compulsory community-wide basis, by 3% in 2005, 4% in 2006 and 5% in the years 
2007 to 2012.  

Community law states that all the funds released by modulation can only be used in 
the  context  of  rural  development  programmes  -  including  the  amount  that  could 
possibly be used for risk and crisis management measures.  

New  risk  management  measures  co-financed  from  the  one  percentage  point  of 
modulation  would  aim  to  improve  the  competitiveness  of  the  agricultural  and 
forestry sector by strengthening the economic sustainability of agricultural holdings. 
They  would  therefore  enlarge  the  scope  of  “Priority  Axis  1”  of  the  Commission’s 
proposal  for  a  new  rural  development  regulation.  It  is  in  this  context  that  Member 

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Article 38 of Council Regulation (EC) No 1254/1999 (OJ L 160, 26.6.1999, p. 21). 

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States  would  have  the  choice  of  introducing  new  risk  and  crisis  management 
measures into their rural development programmes.  

Under the new Financial Regulation, and in particular the principle of annuality, the 
new  regime  of  compulsory  modulation  no  longer  allows  Member  States  to  retain 
funds in view of their redistribution in later years.  

Using modulation to finance new risk and crisis management instruments would not 
require  additional  Community  expenditure;  it  would  simply  make  it  possible  for 
Member  States  to  use  a  maximum  amount  of  rural  development  funds  for  these 
purposes. The use of state aids or top ups for this type of measures would have to be 
subject to appropriate Community competition rules.  

The EU’s rural development policy is designed to fully comply with the green box 
criteria established by the WTO. As a consequence, any additional measure financed 
under modulation must also comply with green box criteria.  

In this context, in all cases, the amounts used for risk and crisis management shall be 
limited  to  one  percentage  point  of  modulation  in  the  Member  States  where 
modulation is applied. For the Member States where modulation does not yet apply 
an equivalent method could be applied to set the maximum level of rural development 
funds that could be allocated to these measures. 

3.3 

New options for risk and crisis management tools  

The Commission suggests that the potential of three options should be assessed, from 
the  point  of  view  of  individually  or  jointly,  completely  or  partially  replacing 
Community  and  Member  States’  ad  hoc  emergency  measures.  The  Commission 
invites the Council, the European Parliament and other EU Institutions to debate the 
following options, which would be designed to comply with WTO green box criteria. 
If  introduced  to  the  menu  of  rural  development  measures,  these  options  would  be 
available  for  Member  States  and  regions  to  take  up  and  use,  according  to  their 
specific priorities for the next programming period.  

Independent of any decision on the following options, the causes of the rather weak 
development  and  use  of  market  based  risk  management  tools  (insurance,  futures 
market,  contract  farming)  could  be  addressed  by  training  measures  within  rural 
development  programmes.  This  would  help  improve  awareness  of  current  risks, 
improve risk management strategies and provide know how, for instance on the use of 
futures  and  options,  which  could  also  lead  to  a  wider  use  of  contracts  between  the 
food industry, traders, and farmers.  

Option 1: Insurance against natural disasters - Financial participation in farmers’ 
premium payments  

Insurance provides an alternative to public ex-post compensation payments for losses 
caused  by  natural  disasters  at  EU  and  national  or  regional  level.  Certain  Member 
States  have  already  established  national  schemes  to  encourage  farmers  to  obtain 
insurance cover against such events.  

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A  new  measure,  eligible  under  the  rural  development  regulation,  could  therefore 
provide a financial contribution towards the premiums paid by farmers for insurance 
against income loss as a result of natural disaster or disease.  

The  amount  granted  per  farmer  under  such  a  measure  by  EU  and  national/regional 
support  should  not  exceed  50%  of  the  total  premium  cost  for  the  insurance  in 
question.  

To  be  eligible  for  support  from  rural  development  funding,  disaster  insurance 
schemes must comply with EU agricultural state aid guidelines and WTO green box 
requirements. Insurance schemes eligible for co-financing would determine the level 
of  compensation  for  production  losses,  due  to  the  natural  disaster  in  question,  that 
exceed 30% of the average agricultural production in the preceding three-year period, 
or a three-year average based on the preceding five-year period, excluding the highest 
and  the  lowest  entry.  This  measure  would  require  Member  States  to  establish  a 
historical reference system at farm level. 

Insurance payments should compensate not more than 100% of the income loss, at the 
level  of  the  beneficiary,  in  the  year  the  disaster  occurred.  The  payment  should  not 
require or specify the type or quantity of future production. If the natural disaster, in 
addition  to  insurance,  would  trigger  eligibility  for  other  public  compensation,  the 
overall compensation by all schemes should not exceed 100% of the income loss in 
the year the disaster occurred. 

As  many  agricultural  risks  normally  affect  a  large  number  of  farms  (systemic  risk) 
insurance companies have to buy relatively expensive reinsurance. This is one of the 
reasons why private markets for agricultural insurance are not well developed. Thus, 
a  policy  measure  improving  access  to  reinsurance  could  also  help  develop  private 
agricultural insurance schemes. As an alternative to supporting insurance premiums, 
the  encouragement  of  national  reinsurance  schemes  could  also  be  examined.  At  the 
national  level,  in  addition  to  co-insurance  arrangements  between  private  insurance 
companies, governments could (1) offer full reinsurance at reduced prices, (2) offer 
part of the necessary reinsurance at no  cost,  thus reducing the insurance company’s 
overall  need  for  reinsurance,  and  (3)  be  a  partner  for  reinsurance  via  stop  loss 
agreements.  

Option 2: Supporting mutual funds 

Mutual funds represent a way of sharing risk among groups of producers who want to 
take their own responsibility for risk management. The fund’s capital can be called on 
by members in the event of severe income losses to be specified by predefined rules.  

Up till now agricultural mutual funds, established on private initiative, have been set 
up mainly at a sector-specific level, where producers share comparable risks. While 
they are not currently available to all agricultural holdings they have the potential to 
develop into a more common risk management tool to cover income losses. 

With this in mind, the Community could envisage providing support for developing 
mutual funds in the agricultural sector. Under this option, temporary and degressive 
support for the administrative operation could be granted per farmer participating in 
funds formally recognised by the Member State’s competent authority. 

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Option 3: Providing basic coverage against income crises 

With  CAP  reform  focusing  on  income  stabilisation  and  decoupling  support  from 
agricultural production, a generalised approach to respond to income crises seems to 
be  more  appropriate  than  any  sector-specific  approach.  A  more  general  coverage 
against  crises  that  result  in  severe  income  losses  would  allow  existing  safety  net 
provisions  to  be  further  simplified  and  improve  the  balance  between  different 
agricultural sectors. 

Better market orientation and quality production, as promoted by CAP reform, means 
that  many  farmers  in  the  EU  will  need  to  make  substantial  investments  in 
restructuring. Rural development programmes will be available to support structural 
adjustments.  However,  if  the  scope  of  rural  development  measures  should  prove 
insufficient,  the  question  of  new  instruments  to  address  situations  where  liquidity 
problems and serious income losses occur, must be raised. Any such measures should 
meet the following conditions: 

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– 

– 

– 

they should be open to all farmers affected by a crisis; 

farmers  can  only  be  eligible  for  liquidity  support  payments  if  their  income 
derived from agriculture in a specific year is less than 70% of the average gross 
income or the equivalent in net income terms in the preceding three-year period 
or a three-year average based on the preceding five-year period, excluding the 
highest and the lowest entry; 

the  amount  of  the  payments  must  compensate  for  less  than  70%  of  the 
producer’s income loss in the year the producer becomes eligible to receive the 
income assistance; 

the amount of the income stabilisation payments must relate solely to income, it 
must not relate to the type or volume of production of the specific producer; or 
to the prices, domestic or international, applying to such production; or to the 
factors of production employed; 

where  the  producer  receives  payments  from  other  compensation  schemes,  e.g. 
for relief from natural disasters, the total payment shall be less than 100% of the 
loss.  

This measure would require agreement on a precise, accounting definition of income 
and for Member States to establish a system of reference income at farm level. 

Finally,  in  order  to  guarantee  fair  competition  throughout  the  Community,  the 
possibility  of  using  state  aids  or  top  ups  in  this  context  would  have  to  be  carefully 
assessed by the Commission. 

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