Commission staff working document accompanying the Proposals for : #- Council Regulation establishing common rules for direct support schemes under the common agricultural policy for farmers and establishing certain support schemes for farmers#- Council Regulation on modifications to the common agricultural policy by amending Regulations (EC) No 320/2006, (EC) No 1234/2007, (EC) No 3/2008 and (EC) No […]/2008#- Council Regulation amending Regulation (EC) No 1698/2005 on support for rural development by the European Agricultural Fund for Rural Development (EAFRD)#- Council Decision amending Decision 2006/144/EC on the Community strategic guidelines for rural development (programming period 2007 to 2013)#Impact Assessment summary {COM(2008) 306 final} {SEC(2008) 1885}
Date: 2008-05-08
Institutions: European Commission
Subjects: agricultural expenditure, aid to agriculture, common agricultural policy, environmental protection, financial year, fund (EU), impact study, reform of the CAP, rural development

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 20.5.2008 
SEC(2008) 1886 

COMMISSION STAFF WORKING DOCUMENT 

accompanying the 

Proposals for 

COUNCIL REGULATION establishing common rules for direct support schemes 
under the common agricultural policy for farmers and establishing  
certain support schemes for farmers 

COUNCIL REGULATION on modifications to the common agricultural policy by 
amending Regulations (EC) No 320/2006, (EC) No 1234/2007, (EC) No 3/2008  
and (EC) No […]/2008 

COUNCIL REGULATION amending Regulation (EC) No 1698/2005 on support  
for rural development by the European Agricultural Fund  
for Rural Development (EAFRD) 

COUNCIL DECISION amending Decision 2006/144/EC on the Community strategic 
guidelines for rural development (programming period 2007 to 2013) 

Impact Assessment summary 

{COM(2008) 306 final} 
{SEC(2008) 1885} 

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1. 

INTRODUCTION 

The aim of the CAP "Health Check" is to assess the experience of the 2003 CAP reform, and 
to introduce adjustments that simplify and increase the effectiveness of the policy, allowing it 
to respond to present market opportunities and face new challenges. 

First indications from the assessment of the 2003 reform are in general positive, and indicate 
that  a  fundamental  reform  of  the  CAP  for  the  remaining  horizon  of  the  present  financial 
perspectives  (until  2013)  is  neither  necessary  nor  desirable.  However,  other,  parallel  market 
and policy developments, together with experience gained so far from reform implementation, 
indicate  a  rapidly  changing  environment  facing  EU  agriculture  and  the  need  for  CAP 
adjustments which could not be foreseen when the 2003 reform was carried out. 

The  three  main  policy  questions  that  the  Health  Check  addresses  concern  the  three  basic 
Regulations of the CAP: 

Regulation (EC) No 1782/2003 covers all issues related to the core of farm support today, the 
Single Payment Scheme (SPS), 

Regulation  (EC)  No  1234/2007  covers  issues  related  to  the  single  common  market 
organisation (sCMO), 

Regulation (EC) No 1698/2005 covers issues related to Rural Development (RD) policy. 

The Impact Assessment (IA) addresses the above issues, and analyses the impact of potential 
changes in the CAP, examining many existing studies, both internal and external. 

Public  consultation  with  stakeholders  was  organised,  including  two  public  seminars,  one  on 
the  global  presentation  of  the  HC,  the  other  on  dairy  issues.  Stakeholders  were  invited  to 
contribute  to  the  preparation  of  proposals  based  on  a  questionnaire.  This  resulted  in  a 
significant  number  of  submissions  with  wide-spread  representation  across  Member  States 
(MS) and stakeholders. 

2. 

SINGLE PAYMENT SCHEME 

The introduction of the SPS rendered decoupled farm support the central element of the 2003 
CAP reform. In implementing the SPS, MS could opt for two basic models: a historic model 
or a regional model. The current legislation does not include a "regret clause" that would allow 
MS to adjust their SPS model. 

Yet, as more sectors are included in the SPS, within on-going CAP reform, there are fewer a 
priori reasons to exclude such a possibility. To assess the potential impact from allowing MS 
to move towards a more flat rate, four alternative options were analysed. 

A move towards an EU-wide flat rate per hectare was found to imply a fundamental reform 
and  a  major  redistribution  of  support  among  MS.  Turning  the  SAPS,  the  transitional  area 
payment  scheme  in  the  new  MS,  into  an  EU-wide  permanent  scheme  would  contradict  the 
very  philosophy  of  decoupled  support  because  it  would  not  be  a  system  based  on  fixed 
entitlements. The two options of assessing a targeted move towards a flat rate by harmonising 
payments  in  a  regional  context,  either  by  entitlement  or  by  hectare,  was  found  to  address 
equity issues related to the distribution of support while minimising the impact of significant 
shifts of support on land values. 

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Adjustment  of  Article  69  of  the  SPS  legislation  has  also  been  shown  to  be  desirable. 
Originally designed to facilitate transition towards decoupling, this article could also facilitate 
the adjustment needs resulting from the changes proposed in the HC. These challenges mainly 
concern  risks  that  some  regions  may  face  with  the  gradual  phasing-out  of  milk  quotas  and 
further  decoupling,  and  the  need  for  policies  addressing  risk  management.  Through  this 
revision  MS  could  be  allowed  to  use  part  of  their  available  SPS  support  to  target  particular 
sectors  and  regions  with  specific  needs  of  an  economic,  social  or  environmental  nature  thus 
mitigating  negative  effects  on  income,  contributing  to  the  vitality  of  rural  areas  and  to 
promoting environmentally beneficial farming practices. 

In  order  to  avoid  the  risk  of  backtracking  from  the  overall  orientation  of  the  CAP  towards 
decoupling needs to be addressed by dividing the resulting national envelopes into two distinct 
sub-ceilings. One envelope could address the adjustment of decoupled support towards higher 
flat rate payments in those regions where the expiry of the dairy quotas and further decoupling 
could create potential risks, or the introduction of risk management measures that meet Green 
Box criteria. The other sub-ceiling could be used for targeted measures of coupled support or 
other risk management measures. 

As  cross  compliance  creates  a  link  between  farm-relevant  support  and  farm-relevant 
legislation, its scope was screened in order to examine whether the SMR and the GAEC could 
be better targeted, whether the issues of climate change and water management could be better 
taken into consideration, and whether environmental benefits from set-aside could be retained 
through  cross  compliance.  Two  options  were  considered.  The  first  option  identified  those 
requirements whose removal would reduce the administrative burden, but not impact upon the 
current  ambition  of  cross-compliance,  such  as  those  not  directly  linked  to  agricultural 
activities and agricultural land, whose non-respect cannot be attributed to an individual farmer, 
concern MS instead of the farmer's responsibility, and are thus difficult to control under cross 
compliance. 

The second approach considered the broadening of the scope of cross compliance by adding 
certain important legal acts relevant to farming activities that would contribute to meeting new 
challenges and/or retaining environmental benefits from set aside. Ways of introducing water 
management  within  the  scope  of  cross  compliance  have  also  been  considered,  such  as 
including water management within the GAEC. For retaining environmental benefits from set 
aside,  an  additional  standard  on  buffer  strips  and  a  strengthening  of  the  current  standard  on 
retaining landscape features have been considered to be appropriate. 

Partially coupled support is available for some sectors. The remaining coupled support should 
move to full decoupling to achieve more market orientation and improved competitiveness. In 
some  cases,  this  may  have  consequences  for  the  environmental  benefits  provided  by  current 
policy tools, as well as for the vitality of rural areas. The analysis concludes that the biggest 
impact  would  be  in  those  sectors  and  regions  where  the  coupled  premiums  represent  an 
important share of the farmer's margin, such as the sectors of suckler cows and sheep. In the 
cereals sector and in other beef production systems, the impact would not be so significant. 

On  payment  limitations,  the  situation  is  at  present  characterised  by  a  small  number  of  very 
high payments and a large number of very small payments. Introducing individual limits was 
assessed  in  order  for  its  potential  of  improving  the  equality  of  distribution  of  payments 
between farmers. The analysis shows that such a measure would affect a very small number of 
holdings in a limited number of MS, particularly in EU-10, and would result in significant cuts 
in  their  direct  payment  levels  and  the  risk  of  splitting  of  holdings  to  avoid  the  ceilings. 
Progressive individual limits, on the other hand, maintain the more generalised nature of the 

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measure across the EU, but have significantly milder impacts on cuts in direct payments and 
income on the affected holdings. 

An  increase  of  lower  payment  limitations  was  assessed  due  to  the  merits  this  could  have  in 
easing  the  administrative  burden  for  the  MS.  Depending  on  where  the  limit  is  set,  the 
percentage  of  beneficiaries  excluded  from  payments  could  vary  greatly  within  MS.  Leaving 
the  choice  of  setting  either  a  minimum  area  or  a  minimum  amount  to  the  MS  would  allow 
better adjustment to their specific needs. 

3. 

GRASPING MARKET OPPORTUNITIES 

The proposed options for adjustments to cereal intervention and set-aside were assessed with 
respect  to  their  capacity  to  improve  competitiveness  and  market  orientation  for  the  sector 
while  keeping  intervention  as  a  safety-net  in  case  of  market  disruptions,  facilitate  farmers' 
response to market conditions, and identify measures that could deliver similar environmental 
benefits to set-aside where its removal may put them at risk. 

Limiting  quantities  going  to  intervention  at  zero for  all  feed  grains  facilitates  supporting  the 
entire  cereal  markets  if  necessary  (since  cereal  prices  move  in  parallel)  without  the 
disadvantage of artificially undermining barleys' competitiveness. Introducing tendering would 
simplify and harmonise cereal intervention rules with those of other CMOs. 

Removal  of  the  set-aside  obligation  would  likely  bring  back  into  production  an  area 
corresponding  to  roughly  half  the  area  currently  under  mandatory  set-aside.  It  has  been 
suggested that the environmental benefits of set aside could be retained by introducing a fixed 
percentage of total area as an "environmental compensation/priority" area, containing certain 
landscape features. However, such a measure would attempt to fix in a similar manner MS a 
potential problem whose distribution is presently very diverse across MS, and would thus not 
necessarily compensate for environmental losses in the place that they occurred. If the fixed 
percentage  of  set-aside  for  all  farmers  is  replaced  with  new  standards  to  reflect  the  above 
landscape features, an expanded list in GAEC would ensure better coverage than at present of 
these features by MS. Furthermore, the strengthening of set-aside within Pillar II would allow 
the  targeting  of  environmental  benefits  where  they  are  mostly  needed,  but  the  impacts  will 
depend on relevant provisions of existing RD programmes in different MS. 

Milk quotas hold back the sector from achieving the objectives of CAP reform since they still 
reflect  concerns  of  two  decades  back,  instead  of  responding  to  present  opportunities.  The 
phasing-out of dairy quotas was assessed, and various policy options were compared with the 
continuation  of  the  dairy  quota  as  a  reference.  In  the  continuation  option,  constrained 
production  combined  with  growing  demand  increases  the  milk  price,  but  market  orientation 
and competitiveness of producers and processors alike is being hampered. 

On  the  other  hand,  under  the  expiry  option,  when  quotas  are  lifted  in  2015/16,  production 
jumps to match demand, causing a strong price decrease after quotas expire. Price declines and 
production  responses  are  smoother  under  both  phasing  out  options,  but  the  extent  of 
adjustment  differs.  The  lower  annual  quota  increase  option  allows  for  a  smoother  price 
adjustment throughout the transition period, but in both phasing out scenarios, the butter price 
falls to intervention price level. 

The  transition  to  the  phasing  out  of  dairy  quotas  has  social  and  environmental  effects.  A 
smooth  transition  in  the  phasing  out  scenarios  prevents  rapid  restructuring  and  allows 

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preparing  and  adjusting  accompanying  measures  to  the  potential  social  and  environmental 
problems that could appear. 

Finally,  for  a  list  of  small  support  schemes,  the  status  quo  option  contradicts  the  2003  CAP 
reform path in terms of competitiveness, market-orientation and simplification of the support 
scheme.  Although  full  decoupling  would  have  a  positive  impact  on  farm  income  in  most 
regions due to higher transfer efficiency of direct support, nevertheless it could affect specific 
regions where local production is vital for the viability of the local agri-food chain or for the 
environment,  thus  indicating  the  need  for  a  variable  degree  of  transition  for  the  industry, 
according to the sector. 

Analysis has also been carried out on how to best take account of the farmers increasing need 
for risk management tools, due to increasing impacts of climate change and the higher degree 
of  market  orientation.  Introduction  of  new  risk  management  tools  should  contribute  to 
stabilising  the  income  of  the  farm  society,  while  not  introducing  unnecessary  administrative 
burden or excessively high budgetary costs. 

Price  risks  appear  to  be  sufficiently  addressed  with  safety-net  intervention  and  with  the 
flexibility  that  decoupling  provides;  hence  there  is  no  need  for  additional  risk  management 
tools to deal with price risks. The extension of SPS to sectors which are currently not included 
could  also  provide  a  positive  contribution  in  mitigating  price  variability  for  the  agricultural 
community. 

With respect to the potentially growing needs for production risks, an EU-wide scheme cannot 
be considered feasible at this stage. Such a scheme would be very expensive, and would imply 
an increased administrative burden for farmers and MS. Given the heterogeneity of the risks 
and  crises  that  the  EU  faces  heterogeneous  measures  seem  to  provide  the  most  suitable 
solution  to  help  farmers  deal  with  crisis  situations.  A  harmonisation  at  EU  level  of  the  aid 
schemes  currently  supported  with  state  aids  could  contribute  to  increased  transparency 
between  MS,  while  at  the  same  time  allowing  the  CAP  to  better  meet  the  objective  of 
contributing to the income stability for the agricultural community. 

An introduction of new risk management tools within existing CAP instruments as an option 
in a revised Article 69 would be budget neutral with respect to the overall EU budget. National 
contributions would depend on MS preference, but introducing the measure would in any case 
be  optional.  On  top  of  this,  RD  programmes  contain  measures  directly  related  to  risk 
management  for  agriculture  and  forestry,  and  that  provide  complementary  support  for 
preventive action in the areas of physical investment or human capital formation. 

4. 

RESPONDING TO NEW CHALLENGES 

The HC Communication identified a number of new and ongoing challenges facing the CAP 
(such as climate change, bio-energy, water management and biodiversity) and considers RD to 
be a key instrument to deal with these challenges. The screening exercise of RD programmes 
indicates  that  existing  measures  are  already  providing  various  solutions  to  address  the  new 
challenges and that MS have already included a significant number of related measures in their 
RD programmes for the period 2007-13. 

The  analysis  of  the  impact  of  the  proposed  options  for  facing  "new  challenges"  via  RD 
measures focused on the impact of such proposals on improving the EU responsiveness to new 
challenges  via  greater  MS  uptake  of  second  pillar  measures.  Four  options  were  examined, 
aiming at targeting additional funds through modulation to existing measures related to "new 

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challenges" with a reporting obligation concerning the new funding and indicators of measures 
in areas where "new challenges" were considered. 

However,  the  constraints  on  the  RD  budget  following  the  2005  decision  on  the  Financial 
Perspectives,  present  an  obstacle  to  the  realisation  of  2nd  Pillar  objectives  in  the  current 
budgetary period. Reinforcement of budgetary resources is also necessary in order to respond 
to  the  need  for  increased  efforts  to  address  new  challenges  identified  in  the  HC 
Communication. 

Analysis  of  alternative  levels  of  modulation  assessed  their  impact  on  the  net  budgetary 
transfers among MS and the level of their RD funds, as well as the impact on farm income for 
the  farms  and  sectors  involved.  Since  the  manner  to  distribute  modulated  funds  among  MS, 
once the new MS are also part of the system, is not yet decided, the aim was to illustrate the 
potential  impact  of  the  options  addressed.  Different  options  were  analysed,  assuming  an 
overall increase in modulation, achieved with the same annual steps from 2009 onwards, but 
taking  into  account  different  assumptions  about  the  contribution  of  new  MS.  The  retained 
option analysed is a variant of the idea supported by the European Parliament that introduces a 
progressive  element  in  modulation  based  on  different  thresholds  of  payments,  thereby 
addressing equity issues relating to individual producers limits. 

5. 

CONCLUSIONS 

The  continuation  of  present  CAP  policies  shows  that  the  current  policy  framework,  as 
reformed  in  2003,  contributes  positively  to  fulfilling  the  main  CAP  objectives.  The  analysis 
points to areas where adjustments in current policies would lead to more optimal solutions. 

With respect to the Single Payment Scheme, the implementation of the SPS and the gradual 
expansion of decoupling to more sectors render the need to allow MS to consider adjustments 
in  their  SPS  model  towards  a  more  flat  rate  for  payments.  Such  a  move  could  address  the 
societal concerns of unequal distribution of payments between farmers. 

Further decoupling, as well as a continuation of move to producer support of sectors not yet 
integrated in the SPS, could significantly enhance market orientation of the CAP, but in some 
sectors  decoupling  may  create  the  need  for  transitional  measures  in  order  to  address 
economical, social or environmental concerns. Solutions could be addressed through a revision 
of Article 69 and through transitional periods. 

Revising the scope of cross compliance would contribute to easing the administrative burden 
as  well  as  addressing  new  challenges  that  were  not  as  present  in  2003.  Also,  environmental 
benefits  of  set-aside  could  be  retained  through  the  combined  effect  of  adjustments  in  cross 
compliance and RD measures. 

In terms of agricultural markets, the phasing out of milk quotas and removal of set-aside will 
allow the farmers to better respond to market situations. 

Finally, a screening exercise has showed that the present tool kit of measures available under 
RD  programmes  appears  to  be  sufficient  to  address  new  challenges.  The  best  way  to 
strengthen  the  role  of  these  measures  within  the  RD  policy  appears  to  be  the  creation  of 
mechanisms that guarantee an increased uptake by Member States, as well as the provision of 
additional financing through progressive modulation. 

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