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 {COM(2008) 306 final} {SEC(2008) 1886}
Date: 2008-05-20
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) 1885 

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 

{COM(2008) 306 final} 
{SEC(2008) 1886} 

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TABLE OF CONTENTS 

A – PROCESS, OUTLINE AND METHODOLOGY .............................................................10 

1. 

2. 

process and outline .....................................................................................................10 

Methodology...............................................................................................................11 

B – INTRODUCTION .............................................................................................................16 

1. 

2. 

Scope and objectives ..................................................................................................16 

Issues ..........................................................................................................................17 

C – SINGLE PAYMENT SCHEME ........................................................................................19 

1. 

2. 

Problem Definition .....................................................................................................19 

Objectives ...................................................................................................................19 

C.a. 

IMPLEMENTATION OF THE SINGLE PAYMENT SCHEME.............................20 

1. 

2. 

3. 

4. 

5. 

5.1. 

5.2. 

5.3. 

5.4. 

5.5. 

6. 

7. 

7.1. 

7.2. 

7.3. 

8. 

9. 

Background.................................................................................................................20 

Problem definition ......................................................................................................21 

Objectives ...................................................................................................................22 

Options SPS model.....................................................................................................22 

Impact analysis SPS model.........................................................................................23 

Option 0: status quo....................................................................................................23 

Option 1: EU-wide flat rate per eligible hectare.........................................................25 

Option 2: SAPS for all MS .........................................................................................26 

Option 3: regional flat rates per eligible hectare ........................................................26 

Option 4: regional flat rate per entitlement ................................................................27 

Options for Article 69.................................................................................................28 

Impact analysis Article 69 ..........................................................................................28 

Option 0: status quo....................................................................................................28 

Option 1: targeted revision .........................................................................................29 

Option 2: extended revision........................................................................................29 

Conclusions ................................................................................................................29 

Summary tables ..........................................................................................................31 

9.1. 

Comparison between different options and their respective impacts – SPS flat rate .31 

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9.2. 

9.3. 

9.4. 

Comparison between different options and their respective objectives – SPS flat rate
....................................................................................................................................33 

Comparison between different options and their respective impacts – SPS Article 69
....................................................................................................................................34 

Comparison between different options and their respective objectives – SPS 
Article 69 ....................................................................................................................35 

C.b. 

CROSS COMPLIANCE.............................................................................................36 

1. 

2. 

3. 

4. 

4.1. 

4.2. 

4.3. 

5. 

5.1. 

5.2. 

5.3. 

6. 

7. 

7.1. 

7.2. 

Background.................................................................................................................36 

Problem definition ......................................................................................................36 

Objectives ...................................................................................................................37 

Policy options and analysis of their impacts ..............................................................37 

Option 0: status quo....................................................................................................37 

Option 1: better targeting the current scope of cross compliance ..............................38 

Option 2: broadening the scope of cross compliance .................................................38 

Comparison of the options and their impacts .............................................................39 

Option 0: status quo....................................................................................................40 

Option 1: better targeting the current scope of cross compliance ..............................40 

Option 2: broadening the scope of cross compliance .................................................41 

Conclusions ................................................................................................................41 

Summary tables ..........................................................................................................42 

Comparison between different options and their respective impacts – cross 
compliance..................................................................................................................42 

Comparison between different options and their respective objectives – cross 
compliance..................................................................................................................43 

C.C. 

PARTIALLY COUPLED SUPPORT ........................................................................44 

1. 

2. 

3. 

4. 

Background.................................................................................................................44 

Problem definition ......................................................................................................44 

Objectives ...................................................................................................................45 

Policy Options ............................................................................................................45 

4.1. 

Timing and transition to full decoupling options .......................................................45 

5. 

Impact Analysis ..........................................................................................................46 

5.1. 

Economic impacts.......................................................................................................46 

5.1.1.  Status quo ...................................................................................................................46 

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5.1.2.  Full decoupling ...........................................................................................................47 

5.1.3.  Targeted selective decoupling ....................................................................................49 

5.2. 

Social impacts and environmental impacts ................................................................49 

6. 

7. 

7.1. 

7.2. 

Conclusions ................................................................................................................50 

Summary tables ..........................................................................................................51 

Comparison between different options and their respective impacts – partially 
coupled support...........................................................................................................51 

Comparison between different options and their respective objectives – partially 
coupled support...........................................................................................................52 

C.d. 

INDIVIDUAL PAYMENT LIMITATIONS .............................................................53 

1. 

2. 

3. 

4. 

8. 

8.1. 

8.2. 

8.3. 

9. 

10. 

Background.................................................................................................................53 

Problem Definition .....................................................................................................54 

Objectives ...................................................................................................................54 

Policy options .............................................................................................................54 

Impact Analysis of Upper Payment Limitations ........................................................55 

Option 0 ......................................................................................................................56 

Option 1 ......................................................................................................................56 

Option 2 ......................................................................................................................56 

Impact Analysis of Lower Payment Limitations........................................................57 

Conclusions ................................................................................................................58 

10.1.  Upper limitations ........................................................................................................58 

10.2. 

Lower limitations........................................................................................................58 

11. 

Summary tables ..........................................................................................................60 

11.1.  Comparison between different options and their respective impacts – upper payment 
limitations ...................................................................................................................60 

11.2.  Comparison between different options and their respective objectives – upper 

payment limits ............................................................................................................62 

11.3.  Comparison between different options and their respective impacts – Lower payment 
limits ...........................................................................................................................63 

11.4.  Comparison between different options and their respective objectives – Lower 

payment limits ............................................................................................................64 

D – MARKETS ........................................................................................................................65 

1. 

Problem Definition .....................................................................................................65 

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2. 

Objectives ...................................................................................................................65 

D.A. 

CEREAL INTERVENTION AND SET ASIDE ........................................................66 

1. 

2. 

3. 

4. 

5. 

Background.................................................................................................................66 

Problem Definition .....................................................................................................66 

Objectives ...................................................................................................................67 

Policy options for cereal intervention.........................................................................67 

Impact Analysis of Cereal Intervention Options ........................................................67 

5.1. 

Economic impact ........................................................................................................67 

5.1.1.  Option 0: status quo – no further changes to the intervention system........................68 

5.1.2.  Option 1: reduction of the intervention price to a safety net ......................................68 

5.1.3.  Option 2: extension of maize intervention model to all feed grains...........................68 

5.1.4.  Option 3: tendering.....................................................................................................69 

5.2. 

5.3. 

5.4. 

6. 

6.1. 

6.2. 

6.3. 

6.4. 

7. 

8. 

8.1. 

8.2. 

8.3. 

8.4. 

Environmental impact.................................................................................................69 

Social impact ..............................................................................................................70 

Other ...........................................................................................................................70 

Impact Analysis of Set Aside Abolition .....................................................................70 

Policy options for set aside.........................................................................................70 

Economic impacts.......................................................................................................71 

Environmental impacts ...............................................................................................73 

Social impact ..............................................................................................................75 

Conclusions ................................................................................................................75 

Summary tables ..........................................................................................................77 

Comparison between different options and their respective impacts – Cereal 
intervention.................................................................................................................77 

Comparison between different options and their respective objectives – Cereal 
intervention.................................................................................................................78 

Comparison between different options and their respective impacts – set aside .......79 

Comparison between different options and their respective objectives – set aside....81 

D.B. 

THE PHASING-OUT OF MILK QUOTAS...............................................................82 

1. 

2. 

3. 

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Background.................................................................................................................82 

Problem definition ......................................................................................................82 

Objectives ...................................................................................................................82 

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4. 

4.1. 

4.2. 

4.3. 

Policy options .............................................................................................................83 

Option 1: quota extension...........................................................................................83 

Option 2: quota expiry in 2015...................................................................................83 

Option 3: phasing-out of quotas .................................................................................83 

4.3.1.  Annual increases of national quotas by 1% from 2009/10 to 2014/15.......................83 

4.3.2.  Annual increases of national quotas by 2% from 2009/10 to 2014/15.......................83 

5. 

Impact Analysis ..........................................................................................................83 

5.1. 

Economic impacts.......................................................................................................84 

5.1.1.  Extension of quotas ....................................................................................................84 

5.1.2.  Expiry of quotas in 2015 ("hard landing") .................................................................85 

5.1.3.  Gradual phasing-out of dairy quotas ("soft landing").................................................86 

5.1.4.  Other dairy policy instruments ...................................................................................88 

5.1.5. 

Impact on international markets .................................................................................89 

5.2. 

5.3. 

6. 

7. 

8. 

8.1. 

8.2. 

Social impacts.............................................................................................................89 

Environmental impacts ...............................................................................................92 

Supplementary analysis ..............................................................................................93 

Conclusions ................................................................................................................96 

Summary tables ..........................................................................................................97 

Comparison between different options and their respective impacts – milk quotas ..97 

Comparison between different options and their respective objectives – milk quotas99 

D.c. 

OTHER SUPPORT SCHEMES...............................................................................100 

1. 

2. 

3. 

4. 

Background...............................................................................................................100 

Problem definition ....................................................................................................100 

Objectives .................................................................................................................101 

Policy Options ..........................................................................................................101 

4.1. 

Timing and transition to full decoupling options .....................................................102 

5. 

Impact Analysis ........................................................................................................102 

5.1. 

Economic impacts.....................................................................................................102 

5.1.1.  Status quo .................................................................................................................102 

5.1.2.  Full decoupling .........................................................................................................103 

5.1.3.  Targeted selective decoupling ..................................................................................104 

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5.1.4.  Other .........................................................................................................................104 

5.2. 

Social and environmental impacts............................................................................104 

6. 

7. 

7.1. 

7.2. 

Conclusions ..............................................................................................................105 

Summary tables ........................................................................................................106 

Comparison between different options and their respective impacts – other support 
schemes.....................................................................................................................106 

Comparison between different options and their respective objectives – other support 
schemes.....................................................................................................................107 

D.d. 

RISK AND CRISIS MANAGEMENT ....................................................................108 

1. 

2. 

3. 

4. 

4.1. 

7.3. 

7.4. 

5. 

Background...............................................................................................................108 

Problem Definition ...................................................................................................109 

Objectives .................................................................................................................109 

Policy Options ..........................................................................................................110 

Option 0: status quo..................................................................................................110 

Option 1: EU-wide framework .................................................................................110 

Option 2: enhanced role of risk management in existing CAP instruments.............110 

Impact Analysis ........................................................................................................110 

7.5. 

Option 1: EU-wide scheme.......................................................................................111 

7.5.1.  Subsidies of insurance premiums .............................................................................111 

5.1.1.  Supporting mutual funds ..........................................................................................112 

5.1.2.  Providing basic coverage against income crises.......................................................113 

5.1.3.  Environmental impacts, and impacts in terms of international constraints..............114 

5.2. 

Option 2: enhancing the role of risk management in existing CAP instruments .....115 

5.2.1.  Rural Development measures...................................................................................115 

5.2.2.  Single Payment Scheme ...........................................................................................116 

6. 

7. 

7.1. 

7.2. 

Conclusions ..............................................................................................................116 

Summary tables ........................................................................................................119 

Comparison between different options and their respective impacts – risk 
management..............................................................................................................119 

Comparison between different options and their respective objective – risk 
management..............................................................................................................121 

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E – NEW CHALLENGES ......................................................................................................122 

1. 

2. 

Problem Definition ...................................................................................................122 

Objectives .................................................................................................................122 

E.a 

RESPONDING TO NEW CHALLENGES .............................................................123 

1. 

2. 

3. 

4. 

5. 

Background...............................................................................................................123 

Problem definition ....................................................................................................123 

Objectives .................................................................................................................123 

Policy Options ..........................................................................................................124 

Analysis of Impacts ..................................................................................................124 

5.1. 

Impact on the programming process ........................................................................124 

5.1.1.  Option 0: status quo..................................................................................................124 

5.1.2.  Option 1: transfer of additional funds to Pillar II .....................................................124 

5.1.3.  Option 2: ear-marking ..............................................................................................125 

5.1.4.  Option 3: higher co-financing rates ..........................................................................125 

5.1.5.  Option 4: higher aid intensities.................................................................................126 

5.1.6.  Option 5: obligation to use modulation funds for new challenges ...........................126 

5.2. 

5.3. 

6. 

7. 

8. 

8.1. 

8.2. 

Legislative and administrative consequences...........................................................126 

Social/environmental impacts of alternative options for new challenges ................127 

Conclusions ..............................................................................................................127 

Annex to Chapter VIII – List of indicative action types ..........................................128 

Summary tables ........................................................................................................130 

Comparison between different options and their respective impacts – New challenges
..................................................................................................................................130 

Comparison between different options and their respective objectives – New 
Challenges ................................................................................................................131 

E.b.  MODULATION .......................................................................................................132 

1. 

2. 

3. 

4. 

5. 

Background...............................................................................................................132 

Problem Definition ...................................................................................................133 

Objectives .................................................................................................................133 

Policy Options ..........................................................................................................133 

Analysis of Impacts ..................................................................................................135 

5.1. 

Global effects on budget and MS transfers ..............................................................135 

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5.2. 

5.3. 

5.4. 

5.5. 

6. 

7. 

7.1. 

7.2. 

7.3. 

Economic and social impacts per farm.....................................................................139 

Environmental impacts .............................................................................................140 

Administrative impacts.............................................................................................140 

Supplementary analysis ............................................................................................141 

Conclusions ..............................................................................................................144 

Summary tables ........................................................................................................146 

Comparison between different options and their respective impacts – New challenges
..................................................................................................................................146 

Comparison between different options and their respective impacts – Modulation 148 

Comparison between different options and their respective objectives – New 
Challenges ................................................................................................................149 

7.4. 

Comparison between different options and objectives – modulation.......................149 

F – CONCLUSIONS ..............................................................................................................150 

1. 

2. 

3. 

4. 

5. 

6. 

Summary Results......................................................................................................150 

Impact on stakeholders .............................................................................................151 

Cross-cutting effects .................................................................................................152 

Budgetary Impact .....................................................................................................153 

Summary of different analysed options....................................................................155 

Summary of cross cutting issues between analysed options ....................................156 

G – MONITORING AND EVALUATION ...........................................................................157 

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A – PROCESS, OUTLINE AND METHODOLOGY 

1. 

PROCESS AND OUTLINE 

A Steering Group of 15 Commission Services contributed to the identification of the analysed 
options and objectives, and discussed in several meetings the preliminary results of the Impact 
Assessment.  In  parallel,  public  consultation  with  stakeholders  included  two  public  seminars 
which discussed the HC Communication, and invited contributions based on a questionnaire. 
During the seven-week period of public consultation, the Commission received a significant 
number of submissions (85) with wide-spread representation across Member States (MS) and 
stakeholders, from farm and environmental groups to industry. 

The  conclusions  are  presented  in  this  Impact  Assessment  report,  which  together  with  its 
accompanying  background  material  detailing  the  results  of  the  various  internal  and  external 
analyses, is annexed to the legal proposals. The Impact Assessment compares policy options 
against the baseline assumption of continuation of existing policies, including policies related 
to  the  WTO.  The  most  recent  market  outlook  indicates  that  a  higher  level  of  agricultural 
prices will persist for the foreseeable future. This outlook has been taken into account in the 
present  analysis,  and  constitutes  the  baseline  for  market  developments.  Uncertainties  about 
the prospects of a WTO agreement in the context of the Doha Development Agenda (DDA) 
negotiations  imply  that,  for  this  analysis,  the  description  of  a  reliable  scenario  of  a  DDA 
agreement  was  not  feasible.  However,  in  selective  areas,  the  potential  outcome  of  such  an 
agreement is assessed based on the comparison of options to the formal EU offer in DDA. 

The  Impact  Assessment  used  extensively  quantitative  analysis  for  issues  related  to  the  SPS 
and  market  measures.  The  impact  from  adjustments  in  SPS-related  issues  were  analysed 
based  on  microeconomic  data  from  the  Farm  Accountancy  Data  Network  (FADN),  while 
econometric analysis was used to estimate the impact of adjustments in market measures. On 
the  other  hand,  for  issues  related  to  new  challenges  and  cross  compliance,  analysis  was 
mainly of a qualitative nature. 

This  Report  was  examined  by  the  Impact  Assessment  Board  and  benefited  from  its 
suggestions.  To  take  account  of  its  opinion,  several  modifications  were  introduced  with 
respect to previous versions. An overall introduction was added to give a better overview of 
the  various  elements  of  the  Report,  and  better  identify  in  the  problem  definition  and 
objectives the inter-relation between the various issues. 

The  three  main  areas  of  analysis  (SPS,  markets,  new  challenges)  are  now  addressed  in 
separate  sections.  In  each  section,  a  cover  page  introduces  problem  definition  and  specific 
objectives compared to a clearly defined baseline scenario. At the end of each section, after 
the individual chapters, tables summarise the impacts of each option and assess each option 
with  respect  to  fulfilling  its  objectives.  Specific  modifications  were  also  introduced  in 
individual  chapters,  following  the  Board's  various  suggestions.  A  final  section  was  added, 
bringing  together  the  main  conclusions  of  the  Assessment  of  the  Health  Check  proposals, 
including  cross-cutting  impacts  of  all  options,  and  their  impact  on  stakeholders  beyond  the 
agricultural sector. 

Additional  analysis  has  been  included  in  those  areas  where  developments  in  recent  months 
rendered altered some of the initial assumptions (such was for example the case in dairy with 
respect  to  price  developments  or  the  quota  level  were  altered  because  of  recent 

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developments),  or  existing  analysis  was  added  in  the  annexes  to  clarify  already  analysed 
developments (such as the impact of price increases on consumers).  

A  series  of  Annexes  provide  details  supporting  the  results  of  the  analysis.  These  Annexes 
summarise  the  results  of  the  public  consultation  of  stakeholders  (A),  provide  information 
about the state and role of EU agriculture in the EU economy and EU regions and the impact 
of  CAP  support  (B),  analyse  issues  related  to  the  SPS  framework  (C),  include  analyses  on 
market-related  measures  (D),  on  the  suitability  of  existing  RD  instruments  and  financial 
resources  to  face  new  challenges  (E),  and  provide  additional  internal  (microeconomic)  and 
external studies that were also used in the analysis (F and G, respectively). 

2. 

METHODOLOGY 

To  address  the  above  issues,  and  analyse  the  impact  of  potential  changes  in  the  CAP,  the 
present Impact Assessment (IA) followed these steps. 

Public  consultation  with  stakeholders  included  two  public  seminars,  one  on  the  global 
presentation  of  the  HC,  the  other  with  focus  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, ranging from farm and environmental groups to industry (details are 
provided in Annex A). 

Many existing analyses and studies, both internal and external, were examined, leading to the 
overall assessment that the CAP reform process has already radically reformed and improved 
the performance of the CAP. Annex B provides information about the state of EU agriculture 
and its role in the EU economy and the EU regions which indicates the contribution of CAP 
reform towards increased market orientation, better distribution of support among the various 
policy  pillars,  more  transfer  and  budget  efficiency,  and  improved  balance  in  EU  and  world 
markets. Annex B also sheds light on the impact of CAP support based on the conclusion of 
an extended analysis about the prospects of EU agriculture for 2020. This study provides the 
best  proof  of  what  support  does:  it  contributes  to  regional  farm  income,  less  intensive  farm 
practices and more territorial cohesion in a joined-up manner. It is not the overall level of EU 
agricultural production that would suffer from the removal of support to EU agriculture, but 
the location and the intensity of this production. 

Annex C analyses the potential impact of changes in the SPS model towards a more flat, per 
area,  rate  of  support  on  the  distribution  of  farm  payments,  and  on  farm  income  at  MS  and 
farm level. It relies on the analysis of the distribution of support based on data concerning the 
most recent CAP payments, on microeconomic analysis at farm level, and on the conclusions 
of  external  studies  about  the  impact  of  decoupled  support  on  farm  income  and  on  land 
markets. It also looks into the impact of payment limitations on the distribution of support and 
on farm income. 

Annex D relies on different analytical approaches (in-house and external partial equilibrium 
econometric  models  to  microeconomic  analysis  at  the  farm  level)  to  assess  the  outlook  for 
agricultural  markets  and  the  potential  impact  of  changes  in  CAP  market  instruments.  This 
analysis  also  used  the  results  of  a  commissioned  external  study  on  the  phasing-out  of  dairy 
quotas  and  its  potential  impact  on  production,  prices  and  income.  Furthermore,  the  annex 
summarises the conclusions of several studies on risk management. 

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Annex  E  summarises  the  results  of  the  screening  of  RD  instruments  to  identify  their 
suitability for the new challenges facing EU agriculture, and assesses the potential impact of 
an increase in modulated funds which shift support from the 1st to the 2nd CAP Pillar. 

Finally, Annexes F and G provide a list of additional internal (microeconomic) and external 
studies that were also used in the analysis. 

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LIST OF ANNEXES 

ANNEX A – PUBLIC CONSULTATION SUMMARY 

Stakeholders consultation (D/3377 – 2008) 

ANNEX B – ECONOMIC SITUATION OF EU AGRICULTURE 

1. 

2. 

The situation and perspectives of agriculture and rural zones (D/3338 – 2008) 

The impact of developments in agricultural prices for consumers (D/34703 – 2007) 

ANNEX C – NOTES 1-4 (Regulation (EC) No 1782/2003) 

1. 

2. 

3. 

4. 

Simplification of the Single Payment Scheme (D/1419 – 2008) 

Cross compliance (D/1327 – 2008) 

Partially coupled support (D/1327 – 2008) 

Individual limits for direct payments (D/1066 – 2008) 

ANNEX D – NOTES 5-7 (Regulation (EC) No 1234/2007) 

1. 

2. 

3. 

Cereal intervention and set aside (D/1029 – 2008) 

Milk quotas (D/1046 – 2008) 

Other support schemes (D/1408 – 2008) 

ANNEX E – NOTES 8-10 (new challenges) 

1. 

2. 

3. 

New challenges (D/1071 – 2008) 

Risk and Crisis management (D/1073 – 2008) 

Modulation (D/1333 – 2008) 

ANNEX F – MICROECONOMIC (FADN) ANALYSIS 

1. 

2. 

3. 

4. 

Analysis of the impact of a direct payment flat rate (D/586/ – 2008) 

Impact of a capping of Direct Payments (D/1314 – 2008) 

Dairy  sector:  analysis  of  the  evolution  of  milk  margins  in  the  European  Union 
(1998-2005) (D/32731 – 2007) 

Dairy  sector:  impact  on  milk  margins  of  a  price  reduction  (D/955  –  2008)  and 
additional analysis nº3401 (07/02/08) and 4955 (25/02/08) 

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5. 

6. 

7. 

8. 

9. 

Cereal sector: impact of the reduction of the intervention price to a safety net level 
on farm (D/9771 – 2008) 

Impact of the suppression of the partial re-coupling (D/ D23894 – 2007) 

Rice sector: impact of the coupled payment suppression on rice margins (D/953 – 
2008) and additional analysis 3308 (07/02/08) and 6878 (14/03/08) 

Nuts  sector:  impact  of  the  coupled  payment  suppression  on  nuts  margins 
(D/954 – 2008) 

Impact of additional modulation (D/ D1655 – 2008) 

ANNEX G – RELEVANT EVALUATION STUDIES 

1. 

Agricultural insurance schemes, 2006 

http://ec.europa.eu/agriculture/analysis/external/insurance/index_en.htm 

2. 

Agri-environment  measures,  overview  on  general  principles,  types  of  measures, 
and application, 2005 – Mesures agro-environnementales, November 2005 

http://ec.europa.eu/agriculture/publi/reports/agrienv/rep_en.pdf 

3. 

Common market organisation (CMO) in the cereal sector, October 2005 

http://ec.europa.eu/agriculture/eval/reports/cereals/index_en.htm 

4. 

Community policy for starch and starch products, 2002 

http://ec.europa.eu/agriculture/eval/reports/amidon/index_en.htm 

5. 

Cross compliance as foreseen under Regulation (EC) No 1782/2003, July 2007 

http://ec.europa.eu/agriculture/eval/reports/cross_compliance/index_en.htm 

6. 

Environmental  impacts  of  CAP  measures  and  direct  support  measures  related  to 
the beef and veal sector, IEEP 

(not published) 

http://ec.europa.eu/agriculture/eval/program/2008_2010_en.pdf 

7. 

Environmental impacts of milk quotas, IEEP 

(not published) 

http://ec.europa.eu/agriculture/eval/program/2008_2010_en.pdf 

8. 

9. 

Implementing the energy crops CAP measures and bio-energy market, March 2006 

http://ec.europa.eu/agriculture/eval/reports/bio_energy/index_en.htm 

L’organisation  commune  de  marché  dans  le  secteur  du  lin  et  du  chanvre,  AND 
International 

http://ec.europa.eu/agriculture/eval/reports/lin/index_fr.htm 

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10. 

An  evaluation  of  the  less  favoured  area  measure  in  the  25  Member  States  of  the 
European Union 

http://ec.europa.eu/agriculture/eval/reports/lfa/index_en.htm 

11. 

L'impact des mesures communautaires concernant le gel des terres, February 2002 

http://ec.europa.eu/agriculture/eval/reports/gel/index_fr.htm 

12. 

13. 

L'impact sur l'environnement des OCM et des mesures de soutien direct de la PAC 
relatives aux cultures arables, July 2007 

http://ec.europa.eu/agriculture/eval/reports/ocm/index_fr.htm 

L'organisation  commune  de  marché  dans  le  secteur  du  lin  et  du  chanvre, 
septembre 2005 

http://ec.europa.eu/agriculture/eval/reports/lin/index_fr.htm 

14. 

Mesures communautaires dans le secteur des fourrages séchés, AND International 

(not published) 

15. 

Rural Development programmes in view of post 2006 RD policy, 2004 

http://ec.europa.eu/agriculture/eval/reports/rdimpact/index_en.htm 

16. 

SCENAR 2020, Scenario Study on agriculture and rural world, December 2006 

http://ec.europa.eu/agriculture/publi/reports/scenar2020/index_en.htm 

17. 

Set aside measure 2000 to 2006 

(not published) 

http://ec.europa.eu/agriculture/eval/program/2008_2010_en.pdf 

18. 

The administrative burden on farms arising from the CAP, 2007 

http://ec.europa.eu/agriculture/analysis/external/burden/index_en.htm 

19. 

Withdrawals and crisis management in fruit and vegetable sector, March 2007 

http://ec.europa.eu/agriculture/eval/reports/withdrawals/index_en.htm 

20. 

Evaluation  of  the  application  of  cross  compliance  as  foreseen  under  Regulation 
(EC) No 1782/2003, July 2007 

http://ec.europa.eu/agriculture/eval/reports/cross_compliance/full_text_en.pdf 

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B – INTRODUCTION 

1. 

SCOPE AND OBJECTIVES 

The basic objectives of the common agricultural policy (CAP) are set in the Treaty. Following 
successive  reforms  since  the  mid-1990s,  they  have  since  been  adapted  in  the  European 
Summits of Berlin and Göteborg. In the Communication preparing the 2003 reform, the CAP 
was identified as aiming to achieve: 

•  a competitive agricultural sector, 

•  production methods that support environmentally friendly, quality products that the public 

wants, 

•  a fair standard of living and income stability for the agricultural community, 

•  diversity  in  the  forms  of  agriculture,  maintaining  visual  amenities  and  supporting  rural 

communities, 

•  simplicity in agricultural policy and the sharing of responsibilities among Commission and 

Member States, 

•  justification of support through the provision of services that the public expects farmers to 

provide. 

Implementing  the  above  broad  objectives  in  more  concrete  policy  terms,  the  2003  reform 
marked a new phase in the CAP reform process by introducing changes in the CAP with three 
main objectives: 

•  enhance competitiveness with significant adjustments in market measures in the sectors of 

cereals, dairy, and rice; 

•  promote  a  market  oriented,  sustainable  agriculture  by  decoupling  direct  payments  in  the 

arable crops, beef and dairy sectors via the Single Payment Scheme (SPS); 

•  strengthen  rural  development  with  the  shift  of  funds  from  the  1st  to  the  2nd  pillar  of  the 

CAP via modulation. 

A similar path was followed by subsequent reforms in 2003 (olive oil, cotton and tobacco), 
sugar (2006), fruit and vegetables (2007) and wine (2007). Finally, Rural Development (RD) 
policy instruments were also reformed (2005). 

With  the  reform  implemented  in  2005-07,  it  is  too  soon  to  assess  its  full  impact.  First 
indications are in general positive, whether measured in terms of the implementation rate of 
decoupling,  better  market  outlook  or  strengthened  rural  development  programmes.  In  most 
areas, initially expressed concerns about the impact of the reform did not materialise. Thus in 
the present context, 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  indicate  a  rapidly  changing 
environment facing EU agriculture. These developments, together with the experience gained 
so  far  from  implementation,  indicate  the  need  for  CAP  adjustments  which  could  not  be 
foreseen when the 2003 reform was carried out. The aims of the HC are therefore to: 

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(1) 

(2) 

assess the experience from the implementation of the Singe Payment Scheme and to 
introduce  adjustments  that  further  simplify  and  increase  the  effectiveness  of  the 
policy; 

introduce  adjustments  to  the  CAP  in  order  to  allow  it  to  respond  to  present  market 
opportunities  and  face  new  challenges  related  to  energy/climate  change  policy 
objectives. 

2. 

ISSUES 

Following  the  HC  Communication,  the  present  Impact  Assessment  is  grouped  in 
three main areas aiming to address the three main policy questions of the HC: 

(1) 

How to make the Single Payment Scheme more effective, efficient and simple? 

Regulation  (EC)  No 1782/2003  covers  all  issues  related  to  the  core  of  farm 
support  today,  the  Single  Payment  Scheme  (SPS).  The  analysed  options  are 
assessed  based  on  their  impact  in  allowing  farm  support  to  deliver  the  stated 
reform  objectives  of  market  orientation,  simplicity  and  WTO  compatibility, 
while  in  parallel  being  more  responsive  to  equity  and  other  societal 
considerations. 

(2) 

How to render market support instruments still relevant in a globalised world 
and an enlarged EU? 

Regulation  (EC)  No 1234/2007  covers  issues  related  to  the  single  common 
market  organisation  (sCMO).  The  impact  of  various  options  in  adjusting  this 
recently  consolidated  legislation  is  assessed  based  on  how  such  adjustments 
would  permit  a  better  response  of  the  CAP  to  the  emerging  opportunities  in 
world  agricultural  markets  and  fine  tune  existing  market  management 
instruments  to  render  intervention  a  real  safety-net  mechanism,  and  on  how 
they would remove remaining supply constraints. 

(3) 

How  to  master  new  challenges  by  adapting  to  the  new  risks  and 
opportunities? 

Regulation  (EC)  No 1698/2005  covers  issues  related  to  Rural  Development 
(RD) policy. Existing policy measures and financial resources are assessed in 
order  to  examine  whether  a  better  targeting  of  financial  priorities  within  the 
CAP would allow it to respond to the new challenges and emerging risks from 
climate change, bio-energy, biodiversity and water management. 

The present Impact Assessment has a certain degree of autonomy within each of the 
above three areas. But there are also important cross-cutting linkages in the expected 
impacts of various options. Such linkages are more evident in: 

•  the  removal  of  existing  supply  controls  in  arable  crops  (set  aside)  which  are 
driven by market considerations, but could create risks for existing environmental 
side benefits; 

•  the risk that the expiry of dairy quotas pose for farm income and employment in 

certain regions, and the resulting need for adjustment in the SPS and/or RD; 

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•  the need to combine measures across different policies (cross compliance and RD 

measures) in order to better respond to new challenges; 

•  the increasing importance for farmers of risk management information and tools; 

•  the need to carefully examine and balance the potential benefits form adjustments 

in CAP measures with the administrative costs that they could entail. 

The  potential  impacts  of  the  various  options  for  CAP  adjustments  were  assessed 
based on the following criteria: 

Economic 

Social 

Environmental 

Market orientation 

Stability of farm income 

Environmental sustainability 

Competitiveness 

Vitality of rural areas 

Biodiversity 

Budgetary cost 

Employment 

Expected uptake by MS 

Transfer Efficiency 

Distribution of payments 

Administrative burden 

Simplification 

Others 

Cost to the farm 

Implementation rules 

Cost to public administration 

Better targeting 

Compatibility with 
WTO constraints 

Coherence with other relevant 
policy objectives 

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C – SINGLE PAYMENT SCHEME 

1. 

PROBLEM DEFINITION 

•  The  current  SPS  framework  includes  a  degree  of  rigidity,  which  restricts  the 

effectiveness of the SPS and reduces its responsiveness to evolving conditions: 

–  the SPS payments are based on a reference period, which, particularly under 
the  historic  model,  reflects  previous  production  structures  and  agricultural 
support; 

–  there  is  no  provision  to  allow  MS  to  adjust  their  initial  implementation 
decision,  in  terms  of  the  SPS  model  chosen,  partially  coupled  support  and 
Article 69 options; 

–  there is no instrument for addressing the uneven distribution of payments; 

–  the current scope of cross compliance needs to be re-assessed in the light of 

new challenges facing EU agriculture. 

•  SPS  implementation  has  also  created  a  number  of  extra  costs,  which  lower  the 

efficiency of the system in attaining its declared objectives: 

–  some measures of cross compliance, not linked to agricultural activities, were 

therefore not appropriate for this instrument; 

–  the receipt of high payment levels by a few beneficiaries raises the question 
of whether and to which extent payments can be justified for farms of very 
large economic size; 

–  the receipt of small payment levels of many beneficiaries raises the question 
of whether payments can be justified when they exceed their administration 
cost. 

•  Several aspects of the current SPS implementation, in particular measures of partially 
coupled support and cross compliance, could benefit from a simplification, in order to 
ease the administrative burden for farmers and public administrations. 

2. 

OBJECTIVES 

•  Achieving improved competitiveness, better market orientation and better compliance 

with EU standards; 

•  meeting the underlying sustainability goals of the reformed CAP; 

•  meeting  the  societal  expectations  from  the  CAP  in  terms  of  the  provision  of  public 

goods, the distribution of direct payments and new challenges; 

•  preserving the vitality of rural areas and specific types of farming, which may be low 

in intensity, but high in positive environmental or regional benefits; 

•  further simplifying the CAP. 

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C.a.  IMPLEMENTATION OF THE SINGLE PAYMENT SCHEME 

1. 

BACKGROUND 

The  objective  of  the  2003  CAP  reform  was  to  provide  a  direct  payment  system  that  allows 
farmers to be market oriented, is as simple as possible from an administrative point of view, 
and is compatible with WTO requirements for Green Box payments. This was achieved with 
the  introduction  of  the  Single  Payment  Scheme  (SPS),  which  rendered  decoupled  farm 
support the central element of the 2003 CAP reform. 

In implementing the SPS, MS could opt for a historic model (payment entitlements based on 
individual  historic  reference  amounts  per  farmer),  a  regional  model  (flat  rate  payment 
entitlements based on amounts received by farmers in a region in the reference period) or a 
hybrid model (mix of the two approaches, either in a static or in a dynamic fashion)1. 

In  order  to  receive  payments,  farmers  have  to  activate  their  SPS  entitlements  by  matching 
them with a corresponding number of eligible hectares. In the historic model the number of 
payment entitlements corresponds to the number of hectares that generated support payments 
in the reference period; thus eligible land not used to activate entitlements remains as "naked 
land". On the other hand, in the regional implementation the number of payment entitlements 
broadly matches the number of eligible hectares. 

This  significant  shift  in  farm  support  was  facilitated  by  the  flexibility  that  MS  had  in  their 
choice.  However,  whatever  the  choice  of  model,  both  historic  and  regional  approaches  to 
decoupling  are  similar  in  two  fundamental  aspects.  Both  models  do  not  guide  production 
choices,  but  allow  farmers  to  be  market  oriented  by  reacting  to  market  signals  and  price 
developments. Both models have a fixed reference in payments and in the area to which these 
payments correspond. 

But  the  two  fundamental  choices  in  implementing  the  SPS,  and  their  variants,  also  have  a 
significant difference with respect to the distribution of support, whether this is fixed in one 
shot (static) or gradually (dynamic). 

•  The  first  approach  (historic  model)  respects  the  previous  level  of  support  that  farmers 
received, and leaves redistribution issues to be dealt with through modulation. As a result 
this  SPS  model  uses  the  farm  as  the  fixed  reference  for  the  allocation  of  payment  rights 
(entitlements). 

•  The  second  approach  (regional  model),  driven  mainly  by  equity  arguments  since 
redistribution was significantly scaled down because of the limited extent of modulation, 
addresses issues of redistribution of support through the SPS. As a result, this SPS model 
uses the area as the fixed reference for the allocation of entitlements. 

1 

Most of the new MS are still implementing the Single Area Payment Scheme (SAPS), a simplified area 
payment per hectare, introduced before the SPS to facilitate transition to EU. 

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In practice, MS choices led to an almost even split, in budgetary terms, between historically-
based  and  regionally-based  support.  Both  approaches  achieve  the  objective  of  WTO 
compatibility by introducing fixed references for the payments farmers receive. And although 
the  initial  implementation  of  the  regional  model  proved  to  be  more  complex,  once  in  place 
both models are similar in their implementation rules. 

To  provide  MS  with  additional  flexibility  to  target  specific  needs,  Article  69  of  Regulation 
(EC)  No 1782/2003  authorises  them  to  take  up  to  10%  of  the  component  of  the  national 
ceilings  of  each  sector  to  allocate  additional  payments  to  the  farmers  engaged  in  important 
types  of  agriculture  for  the  protection  or  improvement  of  the  environment  or  for  improving 
the quality and marketing of agricultural products. Payments are made to farmers within the 
sector(s)  affected  by  this  retention.  At  its  origin,  Article  69  was  intended  to  provide  some 
limited flexibility to MS to deal with unintended consequences of decoupling. 

2. 

PROBLEM DEFINITION 

SPS model 

As  Member  States  prepare  themselves  for  future  adjustments  in  the  CAP,  they  should  be 
allowed  to  adjust  their  SPS  model  based  on  the  experience  gained  so  far  from  its 
implementation across the EU. However, in the current legislation there is no provision that 
would allow MS to make such changes. 

The  possibility  to  introduce  adjustments  to  the  SPS  model  is  particularly  relevant  since  the 
question  of  how  equitably  support  is  distributed  among  farmers,  persists  as  an  important 
issue, especially under the historic model. 

The  historic  model  allowed  farmers  to  be  market  oriented  while  keeping  their  past  support 
level while the regional model redistributed support to farmers in a way that the support per 
hectare  is  similar  within  regions.  The  historic  model  can,  thus,  be  regarded  as  being  less 
equitable  since  it  gives  aid  to  individual  farmers  based  on  their  past  support  levels,  which 
reflect  the  previous  structure  of  production  and  of  agricultural  support.  As  the  historic 
reference  period  for  payments  becomes  more  distant,  these  individual  differences  will 
continue to become harder to justify. 

Article 69 

Further  decoupling  and  the  expiry  of  the  dairy  quota  could  affect  the  income  of  certain 
producers  in  particular  regions.  This  could  also  negatively  affect  the  vitality  of  rural  areas 
where  farmers  have  no  viable  alternatives  and  could  lead  to  the  discontinuation  of  certain 
environmentally  beneficial  types  of  farming.  Furthermore,  the  need  for  additional  tools  to 
address risk management has become apparent. 

The  possibility  to  give  targeted,  flexible  support  under  Article  69  has  raised  interest  in  the 
applicability  of  this  Article  as  a  means  to  mitigate  such  problems.  However,  in  its  present 
form, Article 69 does not appear suitable to address these issues due to the fact that payments 
can  only  be  made  to  farmers  in  the  sectors  affected  by  the  retention  of  funds,  and  this  rule 
limits the flexibility of MS in applying Article 69. 

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3. 

OBJECTIVES 

SPS model 

The  specific  objectives  of  adjustments  to  the  SPS  implementation  in  terms  of  the  model 
applied are to give MS the possibility to: 

•  adjust their chosen model towards flatter rates of support; 

•  address concerns about the equity and distribution of payments among farmers; 

•  continue  to  ensure  high  transfer  efficiency,  market  orientation  of  the  farming  sector  and 

environmental sustainability of farming through compliance with EU standards; 

•  limit administrative burdens and simplify the system where possible. 

Article 69 

With respect to the revision of Article 69 the specific objectives are to: 

•  provide  a  flexible  instrument  to  address  specific  problems  stemming  from  further 

decoupling and the end of the dairy quota; 

•  address risk management needs, thus mitigating possible income problems; 

•  continue  environmentally  beneficial  agricultural  production  in  regions  that  could  be 
negatively  affected  and  the  improvement  of  quality  and  marketing  of  the  agricultural 
products; 

•  contribute  to  the  vitality  of  rural  areas  in  certain  where  farmers  may  not  have  viable 

alternatives; 

•  ensure that supporting measures remain in conformity with WTO commitments 

4. 

OPTIONS SPS MODEL 

The following policy options for SPS models were analysed2, and results were assessed with a 
view to whether these options meet the objectives mentioned for the SPS model in section 3. 

Table 1. – Policy options SPS model 

Option 

SPS model 

Description 

0 

1 

2 

3 

4 

Status quo – baseline 

No  review  possibility  for  MS;  both  historic  and 
hybrid/regional models continue as present 

EU-wide flat rate per eligible hectare  The  same  flat-rate  payment  entitlement  per 

SAPS for all MS 

Regional flat rate per hectare  

eligible hectare applies to all EU MS 

The  Single  Area  Payment  Scheme  of  new  MS 
becomes the model for all EU MS 

towards  regional  flat-rate  entitlements 

Move 
applied to all eligible area 

Regional flat rate per entitlement 

Move towards regional flat-rate entitlements based 

2 

Analysis on the basis of FADN simulations with the DG AGRI G3 Aids4k model, results from research 
projects and other DG AGRI calculations (see note 1 in Annex C for details). 

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on current entitlements 

5. 

IMPACT ANALYSIS SPS MODEL 

In  the  public  perception,  the  biggest  difference  between  the  two  SPS  models  lies  in  their 
distribution impact; land value considerations are largely limited to the research community. 
Therefore, the starting point for understanding the impacts of a move towards a flat rate is to 
consider  the  current  distribution  of  direct  payments  in  the  EU,  and  assess  the  impact  of 
various SPS options on this distribution. These impacts, which lie mainly in the economic and 
social sphere, are discussed in some detail in this section but attention is also devoted to the 
environmental and administrative impacts. 

The  overview  table  in  the  end  of  this  chapter  provides  a  complete  picture  of  the  most 
important  economic,  social,  environmental  and  administrative/simplification  impacts  for  all 
options for the SPS model. See also note 1 in Annex C for more detailed analysis. 

5.1. 

Option 0: status quo 

The  two  broad  SPS  models,  historic  and  regional,  differ  with  respect  to  their 
equity/redistribution impact. The historic model did not redistribute support between 
farmers, and thus asset values (especially land) of the farms were little or not at all 
affected3.  A  very  high  transfer  efficiency  results  from  the  fact  that  there  is  some 
"naked land", so support is better aimed at active farmers instead of landowners4. 

While the historic model gives aid to individual farmers based on their past support 
levels,  the  regional  model  redistributed  payments  in  a  way  that  the  support  per 
hectare is similar. By setting flat rates at a regional scale, payments can be adjusted 
to  the  conditions  of  different  regions  which  may  be  justified  by  differing  natural 
conditions and cost structures. However, the redistribution of support among farmers 
in  the  regional  model  could  have  an  effect  on  asset  prices,  which  may  induce  a 
structural response of farms. Its implementation led to increased capitalisation of aid 
in  the  value  of  land  which  may  result  in  a  somewhat  lower  transfer  efficiency  of 
direct support as some of it may benefit non-farming landowners. 

Analysis  of  the  current  distribution  of  support  among  EU  MS  demonstrates  a 
complex  situation.  It  is  often  pointed  out  that  the  distribution  of  direct  payments 
among  farm  in  the  EU  is  “uneven”:  80%  of  beneficiaries  receive  roughly  20%  of 
payments5.  When  regarded  at  a  per  hectare  basis,  as  can  be  expected,  the  range  of 
direct  payments  per  hectare  tends  to  be  wider  in  the  MS  applying  the  historic  SPS 
model than in those applying regional/hybrid models. 

3 

4 
5 

Part  of direct  support  is  captured  ("capitalised")  in  the value  of  land.  Therefore,  any  redistribution  of 
support also affects land values. Capitalisation of support in land values should be the higher, the less 
"naked land" (eligible land not currently used to activate entitlements) exists. 
See note 1 in Annex C for more details. 
See also chapter C.d. (payment limitations) and notes 1 and 4 in Annex C for more details. 

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The  average  payments  also  differ  widely  among  MS,  whether  the  variable  used  as 
reference is the payment per area (hectare) or whether the payment is calculated per 
beneficiary.  In  Figures  1  and  2,  to  facilitate  comparison  of  the  analytical  results, 
average farm payments were calculated in a simplified way based on their expected 
level after all MS fully implement CAP reforms and new MS fully integrate into the 
CAP. It is worth noting that presently the MS with the highest per hectare payments 
figure among those MS with the lowest rate of payment per beneficiary; on the other 
hand,  the  MS  with  the  highest  payment  per  beneficiary  is  around  the  EU  average 
when area is the reference variable. 

Figure 1: Average direct payment per MS (in € per hectare) 

600

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200

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Figure 2: Average direct payment per MS (in €'000 per beneficiary) 

50

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Source: DG AGRI calculations (see Annex C, note 1 for details). 

Due  to  the  "whole  farm  approach"  of  cross  compliance,  both  historic  and  regional 
model  contribute  similarly  to  respecting  cross  compliance  standards.  They  are  also 
similar with respect to administrative burdens. 

EN 

24 

   EN 

 
 
 
 
 
 
 
5.2. 

Option 1: EU-wide flat rate per eligible hectare 

Figure  3  demonstrates  the  potential  redistributive  impact  of  a  move  towards  an 
EU-wide flat rate per hectare by indicating the % change in the overall amounts each 
MS would receive6. 

Figure 3: Redistribution between MS with an EU-wide flat rate 

250%

200%

150%

100%

50%

0%

-50%

-100%

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Source: DG AGRI calculations (see Annex C, note 1 for details). 

This option would imply a fundamental reform of the SPS, and is therefore beyond 
the scope of the HC Communication. However, it has found some proponents in the 
context of the present public debate, and was therefore analysed to better assess its 
potential  impacts.  This  analysis  arrives  at  the  conclusion  that  it  is  very  difficult  to 
identify  any  benefits  it  could  bring  with  respect  to  the  declared  objectives  of 
adjustments to the SPS. 

In summary, the implementation of this option: 

•  would  not  improve  the  distribution  of  payments  within  MS  –  some  of  the  MS 
negatively  affected  have  average  payments  per  beneficiary  that  are  very  low, 
others are in the opposite situation; 

•  would  result  in  adverse  impacts  on  asset  (land)  values,  with  very  significant 
declines  in  some  MS  and  the  opposite  effect  on  others.  It  could  affect  farm 
structures and would decrease transfer efficiency due to higher capitalisation; 

•  would not change much the skewed distribution of support between farms at EU 
level  since  the  distribution  of  land  in  the  EU  mirrors  to  a  large  extent  that  of 
production value (which is the historic reference for payments)7; 

•  would  have  impacts  on  the  distribution  of  payments  between  farms  in  terms  of 

their economic size and in terms of type of farming; 

6 

7 

The  graph  compares  the  national  ceilings  currently  established  for  MS  in  Regulation  (EC) 
No 1782/2003 with the amounts they would receive if an EU-wide flat rate was applied. 
One counter-intuitive result of these simulations was that in some MS, a harmonised flat rate does not 
decrease but actually increases the unevenness in the distribution of direct payments. 

EN 

25 

   EN 

 
 
 
 
                                                 
•  would  possibly  bring  some  new  beneficiaries  into  the  system  which  could 
increase administrative costs but could also slightly increase the land under cross 
compliance; 

•  could be combined with further simplifications to the SPS system8. 

5.3. 

Option 2: SAPS for all MS 

The  Single  Area  Payment  Scheme  was  introduced  in  the  new  MS  before  the 
introduction  of  the  SPS  to  facilitate  their  adjustment  to  the  EU  because  of  their 
specific agricultural situation9. As a transitional system, SAPS was designed to assist 
the integration of new MS in a smooth manner, given the very significant differences 
between the level of their general and rural economies and those in the EU-15. 

As the deadline for the expiration of SAPS approaches, and new MS consider their 
integration into the SPS, the possibility of extending this deadline to the end of the 
present  financial  framework  if  they  so  wish  seems  a  natural  choice  if,  at  the  same 
time,  EU-15  MS  are  allowed  to  review  their  SPS  implementation  and  opt  to  move 
towards a more flat rate model. 

As  a  transitional  scheme,  SAPS  clearly  performed  its  intended  role.  Yet  at  times 
SAPS  has  been  considered  as  a  system  which  should  be  applied  to  all  MS,  i.e.  an 
inverse  move  from  SPS  to  SAPS  is  considered  as  desirable.  Although  such 
suggestions  are  not  wide  spread,  they  tend,  nevertheless,  to  confuse  at  times  the 
policy  debate  because  they  fail  to  focus  on  the  main  difference  between  SPS  and 
SAPS – the fixed entitlement reference of the former and the varying area reference 
of the latter. 

The  single  area  payment  is  a  flat  rate  payment  per  hectare  at  MS  level.  It  is 
calculated  by  dividing  the  annual  national  financial  envelope  of  the  MS  by  the 
agricultural area under SAPS in a given year. As a transitional scheme, this is fine. 
But as a permanent scheme, it would contradict the philosophy of decoupled support 
because it would not be a system based on fixed entitlements. 

In  terms  of  its  distributional  impact,  a  SAPS  for  all  MS  would  lead  to  substantial 
redistribution  within  MS  and  higher  capitalisation  of  support,  resulting  in  strong 
effects on land values. The distribution of payments among farms would mirror that 
of land and would, thus, continue to be skewed. 

The desire of farmers to maximise payments by maximising their eligible area could 
put  pressure  on  land  not  currently  in  agricultural  use  and  of  high  environmental 
value. 

5.4. 

Option 3: regional flat rates per eligible hectare 

A general flat rate could have significant redistribution impacts even within the same 
MS  if  its  farm  structures  differ  widely.  However,  such  impacts  could  be  mitigated 

8 

9 

This  refers  to  simplifications  that  are  neutral  to  the  SPS  model  applied  but  lead  to  administrative 
simplification, e.g. reducing the number of different types of entitlements (see also note 1 in Annex C. 
This situation was characterised by very different and much lower (where relevant) levels of support, 
the absence of previous payment and area references and the consequent absence of control systems. 

EN 

26 

   EN 

 
                                                 
with a targeted move towards a flat rate that takes into account such differences by 
harmonising payments in a regional context10. 

This  can  be  done  by  dividing  the  total  level  of  reference  payments  of  the  historic 
model in a region by the eligible area in this region. 

In  a  move  towards  a  regional  model,  the  extent  to  which  land  remains  “naked” 
becomes  a  crucial  parameter.  A  regional  flat  rate  per  eligible  hectare  reduces  the 
percentage of "naked land” leading to more capitalisation of support in land values11. 

The following general conclusions can be derived: 

•  a regional flat rate per eligible hectare does not change much with respect to the 
unequal  distribution  of  support  between  farms  in  the  EU  (however,  there  are 
variations in results between the MS with improvements in some of them); 

• 

there is some reallocation of direct support from larger to smaller economic size 
classes of farms and the impact is differentiated for different farm types (however, 
both of these impacts are less pronounced than for the EU-wide flat rate); 

•  although  regional  flat  rates  per  eligible  hectare  increase  the  capitalisation  of 
support  in  land  prices  and  reallocate  support  between  farms,  the  effect  on  land 
values in the MS would be moderated by the fact that the regional context can be 
taken into account; 

•  the regional flat rate per hectare could result in new beneficiaries in MS where the 
historic model was previously applied because of the expansion of support to all 
eligible area. This could increase administrative costs but also slightly increase the 
land under cross compliance; 

•  the option can be combined with further simplifications to the SPS system. 

5.5. 

Option 4: regional flat rate per entitlement 

In this option, the regional flat rate is derived by dividing the total value of payment 
entitlements within a region by the area corresponding to these entitlements. 

At  first  sight,  the  difference  with  option  3  appears  small,  especially  since  a  move 
towards  a  flat  rate  based  on  the  existing  entitlements,  with  respect  to  its  overall 
redistributive  effects,  would  produce  largely  similar  results  to  that  of  regional  flat 
rates per eligible hectare. However, there are also some notable differences between 
the two options when comparing their potential impact in the same region. 

The regional flat rate per entitlement: 

•  could mitigate the undesired consequence of a redistribution of support favouring 
landowners  while  still  keeping  the  desired  impact  of  more  even  levels  of 
payments among active farmers; 

10 

11 

This  realisation  seems  to  reflect  the  choice  of  England,  where  the  ratio  between  the  highest  and  the 
lowest flat rate is 7 to 1. 
See more detailed discussion in note 1 in Annex C. 

EN 

27 

   EN 

 
                                                 
•  would  not  change  the  degree  of  capitalisation  of  support  in  land  values  as 
compared  to  the  status  quo  since  the  amount  of  "naked  land”  would  remain  the 
same; 

•  would  not  lead  to  new  beneficiaries  in  the  SPS  system  since  only  those  already 
holding  entitlements  would  be  affected,  thus  limiting  administrative  costs  and 
leading to no change in the amount of land under cross compliance. 

6. 

OPTIONS FOR ARTICLE 69 

The following policy options for Article 69 were analysed, and results were assessed with a 
view to whether these options meet the objectives mentioned for Article 69 in Section 3. 

Table 2. – Policy options for Article 69 

Option 

Article 69 

Description 

0 

1 

Status quo – baseline 

No change to the current Article 69 

Targeted revision 

The sector-specific rule by which retention and payments have to 
be  made  in  the  same  sector  would  be  removed.  MS  would  be 
allowed to use up to x% of their national ceiling to grant targeted 
support to farmers in specific sectors (such as dairy, beef, sheep, 
goat  meat  and  rice)  and  certain  regions  and  in  relation  to  risk 
management  (in  addition  to  the  current  use  of  Article 69).  The 
share of support going to measures that do not with certainty meet 
the conditions of the Green Box would be limited. 

2 

Extended revision 

Same as option 1 except that there would be no limitation on the 
share of support going to non Green-Box measures. 

7. 

IMPACT ANALYSIS ARTICLE 69 

This  section  presents  a  summary  of  the  impacts  of  the  different  options  for  the  revision  of 
Article 69. 

The  overview  table  in  the  end  of  this  chapter  provides  a  complete  evaluation  of  the  most 
important  economic,  social,  environmental  and  administrative/simplification  impacts  for  the 
options. See also note 1 in Annex C for the analysis. 

7.1. 

Option 0: status quo 

No change to the current Article 69 implies that the flexibility for some MS to react 
to potential problems in the milk sector and other sectors due to the end of the quota 
and  further  decoupling,  as  well  as  to  risk  management  issues,  would  be  very 
limited12.  This  would  be  the  case  because  the  requirement  that  the  10%  of  SPS 
support  that  has  to  be  retained  and  used  within  the  same  sector  could  severely 
constrain some MS, e.g. those with more mountainous or fragile dairy regions than 
others. 

This  could  not  only  present  income  problems  to  certain  producers  but  may  also 
negatively affect the vitality of rural areas where farmers have no viable alternatives 

12 

See also Chapter 3 (partial decoupling), Chapter 6 (milk) and Chapter 9 (risk and crisis management). 

EN 

28 

   EN 

 
                                                 
and could lead to the discontinuation of certain environmentally beneficial types of 
farming (e.g. rice cultivation in certain regions). 

7.2. 

Option 1: targeted revision 

The targeted revision would give MS increased means to address possible problems 
in  the  milk  sector  and  other  sectors  arising  due  to  the  end  of  the  quota,  further 
decoupling  or  the  need  for  additional  risk  management  tools.  It  would  not  mean  a 
major  revision  of  the  current  Article 69  but  would  imply  some  risk  of  further 
re-coupling (however within clear limits). 

To take the example  of the dairy sector, such a revision could address problems in 
two  ways  –  either  through  an  increase  of  the  decoupled  payment  in  the  regions 
negatively  affected  by  the  abolition  of  the  quota  system,  or  through  a  coupled 
payment  to  the  sector  in  the  form  of  an  area  or  per  cow  payment  linked  to 
production. 

The first choice would be fully compatible with the overall WTO orientation of the 
CAP, but would not necessarily guarantee the continuation of production. 

The  second  choice  implies  an  increase  in  the  level  of  partially  coupled  (Blue  Box) 
support. In the case of a DDA agreement, it would thus require a parallel reduction in 
other partially coupled support (e.g. in arable crops) to allow the EU to remain within 
its  expected  margins  of  Blue  Box  support  in  the  future.  However,  an  appropriate 
restriction on the share of coupled measures of support would resolve this problem. 

7.3. 

Option 2: extended revision 

A  generalised  extension  of  Article  69  would  give  MS  much  greater  flexibility  to 
address  possible  problems  in  specific  sectors,  as  well  as  risk  issues,  but  it  would 
imply several risks for the consistency of CAP orientation. 

Most measures currently applied by MS under Article 69 are production-linked, and 
this option would mean a backtracking from further decoupling as it would not limit 
the  share  of  coupled  measures  under  a  revised  Article  69.  In  the  case  of  a  DDA 
agreement,  it  would  clearly  risk  exceeding  the  ceiling  of  Blue-Box  support  (unless 
there was a corresponding parallel reduction in other partially coupled support). 

8. 

CONCLUSIONS 

With the experience gained so far with the implementation of the SPS system, the lack of a 
possibility  for  MS  to  adjust  their  chosen  model  towards  a  more  flat  rate  of  payment  is  an 
anachronism. Possibilities to make adjustments in the implemented models seem desirable as 
long as they respect the stated objectives of the system. The historic model of the SPS enabled 
the smooth transition to decoupling in MS whose variable production structures implied that 
various sectors were integrated successively into the SPS. The time seems ripe to allow MS to 
consider if they wish an adjustment towards a more flat rate. 

But there are different ways of doing so and very different impacts from each way. While all 
options analysed fulfil the objective of leading to more equal rates per hectare or entitlement, 
none does actually  result in any  fundamental changes  to the unequal  distribution of  support 
among  farms.  Flat  rates  at  a  larger  scale  (EU-wide  or  MS-wide  under  SAPS)  have  strong 

EN 

29 

   EN 

 
effects on land values with possible structural responses. The more targeted a move towards a 
regional  flat  rate  is,  the  lower  the  impact  on  land  values  would  be  from  the  implied 
redistribution of support, and the more support would remain among active farmers. 

A gradual move towards flatter rates could contribute to making the adjustment process easier 
for  farms.  With  respect  to  environmental  objectives  the  options  have  largely  similar  effects 
(apart from more negative elements of the SAPS). The same is true for administrative impacts 
where, after  some  obvious initial costs of adjustments to the  system under all but the status 
quo,  the  operational  costs  should  not  differ  substantially,  although  there  may  be  some 
additional  costs  where  there  are  new  beneficiaries  to  the  system.  All  SPS  options  can  be 
combined with further simplifications to the system. 

The  best  way  to  address  potential  problems  in  regions  which  could  face  a  negative  impact 
from the dairy quota phasing-out or further decoupling, or to deal with the potential need for 
additional policies addressing risk management, seems to be through a revision of Article 69 
that would allow part of the  available level of SPS support to target such regions, provided 
that  the  global  amount  and  the  proportion  of  coupled  support  in  the  mix  of  supporting 
measures stayed within clearly defined ceilings. 

This  would  allow  supporting  particular  sectors  and  regions,  mitigating  negative  effects  on 
income,  vitality  of  rural  areas  and  environmentally  beneficial  farming  practices  while 
respecting WTO commitments. 

EN 

30 

   EN 

 
9. 

SUMMARY TABLES 

9.1. 

Comparison between different options and their respective impacts – SPS flat rate 

IMPACTS 

Option 0 – baseline – historic 
and regional SPS model 

Option 1 – EU-wide flat 
rate per eligible hectare 

Option 2 – SAPS  
for all MS 

Option 3 – regional flat 
rates per eligible hectare 

Option 4 – regional flat rates 
per entitlement 

☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

Economic 

Social 

Both models 

market orientation 
☺☺ 

Historic model 

no redistribution between 
farms and no impact on asset 
values ☺☺ 

very high transfer efficiency 
☺☺ 

Regional model 

redistribution between farms 
impacts on land values (cid:47) 

high transfer efficiency ☺ 

Historic model 

market orientation 
☺☺ 

market orientation 
☺☺ 

market orientation 
☺☺ 

market orientation 
☺☺ 

very significant 
redistribution across MS 
results in strong impact on 
asset values (cid:47)(cid:47) 

very significant 
redistribution within MS 
results in strong impact on 
asset values (cid:47) 

redistribution between 
farms has limited impact 
on land values 
(cid:46) 

more targeted redistribution 
between farms minimises 
impacts on land values 
☺ 

decreased transfer 
efficiency due to more 
capitalisation 

decreased transfer 
efficiency due to more 
capitalisation 

(cid:47)(cid:47) 

(cid:47) 

decreased transfer 
efficiency due to more 
capitalisation 

(cid:47) 

transfer efficiency unchanged 
with respect to present models 

(cid:46) 

past individual references raise 
equity issues 
(cid:47) 

equalises payment levels 
per area across the EU 
☺ 

equalises payment levels 
per region within a MS 
☺ 

equalises payment levels 
per area in a targeted way 
☺ 

equalises payment levels per 
entitlement in a targeted way 
☺☺ 

more support to active farmers 
☺ 

Regional model 

regional references respond to 
equity issues ☺ 

more support to landowners 
(cid:47) 

payment distribution 
changes, but remains 
skewed (per area this time) 
(cid:47)(cid:47) 

payment distribution 
changes, but remains 
skewed 
(cid:47) 

payment distribution 
improves (to a limited 
extent) 
☺ 

more support is capitalised 
in land, and thus shifts 
more to landowners 
(cid:47) 

more support is capitalised 
in land, and thus shifts 
more to landowners 
(cid:47) 

more support is capitalised 
on land, and thus shifts 
more to landowners 
(cid:47) 

payment distribution improves 
(to a limited extent) 
☺ 

support to land unchanged, and 
neutral with respect to present 
capitalisation on land values 
(cid:46) 

EN 

31 

EN 

 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
IMPACTS 

Option 0 – baseline – historic 
and regional SPS model 

Option 1 – EU-wide flat 
rate per eligible hectare 

Option 2 – SAPS  
for all MS 

Option 3 – regional flat 
rates per eligible hectare 

Option 4 – regional flat rates 
per entitlement 

Both models neutral with 
respect to land under 
cross compliance  

May slightly increase land 
under cross compliance 

Environmental 

(cid:46) 

☺ 

Both models are neutral with 
respect to production practices 

No impact on production 
practices 

(cid:46) 

(cid:46) 

Could put pressure on land 
not currently in agricultural 
use but of high 
environmental value 

(cid:47) 

May slightly increase land 
under cross compliance 

Neutral with respect to amount 
of land under cross compliance 

☺ 

(cid:46) 

No impact on production 
practices 

No impact on production 
practices 

(cid:46) 

(cid:46) 

Administrative 

Both models similar with 
respect to administrative 
burden 

Initial administrative costs 
due to change in number 
and value of entitlements 

Initial administrative costs 
for SPS MS to change 
system 

Initial administrative costs 
due to change in number 
and value of entitlements 

Initial administrative costs due 
to change in value of 
entitlements 

(cid:46) 

(cid:47) 

(cid:47) 

(cid:47) 

(cid:47) 

New beneficiaries cause 
additional administrative 
costs 

(cid:47) 

No costs for MS applying 
SAPS 

(cid:46) 

New beneficiaries cause 
additional administrative 
costs 

Avoids new beneficiaries and 
resulting additional 
administrative costs 

(cid:47) 

☺ 

Simplification 

Both models are neutral with 
respect to further simplification 

Can be combined with 
further simplification  

Can be combined with 
further simplification  

Can be combined with 
further simplification  

Can be combined with further 
simplification  

(cid:46) 

☺ 

☺ 

☺ 

☺ 

Other 

Contradicts aims of 
decoupled support because 
it is not based on fixed 
entitlements 

(cid:47)(cid:47) 

EN 

32 

EN 

 
  
 
 
 
 
 
 
 
 
9.2. 

Comparison between different options and their respective objectives – SPS flat rate 

☺☺ fully respecting objectives; ☺ partially respecting objectives; (cid:46) neutral; (cid:47) moving away from objective; (cid:47)(cid:47) putting at risk objective 

OBJECTIVES 

Competitiveness 

Market orientation 

Societal expectations 
(Equity/distribution 
among farmers) 

Environmental 
sustainability 

Budget costs 

Administrative costs 

Vitality of rural areas 

Simplification 

Transfer efficiency 

Option 0 – baseline – 
historic and regional 
SPS model 

Option 1 – EU-wide 
flat rate per eligible 
hectare 

Option 2 – SAPS  
for all MS 

Option 3 – regional 
flat rates per eligible 
hectare 

Option 4 – regional 
flat rates per 
entitlement 

(cid:46) 

(cid:46) 

☺ 

☺ 

☺ 

☺ 

☺ 

☺ 

☺ 

☺ 

historic: (cid:47) 
regional: ☺ 

per ha ☺☺ 
between farms (cid:47)(cid:47) 

per ha ☺ 
between farms (cid:47) 

per ha ☺ 
between farms (cid:47) 

per entitlement ☺ 
between farms (cid:47) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

historic: ☺ 
regional: (cid:46) 

☺ 

(cid:46) to (cid:47) 

Total costs (cid:46) 
Distribution (cid:47)(cid:47) 

(cid:47) 

☺ 

☺ 

(cid:47) 

(cid:46) 

(cid:46) 

☺ 

☺ 

(cid:47) 

☺ 

(cid:46) 

(cid:47) 

☺ 

☺ 

(cid:47) 

(cid:46) 

(cid:46) 

☺ 

☺ 

☺ 

☺ 

EN 

33 

EN 

 
  
9.3. 

Comparison between different options and their respective impacts – SPS Article 69 

☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Option 0 – Article 69 unchanged 

Option 1 – targeted revision 

Option 2 – extended revision 

Limited flexibility to respond to problems 
in specific sectors and to some needs  
for risk management 

Increased flexibility to respond to problems 
in specific sectors and to some needs  
for risk management 

Economic 

(cid:47) 

☺ 

Limited risks for backtracking  
in decoupling  

(cid:47) 

Significant flexibility to respond  
to a selective set of problems 

☺☺ 

Risk for backtracking in decoupling 

(cid:47)(cid:47) 

Social 

Environmental 

Administrative 

Simplification 

Other: WTO 

Flexibility for support in specific vulnerable 
regions limited 

Increased flexibility for supporting affected 
farmers and regions 

Great flexibility for supporting  
affected farmers and regions 

(cid:47) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

☺ 

☺☺ 

Environmentally beneficial farming 
supported 

Environmentally beneficial farming 
supported 

☺ 

☺ 

Initial costs of reallocating support 

Initial costs of reallocating support 

(cid:47) 

(cid:47) 

(cid:47) 

(cid:47) 

In case of DDA agreement, should allow to 
stay within ceiling  
for Blue Box support 

In case of DDA agreement, risks exceeding 
ceiling for Blue Box support 

(cid:46) 

(cid:47)(cid:47) 

EN 

34 

EN 

 
  
 
9.4. 

Comparison between different options and their respective objectives – SPS Article 69 

☺☺ fully respecting objective; ☺ partially respecting objective; (cid:46) neutral; (cid:47) moving away from objective; (cid:47)(cid:47) putting at risk objective 

OBJECTIVES 

Option 0 – Article 69 unchanged 

Option 1 – targeted revision 

Option 2 – extended revision 

Competitiveness 

Market orientation 

Environmental sustainability 

Budget costs 

Administrative costs 

Simplification 

Vitality of rural areas 

Stabilisation of farmers incomes 

Transfer efficiency 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) to ☺ 

(cid:46) to (cid:47) 

☺ 

(cid:46) 

(cid:47) 

(cid:47) 

☺ 

☺ 

Depends on MS implementation 

(cid:47) to ☺ 

(cid:47)(cid:47) 

☺ 

(cid:46) 

(cid:47) 

(cid:47) 

☺ 

☺ 

Depends on MS implementation 

Depends on MS implementation 

(cid:47) to (cid:46) 

(cid:47) to ☺ 

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C.b.  CROSS COMPLIANCE 

1. 

BACKGROUND 

Cross compliance creates a link between farm-relevant support and farm-relevant legislation. 
It  aims  at  being  an  effective  mechanism  to  promote  sustainable  agriculture  and  at  the  same 
time a tool which enhances the CAP's role in meeting the expectations of the society. 

Payments  under  the  first  pillar  and  some  rural  development  measures  have  to  comply  with 
parts of 19 existing and already implemented regulations or directives, the so-called statutory 
management  requirements  (SMR).  The  SMR  cover  rules  relating  to  agricultural  production, 
land and activities in the three areas of: the environment; public, animal and plant health; and 
animal welfare. 

Payments also have to comply with good agricultural and environmental conditions (GAEC) 
which concern the issues of soil erosion, soil organic matter, soil structure, minimum level of 
maintenance  and  maintaining  the  total  area  of  permanent  pasture.  In  order  to  give  technical 
support  to  farmers  on  the  basic  requirements  of  cross  compliance  MS  had  the  obligation  to 
introduce a Farm Advisory Systems (FAS)13. 

As  a  control  system,  which  reduces  payments  to  farmers  who  are  found  not  to  be  in 
compliance  with  standards  associated  with  their  agricultural  activity,  cross compliance 
contributes to the greater acceptability of agricultural support by the society at large. 

Furthermore, cross  compliance, particularly through the systematic provision of information 
by MS to farmers about the requirements applying to the latter, has been evaluated as making 
a  significant  contribution  to  ensuring  compliance  with  obligations  and  as  contributing  to 
increasing farmers' awareness about obligations with respect to SMR and GAEC14. 

Practical problems in the implementation of cross compliance led the Commission to advance 
a  report  foreseen  on  the  application  of  cross compliance  with  the  2003  CAP  reform.  The 
March  2007  Report  suggested  legal  modifications  aiming  at  simplification  and  streamlining 
of the system. In June 2007 the Agricultural Council adopted conclusions which supported the 
Commission's  report,  and  shortly  thereafter  the  Commission  prepared  the  necessary 
legislative changes. 

The  report  did  not  however  address  the  scope  of  cross  compliance,  since  at  the  time  of 
drafting  the  report  it  was  considered  too  early  to  assess  such  changes.  Instead,  the 
Commission committed itself to address the scope within the context of the HC. 

2. 

PROBLEM DEFINITION 

The  experience  of  implementing  the  cross  compliance  system  has  shown  that  not  all 
requirements  included  in  the  scope  are  actually  relevant  to  meeting  the  objectives  of  cross 

13 

14 

SMR and GAEC are listed in Annex III, and Article 5 and Annex IV of Regulation (EC) No 1782/2003, 
respectively.  FAS  were  to  be  set  up  by  1  January  2007  in  all  MS  cross  compliance  will  apply  from 
2009/2011 following the Council agreement in January 2008. 
The evaluation study was carried out by Alliance Environment (a consortium comprising the Institute 
for  European  Environmental  Policy  and  Oréade-Brèche)  from  June  2006  to  August  2007.  The  final 
evaluation report has been published on the Europa website in November 2007. 

EN 

36 

   EN 

 
                                                 
compliance15.  Some  requirements  may  be  irrelevant,  while  at  the  same  time  implying  an 
administrative burden, and hence the costs of having these requirements within the scope of 
cross compliance are higher than the benefits. Practical problems have been raised by MS, as 
well as by the Commission itself through its activities of audits for the clearance of accounts. 
Therefore, the current scope of requirements needs to be adjusted so that it does not pose an 
unnecessary administrative burden while not adding anything towards meeting the objectives 
of cross compliance. 

Furthermore,  additional  legislative  acts  have  come  into  force  since  the  2003  reform,  which 
could be relevant to include in the scope in order to meet the objectives of cross compliance. 
Also, new challenges have occurred since 2003 which could not be foreseen at the time of the 
reform,  thus  it  is  relevant  to  assess  whether  these  challenges  could  be  better  addressed 
through the cross compliance system. On top of this, changes which are suggested with the 
Health  Check,  such  as  the  setting  to  zero  of  set  aside,  may  have  negative  environmental 
implications. The cross compliance scope should therefore be assessed as to whether it could 
be adjusted to contribute to the retention of environmental benefits from set aside.  

3. 

OBJECTIVES 

The  scope  of  cross  compliance  should  be  screened  to  examine  whether  the  SMR  and  the 
GAEC could be better targeted or if more requirements should be added, in order to:  

•  enhance  the  contribution  of  cross  compliance  as  an  effective  mechanism  to  promote 

sustainable agriculture16; 

•  enhance  cross  compliance's  role  in  meeting  the  expectations  of  the  society,  without 

increasing the administrative burden of cross compliance for MS and farmers. 

The  screening  aims  specifically  at;  firstly,  deleting  requirements  which  are  not  considered 
relevant  in  meeting  the  objectives  of  cross  compliance,  and  thereby  decreasing  the 
administrative  burden  for  MS.  Secondly,  the  screening  aims  at  adding  requirements  which 
could  enhance  the  CAP's  role  in  better  addressing  concerns  regarding  climate  change  and 
water  management,  although  the  requirements  added  should  not  imply  higher  costs  than 
benefits17. The possibility of retaining environmental benefits from set aside through the cross 
compliance system will also be analysed. 

4. 

POLICY OPTIONS AND ANALYSIS OF THEIR IMPACTS 

4.1. 

Option 0: status quo 

The options considered here, and their potential impact, are assessed with respect to 
the scope of cross compliance as defined in existing legislation (status quo). The list 
of  SMR  and  GAEC  standards  stay  as  they  are  in  Article 5,  Annexes  III  and  IV  of 
Regulation  (EC)  No 1782/2003.  By  maintaining  status  quo,  more  time  would  be 
allowed to analyse the potential benefits and costs of the existing scope, since these 
may become clearer over time. However, maintaining status quo would also imply a 

15 

16 

17 

The objectives of cross compliance are to be an effective mechanism to promote sustainable agriculture 
and to enhance the CAP's role in meeting the expectations of the society. 
This  is  considered  to  be  achieved  through  the  respect  by  farmers  of  the  rules  relating  to  the  relevant 
aspects of cross compliance. 
The criteria outlined below will clarify this statement. 

EN 

37 

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missed  opportunity  to  address  the  concerns  that  have  already  been  raised  with  the 
current  scope,  as  well  as  to  include  potential  new  measures  that  can  contribute  to 
meeting the overall objectives of cross compliance. 

4.2. 

Option 1: better targeting the current scope of cross compliance 

This option concerns mainly the assessment of existing SMR based on the analysis of 
the  legal  texts,  on  the  questions  and  remarks  made  by  the  Member  States  to  the 
Commission based on their experience of controls, as well as on the audits done by 
the Commission in the framework of the clearance of accounts procedure. 

Increasing  the  acceptance  of  cross  compliance  by  farmers,  by  only  having  relevant 
legal  acts  within  the  scope  of  cross  compliance,  is  considered  to  enhance  the 
contribution of cross compliance as an effective  mechanism  to promote sustainable 
agriculture.  Hence,  this  option  consists  of  identifying  the  requirements  whose 
deletion  would  not 
the  scope  of 
cross compliance18.  As  such,  the  list  contains  SMR  proposed  to  be  deleted  because 
they do not fulfill one or more of the following criteria: 

the  current  substance  of 

impact  upon 

•  do  not  have  a  direct  link  to  agricultural  activities  and  agricultural  land,  and/or 

whose non respect cannot be attributable to an individual farmer; 

•  concern MS and not farm activities and as a result become difficult to control; 

•  induce  administrative  costs  for  MS  that  exceed  the  benefits  derived  from  the 

inclusion of these legal acts19. 

4.3. 

Option 2: broadening the scope of cross compliance 

This  option  consists  of  analysing  the  consequences  from  adding  certain  important 
legal acts relevant to farming activities in the areas of environment, public, plant and 
animal  health  and  animal  welfare,  as  well  as  certain  standards  to  maintain  the 
agricultural land in good agricultural and environmental condition. The relevant acts 
shall fulfill the criteria presented for the previous option, and in addition they shall 
help  meeting,  where  appropriate,  the  new  challenges  mentioned  in  the  HC 
communication,  in  particular  those  of  climate  change  and  water  management,  and 
contribute to the retention of environmental benefits stemming from set aside20. 

One  legal  act  that  could  be,  partly,  considered  to  be  included  in  the  scope  of  cross 
compliance is the Water Framework Directive (WFD). The purpose of the WFD is to 
establish  a  framework  for  the  protection  of  all  community  waters  (groundwater, 
surface  waters,  coastal  waters,  etc.)  with  the  aim  of  meeting  "good  status"  for  all 
water  bodies  by  2015.  Article  11  of  the  WFD  foresees  the  establishment  of  MS 
programmes with measures for the management of river basins by the end of 200921. 

18 
19 
20 

21 

See note 2 in Annex II for details. 
http://ec.europa.eu/agriculture/eval/reports/cross_compliance/full_text_en.pdf. 
Only  water  issues  are  addressed  here,  while  issues  directly  or  indirectly  related  to  climate  change 
challenges are dealt elsewhere (section VIII, and V for set aside). Certain public provisions that were 
examined, but considered either already covered or not justified from a cost/benefit analysis are covered 
in note 2 in Annex C. 
Some measures will apply at farm level and are the ones which would be included in the scope of the 
cross compliance. However, they will not necessarily apply to all farms in the same river basin and will 

EN 

38 

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MS then have to implement the programmes of measures (buffer strips, winter cover, 
input  reductions,  etc.)  by  the  end  of  2012  at  the  latest.  Thus  the  difficulty  of 
including the WFD as an SMR within the scope of cross compliance at this stage is 
that the programmes of measures are not defined yet, and hence their relevance for 
farming activity and farm responsibility cannot be assessed22. 

However,  although  the  WFD  can  be  considered  not  to  be  mature  enough  to  be 
included  in  the  scope  of  cross  compliance  at  this  stage,  other  ways  of  introducing 
water  management  within  the  scope  of  cross  compliance  could  be  considered.  For 
example, the discussion about the "misuse of water resources" is mainly focused on 
including water as an issue and/or standard within the GAEC. 

Currently, the issues and standards do not cover water specifically, since GAEC was 
introduced to ensure proper land management in order to handle risks associated with 
the  decoupling  of  support  in  the  2003  CAP  reform.  Therefore,  including  water 
management  in  GAEC  would  imply  a  broadening  of  its  scope,  but  it  would 
simultaneously  increase  the  capability  of  MS  to  deal  with  the  water  management 
issue. 

This  option  also  consists  of  analysing  the  possibility  of  retaining  environmental 
benefits from set aside through cross compliance. Losses of environmental benefits 
are not the same in every Member State, but are specific to certain regions depending 
on  the  current  use  of  set  aside  as  well  as  the  characteristics  of  its  implementation. 
Therefore,  instruments  that  could  allow  for  flexibility  in  application  should  be 
introduced. A general GAEC solution, such as a fixed environmental area, should be 
avoided since this would give rise to disproportionate effects compared to the current 
legal obligations.. Within the GAEC, such instruments could for example include the 
introduction  of  a  standard  on  buffer  strips  (without  a  fixed  quantification  on  EU 
level),  and  a  reinforcement  of  the  standard  on  retaining  landscape  features.  These 
measures  could  however  have  implications  for  the  baseline  of  Rural  Development 
programs. 

5. 

COMPARISON OF THE OPTIONS AND THEIR IMPACTS 

Assessing the costs and benefits of new cross compliance measures at this early stage of the 
implementation of the system is extremely difficult. Measures in place have already provided 
some  indications  of  their  effectiveness  and  relevance,  leading  to  the  conclusions  in  the 
discussion of option 1. But how to assess options not yet in place? 

The discussion in this section is, therefore, by necessity of a qualitative nature, and needs to 
be considered with this caveat in mind. It lists potential advantages and disadvantages of the 
various options, but leaves open the assessment of the best policy choice (or combination of 
choices).  This  was  considered  necessary  since  many  of  the  following  advantages  and 
disadvantages  are  part  of  a  public  debate  based  more  on  assumptions,  arguments  and 
preferences, than on concrete evidence. 

differ depending on the specificities of each river basin and conditions within the river basin, depending 
on the location of the farms. 
Note 2 in Annex C discusses in more detail the practical difficulties involved. 

22 

EN 

39 

   EN 

 
                                                                                                                                                         
As for impacts, the analysis does not consider economic impacts or impacts on employment 
for any of the option, since this is not considered to be affected by a change in the scope of 
cross compliance. 

5.1. 

Option 0: status quo 

Advantages: 

•  it  grants  more  time  for  proper  definition,  implementation  and  evaluation  of 
existing SMR instead of modifying the scope of cross compliance at this time; 

•  many  of  the  potential  benefits  and  costs  of  cross  compliance  will  only  become 
clear in the longer term and more time will be needed to properly assess them; 

•  some MS have yet to define obligations for farmers for some requirements in the 

current SMR, or clarify the definition and extent of their GAEC; 

•  a well developed awareness and understanding of SMR is not necessarily present 
yet among farmers, and the FAS that should assist them are in their early stages. 

Disadvantages: 

•  the  opportunity  of  further  contributing  to  new  challenges  by  including  more 

requirements or standards will be missed; 

•  the  opportunity  of  deleting  requirements  which  are  not  relevant  to  meeting  the 

objectives of cross compliance, or which are redundant, will be missed; 

•  the opportunity to clarify some existing requirements in order to make them better 

accepted by the farmers and thus better implemented will be missed. 

5.2. 

Option 1: better targeting the current scope of cross compliance 

Advantages: 

•  simplification  to  farmers  since  the  controllability  and  targeting  of  current 
requirements  (concerning  a  farmer's  responsibility  or  farming  activity)  would  be 
improved, making it easier for farmers to understand the rules and issues, and thus 
increasing their acceptance for the system; 

•  administrative costs for the Member States would be reduced; 

•  due to synergy in effects and the overlapping between the regulations/directives, 
the  objectives  of  cross  compliance  may  still  be  achieved,  even  if  some 
requirements are withdrawn from the scope. 

Disadvantages: 

•  confusion among farmers may be created about the importance of respecting legal 
requirements who will apply to farmers even though they are withdrawn from the 
scope of cross compliance. 

EN 

40 

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5.3. 

Option 2: broadening the scope of cross compliance 

Advantages: 

•  additional  requirements  or  standards  could  contribute  to  better  addressing  and 
facing the new challenges (e.g. with respect to water) within the CAP, as well as 
to retention of environmental benefits form set aside; 

•  broadening the scope of cross compliance would send a clear political message of 
the  importance  attached  to  these  requirements  and  the  importance  of  these 
requirements  being  respected  by  farmers.  Thus,  broadening  the  scope  would 
improve  the  acceptability  of  public  support,  and  could  therefore  have  positive 
social impacts; 

•  introducing  new  obligations  into  cross  compliance  based  on  pre-existing  and 
already  implemented  legislation  (SMRs)  should  in  principle  have  no  impact  on 
production costs for farmers; as has been the case for the majority of GAEC. 

Disadvantages: 

•  may  increase  the  administrative  burden,  since  additional  cross  compliance 
obligations  would  demand  additional  effort  from  administrations,  and  would 
stretch the ability of inspectors to carry out controls on wide ranging obligations; 

•  negative  attitudes  of  farmers  towards  cross  compliance  policy  could  increase  as 
they may feel overloaded or over-controlled, which might be counter-productive 
rather than improving the achievements of the objectives; 

•  including  the  WFD  in  the  scope  of  cross  compliance  and  introducing  water 
management issues within GAEC generates reactions because WFD measures are 
not defined yet and GAEC was meant to ensure proper land management; 

•  broadening  the  scope  of  requirements  under  GAEC  impacts  upon  the  "baseline" 
for  the  formulation  of  agri-environmental  rural  development  measures,  with 
potentially negative impacts when income foregone for farmers is calculated. 

6. 

CONCLUSIONS 

There are advantages both from deleting some of the current requirements within the scope of 
cross compliance, and from adding new requirements. Better targeting is necessary in order to 
address some of the practical problems that have arisen during the implementation period of 
the system. This will ease the administrative burden while not putting at risk the objectives of 
cross compliance. Simultaneously, a broadening of the scope will contribute to addressing the 
concerns of dealing with new challenges, as well as contributing to retaining environmental 
benefits from set aside. 

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7. 

SUMMARY TABLES 

7.1. 

Comparison between different options and their respective impacts – cross compliance  

☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Economic 

Social 

Environmental 

Administrative 

Simplification 

Option 0 – status quo 

Option 1 – better targeting the scope 

Option 2 – broadening the scope 

(cid:46) 

(cid:46) 

(cid:46) 

Some existing rules have proven 
redundant of not relevant 

(cid:47) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

Improves acceptability of public support 

☺ 

Neutral with respect to environmental 
impacts as changes affect only irrelevant 
provisions  

Contributes to better meeting and 
addressing new challenges, and retain 
environmental benefits from set aside 

(cid:46) 

☺☺ 

Eases administrative burden for MS 

Increases administrative burden for MS  

☺☺ 

(cid:47) 

More pertinent, and thus simpler for 
farmers to grasp and implement 

Implies more requirements for farmers 
within cross compliance framework 

☺☺ 

(cid:47) 

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7.2. 

Comparison between different options and their respective objectives – cross compliance 

☺☺ fully respecting objective; ☺ partially respecting objective; (cid:46) neutral; (cid:47) moving away from objective; (cid:47)(cid:47) putting at risk objective 

OBJECTIVES 

Competitiveness 

Market orientation 

Environmental sustainability 

Budget costs 

Administrative costs 

Simplification 

Vitality of rural areas 

Stabilisation of farmers incomes 

Transfer efficiency 

Option 0 – status quo 

Option 1 – better targeting the scope 

Option 2 – broadening the scope 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:47) 

☺☺ 

(cid:46) 

☺ 

(cid:46) 

(cid:46) 

(cid:46) 

☺☺ 

(cid:46) 

(cid:47)(cid:47) 

(cid:47) 

(cid:46) 

(cid:46) 

(cid:46) 

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C.C.  PARTIALLY COUPLED SUPPORT 

1. 

BACKGROUND 

Decoupling introduces flexibility in the choice of producers, who continue to produce where 
it is profitable, and adapt their output to the market or change to alternative crops where it is 
adequate.  Thus  overall,  decoupling  leaves  the  producer  at  least  as  well  off  as  before  when 
his/her  choice  is  the  same,  and  most  likely  better  off  when  he/she  adjusts  as  a  result  of 
production flexibility and market orientation. 

The  fact  that  the  actual  level  of  decoupled  support  after  the  2003  reform  exceeded  the 
minimum required indicates that the above argument is well understood. Within this context, 
therefore, the continuation of partially coupled support in certain sectors begs the question of 
whether such support is still pertinent23. For an answer, one has to recall the reasons by which 
the 2003 and 2004 reforms retained such support: 

•  the need to provide stable supply to the processing industry and thus avoid negative social 

and economic consequences of the implied restructuring; 

•  the  need  to  sustain  a  certain  level  of  specific  production  due  to  lack  of  alternatives  and 

consequent social problems or environmental problems. 

2. 

PROBLEM DEFINITION 

Experience with decoupling in general shows that this move did not imply dramatic changes 
in the production structure at the EU level, although a few sectors faced significant reduction 
of  production  at  the  regional  level..  Furthermore,  the  extent  of  recent  reforms  and  the 
integration of more sectors into the SPS render the partially coupled support less relevant and 
often  preventing  farmers  to  achieve  further  competitiveness  and  market  orientation. 
Moreover, in the cases of non profitable sectors  farmers are worse of than farmers in a full 
decoupling situation receiving lower payments24. Besides, farmers still receiving coupled aid 
are  have  also  to  face  both  coupled  and  decoupled  systems  running  in  parallel,  thus  adding 
complexity and administrative costs without any income benefits. For the reasons mentioned 
above, move to full decoupling would be desirable. However, adjustments in production may 
represent  short-term  challenges  for  the  agri-food  chain,  and  in  few  cases  these  may  create 
more costs than benefits. In some specific cases a minimum level of agricultural production is 
important to sustain economic activity in regions with few economic alternatives, to ensure an 
adequate  supply  of  raw  materials  to  processing  industries,  or  to  generate  environmental 
benefits. 

Thus the potential risks and possible alternatives in the regions should be identified on a case-
by-case  basis  before  deciding  to  which  extent  and  until  when  coupled  or  industry  support 
should  remain,  and  where  these  were  designed  to  promote  certain  production,  their 
effectiveness should be assessed. 

23 
24 

See note 3 in Annex C for details about the remaining partially coupled support. 
This argument was already raised during the discussion in the Council that preceded the 2003 reform. 
See Council "CAP Reform: Explanatory note DS 222/03", Luxembourg, 18 June 2003. 

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3. 

OBJECTIVES 

The following policy options were analysed, and results were assessed based on whether these 
options met the following objectives: 

•  fulfil  the  principal  objectives  of  the  2003  CAP  Reform:  competitiveness,  market 

orientation and sustainability; 

•  simplify the support scheme; 

•  contribute  to  vitality  of  rural  areas,  prevent  land  abandonment  and  allow  smooth 
restructuring of downstream industries, where they are crucial for the vitality of rural areas. 

4. 

POLICY OPTIONS 

Table 3. – Analysed policy options for partially coupled support schemes25 

Option 

SPS model 

Description 

0 

1 

2 

Status quo – baseline 

No change in the present set of measures 

Full decoupling 

Inclusion  of  all  partially  coupled  aids  in  the  Single  Payment 
Scheme 

Targeted selective decoupling  Case-by-case analysis to identify if, and in which sectors, the 
shift  of  partially  coupled  support  to  full  decoupling  could 
create social, regional or environmental problems. 

4.1. 

Timing and transition to full decoupling options 

Options 1 and 2 above do not exclude the possibility of transition to full decoupling, 
and  a  gradual  phasing  out  process  could  be  foreseen  to  attenuate  impacts.  Specific 
sectors  may  require  specific  solutions,  and  measures  under  rural  development  or 
measures such as the previously mentioned Article 69 (section C.a.) could tackle the 
issues  of  providing  alternatives,  diversification,  infrastructure  development  and 
restructuring  to  prevent  abandonment  and  adverse  effects  on  processing  industries 
that  were  behind  partially  coupled  payments  and  environmental  impact  in  specific 
areas.  However,  as  the  analysis  of  other  support  schemes  (section  D.c.)  will 
demonstrate, the issue of transition to full decoupling is more pertinent for aids to the 
industry than aids to farmers. For the latter's point of view and income prospects, the 
risk of production decline is best managed with full decoupling. 

25 

The following sectors are excluded from this analysis because they have been recently reformed or are 
included  elsewhere  in  the  present  analysis:  fruit  and  vegetables,  tobacco,  sugar,  cotton,  payments  for 
outermost regions. 

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5. 

IMPACT ANALYSIS 

5.1. 

Economic impacts 

The assessment of the economic impacts from a move towards full decoupling was 
based  on  two  sets  of  interrelated  analyses  –  those  focusing  on  a  specific  sector’s 
market  and  income  outlook  and  those  focussing  on  a  farm’s  reaction  to  further 
decoupling26. It also looked into the experience of decoupling into the EU since the 
reforms of 2003 and afterwards. 

5.1.1. 

Status quo 

a.  Market and income outlook 

The potential impact of this option is essentially driven by the present medium-term 
outlook for EU agriculture27. From this outlook, it is the production and price picture 
that is more relevant here. 

The price outlook for most EU cereals appeared particularly strong both within the 
EU and in world markets, but a number of risk factors particularly those related to 
weather  and  climate  could  result  in  greater  price  fluctuations  than  seen  in  the  past 
decade.  This  outlook  affects  all  related  crop  sectors,  generating  price  increases, 
especially for oilseeds.  

The  medium-term  perspectives  for  animal  products  are  very  positive  for  dairy 
markets, relatively positive for poultry and pig meat, but beef production is expected 
to continue to decline over the medium term in line with the structural reduction of 
the dairy herd and the impact of decoupling in certain high cost, extensive regions. 

Sheep  and  goat  meat  production  is  projected  to  decline  gradually  in  line  with  past 
long-term  trends  and  the  impact  of  decoupling  of  ewe  premiums  in  the  major 
producing countries.  

The medium-term income projections display a rather favourable income outlook for 
EU-27, supported by positive price developments and by the implementation of the 
CAP, including the sharp rise in the subsidies granted to agricultural producers in the 
EU-1228. 

26 

27 
28 

The market and income outlook is based on the input from AGRI.G2, while analyses on farm reactions 
are  based  on  FADN  data  analysed  by  AGRI.G3.  The  Scenar2020  stud  has  also  been  used,  where 
appropriate, to supplement conclusions. All relevant sources are available in full detail in the site of DG 
AGRI. 
See http://ec.europa.eu/agriculture/analysis/markets/index_en.htm. 
This  market  outlook  is  based  on  current  macroeconomic  assumptions.  Changes  in  assumptions  on 
exchange rates and oil prices could alter this outlook, but not the conclusions of this section. The latest 
update is found in http://ec.europa.eu/agriculture/analysis/markets/index_en.htm. 

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b. 

Summary conclusions for coupled support29 

The present level of coupled support in the arable crop sector, or in the much smaller 
hops  and  seeds  sectors,  does  not  seem  to  relate  to  the  perceived  fears  about  the 
potentially  negative  impact  on  farmers  expressed  before  the  2003/04  reforms.  It 
seems to be more related to developments that characterise these sectors and that are 
generally positive30. 

In the livestock sector, on the other hand, and especially in the extensive beef and the 
sheep  and  goats  sector,  especially  for  meat  production,  partially  coupled  support 
seems to have a stronger impact on farm income. 

In general, the status quo raises a complex problem already identified in the context 
of  the  debate  for  the  2003  reform.  These  payments  are  generally  considered  as 
slowing  down  production  losses  in  the  sectors  involved;  but  at  the  same  time  they 
imply that producers cannot reap the full benefits of SPS because in regions facing 
downward  production  trends  coupled  payments  will  keep  being  reduced  (unlike 
decoupled  ones,  which  are  fixed).  On  the  other  hand,  in  some  cases  coupled 
premiums,  by  keeping  a  certain  level  of  production  activity  could  be  important  for 
some  agri-food  chains  in  certain  areas  and  for  delivering  environmental  benefits  in 
cases where these are dependant on specific faming systems. 

In terms of administrative impacts, the status quo keeps by design intact the existing 
administrative  systems  which  run  in  parallel,  and  therefore  ensuing  administrative 
burden for both EU and MS administration and farmers. Finally with respect to trade, 
keeping the present level of coupled support implies the continuation of the present 
level of "blue box" CAP payments. 

5.1.2.  Full decoupling31 

With respect to cereals, full decoupling could imply declines of area in some regions 
of  the  MS  involved,  but  these  should  be  moderate  based  on  the  recent  price 
increases.  A  drop  of  durum  wheat  (more  sensitive  because  coupled  payments 
represent  a  higher  share  of  the  farm's  margin)  in  favour  of  soft  wheat  could  have 
implications for the processing industry, but the generally higher price levels over the 
medium  term  could  partly  offset  some  of  this  impact32.  Full  decoupling  does  not 
seem to change the profitability hierarchy in Spain for the cereals studied in FADN, 
but  changes  that  of  France.  In  the  latter  durum  wheat  growers  could  be  willing  to 
change to more profitable crops such as soft wheat or grain maize. 

The  following  table  shows  the  impacts  no  farmers'  margins  over  variable  costs 
resulting from a move to further decoupling. 

29 
30 

31 

32 

For a discussion on this point, see in particular Section 5.1.3b of note 3 in Annex C. 
For olive oil, it is hard to see any economic reasoning for the level of coupled support (6%) retained in 
Spain, given the positive developments in the sector and the experience from other producing MS. 
The conclusions of this part are common whether one looks ate the sector level or the microeconomic 
level of the farm. 
The most sensitive regions to be affected appear in results of note 3 in Annex C. 

EN 

47 

   EN 

 
                                                 
Table 4. – Summary results of impact from full decoupling (production of specialist 
producers where margin over variable costs is affected) 

Spain

France

Portugal

Belgium

Coupled 
payment as 
% of the 
margin

%  switching 
to negative 
margin

Coupled 
Payment 
as % of the 
margin

%  switching 
to negative 
margin

Coupled 
Payment 
as % of the 
margin

%  switching 
to negative 
margin

Coupled 
Payment as 
% of the 
margin

%  switching 
to negative 
margin

COP
HOPS
BEEF 
BREEDERS
BEEF 
BREEDERS & 
FATTENERS
BEEF 
FATTENERS
SHEEP MEAT
SHEEP MILK
GOAT MILK 

23%

42%

36%

28%

7%

10%

5%

4%

0%

5%

*

*

39%

11%

63%

19%

60%

19%

43%

56%

15%

43%

68%

10%

4%

19%

*

*

34%

18%

18%

31%

*

*

7%

0%

* FADN sample to small too assess the impact of supression of coupled payments

Austria

Sweden

Finland

Germany

Coupled 
Payment as 
% of the 
margin

%  switching 
to negative 
margin

Coupled 
Payment 
as % of the 
margin

%  switching 
to negative 
margin

Coupled 
Payment 
as % of the 
margin

%  switching 
to negative 
margin

Coupled 
Payment as 
% of the 
margin

%  switching 
to negative 
margin

102%

35%

5%

0%

n.a. 
(average 
margin is 
already 
negative)

average 
margin 
negative

8%

0%

61%

46%

*

COP
HOPS
BEEF 
BREEDERS

BEEF 
BREEDERS & 
FATTENERS

BEEF 
FATTENERS

SHEEP MEAT
SHEEP MILK
GOAT MILK 

* FADN sample too small to assess the impact of supression of coupled payments

Source: DG AGRI G3 – EU FADN 

In beef, the move to full decoupling could accentuate present trends, with the most 
significant  negative  impacts  expected  among  suckler  cow  producers,  where  the 
coupled  premium  represents  a  significant  part  of  a  farm's  margin.  The  more 
extensive and specialised the production system is, the higher the risk especially in 
those  regions  where  output  is  low  and/or  production  costs  are  higher.  Suckler  cow 
breeders are also more exposed to price reductions due to their lower margins, and 
more vulnerable to potential WTO developments. 

On the other hand, while for suckler cows the number of animals for which coupled 
support  premium  is  claimed  is  close  to  the  ceilings  set  with  the  2003  reform,  the 
number  of  animals  is  significantly  lower  for  other  beef  premiums  (except  for 
fatteners in some MS), indicating less potential negative impacts in these sectors. 

The  sheep  meat  sector  would  be  also  affected  by  decoupling  as  the  50%  coupled 
premium sheep meat production plays an important role in farms' margin (in France, 

EN 

48 

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in  particular,  almost  20%  of  sheep  meat  farm  would  not  cover  their  variable  costs, 
against  5%  in  Spain).  But  milk  sheep  or  goat  would  be  less  affected  because  their 
output is higher. 

In  summary,  the  analysis  of  a  move  towards  full  decoupling  indicates  that  the 
stronger  impacts  will  be  in  the  sectors  and  regions  where  the  coupled  premiums 
represent an important share of farmer's margin. Analysis has identified these sectors 
to be those of suckler cows, and sheep (especially for meat). In the cereals sector and 
in other beef premiums impacts would not be significant overall (although could still 
affect some particular regions). 

The  biggest  advantage  from  a  generalised  move  towards  full  decoupling  will  be  in 
market  orientation,  in  income  transfer,  and  in  administrative  and  simplification 
terms for both public administrations and farmers because instead of several systems 
running in parallel there would be only one single SPS system for the premiums to be 
decoupled.  The  complexity  and  overhead  of  aid  application  controls  would  be 
reduced,  specifically  on  the  spot  controls.  It  would  also  be  advantageous  in  WTO 
terms  where  a  full  share  of  old  direct  payments  would  be  fully  “green  box” 
payments.  

5.1.3.  Targeted selective decoupling 

This option, which stems directly from the conclusions of the previous one, suggests 
that  the  risks  of  production  decrease  in  the  suckler  cow  and  sheep  meat  sectors  in 
extensive systems would be avoided by keeping the corresponding premiums in the 
current partially coupled support. 

The budgetary impact of this (and the previous) option would not change in relation 
to  the  status  quo  (baseline)  because  the  partially  coupled  part  of  support  would  be 
transferred to the SPS. It would be positive in administrative and simplification terms 
for  both  administration  and  farmers  as  mentioned  in  the  full  decoupling  scenario 
except for the premiums to be kept coupled. 

It  would  also  be  advantageous  in  WTO  terms  where  a  bigger  share  of  old  direct 
payments would be fully “green box” payments (just arable crops coupled premium 
in SP and FR accounting for 35% of the EU remaining coupled elements), although 
at lower extent than in the previous option. 

In  comparison  to  the  full  decoupling  option  the  disadvantages  related  to  the 
premiums to be kept coupled would remain. 

5.2. 

Social impacts and environmental impacts 

The  potential  impacts  that  various  options  of  full  decoupling  could  have  in  the 
sectors examined are summarised in the following Table 5. 

EN 

49 

   EN 

 
Table 5. – Social/environmental impacts of alternative partially coupled support options 

Option 

0 

Social impact 

Environmental impact 

Production and farmers remain in regions with 
risks  for  abandonment,  mainly  in  extensive 
livestock regions. 

Minor environmental impacts where payments 
are  in  extensive  farming,  such  as  beef  and 
sheep production. 

Farm  income  would  be  lower  than  with  full 
decoupling  where  the  trend  for  production  is 
already downward.  

The processing industry would not be affected 
because policy factor would remain unaltered. 

1 

Improved  income  transfer  for  farmers  in  all 
sectors. 

to 

lead 

could 

Decoupling 
reduction, 
abandonment or change of production in areas 
with  low  farm  margins,  such  as  in  suckler 
cows and sheep for meat.   
that  33%  of 
(FADN  simulations  shows 
specialised  suckler  cows  holdings  in  Austria, 
21%  in  France  and  17%  in  Spain  could  not 
cover  their  variable  costs  and  hence  could 
abandon production. A similar situation would 
occur to 19% of French sheep meat farmers). 

Minor  impacts  in  processing,  except  for 
regions  that  depend  to  a  large  extent  on 
extensive livestock systems.  The reduction of 
production  in  some  areas  can  have  negative 
repercussions for the processing industry (and 
consequently  on  local  employment)  which 
depend on a minimum quantity of supply33 

2 

Keeping  coupled  support  only  where  it  is 
found 
are 
minimised,  namely  with  respect  to  farm 
impact in local processing industry. 

necessary, 

impacts 

social 

In  cereals,  similar  production  patterns  as  at 
present will continue. 

Mixed  picture,  with  some  gains  and  also  in 
certain  regions  some  significant  losses  for 
environment. 

On  the  plus  side,  gains  in  terms  of  lower 
greenhouse  gas  emissions  and,  in  certain 
areas, reduced pressure on limited resources. 

On  the negative  side,  benefits  from  extensive 
livestock  systems  in  fragile  and  normally 
environmentally  of  high  value  regions  would 
be  at  risk  (e.g.  biodiversity  and  landscape 
losses, reduced forest fire protection). 

This  option  minimises  any  potentially 
negative  impacts  by  retaining  support  where 
its  removal  would  imply  high  environmental 
costs. 

6. 

CONCLUSIONS 

The  status  quo  option  contradicts  the  2003  CAP  reform  path  in  terms  of  competitiveness, 
market  orientation  and  simplification  of  the  support  scheme.  Full  decoupling  would  have  a 
positive  impact  on  farm  income  in  most  regions  due  to  higher  transfer  efficiency  of  direct 
support,  it  could  put  at  risk  production  in  certain  sectors  in  specific  regions  where  local 
production  is  vital  to  ensure  the  viability  of  local  agri-food  chain  and  to  preserve  the 
environment.  Evidence  from  analysis  suggests  that  targeted  selective  decoupling  whereby 
coupled support is retained in sectors of extensive livestock meat production (beef and sheep) 
would maximise the benefits from full decoupling in the crop sector, while at the same time 
maintaining  the  overall  positive  social  and  environmental  impacts  of  coupled  support  in 
fragile regions of high environmental value. 

33 

Following industry and DG AGRI estimations in 2005 red meat and pigmeat provided for 230 000 jobs 
in slaughtering/cutting and 600 000 in processing activity. 

EN 

50 

   EN 

 
                                                 
7. 

SUMMARY TABLES 

7.1. 

Comparison between different options and their respective impacts – partially coupled support 

☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Option 0 – baseline 

Option 1 – full decoupling 

Option 2 – targeted selective decoupling 

Economic 

Continues current production trends 
(cid:46) 

Full market orientation 
☺☺ 

Production and farmers remain in regions 
with risks for abandonment, mainly in 
extensive livestock regions 
☺ 
Supply to processing industry continues 
(cid:46) 
Farm income declines where production 
trends are already downward 
(cid:47) 
Positive environmental impact in extensive 
livestock farming 
(cid:46) 
Two administrative systems continue to run 
in parallel 
(cid:47) 

(cid:46) 

(cid:46) 

Social 

Environmental 

Administrative 

Simplification 

Other 

Could lead to reduction of production in 
regions with low farm margins, such as with 
extensive beef and sheep farming 
(cid:47) 
Minor impact for processing industry except 
where extensive livestock 
(cid:47) 
Improved farm income transfer 
☺☺ 

Market orientation gains limited to sectors 
moving to full decoupling 
☺ 

Social negative impacts for processing 
minimised since production support in fragile 
areas continues 
☺☺ 
Improved income transfer limited to sectors 
where full decoupling applies 
☺ 

Losses in environmentally high value regions 
of extensive livestock systems 
(cid:47) 

Production of extensive livestock systems 
retained 
(cid:46) 

Great administrative simplification 
☺☺ 

All direct support instruments merged 
☺☺ 

All coupled payments shift to Green Box 
☺☺ 

Reduction of administrative burden only 
where full decoupling is implemented 
☺ 
Reduction of number of instruments in the 
sectors where decoupled is fully implemented 
☺ 
Important part of the coupled payments shifts 
to Green Box 
☺ 

EN 

51 

EN 

 
  
7.2. 

Comparison between different options and their respective objectives – partially coupled support 

☺☺ fully respecting objective; ☺ partially respecting objective; (cid:46) neutral; (cid:47) moving away from objective; (cid:47)(cid:47) putting at risk objective 

OBJECTIVES 

Option 0 – baseline 

Option 1 – full decoupling 

Option 2 – targeted  
selective decoupling 

Competitiveness 

Market orientation 

Environmental sustainability 

Budget costs 

Administrative costs 

Simplification 

Vitality of rural areas 

Stabilisation of farmers incomes 

Transfer efficiency 

(cid:47) 

(cid:47) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:47) 

(cid:46) 

(cid:46) 

(cid:46) 

☺☺ 

☺☺ 

(cid:47) 

(cid:46) 

☺☺ 

☺☺ 

(cid:47) 

☺☺ 

☺☺ 

☺ 

☺ 

☺ 

(cid:46) 

☺ 

☺ 

☺ 

☺ 

☺ 

EN 

52 

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C.d.  INDIVIDUAL PAYMENT LIMITATIONS 

1. 

BACKGROUND 

Whether  to  introduce  cuts  in  the  highest  payments  received  by  larger  farms,  because  such 
payments are not considered economically or socially justified, has been an issue in the public 
debate  on  the  CAP  since  the  early  1990s.  Several  Commission  proposals  for  payment 
redistribution mechanisms (1992, 2000, and 2003) were not retained in full by the Council. 

Currently, the only method for achieving a certain redistribution of payments under the CAP 
is through the linear, 5% reduction of payments above €
 5 000 from compulsory modulation. 
Two  provisions  at  the  MS  discretion,  however,  currently  impact  on  low  payments:  the 
possibility of setting up a minimum size of agricultural parcels for which an SPS application 
can  be  introduced  (0.3  ha),  and  the  possibility  not  to  grant  any  aid  if  the  amount  per 
application is less than €

 10034. 

Continued  attention  is  being  drawn  to  the  uneven  distribution  of  direct  payments  between 
farmers  (see  Figure  4  below).  A  minority  of  beneficiaries  (around  20%)  receives  the  large 
majority  of  payments  (around  80%).  Almost  half  of  beneficiaries  in  the  EU-25  receive 
payments that do not exceed €

 500. 

Figure 4: Distribution of direct payments in EU-15 and EU-25 

EU-25

EU-15

)

%

(

P
D

f
o
e
r
a
h
S

90,0

80,0

70,0

60,0

50,0

40,0

30,0

20,0

10,0

0,0
>=500  
>=45< 50  
>=80< 85  
>=75< 80  
>=55< 60  
>=50< 55  
>=25< 30  
>=20< 25  
>=95< 100  
>=70< 75  
>=40< 45  
>=5< 10  
>=15< 20  
<0  
>=10< 15  
>=65< 70  
>=35< 40  
>=85< 90  
>=90< 95  
>=60< 65  
>=30< 35  
>=0< 5  
>=200< 250 
>=400< 450 
>=150< 200 
>=350< 400 
>=300< 350 
>=450< 500 
>=250< 300 
>=100< 150 

Classes in € per beneficiary (000)

Source: DG AGRI calculation based on CATS data 

34 

New MS shifting from SAPS to SPS may fix a minimum size of 1 ha per holding for the establishment 
of payment entitlements and payments. 

EN 

53 

   EN 

 
 
 
 
 
 
                                                 
2. 

PROBLEM DEFINITION 

High levels of payment per holding are exposed to the criticism that they are excessive and 
socially unacceptable. This criticism has grown  in the context  of increasing transparency of 
EU  policy,  notably  of  CAP  payments,  and  the  shift  of  support  to  the  SPS.  In  removing  the 
link between production and the direct payment through the decoupling process, the question 
has been raised about whether an individual beneficiary deserves such a high level of income 
support and whether the money could be used within the CAP in a more effective way. The 
situation  has  become  more  complex  with  enlargement  to  EU-27  because  of  the  structural 
characteristics  of  farms  (i.e.  large  or  very  large  co-operative  farms)  in  some  MS,  including 
new MS. 

The other problem arising from the uneven distribution of direct payments relates to the large 
number of  very small payments. This  number  essentially includes small  farmers,  but  it  also 
includes in certain MS recipients whose value of payment is below the administrative cost of 
managing it. While this situation has existed for some time, the problem has been exacerbated 
with the introduction of the regional SPS model in some MS, which extended payments to all 
eligible area, and brought with it new beneficiaries, some receiving very low payments. 

3. 

OBJECTIVES 

Introducing individual limits for decoupled direct payments should be assessed with respect to 
its impact on the following policy objectives: 

•  contributing  to  the  overarching  goals  for  the  CAP  (improved  competitiveness,  better 

market orientation, better compliance with EU standards), 

•  meeting  the  societal  expectations  (in  particular,  for  a  more  even  distribution  of  direct 

payments), 

•  preserving the vitality of rural areas, 

•  further simplifying the CAP. 

4. 

POLICY OPTIONS 

Against  this  background,  and  taking  into  account  the  Commission's  approach  to  keep  any 
savings from payment limitations within the MS, and to apply lower payment limitations only 
at MS discretion, the following policy options were examined: 

Table 6. – Policy options for individual payment limits 

Option  Upper payment limitations 

Description 

0 

Status quo – baseline 

No change in the present set of measures. Currently, reduction in 
payments  under  the  CAP  is  made  through  the  linear,  5% 
reduction  of  payments  above 
from  compulsory 
modulation. 

€ 5 000 

1 

2 

Fixed  individual  limits  at  a 
certain level 

Individual  limits  set  at  a  certain  maximum  level  per beneficiary 
 300 000),  beyond  which  no 
 200 000  or  €
(e.g.  €
payments are granted (capping). 

 100 000,  €

Progressive individual limits   The  support  level  would  be  reduced  at  different  rates  as  overall 
payments  to  the  individual  farm  reach  different  thresholds  (e.g. 
payments above €
 100 000 would be reduced by 10%, payments 
 300 000 by 45%). 
above €

 200 000 reduced by 25%, and above €

EN 

54 

   EN 

 
Option  Lower payment limitations 

Description 

0 

Status quo – baseline 

1 

2 

Compulsory  application  of 
current 
lower 
individual 
limits  

Increased  individual  lower 
limits  

No change in the present set of measures. MS currently have the 
possibility  of  setting  up  a  minimum  size  of  agricultural  parcels 
for which an SPS application can be introduced (0.3 ha), and the 
possibility  not  to  grant  any  aid  if  the  amount  per  application  is 
less than €

 100. 

The  current  lowest  level  of  threshold  (€
implemented in all MS. 

 100  or  0.3 ha)  is 

Increase in the value of lower payment limits in all MS to €
 250 
and  1 ha.  The  minimum  size  for  parcels  (not  exceeding  0.3 ha) 
remains unchanged. 

8. 

IMPACT ANALYSIS OF UPPER PAYMENT LIMITATIONS 

Detailed  results  of  the  various  options  are  presented  in  Annex  C35.  These  main  results  are 
summarised in Table 7. 

Table 7. – Summary impacts of upper payment limitations at aggregate EU level 

Variable 

Payment threshold (option 1) 

A 

B 

C 

 100 000 

 200 000 

 300 000 

Progressive cuts 
(option2) 

A cut = 10% 
B cut = 25% 
C cut = 45% 

Number of affected MS 

Affected farms (number) 

Affected farms (% of total) 

15 

25 480 

1% 

8 

7 610 

0.2% 

5 

4 380 

0.1% 

Average size of affected farm 

721 ha 

1 440 ha 

1 898 ha 

Average labour per farm  

16 AWU 

38 AWU 

51 AWU 

Changes in affected farms  

– in average payment (%) 

– 55% 

– 54% 

– 47% 

– in average farm income (€) 

– 30% 

– 28% 

– 25% 

Budgetary savings (million €) 

Budgetary savings (% of SPS) 

3 087 

8% 

1 754 

5% 

1 176 

3% 

15 

25 480 

1% 

721 ha 

16 AWU 

– 14% 

– 8% 

807 

2% 

Source:  DG AGRI calculation based on FADN 
Note: 

The  progressive  cuts  option  is  more  comparable  to  the  capping  option  with  the  threshold  set  at 
€100 000. 

Summary results in Table 7 and the more detailed results of Annex A lead to the following 
conclusions with respect to the main economic and budgetary impacts for the three options36. 

35 
36 

See note 4 in Annex C, and the detailed Annex tables it contains.  
See in particular the summary table in Annex C, note 4.  

EN 

55 

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€
€
€
 
 
 
 
                                                 
8.1. 

Option 0 

The  status  quo  (baseline)  is  neutral  in  terms  of  impacts.  However  it  fails  to  address  the 
problem of the uneven distribution of payments. The high levels of payment per holding will 
continue to be exposed to the criticism that they are socially unacceptable. An increase of the 
share  of  decoupled  payments  due  to  further  decoupling,  as  analysed  in  other  parts  of  this 
impact assessment, will make payments more transparent to the public and further increasing 
societal concerns on equity issues. 

8.2. 

Option 1 

Individual  limit  thresholds  set  at  high  levels  as  referred  in  option  1  (i.e.  €
 300 000  and 
 200 000) affect a very small number of holdings (0.1-0.2% of EU total) in a limited number 
of MS, particularly the new ones. On the affected holdings, capping results in very significant 
cuts in direct payment levels (47-54%) and reductions in income levels (25-28%). The burden 
of such a measure in terms of the budget released by such ceilings would fall on only three 
MS (Germany, Czech Republic and Hungary). 

Individual limit thresholds set at lower levels (i.e. €
 100 000) affect more farms across the EU 
(up to 1% of EU total of holdings) and more MS (15 in total are affected). However, even at 
this  level,  the  measure  would  not  attain  its  specific  objective  because  it  would  not 
significantly change the distribution pattern of payments, due to the heavy bias towards small 
payments  in  the  EU.  The  lower  limit  would  need  to  be  set  far  closer  to  the  average  direct 
payment per beneficiary in EU-25 (€
 6 100 in 2005 from the CATS payment database) to have 
any significant effect on payment distribution. Furthermore, the impact from such lower limit 
thresholds  on  the  affected  holdings  on  the  level  of  direct  payments  (–55%)  and  income  (–
30%), are stronger. Since many of these farms are large employers of agricultural labour, the 
consequences  on  the  employment  situation  in  their  local  areas  could  be  significant.  On  the 
other hand, the incentives for structural adjustment to avoid the limit (i.e. splitting of larger 
farmers  into  several  smaller  entities  or  transfer  of  entitlements)  would  be  much  stronger  at 
this level of payment limitation. 

Various  legal  responses  to  this  problem  of  impact  in  large  farms  which  are  important 
employers  of  agricultural  labour  were  addressed  but  found  to  have  difficulties.  Taking 
account  of  different  farm  structures  and  ownership  arrangements  (e.g.  co-operatives)  would 
require adjustment to the definition of the "legal person" claiming the payment, which would 
in  itself  open  the  door  to  circumvention  and  fraudulent  splitting.  Preventing  any 
circumvention  of  the  ceilings  (by  the  transfer  of  entitlements  or  the  splitting  of  holdings) 
would  be  difficult  to  implement,  would  require  a  definition  of  splitting  and  would  lay  the 
burden of proof on Member State administrations. 

8.3. 

Option 2 

 100 000  upwards)  maintain  the  more 
Progressive  individual  limits  (i.e.  step-wise  as  from  €
generalised  nature  of  the  measure  across  the  EU  (1%  of  EU  total  of  holdings)  but  have 
significantly  milder  impacts  on  cuts  in  direct  payments  (–14%)  and  income  (–8%)  on  the 
affected  holdings.  The  total  funding  released  by  the  measure  is  significantly  less  (€
 807 
million) but more evenly spread across the 15 affected MS. 

The main advantage of progressive payment limitations is that they weaken the incentives for 
structural  adjustment  to  avoid  the  limit  (e.g.  farm  splitting).  However,  the  possibility  of  an 

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€
increase in transfer of entitlements (sale or rent) to maximise benefits in the presence of the 
individual limitations remains. 

In terms of net budgetary effect and financial management, independently of the impacts at 
farmer level, the possibility that Member States could retain the funding released through this 
measure significantly increases the possibilities for adoption of high-level individual payment 
limits. However, with progressive limitations, the current system of financial control used to 
manage modulated funds would no longer be workable. Farmers receive a varying mixture of 
direct aids originating in different regimes and of different composition each year; therefore it 
would  be  problematic  to  anticipate  the  amounts  released  by  the  individual  limit  mechanism 
for each individual regime. Consequently, it would no longer be possible for the Commission 
to  define  net  financial  ceilings  for  each  individual  direct  aid  scheme,  which  would  imply 
important changes to financial management. 

9. 

IMPACT ANALYSIS OF LOWER PAYMENT LIMITATIONS 

The potential impact from an increase in lower payment limitations is shown in Table 8. 

Assuming  that  the  current  possibility  of  individual  payment  limits  of  €
around 12.5% of all beneficiaries would be excluded from direct payments. 

 100  was  applied, 

Table 8. – Summary impacts of lower payment limitations at aggregate EU level 

Minimum payment 

Minimum total area 

% of total 

€ 100 

€ 250 

Affected 

0.3 ha 

1.0 ha 

Affected 

Beneficiaries 

12.51% 

Payments 

0.16% 

30.84% 

0.84% 

18.33% 

0.68% 

1.54% 

0.01% 

9.27% 

0.17% 

7.74% 

0.16% 

Source:  CATS 2006. For minimum payment, all direct payments in EU-25; for area, 10 MS applying SPS. 

The percentage of beneficiaries affected varies greatly between MS (see Table 9 below). 

Table 9. – Impacts of lower payment limitations at MS level 

BE

CZ

Payment range
0 and < EUR 100           
>=EUR 100 and < 250    
0 and < EUR 250

3%
2%
5%

DK

FR
1% 5% 1% 18% 11% 10% 3% 2% 19% 40% 23% 22%
7% 7% 5% 25% 15% 11% 2% 1% 19% 31% 38% 44%
8% 12% 6% 43% 25% 22% 5% 3% 38% 71% 61% 66%

CY

LV

LT

IT

IE

% of beneficiaries affected
DE
ES

GR

EE

Payment range
0 and < EUR 100           
>=EUR 100 and < 250    
0 and < EUR 250

LU

AT

NL

HU MT

EU-25
1% 14% 85% 14% 2% 15% 14% 16% 18% 0% 0% 7% 13%
2% 26% 7% 16% 4% 32% 22% 26% 28% 1% 5% 7% 18%
3% 40% 93% 31% 6% 46% 36% 42% 46% 1% 5% 14% 31%

UK

SK

PT

PL

SE

FI

SI

Increasing  the  minimum  level  to  €
beneficiaries and the amount saved would represent around 0.84% of the payments. 

 250  would  affect  close  to  31%  of  all  direct  payment 

The currently possible minimum individual area limit of 0.3 ha involves around 1.5% of all 
beneficiaries,  which  may  be  excluded  from  the  SPS.  The  percentage  affected  again  varies 
greatly, from 0.32% in Ireland to 9.2% in Portugal, but the amounts affected are even smaller 
than the rounded figure in the table (0.005% of the payments). 

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Increasing  the  minimum  individual  area  limit  to  1.0  ha  would  affect  around  9.3%  of  all 
beneficiaries of the SPS, representing around 0.17% of the payments. 

The very large number of small beneficiaries of CAP direct payments reflects more general 
structural aspects of EU agriculture. For many of these small beneficiaries, agriculture may be 
only one of several economic activities. These activities may be related more or less directly 
to  agriculture.  Consequently,  any  change  in  the  payment  rules  would  be  unlikely  to  have 
significant agricultural employment impacts but could remove an alternative income source in 
rural areas with many small and part-time farmers. 

While data on the administrative costs to MS of the management of direct payments is not yet 
available, studies on the transaction costs of the CAP on farmers have indicated that, in the 
range of MS studied, the average farmer in those MS imply total costs of applying for SPS 
 25037. Only in one MS was the average farmer administrative cost below 
payments above  €
 107),  largely  a  reflection  of  the  small  farm  size,  since  costs  per  ha  were  more 

 250  (i.e.  €
similar between most MS, ranging between €

 9 and €

 14 per ha. 

10. 

CONCLUSIONS 

10.1.  Upper limitations 

In relation to the attainment of the objectives pertaining to the SPS, the status quo (baseline), 
though  neutral  in  terms  of  many  impacts,  fails  to  address  the  problem  of  the  uneven 
distribution of payments. 

The introduction of fixed individual limits, however, moves away from the general objectives 
of the SPS by having very severe impacts on large farms with high employment levels, and 
could  jeopardise  the  rural  fabric  of  the  relatively  few  regions  such  payment  ceilings  would 
affect. 

The  progressive  individual  limits  option,  though  contrary  to  the  simplification  objective, 
becomes globally the most positive option, since it addresses the problem of uneven payment 
distribution  in  a  manner  which  attenuates  the  negative  impacts  on  farms  in  regions  with 
productive structures based on large farms. 

10.2.  Lower limitations 

By  excluding  an  estimated  30%  of  all  beneficiaries  from  the  SPS,  increasing  the  individual 
limits  to  a  minimum  of  EUR 250  would  significantly  affect  the  distribution  of  direct 
payments. However, it should be recalled that public perception of the uneven CAP payment 
distribution  is  focused  more  on  the  high  payment  level  of  a  relatively  small  number  of 
beneficiaries, and not on the other less widely recognised feature of CAP payments, the very 
high number of small beneficiaries. 

From  the  point  of  view  of  simplification  of  the  SPS,  increasing  the  individual  limits  would 
have  the  advantage  of  reducing  the  number  of  small  dossiers  to  be  handled.  Furthermore, 
raising the minimum size for SPS to 1 ha would mean that rules for EU-15 and EU-12 would 
no longer diverge, which would increase the degree of equal treatment between EU farmers. 

37 

See “The administrative burden on farms arising from the CAP, 2007”, available in the following site: 
http://ec.europa.eu/agriculture/analysis/external/burden/index_en.htm 

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58 

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€
                                                 
However, owing to the great difference in the percentage of beneficiaries affected by such a 
measure, lower limits could be criticised in some MS as an unfair treatment of small farmers. 

In  relation  to  the  attainment  of  the  objectives  pertaining  to  the  SPS,  the  compulsory 
application of the current optional rules on minimum payment size would address the need for 
simplification  but  have  some  negative  social  impacts  in  some  MS.  Raising  higher  the 
minimum payments intensifies the gains in simplification and the negative impacts on regions 
with  farms  structures  based  on  small  farms.  For  that  reason,  leaving  the  choice  of  setting 
either  a  minimum  size  or  a  minimum  amount  to  MS  competence  would  allow  better 
adjustment to their specific situation. 

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11. 

SUMMARY TABLES 

11.1.  Comparison between different options and their respective impacts – upper payment limitations 

☺☺ strong positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) strong negative 

IMPACTS 

Option 0 
Status Quo 

Option 1a 
Fixed individual limits at 
EUR 100 000 

Option 1b 
Fixed individual limits at 
EUR 200 000 

Option 1c 
Fixed individual limits at 
EUR 300 000 

Option 2 
Progressive individual 
limits 

Economic 

(cid:46) 

(cid:47)(cid:47) 

(cid:47) 

(cid:47) 

(cid:46) 

Cuts direct payments  
by 55% in 1% of farms 
in many MS 

Cuts direct payments  
by 54% in 0.2% of farms 
in a few MS 

Cuts direct payments  
by 47% in 0.1% of farms 
in a few MS 

Cuts direct payments by 
14% in 1% of farms in 
many MS 

Perceptions of uneven 
payment distribution in 
some MS persist 

Social 

(cid:47) 

(cid:46) 

Environmental 

releases €

 3 billion 

releases €

 1.8 billion 

releases €

 1.2 billion 

releases € 0.8 billion 

☺☺ 

☺ 

☺ 

☺ 

Net income drops 30% in 
affected farms (avg. 
labour levels 16 AWU) 

Net income drops 28% in 
affected farms (avg. 
labour levels 38 AWU) 

Net income drops 25% in 
affected farms (avg. 
labour levels 51 AWU) 

Net income drops 14% in 
affected farms (avg. 
labour levels 16 AWU) 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

(cid:47) 

modest impact on 
payment distribution 

minor impact on  
payment distribution 

insignificant impact on 
payment distribution 

small impact on  
payment distribution 

(cid:47) 

(cid:47) 

(cid:47) 

(cid:47) 

Cross compliance  
still applicable 

Cross compliance  
still applicable 

Cross compliance  
still applicable 

Cross compliance  
still applicable 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

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Comparison between different options and their respective impacts – upper payment limitations (cont'd) 

IMPACTS 

Option 0 
Status Quo 

Option 1a 
Fixed individual limits  
at EUR 100 000 

Option 1b 
Fixed individual limits  
at EUR 200 000 

Option 1c 
Fixed individual limits  
at EUR 300 000 

Option 2 
Progressive individual 
limits 

Significant risk of 
circumvention, increase 
in controls required 

Significant risk of 
circumvention, increase 
in controls required 

Some risk of 
circumvention, increase 
in controls required 

Low risk of 
circumvention, increase 
in controls required 

Administrative 

(cid:46) 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

(cid:47) 

☺ 

affects only  
some MS 

disproportionate effect  
on very few MS 

disproportionate effect  
on very few MS 

moderate effect  
on some MS 

(cid:47) 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

Simplification 

(cid:46) 

Clear, simple and easily 
communicated rule 

Clear, simple and easily 
communicated rule 

Clear, simple and easily 
communicated rule 

Introduces complexity in 
payment rules 

☺ 

☺ 

☺ 

(cid:47) 

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11.2.  Comparison between different options and their respective objectives – upper payment limits 

☺☺ fully respecting objectives; ☺ partially respecting objectives; (cid:46) neutral; (cid:47) moving away from objective; (cid:47)(cid:47) putting at risk objective 

OBJECTIVES 

Option 0 – baseline 

Option 1a 
Fixed individual limits 
at EUR 100 000 

Option 1b 
Fixed individual limits 
at EUR 200 000 

Option 1c 
Fixed individual limits 
at EUR 300 000 

Option 2 
Progressive individual 
limits 

Competitiveness 

Market orientation 

(Equity/distribution 
among farmers 

Environmental 
sustainability 

Budget costs 

Administrative costs 

Vitality of rural areas 

Simplification 

Transfer efficiency 

(cid:46) 

(cid:46) 

(cid:47) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

☺ 

(cid:46) to (cid:47) 

☺ 

(cid:46) to (cid:47) 

☺ 

(cid:46) to (cid:47) 

☺ 

(cid:46) 

(cid:46) 

(cid:47) 

(cid:46) 

(cid:47) 

☺ 

☺ 

(cid:46) 

(cid:46) 

(cid:47) 

(cid:46) 

(cid:47) 

☺ 

☺ 

(cid:46) 

(cid:46) 

(cid:47) 

(cid:46) 

(cid:47) 

☺ 

☺ 

(cid:46) to (cid:47) 

☺ 

(cid:46) 

(cid:46) 

(cid:46) to (cid:47) 

(cid:46) 

(cid:47) 

☺ 

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11.3.  Comparison between different options and their respective impacts – Lower payment limits 

☺☺ fully respecting objective; ☺ partially respecting objective; (cid:46) neutral; (cid:47) moving away from objective; (cid:47)(cid:47) putting at risk objective 

IMPACTS 

Option 0 – baseline 

Economic 

(cid:46) 

Social 

Large number of small beneficiaries 
in some MS applying regional model 

(cid:47) 

(cid:46) 

Option 1 – Compulsory application of 
current individual lower limits 

Option 2 – Increased individual lower 
limits 

Exclusion from payments of 13% of 
beneficiaries, but minimal impact on 
total payments (0.2% of total) 
(cid:47) 

Exclusion from payments of 31% of 
beneficiaries, with small impact on 
total payments (0.8% of total) 
(cid:47)(cid:47) 

13% of total beneficiaries (and higher 
percentage in some MS) affected 
(cid:47) 

13% of total beneficiaries (and higher 
percentage in some MS) affected 
(cid:47)(cid:47) 

Net income loss to few beneficiaries 

(cid:46) to (cid:47) 

(cid:46) 

Net income loss to many 
beneficiaries in some MS 
(cid:47) 

(cid:46) 

Environmental 

Administrative 

Administrative cost higher than 
payments in some cases 
(cid:47) 

Reduction in MS administrative 
burden 
☺ 

Significant reduction in MS 
administrative burden 
☺☺ 

Simplification 

(cid:46) 

Extent depends on level of limits 
☺ 

Significant simplification across MS 
☺☺ 

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11.4.  Comparison between different options and their respective objectives – Lower payment limits 

☺☺ fully respecting objective; ☺ partially respecting objective; (cid:46) neutral; (cid:47) moving away from objective; (cid:47)(cid:47) putting at risk objective 

OBJECTIVES 

Option 0 – baseline 

Option 1 – Compulsory application of 
current individual lower limits 

Option 2 – Increased individual lower 
limits 

Competitiveness 

Market orientation 

Environmental sustainability 

Budget costs 

Administrative costs 

Simplification 

Vitality of rural areas 

Stabilisation of farmers incomes 

Transfer efficiency 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:47) 

(cid:46) 

(cid:46) 

(cid:46) 

☺ 

(cid:46) 

(cid:46) 

(cid:46) 

☺ 

☺ 

(cid:47) 

(cid:47) 

☺ 

☺ 

☺ 

(cid:46) 

(cid:46) 

☺☺ 

☺☺ 

(cid:47)(cid:47) 

(cid:47) 

☺ 

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D – MARKETS 

1. 

PROBLEM DEFINITION 

The  changed  policy  environment  and  the  favourable  market  situation  currently  facing  EU 
agriculture  have  raised  questions  as  to  the  pertinence  of  CAP  market  instruments  in  their 
present form: 

–  supply control measures of the CAP in the sectors of milk (quotas) and cereals (set aside) 
restrict  the  ability  of  EU  farmers  to  respond  to  market  signals  and  to  grasp  market 
opportunities, and contradict the objective of market orientation; 

–  in  several  small  sectors  which  retain  policies  of  supply  control  and/or  coupled  aid 

adjustments are need to make adapt them to the overall orientation of the CAP; 

–  the intervention system for cereals has been adjusted to better fulfil its safety-net function. 
However, further modifications are necessary in order for it to function more efficiently in 
the  case  of  strong  market  disruptions,  without  reliance  upon  subsidised  sales  (both 
internally and externally); 

–  differences  among  sectors  in  current  intervention  rules  make  their  application  more 
complex than necessary. Harmonising provisions for intervention across all sectors would 
further simplify the CAP; 

–  increased  market  orientation  of  EU  agriculture  and  concerns  for  increased  impacts  from 
climate change, turn production and price risks into a heavier burden for farmers to bear, 
and bring calls for more risk management tools that need to be examined. 

2. 

OBJECTIVES 

•  Improve  competitiveness  and  market  orientation,  while  preserving  the  environmental 

benefits of current policy tools, 

•  provide a safety net for farmers in case of strong market disruptions, which does not lead 

to unsustainable public stocks, 

•  assure  that  application  of  the  measures  will  not  lead  to  excessive  budgetary  cost  and 

complexity, 

•  contribute to the vitality of rural areas, 

•  contribute to the stability of farm income. 

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D.A.  CEREAL INTERVENTION AND SET ASIDE 

1. 

BACKGROUND 

The  current  EU  intervention  system  for  cereals  is  a  single  floor  price  of  101.31  €/t,  with 
monthly increments, applicable to all major cereals across the EU38. Through buying at this 
price  level,  CMO  ensures  that  internal  market  prices  do  not  drop  far  below  the  safety-net 
intervention price. In the most recent reform of the cereal intervention system it was agreed 
that intervention quantities for maize will be gradually phased-out, but left open for the HC 
any further changes in the system39. 

Set  aside  was  introduced  with  the  1992  reform  to  limit  the  cultivated  area  and  thus 
complement  the  role  of  intervention  and  border  measures  in  balancing  the  markets.  The 
importance of set aside has been significant in the past, but the recent increase in cereal prices 
and  most  importantly  the  transition  to  the  SPS  have  raised  questions  about  its  consistency 
with the overall objectives of the reformed CAP40. 

2. 

PROBLEM DEFINITION 

The specificity of agriculture production41 has been at the basis of the policy makers' decision 
to provide for a safety-net to farmers in case of markets disruptions. The dismantling of the 
maize  intervention  was  necessary  to  remedy  possible  risks  of  high  regional  intervention 
stocks; but may lead to a relative loss of competitiveness for barley and possibly soft wheat, 
which under normal market conditions (i.e. lower cereals prices) may also trigger the risk of 
increasing public stocks for these  cereals. In the  current outlook  context, the  probability  for 
such outcome looks remote. Since price variations are a feature of agricultural production, the 
intervention system has to be redesigned in a way that it still fulfils its safety-net role in case 
of  strong  market  disruptions,  but  efficiently,  without  reliance  upon  subsidised  sales  (both 
internally and externally). 

In addition, set aside needs to be reviewed because it still restricts the ability of EU farmers to 
respond to market signals and to grasp market opportunities thus contradict the objective of 
market  orientation.  In  the  context  of  expected  high  prices  and  decoupled  support,  further 
questions  have  been  raised  about  the  need  of  set  aside  as  a  supply  control  mechanism.  The 
question  has  become  more  pertinent  with  the  temporary  setting  of  set aside  at  0%  for 
2007/2008 due to low stocks and the current market outlook. 

Yet, since mandatory set aside also delivers clear environmental benefits, concerns have been 
expressed about the environmental impact with its removal. This raises the question of where 

38 

39 

40 

41 

At present, intervention is available for bread making wheat, durum wheat, barley, maize, and sorghum; 
not available for feed wheat, rye and oats. It is being phased out for maize. 
The June 2007 agreement set an upper ceiling on quantities going to intervention of 1.5 million tonnes 
in  2007/08,  700 000  tonnes  in  2008/09,  and  0  in  2009/10.  It  leaves  the  possibility  to  re-open 
intervention in case of changing market conditions. 
See  Figure  5  of  note  5  in  Annex  B,  for  the  strong  inverse  relationship  between  lower  set  aside  and 
higher  intervention  stocks  in  the  past.  In  the  same  note,  Figure  1  indicates  why  this  relationship  is 
weaker  recently;  SPS  allows  set-aside  entitlements  to  be  transferred  to  less  productive  areas,  thus 
limiting the supply control effectiveness of set aside.  
Production  decisions  have  to  be  taken  long  in  advance  with  limited  knowledge  of  the  final  outcome, 
large number of producers, relatively homogeneous products, inelasticity of demand, etc. 

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and  to  which  extent  loss  of  environmental  benefits  would  take  place,  and  of  what  type  of 
measures would be appropriate to mitigate such impacts. 

3. 

OBJECTIVES 

The proposed options for adjustments in cereal intervention and set aside were assessed with 
respect to their capacity to meet the following objectives: 

•  provide a safety net for farmers in case of strong market disruptions, which does not lead 

to unsustainable public stocks 

•  ensure  competitiveness  and  market  orientation  for  the  sector,  while  preserving  the 

environmental benefits of set aside 

•  facilitate  farmers'  response  to  market  conditions,  especially  prospects  for  high  prices  by 

eliminating mandatory set aside as well as simplifying the SPS implementation 

4. 

POLICY OPTIONS FOR CEREAL INTERVENTION 

Table 10. – Analysed option for cereal intervention 

Option 

Description 

Status  quo  –  no  further  changes  to 
the intervention system 

The  quantity  of  maize  intervention  is  set  at  zero  from 
2009/10,  with  the  possibility  to  re-open  intervention  in 
case of adverse market conditions 

0 

1 

2 

Reduction  of  the  intervention  price 
to a safety-net level 

Restrict  intervention  quantities  to 
zero for all feed grains 

3 

Tendering system 

The  buying-in  price  could  be  reduced  to  a  sufficiently 
lower level allowing the system to act as a genuine safety 
net  (this  scenario  corresponds  to  a  hypothetical  low 
world price situation) 

Similar  to  maize,  zero  ceilings  are  applied  to  coarse 
grains  going  into  intervention,  with  the  possibility  to 
re-open 
in  case  of  adverse  market 
conditions. No quantity intervention ceiling is introduced 
for soft wheat. 

intervention 

A combination with option 2. Examines the possibility to 
introduce  a  tendering  scheme  for  intervention  from  the 
first  offered  quantity.  From  the  2009/10  marketing  year 
intervention  would  take  place  exclusively  in  the  context 
of  the  activation  of  the  special  intervention  measures, 
standard  intervention  for  grain  would  only  concern  soft 
wheat and rice.  

5. 

IMPACT ANALYSIS OF CEREAL INTERVENTION OPTIONS 

5.1. 

Economic impact 

The  analysis  of  the  EU  market  situation  under  alternative  intervention  assumptions 
on  production,  consumption,  public  and  private  stocks,  prices  and  trade  was  done 
using  the  ESIM  model.  Three  of  the  four  options  were  simulated  for  the  2007–13 

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period based on the updated DG AGRI baseline which takes into account the latest 
market developments in the EU and world markets42. 

A  particular  difficulty  in  this  analysis  proved  to  be  the  current  very  high  level  of 
world  market  prices  for  cereals.  Since  intervention  is  a  safety-net  mechanism,  it 
makes sense to analyse its potential impact when prices fall below their intervention 
level, not when they are almost twice as high as the latter. Thus sensitivity analysis 
focused on the potential impact of the various options under lower price levels (such 
as those witnessed in the recent past). 

Table 11. – Impact of intervention options on the cereal sector 

Production 
(mio t) 

Consumption
(mio t) 

Imports
(mio t) 

Exports 
(mio t) 

Area 
(ha) 

Level 

change from baseline 

Level (million t) 

change from baseline 

307.1 

1% 

307.1 

1% 

Option 0: Status quo 

284 

0 

9.0 

–13% 

Option 1: Safety net 

284.8 

1% 

9.0 

–13% 

32.5 

15% 

27.7 

–2% 

Option 2: Intervention only for wheat 

Level (million t) 

change from baseline 

306.8 

1% 

284.1 

0 

9.0 

–13% 

32.9 

17% 

60.2 

2% 

60.2 

2% 

60.1 

2% 

Source: DG AGRI based on ESIM model. Change is measured from baseline in 2013 

5.1.1.  Option 0: status quo – no further changes to the intervention system 

The  impact  of  this  option  could  be  felt  when  prices  are  at  levels  that  were  (until 
recently)  considered  "normal".  Then,  some  of  the  previous  pressure  on  maize 
intervention shifts to barley and soft wheat, and some build-up of intervention stocks 
for both would be inevitable (especially if export subsidies are abolished). In such a 
case budgetary costs will increase. 

5.1.2.  Option 1: reduction of the intervention price to a safety net 

Under  current  high  price  levels  the  definition  of  a  safety-net  level  appears  very 
 95/t 
difficult.  For  demonstrative  purposes  a  decrease  of  the  intervention  price  to  €
was  chosen  (based  on  minimum  prices  resulting  from  simulations  with  the  ESIM 
model under a low price scenario). This option could bring benefits of international 
competitiveness  and  market  orientations,  including  to  the  EU  meat  sector  and  its 
competitiveness, only in a lower price environment in world markets. Currently, this 
looks a very remote possibility. 

5.1.3.  Option 2: extension of maize intervention model to all feed grains 

This  option  has  the  advantage  to  allow  the  support  of  all  cereals  under  low  prices, 
without the disadvantage of hampering barleys' competitiveness. Such a case would 

42 

See  http://ec.europa.eu/agriculture/publi/caprep/prospects2007a/index_en.htm  and  note  5  in  Annex  A 
for details. 

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lead to lower budget costs with respect to status quo. Previous analysis indicates that 
setting  the  support  price  only  for  one  cereal  would  be  enough  to  allow  all  cereal 
prices  to  find  their  natural  balance  around  it43.  Wheat  seems  the  natural  choice  for 
such a price based on its destination for food and the fact that its price formation is 
more transparent with more competitors in world markets than in other cereals. 

5.1.4.  Option 3: tendering 

This  option  was  not  evaluated  quantitatively  because  it  is  not  possible  to  model 
unknown  future  behaviour  of  cereal  market  participants.  Two  strong  arguments 
favour  it.  The  first  is  the  simplification  it  will  bring  by  harmonising  cereal 
intervention rules to those of other CMOs. And although for some it would be seen 
as  a  drop  in  the  effective  intervention  buying-in  price  of  those  quantities  that  enter 
intervention,  in  reality  it  helps  the  average  market  price  to  find  its  natural 
equilibrium level in a smoother manner when prices are low. In this case budgetary 
costs would be lower with respect to the other options. 

5.2. 

Environmental impact 

Conclusions  of  a DG AGRI evaluation study44 indicate that in the past, even when 
EU intervention prices were higher than world prices, a direct link between the price 
support and the change in production techniques was difficult to establish and cannot 
be  quantified.  Only  when  support  prices  were  increased  significantly  above  world 
market  prices  did  the  relevant  profitability  of  cereals  change,  and  resulted  in 
environmental  risks  (notably  water  and  soil  pollution,  fall  in  biodiversity,  and  a 
degradation of soil structures). For instance, risks on water quality, soil erosion, soil 
pollution, and biodiversity could be greater in regions where greater intensification is 
associated  with  higher  specialisation,  monoculture,  and  the  elimination  of  existing 
landscape  features.  On  the  other  side,  cross  compliance  applies  equally  to  all  land, 
regardless of the crop produced. 

Since world market prices are significantly above support prices in the EU, none of 
the above holds in the current context. This high level of prices could create risks of 
intensification, but these risks have no evident link with the current support policy. 
On  the  contrary,  under  low  price  conditions  the  maintenance  of  the  current 
intervention  system  may  hamper  the  profitability  of  feed  grains  (barley)  and  could 
lead  to  environmental  implications  analogous  to  those  described  previously.  Risks 
will be higher in case of substitution with maize, and to a lesser extent with oilseed 
rape,  with  respect  to  other  cereals  given  their  relative  higher  negative  impacts  on 
water quality, soil erosion, biodiversity and landscape45. 

None of the other options (1, 2 and 3) is supposed to have strong incidence over the 
relative  profitability of cereals. If the production of any cereal would increase with 
respect to others, considerations over its impact on the environment should take into 
account  not  only  the  differences  in  intensity  with  respect  to  other  cereals,  but  also 
market and technical developments.  

43 

44 

45 

The idea was already proposed by the consultants in the DG AGRI "Evaluation of the cereals CMO" 
carried out by LMC International in 2005. 
"Evaluation  de  l'impact  sur  l'environnement  des  OCM  et  des  mesures  de  soutien  direct  de  la  PAC 
relatives aux cultures arables", 2007. 
Idem as note 44. 

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5.3. 

Social impact 

The  only  option  to  have  an  impact  on  farmers'  income  is  option  2.  On  average  the 
reduction of the intervention price to a safety-net level would not affect significantly 
the income per annual work unit of the farms producing cereals. If compared with the 
baseline  (option  0),  the  increase  of  income  by  2013  would  be  2%  lower,  e.g.  there 
will be an increase of income of 2% against a 4% in the baseline. 

There would nevertheless differences with respect to the average income between the 
safety-net  scenario  and  the  baseline  at  Member  State  level,  which  would  go  from  
–6% (Slovakia) to +2% (Denmark), and by region from –8% (Marche, Italy) to +6% 
(Asturias,  Spain).  The  main  explanatory  factors  are  the  degree  of  specialisation  in 
cereals (the lower the specialisation in cereals, the lower the decrease of income (or 
the  higher  the  increase);  the  extent  of  the  feed  costs  (the  higher  the  feed  costs,  the 
lower  the  decrease  of  income  (or  the  higher  the  increase),  because  of  the  high 
decrease of feed costs); the share of durum wheat in cereals (the higher the share of 
durum wheat  in the cereals area, the  higher the decrease of income, because of the 
high price drop applied in comparison to the baseline, i.e. –25%)46. 

5.4. 

Other 

In all cases, given that the EU has become a net importer of cereals, there will be no 
impact on third countries. 

Options  2,  3  and  4  could  require  deconsolidation  of  import  duties47,  while  for 
option 5  a  pure  tendering  system  would  no  longer  operate  on  the  basis  of  a  fixed 
intervention price. 

6. 

IMPACT ANALYSIS OF SET ASIDE ABOLITION 

6.1. 

Policy options for set aside 

Table 12. – Analysed options for set aside 

46 
47 

For more details see Annex F, in particular note 5. 
At  present  the  maximum  duty  is  calculated  on  the  basis  of  the  fixed  cereals  intervention  price  of 
€ 101.31 per tonne (Headnote 6 of the WTO schedules). 

EN 

70 

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0 

1 

2 

3 

4 

Option 

Status quo – no further 
changes to the current 
system 

Set-aside obligation and entitlements are kept 

Description 

Removal of set-aside 
obligation 

Withdrawal  of  the  obligation  to  set  aside.  The  set-aside  entitlements 
become regular entitlements. 

Mandatory 
environmental set aside, 
5% of total farm area 

Obligation for all farmers to keep a fixed percentage of total area (5% 
reflects some such ideas) as an "environmental compensation/priority" 
area,  with  existing  landscape  features  (e.g.  hedges,  ponds,  fields 
margins) supplemented by strips along water courses. 

New GAEC 
environmental features  

One variant of option 2 is to replace the fixed percentage of set aside 
for all farmers with new standards that would expand the present list 
in GAEC to reflect the above landscape features. 

Strengthening of 
environmental set aside 
within Pillar II 

Agri-environmental  measures  within  Pillar  II  already 
include 
programmes with many features that are similar with those advocated 
under  cross  compliance  (GAEC),  and  provided  additional  funding 
were available they could be used to target the expected impact from 
the abolition of set aside. 

The  two  distinct  aspects  of  mandatory  set  aside  (a  supply  control  mechanism  with 
environmental side benefits) were examined in parallel in the various options of its 
abolition.  Initially,  supply  control  was  the  dominant  set-aside  feature,  but  as  it 
became less effective and society started to realise the environmental benefits of set 
aside, more focus turned on its environmental aspects. Analysed options reflect this 
evolution of concerns about set aside. The first two options looked at the impact of 
set-aside  abolition  on  cereal  area,  production,  prices,  and  farm  income,  and  the 
impact from the potential loss on environmental benefits. The last two focus on ways 
to mitigate potentially negative environmental effects. 

6.2. 

Economic impacts 

The table blow summarises the economic impact of first two set-aside options. 

Table 13. – Set-aside options of cereal area, production and prices 

Area (mio ha) 

Production (mio mt) 

Prices (€/mt) 

Option 1: no set aside 

Level 

Change from status quo 

60.2 

+ 2% 

307.1 

+ 1% 

Option 2: 5% mandatory set aside on all land 

Level 

Change from status quo 

58.7 

–1% 

297.7 

–2% 

150 

–4% 

165 

+ 5% 

Source: DG AGRI based on ESIM model. Change is measured from status-quo value in 2013. 

In  2007,  around  3.7  million  ha  of  EU  arable  land  was  under  compulsory  set aside, 
including  0.8  million  ha  used  for  non-food  production.  All  this  area  is  in  EU-15 
(most of it in Germany and France); new MS have no set-aside obligation. 

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An additional 3.0 million ha of agricultural land eligible for direct payments are non-
cultivated land, mainly under permanent set aside48. 

Baseline – Set-aside distribution in 2007 – % of COP area 

20,0

18,0

16,0

14,0

12,0

10,0

8,0

6,0

4,0

2,0

0,0

Obligatory set-aside

Voluntary set-aside

Average total set-aside = 11.5%

Average obligatory set-aside = 7.7 % 

Average voluntary set-aside = 3.8%

Ger

Bel-Lux
Aus

Den

Fin

Fra

Gree Ire Ita

Net

Por

Spa

Swe UK Lat

Rom

Sloven Lit

Bul

Pol

Hun

Cze

Slovak Est

Cyp Mal

The impact from the abolition of mandatory set aside (option 1) will be to bring back 
to production an area corresponding to roughly half of the area that is currently under 
mandatory  set aside.  It  is  expected  that  the  total  area  under  set aside  (including 
voluntary set aside) will remain in average at around 5% even with no mandatory set 
aside  in  place.  By  2013,  production  would  increase  by  1%  and  prices  drop  by  4% 
compared to the baseline. 

Under option 2, production would decrease by 2% and prices increase by 5%, again 
from  the  baseline.  Thus  this  option  still  limits  production  response  in  the  EU,  but 
adds  0.4 million  hectares  to  set  aside.  But  the  flat  rate  imposed  across  all  MS  is 
significantly different than the one of today, since option 2 leads to a drastic change 
in the allocation of set aside across MS and farmers by imposing an across the board 
percentage, while the potential environmental impacts from the abolition of set aside 
are  limited  to  a  few  regions.  The  administrative  burden,  both  at  EU  and  MS,  is 
expected to grow significantly due to the need to settle a brand new payment system, 
and  also  because  of  more  controls  at  MS  level.  Moreover,  the  merging  of 
entitlements  is  rendered  more  complicated  and the raises the  baseline for other RD 
environmental measures. 

Option  3  allows  for  a  more  targeted  approach,  since  it  does  not  impose  a  fixed 
percentage of area under environmental set aside, but allows MS to choose the most 
appropriate  feature  from  an  expanded  list  of  GAEC.  On  the  negative  side,  the 
expansion  of  the  scope  of  cross  compliance  with  this  option  risks  affecting  the 
baseline,  and  thus  relevant  provisions  of  existing  RD  programmes  in  different  MS. 

48 

With the implementation of the SPS in all MS, no distinction is made between voluntary set aside and 
non-cultivated land. The latter is significant in Spain, Portugal, Finland, Sweden and the UK. 

EN 

72 

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However, if on one side, the administrative burden in most MS and farms increases, 
on  the  other,  the  merging  of  set-aside  entitlements  implies  a  simplification  of  the 
system.  

Finally option  4 allows MS to target environmental benefits where they are mostly 
needed, building upon existing RD provisions. Although at MS level reprogramming 
will  be  needed  at  the  beginning,  the  whole  set-aside  system  will  become  simpler 
following the merging of entitlements. The prospects for success of this option would 
depend  on  the  debate  on  modulation  and  on  MS  priorities.  More  funds  would  be 
needed, but also more focus by MS on retaining the environmental benefits from set 
aside in the regions that could be most affected49. 

6.3. 

Environmental impacts 

Quantifying the exact environmental benefits of set aside remains difficult; however, 
qualitative  conclusions  can  be  drawn  based  on  the  literature  and  on  the  expected 
market results. 

The environmental impacts of option 1 (removing set aside) are expected to apply to 
all MS, thought there would be quite a strong regional component, since the extent of 
set  aside  varies  significantly  across  EU,  with  its  area  increasing  in  some  MS  and 
decreasing  in  others  (see  Figure 5).  The  magnitude  of  impacts  will  depend  on  the 
characteristics of these regions. Some movement of set aside out of very productive 
regions  to  less  productive  ones  would  appear  to  have  already  happened  where  MS 
rules  have  allowed  this.  It  is  also  to  be  noticed  that  25%  of  the  set-aside  area  is 
currently cultivated with non-food crops, 80% of which is oilseed rape. 

49 

The criticism  of environmental NGOs often focuses on the very different emphasis that MS place on 
agri-environmental measures, whether within GAEC or within RD. 

EN 

73 

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Figure 5: Evolution of set-aside area in EU-15 since 1993, based on FADN data 

'000 ha

6000

5000

4000

3000

2000

1000

0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

 France
 Austria

 Spain
 Portugal

 Germany
 Ireland

 United Kingdom
 Greece

 Italy
 The Netherlands

 Denmark
 Belgium

 Sweden
 Luxembourg

 Finland

Under current market perspectives for the medium term, production of cereals, and to 
a  certain  extent  oilseeds,  are  expected  to  expand  in  the  main  producing  regions, 
where set aside is mostly concentrated (e.g. some parts of UK, France and Germany). 
In these areas greater risks of losing benefits are associated to a greater intensity if 
set-aside  land  is  converted  to  arable  crops  under  monoculture  (loss  of  biodiversity, 
landscape features, nutrient leaching, soil erosion and soil and water pollution). On 
the  other  side,  if  land  conversion  takes  place  in  a  context  of  diversification  and 
rotation  with  the  introduction  of  oilseeds  and  protein  crops  within  the  rotation,  the 
negative risks on environment would be much smaller50.  

In the less productive areas obligatory set aside assumes particular relevance in the 
farm  rotation  scheme.  It  is  likely  that  in  these  areas  set-aside  land  will  remain 
broadly  as  it  is  with  perhaps  some  return  into  break  crops  such  as  temporary  grass 
land, with minor impact on the environment.  

In some parts of southern EU areas, such as in Spain, there is already a requirement 
for  mandatory  rotation  within  the  national  legislation,  but  in  other  regions  how  the 
benefits of set aside are retained would depend on managing practices, the risks are 
very variable depending on agricultural practises and local conditions51. 

As  for  option  2,  the  retention  of  environmental  benefits  should  be  ensured  over  an 
area which is expected to be higher and distributed among 27 MS. 

Under option 3 the environmental benefits of set aside are expected  to be retained, 
but the exact extent is difficult to assess since it will depend on how MS implement 

50 
51 

See reference in note 6. 
Idem. 

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74 

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GAEC  standards.  In  several  Member  States  GAEC  standards  with  clear  benefits  to 
biodiversity are already in place. They include mandatory buffer strips, e.g. 2 meters 
buffer  trips  along  hedges  and  watercourses  in  UK,  and  5  meters  buffer  strips  in 
France.  Other  standards  with  benefits  to  biodiversity  include  the  ban  of  converting 
grassland in certain  areas  in Austria,  minimum  stocking densities and requirements 
for buffer strips in England and Finland.  

Although the environmental impacts of the strengthening of environmental set aside 
foreseen  in  option  4  are  expected  to  be  positive,  they  are  also  difficult  to  quantify. 
They  will  depend  on  the  uptake  of  measures  and  the  implementing  modalities  that 
MS will put in place, and on the funding available. 

6.4. 

Social impact 

If the obligation of set aside would continue (baseline scenario) in an environment of 
high  prices  farmers  would  be  penalised  since  they  could  not  increase  their  income, 
taking advantage of favourable market conditions. On the contrary, under option 1, 
farmers could benefit from a higher income under the present market outlook. Under 
option  2,  the  area  under  production  would  be  reduced  and  also  farmers  income, 
although its extent depends on the extent of the obligation and on the amount of the 
payments. Under option 3 and 4, the extent of the impact would depend on the extent 
of the area under set aside. Both options imply a higher acceptability of the SPS to 
the wider public. 

7. 

CONCLUSIONS 

The  intervention  system  being  a  safety-net  mechanism,  analysing  the  impact  of  alternative 
intervention  systems  under  current  very  high  world  market  prices  appeared  difficult.  Thus, 
considerations of the potential impacts of the various options focused on a sensitivity analysis 
under lower price levels. 

In  brief,  although  the  reduction  of  the  intervention  price  (option  1)  would  imply  a  real 
increase of competitiveness and market orientation, an effective reduction of the intervention 
price  appears  difficult.  Restricting  intervention  to  zero  for  all  feed  grains  (option  2)  would 
allow  a  safety–net  support  to  all  grains  without  impacting  on  their  competitiveness,  but  a 
combination  with  a  tendering  system  (option  3)  would  better  reflect  needs  for  intervention 
when  prices  are  low  as  well  as  imply  lower  budget  costs.  This  option  has  the  further 
advantage of harmonising the intervention system to that of the other market sectors. 

As  regards  to  set  aside,  under  the  current  price  environment  the  impact  of  the  baseline 
scenario would be negative in economic and social terms due to the lost opportunities for EU 
farmers. The withdrawal of the set-aside obligation (option 1) will allow a better response to 
market opportunities and will lead to a higher income for farmers and a simplification of the 
system, but there are potential risks of losing the environmental side benefits of set aside.  

The three alternative systems that were analysed, i.e. setting an environmental set-aside area 
(option  2),  introduction  of  new  GAEC  features  (option  3)  and  the  strengthening  of  RD 
environmental  set  aside  (option  4)  will  bring  environmental  benefits,  although  to  different 
extents.  Option  2  will  imply  a  lower  response  to  markets,  lower  income  to  farmers  and  a 
significant  increase  in  administrative  burden  and  complexity,  but  higher  environmental 
benefits. In the case of option 3 and 4, the economic impacts will depend on MS absorption of 
the relevant measures, as well as the extent of the environmental impact, which in any case 

EN 

75 

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will  be  positive.  In  both  cases  the  overall  acceptability  of  the  SPS  to  the  wider  public  will 
increase. 

All  proposed  options  for  cereal  intervention  and  set  aside  are  not  expected  to  have  a 
significant  impact  on  consumers  because  the  transmission  from  producer  to  retail  prices  is 
very limited. This is due to the very low share (4%) of agricultural raw materials on the final 
value of transformed products (bread, flour and other related products). 

EN 

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8. 

SUMMARY TABLES 

8.1. 

Comparison between different options and their respective impacts – Cereal intervention 

☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Option 0 – baseline 

Option 1 – Reduction of the 
intervention price 

Option 2 – Restrict intervention 
to zero for all feed grains 

Option 3 – Combination of 
option 2 and tendering system 

With present outlook 
(cid:46) 
If price were to drop, stocks of 
barley and possibly wheat 
could lead to budgetary costs 
(cid:47) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

Economic 

Social 

Environmental 

Administrative 
burden 

Simplification 

Other 

Presently remote chances 
(cid:46) 
Competitiveness and market 
orientation only in an 
environment of lower prices 
☺ 
(cid:46) or (cid:47) depending on MS, and 
their relative degree of 
specialisation in cereals 

(cid:46) 

(cid:46) 

(cid:46) 

Allows safety-net support to all 
grains without impacting on 
their competitiveness 
☺☺ 

Would better reflect needs for 
intervention when prices are 
low, and lower budget costs 
☺☺ 

(cid:46) 

(cid:46) 

Small initially, but not under 
present high prices 
(cid:47) to (cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

Harmonisation in all sectors 
☺☺ 

Import duties to be changed (cid:47) 

Import duties to be changed  
(cid:47) 

Import duties to be changed  
(cid:47) 

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8.2. 

Comparison between different options and their respective objectives – Cereal intervention 

☺☺ respecting objective; ☺ possibly respecting objective; (cid:46) neutral; (cid:47) objective possibly at risk; (cid:47)(cid:47) objective at risk 

OBJECTIVES 

Option 0 – baseline 

Option 1 – Reduction of the 
intervention price 

Option 2 – Restrict 
intervention to zero for all 
feed grains 

Option 3 – Combination of 
option 2 and tendering 
system 

Competitiveness 

Market orientation 

(cid:46) 

(cid:46) 

Environmental sustainability 

(cid:46) / (cid:47) under low prices 

Budget costs 

(cid:46) / (cid:47) under low prices 

Administrative costs 

Simplification 

Vitality of rural areas 

Stabilisation of farmers 
incomes 

Transfer efficiency 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) / ☺☺ under low 
international prices 

☺☺ 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) / (cid:47) only under persistent 
low prices 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

☺☺ 

initially (cid:47)(cid:47) / then (cid:46) 

initially (cid:47)(cid:47) / then (cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

☺ 

(cid:46) 

☺☺ 

(cid:46) 

☺☺ 

(cid:46) 

(cid:46) 

☺ 

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8.3. 

Comparison between different options and their respective impacts – set aside 

☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Option 0 – Baseline 

Option 1 – Withdrawal 
of set-aside obligation 

Option 2 – obligatory 
environmental  
set-aside area 

Option 3 – New GAEC 
environmental features 

Option 4 – strengthen 
RD environmental 
set aside 

Economic 

If high prices persist, loss 
of opportunities for EU 
farmers 

(cid:47) 

Better response to markets; 
increased competitiveness 

Lower response to markets; 
lower competitiveness 

☺☺ 

(cid:47)(cid:47) 

Impact depends on MS 
absorption of relevant 
measures 

Impact depends on MS 
absorption of relevant 
measures 

(cid:46) 

(cid:46) 

Social 

If high prices persist, loss 
of farm income 

Higher income with present 
market outlook 

(cid:47) 

☺☺ 

Impact on lowering farm 
income depends on extend 
of obligation  

(cid:46) to (cid:47) 

Increases acceptability of 
SPS to wider public 

Increases acceptability of 
SPS to wider public 

☺ 

☺ 

Environmental 

If high prices persist, 
set-aside entitlements could 
shift away from intensive 
farming  

Administrative 
burden 

Simplification 

(cid:47) 

(cid:46) 

(cid:46) 

Potential risks of losing 
environmental side benefits 
of set aside in some areas 

Environmental benefits 
increased (wider set-aside 
area) 

(cid:47) 

☺☺ 

Environmental benefits 
from GAEC standards 
depend on MS 
implementation 

☺ 

Environmental benefits 
from RD measures depend 
on MS implementation 

(cid:46) to ☺ 

Significantly reduces 
administrative burden 

☺☺ 

Significantly increases 
administrative burden, 
including of controls 

(cid:47)(cid:47) 

Increases burden for most 
MS and farms 

Increases burden at MS 
level (reprogramming)  

(cid:47) 

(cid:47) 

Entitlements merged 

☺ 

Complicates merging of 
entitlements and increases 
RD baseline 

(cid:47) 

Entitlements merged 

Entitlements merged 

☺ 

☺ 

Increases RD baseline  
(cid:47) 

Extent depends on 
implementation by MS 

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☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Option 0 – Baseline 

Option 1 – Withdrawal 
of set-aside obligation 

Option 2 – obligatory 
environmental  
set-aside area 

Option 3 – New GAEC 
environmental features 

Option 4 – strengthen 
RD environmental 
set aside 

(cid:46) to ☺ 

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8.4. 

Comparison between different options and their respective objectives – set aside 

☺☺ respecting objective; ☺ possibly respecting objective; (cid:46) neutral; (cid:47) objective possibly at risk; (cid:47)(cid:47) objective at risk 

OBJECTIVES 

Option 0 – Baseline 

Option 1 – Withdrawal 
of set-aside obligation 

Option 2 – obligatory 
environmental 
set-aside area 

Option 3 – New 
GAEC environmental 
features 

Option 4 – strengthen 
RD environmental 
set aside 

Competitiveness 

Market orientation 

(cid:47) 

(cid:47) 

Environmental sustainability 

(cid:46) to (cid:47) 

Budget costs 

Administrative costs 

Simplification 

Vitality of rural areas 

Stabilisation of farmers 
incomes 

Transfer efficiency 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

☺☺ 

☺☺ 

(cid:47) 

(cid:46) 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

☺☺ 

(cid:46) 

(cid:47) under low prices 

☺ under low prices 

☺☺ 

☺☺ 

(cid:46) to ☺ 

☺☺ 

(cid:46) 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

☺☺ 

(cid:47) 

(cid:46) 

(cid:46) 

(cid:46) 

☺☺ 

(cid:46) 

(cid:47) to (cid:46) 

(cid:47) to (cid:46) 

(cid:46) to ☺ 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

☺ 

(cid:46) 

(cid:47)  

(cid:46) 

(cid:46) to ☺ 

(cid:46) 

depends on MS 
implementation 

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D.B.  THE PHASING-OUT OF MILK QUOTAS 

1. 

BACKGROUND 

With  the  introduction  of  milk  quotas  in  1984,  market  support  for  the  dairy  sector 
remained essentially unchanged in the EU since the late 1990s. Reforms in 1999 and in 
2003  decreased  support  prices  with  the  aim  of  enhancing  the  competitiveness  of  the 
sector,  and  resulted  in  a  better  balance  between  internal  and  world  market  prices.  But 
supply control through the milk quota system remains to date the defining feature of EU 
dairy policies, prolonged with the 2003 reform until 2014/15. 

At  the  same  time  with  the  restricted  supply  environment  in  the  EU,  world  markets  are 
experiencing significant demand growth, driven not only by stronger demand but also by 
a  shift  in  demand  towards  higher  value  added  dairy  products52.  Part  of  this  growth  is 
reflected  in  the  improvement  of  the  EU  market  balance,  and  the  recent  strength  in  EU 
prices. But any additional EU supply response is not possible with the present system. 

2. 

PROBLEM DEFINITION 

In the light of buoyant internal and external demand, the remaining quota system is now 
restricting production expansion, as opposed to the situation in 1984, when quotas were 
introduced as a response to overproduction. 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.  They  reduce  market  orientation  because 
they distort farmers' response to price signals, and prevent efficiency gains in the sector 
by slowing down restructuring. 

In the absence of a decision to extend the national reference quantities beyond 31 March 
2015  the  quota  regime  would  effectively  expire  because  the  levy  on  excess  production 
and  the  national  reference  quantities  would  cease  to  exist.  Since  dairy  production  is 
relatively  capital  intensive  and  investment  decisions  have  to  be  taken  in  a  longer  time 
frame  than  most  other  sectors,  an  early  strategy  would  allow  the  sector  to  gradually 
adjust to a quota-free policy environment. 

3. 

OBJECTIVES 

The analysis of alternative policy options of the phasing-out of dairy quotas was assessed 
with respect to the fulfilment of the following CAP reform policy objectives: 

•  promoting competitiveness, market-orientation and sustainability; 

•  contributing to the vitality of rural areas and preventing land abandonment; 

•  preserving types of farming which are important for the protection or enhancement of 
the environment or for improving the quality and marketing of agricultural products. 

52 

An  in-depth  analysis  of  market  situation  has  been  presented  by  the  Commission  in  a  report 
“Market Outlook for the Dairy Sector” COM(2007) 800. 

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4. 

POLICY OPTIONS 

The policy options analysed here were all based on the assumption that the logic of the 
present system has run its course and is no longer sustainable beyond its expiration. This 
assumption is supported by all previous major analyses on the outlook of EU and world 
dairy markets, which demonstrate two things: that the abolition of the quota will result in 
significant gains for the EU dairy sector, but also that certain regions in the EU will face 
significant adjustment costs and environmental risks53. 

4.1. 

Option 1: quota extension 

This  option  envisages  the  continuation  of  the  quota  beyond  to  provide  a 
reference  scenario  for  comparison  with  the  other  options.  In  a  sense,  it 
corresponds to the extension of the quota system for analytical purposes. 

4.2. 

Option 2: quota expiry in 2015 

This  option,  which  envisages  no  change  to  the  current  policy  framework, 
enables  the  assessment  of  any  adjustments  in  the  system  to  make  it  less 
restrictive.  It  corresponds  to  a  "hard  landing"  for  the  sector,  which  will  face 
abrupt adjustments. 

4.3. 

Option 3: phasing-out of quotas 

the  gradual  phasing-out  of 

the  quota  regime 
This  option  envisages 
("soft landing")  through  annual  increases  of  the  quotas,  in  order  to  reduce  the 
restrictiveness  of  the  quota  regime  by  2015.  Two  sub-options  with  different 
rates of phasing out are foreseen through the introduction of two annual rates of 
quota increase: 

4.3.1.  Annual increases of national quotas by 1% from 2009/10 to 2014/15 

4.3.2.  Annual increases of national quotas by 2% from 2009/10 to 2014/15 

Results  of  the  above  sub-options  provide  information  that  indicates  whether 
there is also need for technical adjustments that would enhance the smoothness 
of  the  transition  (such  as  the  reduction  of  the  super  levy,  the  transferability  of 
quotas, the distribution of additional quotas, etc.). 

5. 

IMPACT ANALYSIS 

The quota system restricts the level of production and consequently affects the price of 
milk  and  the  market  situation  for  milk  products. The consequences of different options 
have  been  estimated  using  a  quantitative  econometric  model  on  the  basis  of  a 
Commission funded study 'Economic analysis of the effects of the expiry of the EU milk 
quota system'54. 

53 
54 

The recent Scenar2020 is the latest in a series of analyses supporting this conclusion. 
The study was done independently from the Commission's estimation of the medium-term outlook 
for dairy. General trends regarding markets are similar balance in both forecasts, but there are also 

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5.1. 

Economic impacts 

5.1.1.  Extension of quotas 

In this scenario, since production is restricted at the quota level, demand trends 
for fat and protein shape milk prices, leading to a slight production response in 
those  MS  currently  producing  below  their  quota  level.  This  restriction  in 
production results in a price increase of 7.2% in the period 2008–2015, or about 
1% per year (see table below).  

Table 14. – The impact of quota extension in the EU dairy market 

Situation in 2015/16 (compared to 2008/09) 

EU-27 

Milk 

Cheese  

SMP 

Butter 

Fresh 

Price 

+7.2% 

+7.3% 

+12.0% 

–3.9% 

+3.4% 

Supply 

+0.7% 

+5.5% 

–14.8% 

–4.3% 

+7.1% 

Demand 

Exports 

Imports 

+5.8% 

–5.2% 

–2.8% 

+7.2% 

+0.4% 

–37.6% 

–20.4% 

0.0% 

0.0% 

0.0% 

Source: "Economic analysis of the effects of the expiry of the EU milk quota system", IDEI. 

Demand in cheese and fresh milk products show the strongest increases in the 
medium-term, while demand for bulk commodities such as butter and skimmed 
milk powder declines further. SMP price increases, but the price of butter falls 
(yet both stay above their intervention level). This situation strongly influences 
EU exports of milk products. Despite strong demand growth on world markets, 
cheese exports stagnate and the exports of SMP and butter decrease strongly. 

For producers, rising prices lead to higher quota rent and income, but the same 
higher  prices  are  capitalised  in  the  value  of  quota,  thus  rendering  quota 
expansion  more  difficult55.  This  slows  down  efficiency  gains  and  most  of  the 
investment would be spent on additional quotas, eroding much of the advantage 
of high prices. The less efficient remain locked in the production, quota system 
would have little incentive to orient towards more competitive markets. 

55 

some  differences  in  particular  values  due  to  different  assumptions  used  in  the  models  (such  as 
different product definitions). 
A quota rent is defined as the difference between the price under quota (higher than market price 
when quotas are binding) and marginal costs of production. 

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The  quota  system  is  also  identified  as  one  of  the  main  obstacles  to  increased 
competitiveness  of  the  dairy  processing  industry  because  of  limited  access  to 
raw  materials,  increased  costs  of  production  and  lost  opportunities  to  supply 
growing international markets56. It is also administratively burdensome in terms 
of  management  and  control.  Finally,  high  prices  represent  a  loss  to  the 
consumer,  but  analysis  shows  this  impact  to  be  smaller  than  often  thought 
because of the very low price transmission of farm prices to consumer prices. 

5.1.2.  Expiry of quotas in 2015 ("hard landing") 

In  this  scenario,  the  market  developments  are  similar  to  those  presented  in  the 
extension scenario until the point of quota expiry in 2015/16. When quotas are 
lifted in 2015, EU production increases by 3.8% (compared to the baseline) in 
order  to  match  demand.  The  result  is  a  strong  price  decrease  of  8.2%  with 
respect to the baseline in the first year after quota expiry (see table below). 

Table 15. – The impact of quota expiry in the EU dairy market 

EU-27 

Milk 

Cheese 

SMP 

Butter 

Fresh 

Price 

–8.2% 

–6.4% 

–7.5% 

–4.5% 

–2.7% 

Situation in 2015/16 (compared to baseline) 

Supply 

Demand 

Exports 

Imports 

+3.8% 

+1.4% 

+20% 

+8.5% 

+0.5% 

+0.7% 

+3.8% 

+1.4% 

+0.5% 

+12% 

+79% 

+106% 

0.0% 

0.0% 

0.0% 

Source: "Economic analysis of the effects of the expiry of the EU milk quota system", IDEI. 

The  impact  from  the  sudden  removal  of  quota  restrictions  is  very  different  on 
the milk sector of MS, and depends mostly on prices and production costs in a 
given  MS.57  Similar  changes  with  milk  production  and  milk  prices  are  also 
observed in dairy products (see table above). For higher value added products, 
changes are small, but are more pronounced for the commodity products, where 
production increases in both butter and especially SMP (compared to 2008). But 
while for SMP exports also increase since the world price is above the EU price, 
the  price  of  butter  quickly  reaches  the  intervention  level  and  is  sustained  only 
through export subsidies (this scenario assumes present WTO policies); this also 
explains the export surge compared to baseline58. 

For  producers,  the  moment  of  expiry  creates  a  great  uncertainty.  In  the  period 
until  2014/15,  the  quota  system  would  become  increasingly  restrictive  and  the 
quota rent would considerably increase until the moment of abolition, making it 
difficult to formulate a clear perspective and reasonable expectations about the 

56 

57 
58 

"Competitiveness  of  the  European  Food  Industry:  An  economic  and  legal  assessment",  J.H.M. 
Wijnands, B.M.J. van der Meulen,K.J. Poppe (eds), Reference no ENTR 05/75 
See Graph A5 in Annex B, note 7 for details.  
With  a  DDA  agreement  and  the  abolition  of  export  subsidies,  the  current  price  for  butter 
intervention is unsustainable. 

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future of the sector. Restructuring could slow down before the quota expiry due 
to high prices, but this would evoke a strong supply response at the end of the 
regime.  Such  a  situation  would  be  disruptive  for  processors,  who  depend  on  a 
steady supply of raw materials and have limited capacity to accommodate large 
production increase. For the consumers, on the other hand, this represents a loss 
due to high prices until abolition, but also relatively inelastic demand for dairy 
products, means that a sudden drop in prices is of limited benefit.  

5.1.3.  Gradual phasing-out of dairy quotas ("soft landing") 

By  contrast  to  the  previous  scenario,  the  phasing-out  of  dairy  quotas  supposes 
gradual annual increases of the quota level to allow for production to respond to 
growing demand, and thus avoid the drastic production increase and price drop 
at  the  moment  of  lifting  quotas.  The  impact  on  EU  market  developments  was 
simulated  with  two  scenarios:  six  annual  increases  in  the  quota  level  by  1% 
(scenario  Q1)  and  by  2%  (scenario Q2).  Results  on  price  and  production  are 
summarised in the following table. 

Table 16. – The impact of quota increases on EU milk production and milk prices 

Milk 

Price 

Production 

2014/15 
(compared to 2008) 

2015/16 
(compared to 2014/15) 

Q1 

–0.6% 

+3.9% 

Q2 

–2.9% 

+4.9% 

Q1 

–2.7% 

+1.3% 

Q2 

–0.9% 

+0.6% 

Source: "Economic analysis of the effects of the expiry of the EU milk quota system", IDEI. 

EU-27 production is projected to increase annually by 0.7% in scenario Q1 and 
0.8%  in  scenario  Q2,  which  attenuates  to  some  extent  the  expected  price 
increases.  Figure 6  shows  the  expected  path  of  milk  prices  and  Figure  7  the 
corresponding path of milk production under all four analysed scenarios59. 

Figure 6: Comparison of milk prices under the four scenarios 

59 

MS responses vary depending on their competitiveness. Detailed results for production and price 
responses are shown in Annex B, note 7. 

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300

295

290

285

280

275

t

m

/

270

265

260

255

250

Baselin e

1% g r ad u al in cr ease

2% g r ad u al in cr ease

Exp ir y

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: "Economic analysis of the effects of the expiry of the EU milk quota system", IDEI. 

Figure 7: Comparison of milk production under the four scenarios 

150

148

145

t

143

m
o
m

i

140

138

135

Baselin e

1% g r ad u al in cr ease

2% g r ad u al in cr ease

Exp ir y

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: "Economic analysis of the effects of the expiry of the EU milk quota system", IDEI. 

Milk  prices  remain  relatively  stable  under  scenario  Q1,  with  some  increase 
towards the end of the quota, and a decline when quotas expire. In scenario Q2 
the  initial  milk  price  decrease  is  bigger  but,  at  the  end  of  the  quota  period  in 
2014/15,  price  adjustment  is  also  smoother.  In  both  scenarios,  milk  prices  are 

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€
 
 
 
partly  sustained  by  butter  intervention  and  subsidised  sales;  in  their  absence, 
milk prices would be around 1.5% lower60. 

The  impact  of  both  scenarios  on  dairy  products  is  shown  in  the  tables  below. 
Market developments follow similar paths with the baseline scenario, indicating 
once  more  the  potential  problem  that  may  exist  with  butter  intervention  in  the 
absence  of  subsidised  supply  disposal.  The  problem  is  more  acute  with  the 
higher quota increase scenario (Q2). 

Table 17. – The impact of quota extension on EU dairy products (Q1) 

Situation in 2015/16 (compared to baseline) 

EU-27 

Cheese  

SMP 

Butter 

Fresh 

Price 

–5.4% 

–6.2% 

–4.6% 

–2.3% 

Supply 

+1.2% 

+17.6% 

+7.1% 

+0.4% 

Demand 

Exports 

Imports 

+0.6% 

+3.2% 

+1.5% 

+0.4% 

+9.7% 

+69.1% 

+86% 

0.0% 

0.0% 

0.0% 

Source: "Economic analysis of the effects of the expiry of the EU milk quota system", IDEI. 

Table 18. The impact of quota extension on EU dairy products (Q2) 

Situation in 2015/16 (compared to baseline) 

EU-27 

Cheese  

SMP 

Butter 

Fresh 

Price 

–7.4% 

–9.0% 

–4.6% 

–3.5% 

Supply 

+1.5% 

+20.7% 

+9.2% 

+0.6% 

Demand 

Exports 

Imports 

+0.7% 

+4.6% 

+1.5% 

+0.6% 

+11.4% 

+77.8% 

+116.7% 

0.0% 

0.0% 

0.0% 

Source: "Economic analysis of the effects of the expiry of the EU milk quota system", IDEI. 

For  the  processing  industry  and  consumers,  both  scenarios  of  phasing-out 
present  clear  advantages  with  respect  to  the  abrupt  quota  expiry.  Their 
difference is in the price path, which is clearly more stable with scenario Q2; but 
the same scenario puts more pressure on the existing market support mechanism 
for butter. 

5.1.4.  Other dairy policy instruments 

In  both  expiry  and  phasing  out  scenarios,  the  SMP  price  remains  above  the 
intervention  level.  However,  in  each  scenario  the  butter  price  reaches  the 
intervention  level,  triggering  market  mechanisms  to  prevent  any  further  fall  in 

60 

During  the  phasing  out  of  quotas,  the  quota  value  decreases  at  the  end  of  the  quota  period  by 
about 60% in Q1 scenario and 90% in Q2 scenario. 

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the  butter  price61;  in  2015  in  the  'expiry'  scenario,  in  2011  with  1%  quota 
increase and in 2010 with 2% quota increase. 

5.1.5. 

Impact on international markets 

As  milk  is  a  perishable  product,  the  principal  dairy  products  traded  on  world 
markets are milk powders, butter and cheese. In the quota continuation option, 
the  net  exports  are  reduced  as  production  moves  to  higher  value  products  and 
domestic demand increases, which results in higher world prices. The expiry of 
quotas results in relatively high increase of exports and a significant decrease of 
world prices. The phasing out scenario forecasts gradual increase of exports as 
milk  production  increases  which  attenuates  the  world  price  developments  and 
reduces the effect at the moment of expiry. Notably, as EU butter price reaches 
intervention level during the phasing out period, export refunds are used, which 
result  in  lower  world  price  (at  the  same  time  increasing  the  value  of  refunds 
required). 

5.2. 

Social impacts 

The  evolution  of  income  between  1998  and  2005  in  EU-15  shows  that  on 
average milk specialised farms have a higher than average farm income, with an 
increasing trend (a similar situation is observed in EU-10). But quotas have not 
stopped the number of small farms from declining; only resulted in larger farms 
stagnating  over  the  same  period  (with  their  average  size  still  being  considered 
small with international standards). 

The  expiry  of  quotas  will  lead  to  expansion  of  the  dairy  sector,  allowing 
producers  and  the  processing  industry  to  benefit,  with  associated  positive 
impacts  on  rural  economies,  for  example  on  employment.  However,  since  the 
quota system has been ring-fenced at national (and often regional) level, quota 
expiry  leads  to  restructuring  of  the  milk  production  sector  with  potential 
implications for selected regions. 

In most dairy producing regions, more than 90% of milk specialised farms will 
retain positive margins over variable costs with the price drop expected with the 
sudden expiry of quotas. But in a number of regions (around 15%), over half of 
the  farms  with  negative  margins  were  in  that  situation  even  before  simulated 
price decrease, which is indicative of more general trends in the dairy sector in 
those regions (see table below). In some regions, this may lead to restructuring 
of diaries, which are localised close to production sources. (Section C indicates 
potential ways of addressing this issue in the discussion on a possible revision of 
Article 69). 

Table 19. – Regions most affected with costs with a price decrease 

61 

In the standard model simulations, butter (and SMP) prices are prevented by falling below the IP 
level by the means of export refunds and/or domestic disposal aids. 

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Regions/MS where farms with positive 
margins are between 80-90% 

Regions where farms with positive margins 
are below 80% 

Estonia, Latvia, Sweden, England-East (UK)  Czech Republic, Malta, Slovakia, Brandenburg 

(DE), Sachsen (DE), Sachsen-Anhalt (DE), 
Thueringen (DE), Aquitaine (FR) 

Source: DG AGRI analysis based on FADN data. 

The FADN analysis shows that on average milk farms in mountainous regions 
in the EU15 receive higher prices, which compensate higher variable costs that 
they  incur  and  allow  for  a  higher  margin  per  t  of  milk  than  in  other  areas, 
however on average their production is lower. On the other hand, in EU10 the 
margin in mountainous regions is on average lower62. An analysis of the impact 
of  price  drop  indicates  that  results  for  mountainous  regions  would  not  differ 
strongly from overall results in EU15. The percentage of farms remaining with 
positive margins would be 95% in LFA mountainous areas, compared with 96% 
overall.  In  EU10,  the  decrease  would  be  greater,  however  still  89%  of  farms 
would retain positive margins (as compared to 97% overall). 

The phasing out of quotas would smooth out the price developments and allows 
for  production  increase,  providing  a  stable  framework  for  farmers  and 
development  opportunities  for  processors.  The  transformation  period  given  by 
phasing  out  allows  less  competitive  farmers  to  adapt  to  a  gradually  changing 
situation  rather  than  face  an  abrupt  price  decrease.  Rather  than  reinforcing  the 
tendency to exploit short term benefits of market constraints before the expiry, it 
would encourage moving towards more remunerative product mix and adjusting 
the  relationship  with  processing  industry.  Gradual  phasing  out  provides  for 
production  that  is  less  uneven  between  member  states  than  a  sudden  abolition 
and at the same time prevents the effect of increasing of the quota value before 
2015 due to rising prices. Moreover, a transitional period allows for more time 
and flexibility in adjustment of the sector and the regime to better prepare for a 
no-quota situation. 

62 

Impact  on  milk  margins  of  a  price  reduction  –  Complement  on  mountainous  areas,  Agri-G3, 
D(2008) D3926. 

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Figure 8: Cumulative production growth under 1% scenario (compared to 2008) 

2011

2012

2013

2014

2015

STRONG SUPPLY RESPONSE

WEAK SUPPLY RESPONSE

e
g
n
a
h
c
%

18

16

14

12

10

8

6

4

2

0

-2

L
N

S
E

L
B

U
H

E

I

T
A

T

I

R
F

K
D

I

E F
D

R
G

L
P

E
S

7
U
E

Z
C

T
P

K
U

Source: “Economic analysis of the effects of the expiry of the EU milk quota system”, 
IDEI 

Figure 9: Cumulative production growth under 2% scenario (compared to 2008) 

2011

2012

2013

2014

2015

STRONG SUPPLY RESPONSE

WEAK SUPPLY RESPONSE

20

18

16

14

12

10

8

6

4

2

0

-2

e
g
n
a
h
c
%

L
N

S
E

T
A

E

I

L
B

U
H

T

I

R
F

K
D

E
D

I

F

R
G

L
P

E
S

7
U
E

Z
C

K
U

Source: “Economic analysis of the effects of the expiry of the EU milk quota system”, 
IDEI. 

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The  price  impact  from  the  phasing-out  of  the  dairy  quotas  should  normally 
benefit consumers, as more supply leads to lower prices. Results from the study 
'Economic  analysis  of  the  effects  of  the  expiry  of  the  EU  milk  quota  system' 
show  that  such  a  consumer  gain  at  the  EU-25  level  would  amount  to  about 
€3.7 billion in the year of quota removal  (2015/16). However, while this benefit 
would certainly pass to the industry as a user of milk, the transmission of such 
price changes to the final consumer should be expected to be rather small. 

As  DG  AGRI  analysis  has  shown,  the  share  of  the  agricultural  product  to  the 
final food product is generally low, and so is on the average the share of food to 
total  consumption.  The  same  analysis  indicates  that  the  EU  average  masks 
significant  differences  not  only  among  MS,  but  also  among  different  social 
groups,  with  lower  income  consumers  being  much  more  vulnerable  to  price 
changes. In this case, the latter group would be more prone to reap the benefits 
from lower milk prices)63. 

5.3. 

Environmental impacts 

Two recent studies have looked into the two main processes that influence the 
environmental  impacts  of  dairy  production64.  Their  conclusions  indicate  that 
policy in itself may not always be the main factor. 

identified 

the  following 

These  studies 
linkages  between  environmental 
indicators and policy-related factors that could be influenced from the phasing-
out  of  dairy  quotas:  water  quality  (from  overstocking),  soil  protection  (from 
increased  area  under  forage  crops),  biodiversity  (from  intensive  production 
methods), and emissions of ammonia and greenhouse gases (from herd size and 
production methods). In addition, the loss of dairy production in more marginal 
areas can be expected to lead to a loss of related biodiversity. 

The  continuation  of  the  quota  regime  constrains  production,  increases 
specialisation  and  yields,  and  results  in  decreasing  number  of  dairy  cows  by 
about  6.7%  between  2008  and  2015  (or  1.6  million  dairy  cows).  This  leads  to 
lower ammonia emissions of the dairy herd (to a level of 652 Kt NH3 and lower 
GHG emissions (to a level of 58 Mt CO2 equivalent) in the last year of current 
quota arrangements65. 

The  expiry  of  quotas  results  in  rapid  production  growth  with  strong 
concentration  and  intensification,  as  prices  decrease  and  cost  efficiency  is 
crucial.  There  are  areas  where  marginalisation  is  a  threat,  while  in  others 
production responds and specialisation increases. At the moment of abolition the 
number of dairy cows increases by about 2% (about 0.5 million cows), but still 
remain  by  3.3%  below  2008  level.  This  would  also  cause  a  strong  one-off 

63 
64 

65 

See "The impact of developments in agricultural prices for consumers". 
Environmental  impacts  are  evaluated  mainly  on  the  basis  of  the  study  "Evaluation  of  the 
environmental impacts of CAP measures related to the beef and veal sector and the milk sector" 
and a supplementary study "Evaluation of the environmental impacts of milk quota". 
These  estimates  are  based  on  Commission  calculations  using  data  on  emission  factors  in  the 
GAINS model (http://www.iiasa.ac.at/web-apps/apd/gains/EU/index.login). 

EN 

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increase in ammonia and GHG emissions and the concentration effect could also 
lead  to  more  nitrogen  pressure.  After  the  expiry,  the  number  of  cows  is  then 
gradually  reduced  as  production  stabilises  and  yield  grows.  By  2020,  in  all 
expiry  and  phasing  out  scenarios  the  number  of  cows  is  reduced  by  6.2%  as 
compared  to  2008  (1.5  million  cows)  and  ammonia  and  methane  emissions 
would  reach  respectively  674  Kt  and  57  MtCO2  equivalent.  The  increase  of 
GHG (methane) emissions compared to baseline represents roughly 0.2% of the 
reduction needed to meet the 20% GHG reduction target in 2020 for the overall 
EU.  It  would  also  represent  in  2020  an  increase  of  less  than  1%  of  total  NH3 
emissions  (from  all  NH3  sources),  which  is  well  below  the  uncertainty 
surrounding the ammonia estimates. 

The  phasing  out  scenario  results  in  a  smoother  process  of  adjustment  thus 
limiting  the  extreme  concentration  and  marginalisation  effects.  Relocation  of 
production  is  less  dramatic  in  this  case  and  the  number  of  cows  continues  to 
decrease, albeit at a lower rate than under the status quo, but by 2015 the herd 
size equals that of the expiry scenario. The number of cows falls between 2008 
and  2015  by  3%  in  Q1  scenario  (0.7  million  cows)  and  2.7%  in  Q2  scenario 
(0.6 million cows). This would lead to ammonia emissions of a level of 673 Kt 
in Q1 and 679 Kt in Q2. As for GHG emissions, in the last year of quota they 
decrease more in Q1 scenario (2.3%), while in Q2 they slightly increase in the 
first years with overall decline by 1.5% over the period. The gradual increases 
prevent the strong uneven production growth throughout the EU by allowing for 
a more gradual transition and reduce the very strong intensification pressure of 
the expiry option, thus easing the associated nitrogen pressure. 

Table 20. – Impact on ammonia and GHG emissions 

Ammonia emissions (Kt) 

GHG emissions (MtCO2 equivalent) 

Option 

2010/11 

2014/15  2020/21 

2010/11 

2014/15 

2020/21 

Continuation 

1% increase 

2% increase 

Expiry 

657 

665 

671 

657 

Source: Commission. 

652 

673 

679 

652 

643 

674 

674 

674 

60 

60 

61 

60 

58 

59 

60 

58 

55 

57 

57 

57 

6. 

SUPPLEMENTARY ANALYSIS 

The  study,  on  which  the  quantitative  analysis  was  based,  was  initiated  before  the  most 
recent  EU  and  world  market  price  developments  and  the  Commission  proposal  to 
increase for a 2% quota increase in 2008. A complementary analysis was carried out by 
DG AGRI with the OECD/AGLINK model, incorporating those factors in the baseline. 

The most recent DG AGRI baseline was used as the reference scenario, and the following 
adjustments  to  the  above  scenarios  were  introduced:  no  quota  increase  in  2009/10, 
followed  by  annual  increases  of  1%  between  2010/11  and  2013/14,  no  increase  in 

EN 

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2014/15 and no quotas thereafter. As such, the cumulated quota increase (including the 
2% increase in 2008/09) approaches that of scenario Q1. 

Results  in  table  21  indicate  that  by  the  end  of  the  phasing-out  period  (2014)  milk 
production  would  increase  by  2.2%  and  the  price  decline  by  4.9%  below  the  baseline 
level. With respect to present price levels, however, the milk price remains fairly stable 
during the phasing-out period, declining by only 1% from its 2008 level. Quota expiry in 
2015  would  lead  to  a  further  production  increase  of  1.1%  and  a  price  drop  of  2% 
compared to the respective 2014 levels. 

Regarding  processed  commodities,  the  production  of  higher  value  added  products 
exceeds baseline levels, responding to both domestic as well as external demand growth. 
SMP production increases by almost 6%, but butter production grows only slightly above 
its baseline level (0.5%) by 2014. For both products EU prices remain above intervention 
level throughout the phasing-out period. 

Table 21. – The impact on the EU dairy market in the phasing-out period 

Situation in 2014 compared to the baseline 

Price 

Production 

Consumption 

Exports 

Imports 

Milk 

Cheese  

SMP 

Butter 

Fresh 

–4.9% 

–3.3% 

–6.7% 

–0.7% 

+2.2% 

+2.8% 

+5.8% 

+0.5% 

+1.7% 

+2.1% 

+4.5% 

+0.1% 

+14.1% 

+27.2% 

+13% 

0.0% 

0.0% 

0.0% 

Source: DG AGRI simulation based on OECD/AGLINK model. 

EN 

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Figure 10: Milk production compared to baseline 

158

155

153

150

t

m
o
m

i

148

145

143

140

320

315

310

305

t

m

€/

300

295

290

285

280

Baseline

1% increase 2010/11-2013/14

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: DG AGRI simulation based on OECD/AGLINK model. 

Figure 11: Milk price compared to baseline 

Baseline

1% increase 2010/11-2013/14

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: DG AGRI simulation based on OECD/AGLINK model. 

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7. 

CONCLUSIONS 

In  the  extension  option,  constrained  production  with  growing  demand  increases  milk 
price by 7% between 2008 and 2015 period. Market orientation and competitiveness of 
producers and processors is hampered. 

In  the  expiry  option,  when  quotas  are  lifted  in  2015/16,  production  jumps  by  3.8%  to 
match  demand,  causing  a  strong  price  decrease  of  8.2%  in  the  first  two  years  after  the 
quota expiry. 

Price  declines  and  production  responses  are  smoother  under  both  phasing  out  options, 
but the extent of adjustment differs. 

–  When  the  quota  increases  by  1%  annually,  production  increases  by  1.3%  after  the 

quota expiry while price decreases by 2.7%. 

–  When the quota increases by 2% annually, production increases by 0.6% and a price 

decreases by 0.9%. 

In  both  phasing  out  scenarios,  the  butter  price  falls  to  its  intervention  price  level  (in 
2011/12  with  the  1%  scenario,  in  2009/10  with  the  2%  scenario,  immediately  after  the 
quota  expiry).  Model  simulations  assumed  that  exports  refunds  would  be  needed  to 
sustain  butter  at  the  intervention  price  level.  A  sensitivity  analysis  indicates  that  the 
effect of the assumption of no export refunds would be to reduce the average milk price 
by an additional 1.5%. 

The end result for the expiry and phasing out options in terms of market balance is the 
same.  However  the  transitional  process  affects  the  social  and  environmental  aspects.  A 
smooth  transition  in  the  phasing  out  scenarios  prevents  rapid  restructuring  and  allows 
preparing  and  adjusting  accompanying  measures  to  the  potential  problems  as  they 
become apparent. 

Consumers  would  benefit  only  partially  from  the  price  decrease  that  would  follow  the 
implementation of options 2 and 3, although option 2 should bring the greatest benefits 
since prices are expected to decrease at a higher rate. 

The  decrease  in  prices  foreseen  in  the  various  options  is  expected  to  be  only  partially 
transmitted  to  retail  prices,  given  that  the  share  of  agricultural  raw  materials  on  the 
processed  dairy  products  is  39%.  The  extent  of  price  transmission  will  also  depend  on 
other factors (food consumption structure in each MS, concentration and segmentation of 
supply chain, marketing strategies of the retails sector). 

A  complementary  analysis  was  conducted,  incorporating  more  recent  world  market 
developments and the recent 2% quota increase in the baseline, with a scenario of annual 
1% quota increases between 2010/11 and 2012/13. In the last year of quota, production 
would increase by 2.2% and price would fall by 0.8% compared to 2008 (2.2% and 4.9% 
respectively,  compared  to  baseline).  When  quotas  expire,  production  is  anticipated  to 
increase by further 1.1% with an additional price decrease by 2.1%. Both EU butter and 
SMP prices would remain above the intervention level. 

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8. 

SUMMARY TABLES 

8.1. 

Comparison between different options and their respective impacts – milk quotas 

☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Option 0 – Quota continuation 

Option 1 – Quota expiry in 2015 

Option 2 – Quota phasing out 

Economic 

Social 

Higher prices, but increased costs 
and reduced market opportunities 

Strong restructuring post-2015, but 
disadvantages of quotas until 2015 
delay benefits from markets 

Smooth adaptation of sector with 
"soft landing" allows increased 
benefits from markets 

(cid:47)(cid:47) 

☺ 

☺☺ 

Continued production in less 
competitive areas 

Strong production increase and price 
decline 

Transition allows less competitive 
areas to adjust more smoothly 

☺ 

(cid:47)(cid:47) 

☺ 

Continuation of decline in milk 
cows herd 

Environmental 

☺ 

some pressure from concentration 

(cid:47) 

Strong restructuring of sector with 
concentration in regions and 
marginalisation in other 

Smoother restructuring of sector 
with gradual decline in herd, less 
concentration and marginalisation 

(cid:47)(cid:47) 

☺/(cid:46) 

Administrative 

Simplification 

Heavy administrative and control 
costs of the system continue 

Administrative burden goes with 
expiry of quotas 

Administrative burden goes with 
phasing-out of quotas 

(cid:47)(cid:47) 

☺☺ 

☺☺ 

Complex system 

(cid:47)(cid:47) 

Lifting of constraints with expiry of 
quotas 

Lifting of constraints with phasing-
out of quotas 

☺☺ 

☺☺ 

EN 

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☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Option 0 – Quota continuation 

Option 1 – Quota expiry in 2015 

Option 2 – Quota phasing out 

Other 

(cid:46) 

(cid:46) 

(cid:46) 

EN 

98 

EN 

 
  
8.2. 

Comparison between different options and their respective objectives – milk quotas 

☺☺ fully respecting objective; ☺ partially respecting objective; (cid:46) neutral; (cid:47) moving away from objective; (cid:47)(cid:47) putting at risk objective 

OBJECTIVES 

Option 0 – Quota continuation 

Option 1 – Quota expiry in 2015 

Option 2 – Quota phasing out 

Competitiveness 

Market orientation 

Environmental sustainability 

Budget costs 

Administrative costs 

Simplification 

Vitality of rural areas 

Stabilisation of farmers incomes 

Transfer efficiency 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

☺ 

☺ 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

☺ 

☺ 

(cid:46) 

☺ 

☺ 

(cid:47) 

(cid:46) to (cid:47) 

☺☺ 

☺☺ 

(cid:47) 

(cid:47) 

(cid:46) 

☺☺ 

☺☺ 

☺/(cid:46) 

(cid:46) to (cid:47) 

☺☺ 

☺☺ 

☺ 

☺ 

(cid:46) 

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D.c.  OTHER SUPPORT SCHEMES 

1. 

BACKGROUND 

Products covered in this note benefit from direct support, industry aid or both. Although 
of  different  origin  and  justification,  all  these  measures  have  a  common  feature  that 
support  is  granted  to  sectors  of  limited  contribution  to  the  total  value  added  of  EU 
agriculture,  but  equally  they  represent  sectors  whose  regional  importance  could  be 
significant. 

Table 22. – Examined sectors66 

Direct aid 

Industry aid 

Nuts 

Rice 

Energy crops 

Protein crops 

Flax and hemp 

Potato starch 

Dried fodder 

Yes 

Yes 

Yes 

Yes 

optional partial coupling 

Yes 

– 

– 

– 

– 

– 

Yes 

Yes 

Yes 

2. 

PROBLEM DEFINITION 

The  2003  Reform  continued  the  shift  from  product  to  producer  support  through  the 
introduction  of  the  decoupled  Single  Payment  Scheme.  This  was  done  in  order  to 
encourage  competitiveness  and  market  orientation  and  at  the  same  time  increase  the 
efficiency of income payments.  

Decoupling  introduces  flexibility  in  the  choice  of  producers.  Farmers  will  continue  to 
produce  where  it  is  profitable,  and  adapt  their  production  to  the  market  or  change  to 
alternative products where it is adequate, while they are still obliged to keep the land in 
good  agricultural  and  environmental  conditions  in  line  with  cross-compliance  rules. 
Overall,  decoupling  leaves  the  producer  at  least  as  well  off  as  before,  and  most  likely 
better off as a result of production flexibility and market orientation. With 90% of aids 
decoupled, farmers receiving coupled aid are less oriented to markets and more limited in 
their production choices. 

However, the continuation of coupled support in certain sectors is explained by: 

•  the  need  to  ensure  steady  supply  to  the  processing  industry  and  thus  avoid  negative 
social  and  economic  consequences  of  the  implied  restructuring  in  cases  where 
production is no longer profitable; 

•  the need to sustain a certain minimum level of specific production to avoid consequent 

social problems or environmental problems; 

66 

The durum wheat quality premium is analysed together with partial support. 

EN 

100 

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•  the  need  to  develop  a  particular  production  type  considered  desirable  for  economic, 

environmental or social reasons. 

The Health Check review poses the question of whether coupled support in those sectors, 
despite  the  overall  orientation  towards  full  decoupling,  is  still  pertinent.  Are  they 
fulfilling their role or are there other more targeted policy instruments, which may take 
on this role, as payments are decoupled. 

3. 

OBJECTIVES 

The following policy options were analysed, and results were assessed based on whether 
these options met the following objectives: 

•  fulfilling  the  principal  objectives  of  the  2003  CAP  Reform:  competitiveness,  market 

orientation and sustainability, 

•  simplification of support scheme, 

•  contributing to vitality of rural areas and preventing land abandonment, 

•  preserving  specific  types  of  farming  which  are  important  for  the  protection  or 
enhancement of the environment or of social importance to rural regions and allowing 
smooth restructuring of downstream industries, where they are crucial for the vitality 
of rural areas. 

4. 

POLICY OPTIONS 

Table 23. – Analysed policy options for support schemes67 

Option 

Degree of decoupling 

Description 

0 

1 

Status quo 

Full decoupling 

2 

Targeted selective decoupling 

No change in the present set of measures 

Inclusion  of  all  support  in  the  Single  Payment 
Scheme  (except  for  energy  crops  premium  which 
would be abolished). 

Case-by-case analysis to identify if, and in which 
sectors,  the  shift  of  partially  coupled  support  to 
full  decoupling  could  create  social,  regional  or 
environmental problems. 

67 

The following sectors are excluded from this analysis because they have been recently reformed 
or  are  included  elsewhere  in  the  present  analysis:  fruit  and  vegetables,  tobacco,  sugar,  cotton, 
payments for outermost regions. 

EN 

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4.1. 

Timing and transition to full decoupling options 

Options  1  and  2  above  do  not  exclude  the  possibility  of  transition  to  full 
decoupling,  and  a  gradual  phasing  out  process  could  be  foreseen  to  attenuate 
impacts.  Specific  sectors  may  require  specific  solutions,  and  measures  under 
rural  development  or  measures  such  as  the  previously  mentioned  Article  69 
(section  C)  could  tackle  the  issues  of  providing  alternatives,  diversification, 
infrastructure  development  and  restructuring  to  prevent  abandonment  and 
adverse  effects  on  processing  industries  that  were  behind  partially  coupled 
payments and environmental impact in specific areas. 

The  issue  of  transition  to  full  decoupling  is  more  pertinent  for  aids  to  the 
industry  than  aids  to  farmers.  For  the  latter's  point  of  view  and  income 
prospects, the risk of production decline is best managed with full decoupling. 

5. 

IMPACT ANALYSIS 

5.1. 

Economic impacts 

The assessment of the economic impacts from a move towards full decoupling was based 
on interrelated analyses on a specific sector’s market and income outlook and on a farm’s 
reaction to further decoupling.  

5.1.1. 

Status quo 

The  coupled  payments  are  an  income  support  instrument,  but  being  linked  to 
particular  products,  they  influence  production  decisions.  In  fact,  the  principal 
justification  for  retaining  them  regardless  of  an  overall  policy  move  to 
decoupled  Single  Payment  Scheme  has  been  to  increase  or  maintain  a  certain 
level  of  production  for  particular  economic,  social  or  environmental  reasons. 
This implies that they have to provide incentive for farmers to grow particular 
crops, although within the restrictions imposed by maximum guaranteed areas or 
quantities (e.g. quotas).  

To what extent they can or need to provide such an incentive depends on market 
and  policy  developments  regarding  those  sectors.  Where  market  prospects  are 
positive or other policy instruments are used, the role of a coupled payment in 
production  decisions  diminishes.  Where  the  prospects  are  negative,  the  role  of 
coupled payment increases, although it is very unlikely to solve the underlying 
problems which remain. 

In  the  feed  market,  both  protein  crops  and  dried  fodder  are  already  of  limited 
significance as plant protein sources, and  the  developments of the feed  market 
with  increasing  feed  efficiency,  slower  increase  in  meat  production  and 
availability  of  cheap  protein-rich  residuals  of  biofuel  production  would  further 
contribute to marginalisation of both products. 

Recent  policy  developments  have  in  turn  overshadowed  the  role  of  the  aid  in 
production  of  energy  crops.  Most  of  the  confidence  in  the  sector  stems  from 

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political  targets  and  various  other  instruments,  but  also  market  developments 
and improvements of the supply chain and related infrastructures. 

The  recent  developments  on  rice  markets  are  positive  as  well.  Since  the  2003 
reform, the competitiveness of the sector increased, with stable production and 
falling stocks in the view of increasing demand, due partly to enlargement of the 
EU. The nuts production has also been stable. 

The future of industrial crops (flax and hemp for fibre, starch), where links with 
the processing industry are crucial, also has a positive outlook. The demand for 
flax  for  long  fibre  has  been  rising  and  production  of  hemp  shows  an  upward 
trend.  Also,  the  demand  for  starch  has  grown  over  time,  at  an  annual  rate  of 
slightly over 5%. However, since the starch potatoes can only be grown within 
the quota limits, it prevents the potato starch sector to participate in the growth 
of the starch sector. 

5.1.2.  Full decoupling68 

While the producers’ income does not change with the inclusion of the payment 
into the SPS, the main effect of decoupling is that the payment no longer is part 
of calculating the profitability of particular production. This choice is guided by 
market demand and so it benefits consumers. At the same time, it influences the 
production decisions and so affects the level of the specific. 

The  analysis  of  comparison  between  margin  over  variable  costs  with  and 
without  the  coupled  payment  allows  examining  this  effect.  There  is  a  high 
probability of abandoning production when margins do not cover costs, but even 
if  they  do  there  is  a  chance  of  switching  to  more  profitable  crops  with  higher 
margins. For the farmer it signifies the possibility to adapt better to the market 
requirements and benefit from most profitable production and so higher market 
receipts. 

In  the  nuts  and  starch  potato  sectors  the  margins  without  coupled  payment 
remain high69. The decoupling of aid will also have small impact on profitability 
of hemp production. 

In the case of aid for the energy crops the examination of existing studies shows 
that  the  premium  has  been  effective  as  promoting  energy  crops  only  in  very 
limited circumstances. Similarly in case of protein crops, the aid has not been an 
incentive for production. 

There  is  a  high  possibility  of  switching  to  other  crops  in  the  case  of  flax  and 
rice. The decoupling would have the strongest effect on the dried fodder sector, 
as the profitability of production is strongly relying on aid. The value added of 

68 

69 

The  conclusions  of  this  part  are  common  whether  one  looks  ate  the  sector  level,  or  the 
microeconomic level of the farm. 
However, the stakeholders' view has stressed that the margin will not be high enough to sustain 
production. 

EN 

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the  dried  fodder  sector  is  estimated  at  25–30%  of  the  revenues  (about  550 
million EUR), which roughly equals the budget of the aid. 

5.1.3.  Targeted selective decoupling 

Where  production  pattern  changes  will  have  a  greater  social  or  environmental 
consequence, a targeted support could be granted to sustain a certain production 
level,  such  as  in  the  case  of  flax  or  rice.  Its  success  depends  on  good 
understanding of needs and targeting of assistance. Notably in the case of dried 
fodder  a  continuation  of  aid  will  not  allow  the  restructuring  of  the  sector  and 
will subsidise a production that is not viable economically and of little relevance 
to the feed market.  

5.1.4.  Other 

In  terms  of  administrative  impact,  the  decoupling  reduces  administrative  and 
control burden, that is excessive compared to the benefits of the scheme. It also 
allows to treat the payments as WTO "green box". 

5.2. 

Social and environmental impacts 

The decoupling of direct aid would have no effect on the level of income for producers, 
as  they  would  continue  to  receive  the  Single  Payment.  However,  in  specific  cases  a 
minimum level of production could be crucial in regions with few economic alternatives 
or to ensure a steady supply to the processing industries. This may have important social 
consequences,  especially  in  areas  highly  dependant  on  a  given  production  in  terms  of 
employment, but also growth potential of the region. 

Indications about the impact of the 2003 CAP reform on employment have been explored 
in an ongoing project "The Impact of CAP Reform on the Employment Levels in Rural 
Areas"  within  the  sixth  RTD  framework  programme70.  Significant  diversity  of  regions 
throughout the EU means that the same measures can cause different impacts in different 
regions,  while  it  is  difficult  to  identify  the  exact  causality  of  such  measures.  There  is 
some  indication,  however,  that  decoupling  and  support  price  cuts  induce  a  profit 
maximising behaviour in the farming sector and increase technical efficiency. 

Notwithstanding  the  above,  growth  in  a  particular  sector  may  still  lead  to  reduced 
employment, albeit promoting more efficient, often younger, farmers and thus increasing 
the quality of labour. Rural development measures reduce employment outflows, support 
structural  changes  and  create  new  job  opportunities  by  supporting  farm  diversification 
and aiding small business to exploit rural location by using new technology. 

The  potential  social  impacts  described  above  could  be  reduced  if  the  decoupling  is 
introduced  gradually  with  a  certain  transitional  period  that  would  allow  the  processing 
industry to adjust to new market conditions. 

70 

The Impact of CAP Reform on the Employment Levels in Rural Areas, CARERA (con # 022563), 
coordinated by Aristotle University of Thessaloniki. 

EN 

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Option 

0 

1 

2 

Table 24. – Main social and environmental impacts 

Social impact 

Environmental impact 

In  sectors  with  good  economic  prospects,  the 
aid  has  limited  social  impact.  In  the  less 
profitable  sectors,  the  aid  forces  farmers  to 
maintain  less  remunerated  production  but  it 
sustains the downstream industry. In the short 
term it benefits employment, but in the longer 
terms  prevents  restructuring  and  long  term 
viability. 

Improved income support transfer for farmers 
in  all  sectors  and  possibility  of  more  market 
oriented  production  decisions  and  higher 
market  receipts.  The  analysis  of  margins 
indicates  that  abandonment  of  production  is 
not likely. 

Decoupling will have an impact on processing 
industries, especially for flax (currently about 
4000  jobs)  and  dried  fodder  (currently  about 
3500  jobs)  and  potato  starch  (currently  about 
4000  jobs)  that  will  require  rationalisation  of 
production.  

Generally,  minor  environmental  impacts  as 
most  crops  concerned  are  planted  in  rotation 
regardless of the premia. 

Of  particular  significance  are  the  sectors  of 
rice  (water  management  and  as  substitute 
wetlands)  and,  to  a  lesser  degree,  nuts  (may 
and 
impact 
some 
have 
desertification) sectors. 

erosion 

on 

For most of the sectors overall environmental 
effects  will  be  marginal,  as  farmers  continue 
to  produce  crops  or  switch  to  alternatives. 
Where production would be abandoned, cross 
compliance  rules  have  to  be  respected.  The 
particular  benefits  of  rice  cultivation  in  some 
reduction  of 
areas  may  be 
industrially  dried  fodder  will  have  a  positive 
impact. 

lost.  The 

Keeping  coupled  support  only  where  it  is 
found necessary and beneficial, social impacts 
are minimised, especially with respect to farm 
impact. 

This  option  minimises  any  potentially 
negative  impacts  by  retaining  support  where 
its  removal  would  imply  high  environmental 
costs. 

6. 

CONCLUSIONS 

The status quo option contradicts the 2003 CAP reform path in terms of competitiveness, 
market orientation and simplification of the support scheme. Full decoupling would have 
a  positive  impact  on  farm  income  in  most  regions  due  to  higher  transfer  efficiency  of 
direct support, it could put at risk production in certain sectors in specific regions where 
local  production  is  vital  to  ensure  the  viability  of  local  agri-food  chain  and  to  preserve 
the  environment.  The  application  of  Article  69  and  allowing  transitional  periods  would 
maximise  the  benefits  from  full  decoupling,  while  at  the  same  time  maintaining  the 
overall positive social and environmental impacts of coupled support in fragile regions of 
high environmental value (better than retaining coupled payments in certain sectors). 

EN 

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7. 

SUMMARY TABLES 

7.1. 

Comparison between different options and their respective impacts – other support schemes 

☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Option 0 – baseline 

Option 1 – full decoupling 

Option 2 – targeted selective 
decoupling 

Economic 

Social 

Environmental 

Administrative 

Simplification 

Farmers depend on production to receive 
support 
(cid:47)(cid:47) 

Farmers benefit from stable income 
support and have freedom in production 
decisions 
☺☺ 

Where coupled support remains, farmers 
still face constraints 
(cid:47) 

Positive for regions, where a large role 
of production and processing dependant 
on aids 
☺ 

Neutral where support does not influence 
the sector 
(cid:46) 

Short term employment impacts in 
regions with significant share of 
processing depending on production-
linked support 
(cid:47) 

Could reduce employment risks in 
regions with significant share of 
processing depending on production-
linked support 
☺ 

Permits long term adjustment to more 
profitable production 
☺ 

Prevents long term adjustment to more 
profitable production 
(cid:47) 

Rice ☺ 
Dried fodder (cid:47)(cid:47) 
Other sectors (cid:46) 

Complex administrative and control 
system (cid:47)(cid:47) 

Detailed and complex systems run in 
parallel with main CAP 
(cid:47)(cid:47) 

Rice (cid:47) 
Dried fodder ☺☺ 
Other sectors (cid:46) 

Inclusion in the SPS 

☺☺ 

Could prevent potential negative effects 
in rice areas 
☺ 

Complex administrative and control 
system (cid:47)(cid:47) 

Better transfer efficiency  
of support to farmers 
☺☺ 

Where applied, different systems would 
continue running in parallel 
(cid:47) 

All coupled support transferred  
to Green Box ☺☺ 

Part of the coupled payments  
transferred to Green Box ☺ 

Other 

(cid:46)(cid:46) 

EN 

106 

EN 

 
  
7.2. 

Comparison between different options and their respective objectives – other support schemes 

☺☺ fully respecting objective; ☺ partially respecting objective; (cid:46) neutral; (cid:47) moving away from objective; (cid:47)(cid:47) putting at risk objective 

OBJECTIVES 

Option 0 – status quo 

Option 1 – full decoupling 

Competitiveness 

Market orientation 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

Rice ☺ 

☺☺ 

☺☺ 

Rice (cid:47) (unless remedied by Art. 69) 

Environmental sustainability 

Dried fodder (cid:47)(cid:47) 

Other sectors (cid:46) 

Dried fodder ☺☺  

Other sectors (cid:46) 

Budget costs 

Administrative costs 

Simplification 

(cid:46) 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

(cid:46) 

☺☺ 

☺☺ 

Option 2 – targeted selective 
decoupling. 

(cid:47) 

(cid:47) 

Could prevent potentially negative 
impacts only in some rice areas 

☺ 

(cid:46) 

☺ 

☺ 

Vitality of rural areas 

☺ to (cid:46) (varies by sector) 

☺ to (cid:47) (varies by sector) 

☺ to (cid:46) (varies by sector) 

Stabilisation of farmers incomes 

Transfer efficiency 

☺ 

(cid:47)(cid:47) 

☺☺ 

☺☺ 

☺ 

☺ 

EN 

107 

EN 

 
  
D.d.  RISK AND CRISIS MANAGEMENT 

1. 

BACKGROUND 

While  business  risk  is  inherent  in  all  economic  activity,  certain  characteristics  of 
agricultural production make it particularly fraught with uncertainty. Firstly, the amount 
and quality of output in agriculture that will result from a given set of inputs are typically 
not known with certainty, due to uncontrollable elements, especially weather. Moreover, 
there  are  long  production  lags,  due  to  the  biological  processes  on  which  agricultural 
production is based. Production decisions have to be taken long in advance with limited 
knowledge  of  final  outcome  and  changing  market  situation  due  to  high  price  volatility 
(due to typical features of agricultural markets: large number of competitive producers, 
relatively homogenous output and inelastic demand). 

Price  risks,  stemming  from  variation  in  output  or  input  prices,  and  production  risks, 
mainly  from  variation  in  yields  but  also  from  animal  diseases,  are  considered  the  main 
sources of risks that farmers face. Some of these risks are easier to identify and predict, 
and therefore can be managed better by ex-ante actions of farmers (on-farm strategies). 
Others are less predictable and require ex-post reactions. 

Within the CAP, several measures are available to deal with risks. The CAP now mainly 
relies on the SPS as an income stabilisation tool, by providing farmers with fixed regular 
payments. Price support at safety net levels exists for the main sectors when farmers face 
situations of low prices. Limited climatic risks are usually addressed by insurances which 
are  available  to  most  EU  farmers.  MS  also  have  the  possibility  of  giving  state  aid  to 
respond  to  crises71.  Measures  to  manage  sanitary  crises  are  harmonised  at  EU  level  by 
animal  health  and  feed/food  strategy  legislation  and  the  EU  Veterinary  Fund.  Rural 
Development measures also offer risk management tools, for example measures aiming 
at  mitigating  natural  disasters  and  climate  risk,  measures  for  training  farmers  in  risk-
reduction  strategies,  measures  for  supporting  diversification,  or  the  possibility  of  using 
advisory services for risk management72. 

The  2003  CAP  reform  provided  for  a  modified  system  of  farm  income  support  to 
farmers, decoupled from production. On that occasion, the Council gave mandate to the 
Commission “to examine specific measures to address risks, crises and natural disasters 
in  agriculture.”  In  March  2005  the  Commission  issued  a  Communication  on  risk  and 
crisis management in agriculture, in which three options were put forward for discussion: 
a)  subsidies  on  insurance  premiums,  b)  assistance  in  setting  up  mutual  funds,  c)  the 
provision  of  basic  coverage  against  income  crises.  In  the  subsequent  discussion  the 
Council did not indicate a preference for any of the options. However, a broad consensus 
emerged  with  regard  to  the  conditions  essential  for  the  implementation  of  any  new 
instrument: 

71 
72 

The de minimis level was recently increased from €3 000 to €7 500 over a 3 year period per farm. 
A list of possible measures available under the current Rural Development policy is provided in 
note 9 of Annex D. 

EN 

108 

   EN 

 
                                                 
 
•  the introduction of new tools, and the related financing rules, must not undermine the 
operation of the instruments already existing  at  national level, e.g. insurance  against 
natural disasters; 

•  the new measures must comply fully with the "green box" criteria as defined by the 

WTO; 

•  although  public  financing  may  be  essential,  especially  for  the  establishment  and 
smooth start-up of new tools, joint responsibility and therefore a financial contribution 
from agricultural producers is also essential. 

Furthermore,  the  provision  in  the  proposal  for  a  Regulation  on  support  for  rural 
development, allowing financing of ongoing training measures with a view to improving 
farmers'  grasp  of  individual  risk  management  strategies,  was  considered  by  the 
delegations to be very useful. 

2. 

PROBLEM DEFINITION 

Both  production  and  price  risks  cause  variability  in  farmers’  income  and,  as  such,  are 
relevant to agricultural policy in the view of the CAP objective to aim at a fair standard 
of living and income stability for the agricultural community.  

The decoupling of aid in the 2003 reform implied more freedom to farmers with respect 
to their production decisions, and allowed them to be more market-oriented. One result 
of the increased market orientation though, is that farmers are in a new situation where 
they individually have to manage risks more actively and make use of tools and practices 
which reduce their risk. 

Moreover,  the  negative  outcomes  of  risks  that  farmers  are  exposed  to  are  increasing  in 
intensity due to the effects of climate change. Hence, access to information and tools that 
dampen negative consequences of climatic and price risks, without creating disincentives 
to follow market signals, are therefore more and more important to farmers. 

Public support is often instrumental in assuring the availability and encouraging the use 
of risk management tools by farmers. At the same time, given the heterogeneous nature 
of  risks,  the  scope  of  the  EU  role  should  be  clearly  defined.  Current  CAP  market  and 
income support contribute to the stability of income, but they do not explicitly target the 
variability,  but  rather  the  level  of  income.  While  state  aids  are  permitted  for  risk 
management  measures  and  are  in  place  in  several  MS,  there  are  shortcomings  to  the 
current,  fragmented  solution,  such  as  the  lack  of  transparency  between  MS,  the 
complexity of the systems applied and differences in accessibility for farmers throughout 
Europe. 

3. 

OBJECTIVES 

The objective of assessing the possible inclusion of additional risk management tools in 
the CAP within the scope of the HC is to identify the best approach to deal with risk and 
crisis  management. Such  an approach  should contribute to the stability  of  farm  income 
and should not lead to excessive budgetary costs. Furthermore, the administrative burden 
that any instrument implies must be weighted against the additional benefits that such an 
instrument could provide.  

EN 

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   EN 

 
4. 

POLICY OPTIONS 

The  following  list  of  options  for  risk  management  were  examined  to  assess  their 
effectiveness to deal with three different types of risk: price risks, production risks and 
animal disease risks. 

4.1. 

Option 0: status quo 

This  option  is  used  as  the  baseline,  considering  that  maintaining  the  current 
policy framework relating to risk and crisis management reflects the fact that the 
2003 CAP reform provides sufficient tools to manage risk. 

7.3. 

Option 1: EU-wide framework 

This option envisages introducing a new EU-wide scheme, using one or several 
of  the  methods  described  in  the  2005  Communication  (insurance  premium 
subsidies,  mutual  funds  and  basic  coverage  against  income  crisis).  This  option 
has to take into account the conditions set by the Council: not interfering with 
existing instruments at national level, compliance with WTO green box criteria 
and joint financial responsibility for producers. 

7.4. 

Option 2: enhanced role of risk management in existing CAP instruments 

This  option  envisages  encouraging  and  strengthening  risk  management 
techniques within the current CAP instruments, which can be targeted to match 
the diverse conditions throughout the EU. This could be done through allocation 
of modulated funds (section E.b) to Rural Development measures aimed at risk 
management,  and/or  through  introducing  more  flexibility  in  Article  69  (as 
described in section C.a). 

5. 

IMPACT ANALYSIS 

When  considering  the  policy  options  for  risk  management,  and  bearing  in  mind  the 
objective  of  contributing  to  income  stability  for  the  agricultural  community,  it  is 
important to be aware of the main features of the evolution of farm income variability in 
the  EU.  Firstly,  farm  incomes  vary  widely  both  between  MS  and  within  MS.  Farm 
incomes  are  also  quite  unstable.  On  average,  each  year  between  1998  and  2003,  more 
than  half  of  all  EU-15  farms  (54%)  experienced  a  drop  in  income;  each  year  over  a 
quarter (about 28% of farms in EU) incur losses greater than –30%73. However, in most 
MS  (except,  notably,  the  UK  and  Ireland)  the  share  of  farms  with  negative  income 
variations has fallen compared with the early 1990s, even if an increase occurred in 2002 
and 2003. This would indicate that, as direct payments have increased, income stability 
has improved.  

73 

See note 9 in Annex D for details. 

EN 

110 

   EN 

 
                                                 
7.5. 

Option 1: EU-wide scheme 

7.5.1. 

Subsidies of insurance premiums 

Insurance provides  an alternative to public ex-post compensation payments for 
losses caused by natural disasters at EU and national or regional level. Certain 
MS  have  already  established  national  schemes  to  encourage  farmers  to  obtain 
insurances. 

Budgetary costs 

An external study looked into four types of insurance: income insurance, yield 
insurance for arable crops, area index insurance for cereals and yield insurance 
on fruit and vegetables and the costs subsidising 50% of premiums through an 
EU-wide  scheme.  The  results  are  summarised  in  the  following  table,  with 
varying  assumptions  on  the  premium  rate  and  the  uptake  (penetration  level) 
revealing  that  the  budget  costs  for  subsidising  insurance  premiums  for  an 
EU-wide scheme would be substantial74. 

Table  25.  –  Budget  costs  for  subsidising  premiums  for  some  insurance 
programmes options at EU level 

Premium rate 

Penetration 
level 

Total premium 
value 
(€ bn) 

Subsidies 
(€ bn) if 50% 
of premiums 

Type 

lower 

upper 

lower 

upper 

lower 

upper 

lower 

upper 

1. Income 
insurance 

2. Yield insurance 
on arable crops 

3. Area index 
insurance for 
cereals 

4. Yield insurance 
on fruit & 
vegetables 

40% 

60% 

2,0 

3,0 

1,0 

1,5 

3.5% 

 5% 

40% 

40% 

0,95 

1,35 

0,47 

0,67 

3.0% 

 5% 

40% 

40% 

0,45 

0,75 

0,23 

0,37 

9.0% 

15% 

15% 
(veg.) 

50% 
(fruit) 

0,5 
0,5 

0,9 
0,8 

0,25 
0,25 

0,45 
0,40 

Source: Agricultural Insurance Schemes study, DG JRC 

Transfer efficiency and income stability 

The welfare effect from subsidising insurance premiums depends greatly on the 
insurance market structure. A subsidy to the premium paid by buyers might have 
the effect of raising the prevailing premium while only having a limited effect 
on the wider market penetration, and therefore little benefit in terms of farmers' 
reduced exposure to risk. A further problem is that mostly farmers with a high 
risk level will buy the insurance. This will push the insurer to raise the premium 
and the insurance will become less attractive for most farmers. This danger can 
be reduced with a bonus-malus system, but it takes a long time to fine-tune such 

74 

http://ec.europa.eu/agriculture/analysis/external/insurance/index_en.htm. 

EN 

111 

   EN 

 
 
 
 
                                                 
system.  Hence,  the  impact  on  the  agricultural  communities'  income  stability 
from this option is not clear.  

Administrative burden 

The  administrative  burden  depends  greatly  on  the  type  of  insurance  scheme 
chosen. An area based index insurance which determines eligibility based on the 
regional  yield  would  imply  fewer  problems  than  an  individual  insurance 
scheme.  An  individual  insurance  scheme  in  fact  requires  the  availability  of 
accurate  information  at  farm  level  (i.e.  claims  for  damages  should  be  assessed 
for  each  insured  farmer).  This  option  requires  a  common  definition  of  natural 
disasters, which could prove burdensome given the heterogeneous character of 
the disasters that occur throughout the Union. 

5.1.1. 

Supporting mutual funds 

Mutual funds are a means of sharing risks among groups of producers who want 
to take on 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. 

Budget costs, transfer efficiency and income stability 

If the Community participation under this option would be limited to support for 
the administrative operation, it implies a low financial cost for the EU budget. 
The transfer efficiency of any financial support would be relatively high because 
it would entail making transfers directly to the farmers, without involvement of 
intermediaries who could capture some of the benefits. However participation in 
mutual funds requires trust among the farmers and high level of social capital. 
Also, the systemic nature of risks could put a mutual fund measure under strong 
pressure,  especially  if  a  crisis  occurs  during  the  first  years  of  having  the 
instrument in place. 

Administrative burden 

Clear rules on when and how the fund's capital could be used would need to be 
predefined.  The  administrative  burden  of  this  option  would  be  limited  for  the 
Commission, but could prove burdensome for MS and farmers. Schemes would 
be based on farmers' organisation that would have to be officially recognised by 
the MS. 

EN 

112 

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5.1.2.  Providing basic coverage against income crises 

The third alternative of an EU-wide scheme consists of a generalised approach 
to manage income crises in agriculture, as an alternative to other possible sector 
specific  intervention.  Under  this  option,  general  income  coverage  would  be 
provided to all farmers, helping them to overcome temporary liquidity problems 
caused by whatever reason. Farmers would be compensated for a serious fall in 
income, specified as a negative variation of more than 30%75. 

Budget costs 

To assess the potential cost payable with this alternative, DG AGRI has carried 
out an internal study analysing the compensation for income losses higher than  
–30%. The analysis was carried out on the basis  of FADN data for the  EU-15 
for  the  period  1989  to  2003,  by  using  the  FNVA  (Farm  Net  Value  Added)  as 
income indicator76. 

The level of estimated compensation for farms  represented  in  FADN  if  such  a 
scheme  was  in  place  is  presented  in  figure  7,  which  simulates  the  impact  of  a 
scheme  based  on  data  of  the  1989–2003  period.  The  loss  was  defined  as  the 
difference between  the  income  for  a  given year (e.g. 1998) compared with the 
average income for the three previous years (e.g. 1995/96/97). 

Over  the  last  six  years  (1998–2003)  compensation  would  have  amounted,  on 
average,  to  nearly  €
 9.3  billion  per  year  for  the  EU-15,  varying  between  a 
minimum  of  €
 8  billion  to  a  maximum  of  12  billion  The  percentage  of  farms 
affected by income losses greater than –30% varies between 22 and 32% in this 
period.  Hence,  a  great  weakness  with  introducing  an  EU-wide  scheme  for 
providing  basic  coverage  against  income  crises  would  be  the  high  budgetary 
variation and uncertainty, which is difficult to conciliate with a policy of budget 
stabilisation and the likely need of some tool to limit the expenditure. 

75 

76 

According to WTO rules the amount of such payments should not exceed 70% of the producer's 
income loss in the year, defined as the difference between the income for the last year (e.g. 1992) 
and the average income of the three previous years (e.g. 1989/90/91). 
Lack of suitable data for the new MS – FADN income data for at least 4 years – has implied their 
exclusion  from  the  analysis.  The  analysis  corresponds  to  WTO  Green Box  criteria,  and  its 
methodology is explained in note 9 of Annex D. 

EN 

113 

   EN 

 
                                                 
Figure 12. – Costs for EU-15 farms with income losses exceeding 30% 

45

40

35

30

s
m
r
a
f

f
o
%

25

20

15

10

5

0

15

13

11

9

7

5

3

1

-1

B

i
l
l
i

o
n

o
f

E
u
r
o

1998

1999

2000

2001

2002

2003

% of farms with income variations higher than -30%

Estimated compensation

Source: DG AGRI calculations based on FADN. 

Transfer efficiency and income stability 

Such  a  payment,  made  directly  to  the  farmers,  should  in  theory  imply  high 
transfer  efficiency,  and  thus  the  contribution  to  income  stability  for  the 
agricultural community is high. However, rent seeking behaviours on the part of 
the  potential  beneficiary  might  dissipate  some  of  the  transfer.  To  avoid 
questions of "moral hazard" (a farmer with an income loss of 29% would get no 
compensation,  while  one  with  31%  would),  would  also  require  some  solution 
(such as progressive levels of compensation). 

Administrative burden 

The  implementation  of  an  income  stabilisation  instrument  as  described  would 
present  certain  practical  difficulties.  Compensation  would  depend  on  farm 
accounts,  which  are  not  available  for  all  farms.  Different  types  of  accounting 
system could produce different results, which in turn could result in inequities in 
the  compensation  paid;  thus  harmonised  and  precise  definition  of  agricultural 
income holding across EU-27 would be needed. 

The  implementation  of  this  tool  would  also  require  a  decision  on  the  type  of 
system used to calculate it.  

5.1.3.  Environmental impacts, and impacts in terms of international constraints 

All  of  the  options  outlined  above  may  have  environmental  impacts.  The 
availability of risk management tools, partly publicly funded, may cause farmers 
to take unnecessary risks and increase production intensity in sensitive regions. 
Introducing  new  risk  management  tools  may  therefore  have  a  negative 

EN 

114 

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environmental impact in some cases, especially those involving issues of moral 
hazard. 

The compatibility of the options outlined above with the WTO green box rules 
depends on the actual design of the scheme. Schemes can be designed in order 
to  fully  comply  with  WTO  green  box  rules,  but  the  closer  one  gets  to  the 
objective  of  stabilising  farmers'  incomes,  the  more  difficult  it  becomes  to 
comply with WTO green box rules.  

5.2. 

Option  2:  enhancing  the  role  of  risk  management  in  existing  CAP 
instruments 

Given the heterogeneity of  the risks and crises that the EU faces (with respect 
both  to  the  type  of  risk/crisis  and  the  type  of  production)  heterogeneous 
measures  seem  to  provide  the  most  suitable  solution  to  help  farmers  deal  with 
crisis  situations  (ex  ante  as  well  as  ex  post).  But  the  form  that  such  measures 
may take could differ. It is not a single measure, but a well chosen combination 
of instruments that would allow MS to better address local risks, with respect to 
markets,  animal  diseases  and  climatic  risks,  and  with  the  necessary  degree  of 
flexibility. 

5.2.1.  Rural Development measures 

Under the current Rural Development Programmes (2007–13) two measures are 
directly related to risk management for agriculture and forestry:  

•  restoring  agricultural  production  potential  damaged  by  natural  disasters  and 

introducing appropriate prevention measures (Axis I) 

•  restoring forestry potential and introducing prevention actions (Axis II)  

In addition to these two measures there are several other measures, both under 
Axis  I  and  II,  which  may  be  used  to  provide  support  for  risk  management  for 
agriculture  and  forestry.  These  measures  provide  complementary  support  for 
preventive  action  in  the  areas  of  physical  investment  or  human  capital 
formation.  Concerning  the  up-take  of  the  different  measures,  the  measure 
"Restoring  forestry  potential  and  introducing  prevention  actions  (Axis  II)"  is 
more  popular  than  the  analogous  measure  for  restoring  agricultural  production 
potential  and  prevention  action  related  to  agriculture.  In  fact,  the  uptake  of 
measures  related  to  risk  management  for  agriculture  (both  with  respect  to 
prevention  and  restoring)  in  the  rural  development  programmes  is  on  average 
relatively weak, compared to the uptake of other measures in the strategies77. By 
providing  more  means  for  Pillar  II,  the  measures  to  address  risk  management 
within the rural development programmes could be reinforced and strengthened 
(see section E.b).  

77 

The screening of rural development strategies carried out by DG AGRI in November 2007 shows 
that  the  average  up-take  for  "Introduction  of  (flood)  prevention  actions  against  natural  disasters 
related  to  agriculture"  and  "Restoring  agricultural  production  potential  damaged  by  natural 
disasters"  is  2,5  and  2,4  respectively,  on  a  scale  where  1 is  equal  to  very  high  up-take  and  3  is 
equal to no up-take. 

EN 

115 

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5.2.2. 

Single Payment Scheme 

Additional  tools  addressing  risk  management  could  be  allowed  through  a 
targeted  revision  of  Article  69  that  would  allow  part  of  the  available  level  of 
SPS  support  to  focus  on  such  issues,  provided  that  the  global  amount  and  the 
proportion  of  coupled  support  in  the  mix  of  supporting  measures  stays  within 
clearly defined ceilings. The instruments could include those that were proposed 
in  2005  Communication  who,  while  not  feasible  at  an  EU-level,  could 
correspond to the needs of particular MS at MS or regional levels.  

Budget costs 

Introducing additional risk management tools within the current scope of CAP 
would  be  budget  neutral  overall,  since  the  new  funding  that  these  measures 
would require would have to be transferred from other measures. Thus, it would 
require a re-prioritisation of existing budgetary means.  

Transfer efficiency and income stability  

The  transfer  efficiency  of  this  option  would  depend  on  how  the  particular 
solutions  that  could  be  implemented  are  designed.  Given  that  MS  would  be 
allowed to implement and design their individual risk management tools, within 
the framework provided by the Community legislation, MS could be expected to 
design  the  solutions  that  have  the  highest  possible  transfer  efficiency  for  their 
particular  situations.  Thus,  the  higher  the  transfer  efficiency,  the  higher  is  the 
possibility to contribute to income stability for the agricultural community.  

Administrative burden 

By introducing new tools to address risk management within the existing CAP 
instrument,  the  additional  administrative  burden  will  be  kept  at  minimum. 
Overall  though,  the  administrative  burden  stemming  from  this  option  could 
increase  compared  to  status  quo,  if  the  risk  management  tools  that  are 
introduced within the CAP framework are not already in place in MS within the 
framework for state aids. In that case, the impact on the administrative burden is 
neutral. 

Environmental impacts, and impacts in terms of international constrains 

As  noted  for  the  option  of  the  EU-wide  scheme,  introduction  of  new  risk 
management  instruments  may  have  environmental  impacts.  Furthermore,  also 
for this option, the compatibility with the WTO green box rules depends on the 
actual design of the scheme. Schemes can be designed in order to fully comply 
with WTO green box rules.  

6. 

CONCLUSIONS 

In brief, 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 

EN 

116 

   EN 

 
currently  not  included  could  also  provide  a  positive  contribution  in  mitigating  price 
variability for the agricultural community. 

For dealing with the potentially growing needs for production risks, an EU-wide scheme 
cannot  be  considered  feasible  at  this  stage.  Introducing  an  EU-wide  scheme  would  be 
immensely  expensive,  and  would  imply  an  increased  administrative  burden  for  farmers 
and MS. 

Given the heterogeneity of the risks and crises that the EU faces (with respect both to the 
type of risk/crisis and the type of  production)  heterogeneous measures seem to provide 
the most suitable solution to help farmers deal with crisis situations (ex ante as well as 
ex post). 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 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, Rural Development programmes contain 
measures which are 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. 

Table 26. – Summary comparison of options 

DRAFT 

Advantages 

Disadvantages 

farmers  with 

Provide 
the 
means  to  manage  their  own 
risk 

Insurance 
against natural 
disasters 

k
r
o
w
e
m
a
r
f

e
d
i
w
U
E

-

Low cost 

Supporting 
mutual funds 

Social 
reducing 
control 
problems  of  moral  hazard  and 
adverse selection 

the 

Would  depend  on 
type  of 
framework  agreed.  Studies  indicate 
that the cost of subsiding premiums 
would  inevitably  be  high,  entailing 
need 
expensive 
relatively 
for 
reinsurance 

Low transfer efficiency 

A  common  definition  of  disaster 
would be required 

Given the "systemic" nature of risk, 
setting  up  a  mutual  fund  is  very 
difficult without public support.  

Requires  a  considerable  level  of 
social capital. 

High transfer efficiency 

High cost 

Provide  solid  safety  net  for 
farmers  

Administratively 
burdensome 

complex 

and 

Providing 
basic coverage 
against income 
crisis 

Require  common  definition  of 
agricultural income across EU-27 

Risk of moral hazard  

Absorption capacity 

MS Specific solutions:  

the 
Provide 
means  to  manage  their  own 

farmers  with 

EN 

117 

   EN 

 
 
 
 
risk (adaptation strategy to the 
changes) 

High  degree  of 
flexibility 
which  allows  MS  better  to 
risks  with 
address 
respect 
to  markets;  animal 
diseases and climatic risks 

local 

EN 

118 

   EN 

 
7. 

SUMMARY TABLES 

7.1. 

Comparison between different options and their respective impacts – risk management 

☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Option 0 – baseline 

Economic 

Social 

Environmental 

Administrative 

Simplification 

Other 

Current instruments not sufficient to 
cover increasing production risks 

(cid:47) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

Option 1 – EU-wide framework for 
addressing production or revenue risks 

Low target efficiency spreads benefits  
even to those not in need 
(cid:47) 

Significant budgetary costs needed  
for revenue scheme 
(cid:47)(cid:47) 

Unclear transfer efficiency for production 
risks; better transfer efficiency  
for revenue schemes 

☺ to ☺☺ 

Option 2 – Introducing risk management 
as option within current CAP 
instruments 

Depends on scheme, but better targeting 
links benefits closer to needs 

(cid:46) to ☺ 

Contributes to stabilising farm income  
and could respond to specific risks 
☺☺ 

Affects farm risk behaviour and  
could increase intensity 
(cid:47)(cid:47) 

Better targeting minimises risks  
for intensification 

(cid:47) to (cid:46) 

Very high administrative costs to establish  
and control 
(cid:47)(cid:47) 

Administrative costs to establish and 
control depend on uptake 
(cid:47) 

(cid:47)(cid:47) 

Adds to existing legislation 
(cid:47) 

Depends on scheme, but shall respect  
EU WTO commitments 

Depends on scheme, but shall respect  
EU WTO commitments 

EN 

119 

EN 

 
  
☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Option 0 – baseline 

Option 1 – EU-wide framework for 
addressing production or revenue risks 

Option 2 – Introducing risk management 
as option within current CAP 
instruments 

(cid:46) 

(cid:46) 

EN 

120 

EN 

 
  
7.2. 

Comparison between different options and their respective objective – risk management 

☺☺ fully respecting objective; ☺ partially respecting objective; (cid:46) neutral; (cid:47) moving away from objective; (cid:47)(cid:47) putting at risk objective 

OBJECTIVES 

Option 0 – baseline 

Option 1 – EU-wide framework 

Option 2 – Enhanced role of risk 
management in current CAP 
instruments 

Competitiveness 

Market orientation 

Environmental sustainability 

Budget costs 

Administrative costs 

Simplification 

Vitality of rural areas 

Stabilisation of farmers incomes 

Transfer efficiency 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:47) to (cid:46) 

(cid:47) to (cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

(cid:46) 

☺ to ☺☺ 

☺ to (cid:47) 

(cid:46) 

(cid:46) 

(cid:46) to (cid:47) 

(cid:46) 

(cid:46) to (cid:47) 

(cid:46) to(cid:47) 

(cid:46) 

☺☺ 

☺ to (cid:47) 

EN 

121 

EN 

 
  
E – NEW CHALLENGES 

1. 

PROBLEM DEFINITION 

•  The CAP is facing a rapidly changing environment where a number of new 

(and ongoing) challenges have intensified: 

– 

– 

– 

– 

short- and long-term climate change creates growing concerns about 
its impacts on agriculture; 

the EU renewable energy road map has set ambitious binding targets 
that imply the contribution of the sector.; 

water  scarcity  and  increased  risks  for  droughts  render  water 
management a priority for the EU, which is more pertinent following 
the removal of set aside; 

the  objective  to  stop  biodiversity  decline  by  2020  requires  an 
enhanced contribution of agriculture in protecting biodiversity. The 
removal of set aside reinforces this requirement; 

•  the present set of policy instruments under RD appears to be sufficient, and 
new challenges have already been addressed to a large extent by the Strategic 
Guidelines for Rural Development that set EU priorities for the RDP in the 
period  2007–2013.  However,  the  uptake  of  RD  funds  by  MS  suggests 
additional budget needs; 

•  the 2005 decision on the Financial Perspectives resulted in lower RD support 

than initially expected. 

2. 

OBJECTIVES 

•  Improve the MS uptake of second pillar measures linked to new challenges, 

following the Strategic Guidelines for Rural Development; 

•  reinforce Rural Development funding, in order to address the shortfall in the 
current budgetary period and meet the extra budgetary resources necessary to 
respond to new challenges; 

•  respect  the  agreement  on  the  exemption  of  new  Member  States  from  basic 

modulation until they reach the same level of payments with the EU-15; 

•  find  an  appropriate  balance  for  allocating  funds  from  additional  modulation 

to the MS. 

EN 

122 

   EN 

 
E.a  RESPONDING TO NEW CHALLENGES 

1. 

BACKGROUND 

The HC Communication identifies a number of new, and ongoing, challenges facing the CAP 
(such as climate change, risk management, bio-energy, water management and biodiversity) 
and  considers  the  Rural  Development  Policy  as  one  of  the  possibilities  to  deal  with  these 
challenges. 

2. 

PROBLEM DEFINITION 

EU  agriculture  is  highly  exposed  to  climate  change.  A  wide  range  of  short  term  concerns 
(precipitation patterns, extreme weather events, temperature levels, water availability, and soil 
conditions)  and  longer  term  impacts  (increased  frequency  and  severity  of  extreme  weather 
events,  and  projected  climatic  changes)  will  affect  crop  yields,  livestock  management,  or 
location of production. These risks would, in turn, impact upon  water  availability, and pose 
renewed risks on biodiversity. 

In addition, the new and ambitious EU renewable energy roadmap has set binding targets that 
imply the contribution of the agricultural sector and which is closely linked to climate change 
mitigation objectives. 

Most  new  challenges  have  been  addressed  to  a  large  extent  by  the  Strategic  Guidelines  for 
Rural Development, that set EU priorities for the RDP in the period 2007–2013. In total, more 
than 25 sub-measures directly or indirectly related to climate change, renewable energies, risk 
and water management have been included in the programmes. However, uptake and mix of 
these  measures  varies  substantially  in  the  89  national  and/or  regional  rural  development 
programs for the new funding period. The number of sub-measures related to biodiversity is 
similarly high as several of the measures under axis 2 are related to this objective78. 

The present tool kit of measures available under RD appears to be sufficient, but the uptake of 
RD  funds  in  2007  suggests  that  MS  have  budget  needs  beyond  their  possibilities,  which 
hamper  their  responsiveness  to  new  challenges.  In  fact,  because  of  the  decisions  on  the 
Financial  Perspectives  a  number  of  Member  States  have  been  confronted  with  significant 
reductions of their rural development budget for 2007–13. 

3. 

OBJECTIVES 

A  screening  exercise  of  RD  programmes  indicates  that  existing  measures  are  already 
providing  various  alternatives  to  address  the  new  challenges  and  that  MS  have  included 
related measures already in their RD programmes for the period 2007–1379. 

Thus, the analysis of the impact of the proposed options for facing "new challenges" via rural 
development  measures  focused  on  the  impact  of  such  proposals  on  improving  the  EU 
responsiveness  to  new  challenges,  as  outlined  in  the  Strategic  Guidelines  for  Rural 
Development, via greater MS uptake of second pillar measures.  

78 
79 

See Annex E note 8, and especially its Annex, for details. 
idem. 

EN 

123 

   EN 

 
                                                 
4. 

POLICY OPTIONS 

Table 27. – Analysed options for new challenges 

Option 

Description 

0 

1 

2 

Status quo 

Transfer  of  funds  to  Pillar  II  without 
any further requirements 

Earmarking 

3 

Higher co-financing rates  

4 

5 

Higher aid-intensities 

Obligation  to  use  modulation  funds 
for challenges 

Simply modulation of funds without specific requirements. 

a)  Targeting  of  funds  to  pre-determined  but  existing  sub-
measures  with  a  reporting  obligation  for  the  new  funding. 
MS will have to implement a system that allows a separate 
reporting  and  management  identifying  funds  from  the 
original funding and new funds from modulation 

a) Targeting of funds to existing measures with a reporting 
obligation  concerning  the  new  funding  (financial  planning 
and reporting) and indicators of  measures in areas of "new 
challenges",  both  financed  by  old  and  new  funds.  MS  will 
be asked to report on results/impacts of the totality of new 
challenges, combined for old and new funding. 

Increase  the  rate  of  EU  funds  in  relation  to  the  eligible 
public  expenditure  (co-financing  rate)  for  individual  sub-
measures or groups of measures that positively contribute to 
any of the identified new challenges. 

Offer a higher percentage of the eligible total expenditure to 
be financed by public budget (aid intensities). 

Member  States  are  requested  to  direct  the  total  amount  of 
additional  resources  from  compulsory  modulation  to  the 
new  challenge  related  actions  by  enlarging  their  number 
and/or  scope  whenever  necessary.  Aid  intensity  rates  for 
new  challenge  related  actions  will  be  increased  by  [10] 
percentage points. 

5. 

ANALYSIS OF IMPACTS  

5.1. 

Impact on the programming process 

5.1.1.  Option 0: status quo 

A qualitative assessment of the programming of new challenge related measures in 
the  RD  programmes  2007–13  has  indicated  that  the  uptake  of  measures  related  to 
New Challenges is often weaker than the extent to which they have been discussed 
by  the  Member  States  in  the  strategy  and  in  the  SWOT  analysis  in  their  RD 
programmes.  Nevertheless,  several  measures  related  to  the  new  challenges  are 
already included in the RD programmes80. 

5.1.2.  Option 1: transfer of additional funds to Pillar II 

The Member States may have to adjust their National Strategy Plan. In any case, they 
will have to adjust the financial plans of the Rural Development Programs to amend 

80 

See Annex E note 8, and especially its Annex, for details. 

EN 

124 

   EN 

 
 
 
                                                 
the amounts of expenditure per axis and measure. The Member States will also have 
to  amend  the  projected  output  that  should  result  from  the  programmes.  Under  this 
option the administrative burden at MS level will be higher due to re-programming. 
The  uptake  of  measures/actions  will  possibly  increase,  although  is  difficult  to 
quantify. 

5.1.3.  Option 2: ear-marking 

(a)  Targeting  of  additional  funds  coming  from  modulation  to  pre-determined  but 
existing  sub-measures81  with  a  specific  reporting  obligation  only  for  the  new 
funding.  For  national  strategy  and  projected  output,  as  in  option 1  MS  would 
be  obliged  to  report  separately  on  "additional"  modulation  funds.  This  would 
necessitate a revision of the financial planning and a separate reporting by the 
MS administrations 

(b)  Targeting  of  additional  funds  coming  from  modulation  to  existing  measures 

related to "new challenges" with a reporting obligation concerning: 

– 

– 

the new funding (financial planning and reporting); 

indicators of measures in areas of "new challenges" financed both by old 
and new funds 

An adaptation of existing indicators could be necessary with this option. Apart from 
the  additional  reporting  concerning  the  exact  allocation  of  the  additional  spending, 
this sub-option would oblige the MS to have a separate reporting on the results of the 
support measures in the area of the new challenges.  

Under both sub-options the uptake measures/actions will surely increase, although it 
is difficult to quantify. The administrative burden at MS level will be higher due both 
to reprogramming and the introduction of new reporting procedures. 

5.1.4.  Option 3: higher co-financing rates 

In  the  programming  period  2007–2013,  for  the  sake  of  simplification,  co-financing 
rates  are  defined  at  the  level  of  each  axis.  Increasing  co-financing  rates  for  new 
challenges  related  actions  would  address  the  level  of  (sub)measures  and  would 
destroy one of the new elements of simplification in the new period. The system of 
financial programming would have to be changed, programming to be re-done, and 
the  financial  system  would  fall  back  into  the  approach  of  the  old  period,  with  the 
consequent increase in the administrative burden for MS. 

Higher  co-financing  rates  for  individual  sub-measures  or  groups  of  measures  that 
positively  contribute  to  any  of  the  dimensions  of  the  new  or  on-going  challenges 
should not be envisaged because it would involve a turn back to a more complicated 
financing mechanism and it could also entail the re-opening of the discussion in the 
Council  on  this  issue  which  should  be  absolutely  avoided.  The  uptake  of 
measures/actions will increase, but it is difficult to quantify. 

81 

The  measures  have  a  wide  scope.  Therefore,  it  may  be  necessary  to  have  targeted  sub-measures  to 
address the new challenge issues. 

EN 

125 

   EN 

 
                                                 
5.1.5.  Option 4: higher aid intensities 

If  additional  budgetary  resources  are  injected  into  the  system,  higher  aid-intensity 
rates  may  constitute  a  simple  but  efficient  tool  to  provide  additional  incentives  for 
those  sub-measures  which  are  expected  to  contribute  positively  to  the  new 
challenges. This will imply reprogramming of RD Plans for MS with its consequent 
burden. 

Due to the limited budget available for RD plans Member States in many cases kept 
aid intensity rates distinctly below the maximum rates possible. Before increasing the 
aid  intensity,  it  should  be  carefully  analysed  whether  such  incentives  are  really 
needed  to  make  the  new  challenge  related  sub-measures  attractive.  There  is  a  risk 
that such increase leads to dead-weight losses. The uptake of measures/actions will 
increase  possibly  more  than  under  the  other  options  depending  on  the  aid-intensity 
rates implemented by MS. Again, the uptake is difficult to quantify. 

5.1.6.  Option 5: obligation to use modulation funds for new challenges 

MS will need to modify their programmes in order to include the additional amounts 
coming form compulsory modulation. In the context of this modification MS should 
clearly  identify  in  the  revised  program  the  choice  of  specific  actions  targeting  the 
new challenges82 and the additional amounts from modulation to be allocated to each 
action.  Member  States  will  be  invited,  on  the  basis  of  an  assessment  of  their 
respective situation and needs related to the new challenges, to make use of actions 
included in an indicative list of action types to be inserted as an annex in the Council 
Regulation.  

In  the  annual  reports  of  each  program,  a  specific  chapter  should  be  dedicated  to 
reporting  on  the  progress  made  in  implementing  the  actions  targeting  the  new 
challenges  (climate  change,  renewable  energies,  water  management,  biodiversity). 
This  would  include  the  obligation  to  report  on  expenditure  and  any  other  relevant 
information. 

This  option  is  the  most  effective  since  it  guarantees  a  higher  uptake  of 
measures/actions,  although  it  implies  higher  administrative  burden  and  complexity 
both at MS and EU level. 

5.2. 

Legislative and administrative consequences  

A  first  step  to  initiate  a  targeted  re-programming  of  RDPs  2007–13  would  be  to 
update  and  revise  the  Community  Strategic  Guidelines  on  RD  by  highlighting  the 
increased importance of the new challenges and by focusing the EU priorities more 
on the new challenges related to all three main objectives of the EU's RD policy.  

A Council decision will be needed on the up-date of the Community Guidelines on 
RD and possibly a modification of the Council Regulation to oblige Member States 
to take up the reinforced EU priorities related to the new challenges in their strategies 
and to define specific actions in their revised RDPs 2007–13. In the case of option 5 
a  new  Article  of  the  Council  Regulation  should  indicate  the  obligation  of  Member 

82 

See the complete list in the Annex to this chapter 

EN 

126 

   EN 

 
                                                 
States  to  channel  all  funds  available  from  increased  modulation  to  new  challenge 
related actions in the context of re-programming. The indicative list of new challenge 
related action-types should be also inserted as an Annex. 

Depending  on  the  option  chosen  a  revised  Commission  Regulation  would  be 
necessary to update the Common Monitoring and Evaluation Framework. The latter 
would need to be up-dated by adding more indicators to facilitate the follow-up on 
the  impact  of  the  revised  objectives  addressing  the  new  challenges.  In  the  case  of 
option 5 a new Article should be inserted in the Commission Regulation specifying 
the additional reporting obligations related to the new challenges. 

5.3. 

Social/environmental impacts of alternative options for new challenges 

Social impact 

Environmental impact 

Option 0 – baseline 

Neutral 

Option 1 – Simply transfer of 
fund to Pillar II 

Response to public concerns 

Option 2 – Earmarking 

Response to public concerns 

Option 3 – Higher 
co-financing rates 

Option 4 – Higher 
aid intensities 

Response to public concerns 

Response to public concerns 

Option 5 – Obligation to 
implement new challenges 
measures 

Response to public concerns 

Difficult to assess, depends on MS 
implementation 

Possible improvement following 
higher uptake primarily of Axis 2, 
and specific Axis 1 & 3 measures83 

Possible improvement following 
higher uptake primarily of Axis 2, 
and specific Axis 1 & 3 measures 

Possible improvement following 
higher uptake primarily of Axis 2, 
and specific Axis 1 & 3 measures 

Possible Improvement following 
higher uptake primarily of Axis 2, 
and specific Axis 1 & 3 measures 

Improvement following higher 
uptake primarily of Axis 2, and 
specific Axis 1 & 3 measures 
ensured by obligation 

6. 

CONCLUSIONS 

Continuing  present  policies  would  significantly  limit  the  responsiveness  of  CAP  to  new 
challenges and its contribution to the key agendas of climate change, renewable energy, water 
management  and  biodiversity.  Extra  RD  funding  would,  in  itself,  lead  to  a  greater 
responsiveness  and  uptake  of  measures,  but  the  reprogramming  effort  of  RD  measures 
required  would  not  be  compensated  for  by  a  better  targeting  or  take-up  of  measures. 
Earmarking  funds,  higher  co-financing  rates  or  higher  aid  intensities  would  imply  further 
administrative burden through the need for major revisions of financial planning and separate 
reporting  by  MS  administrations.  Targeting  the  use  of  additional  modulation  funds  for  new 
challenges would be the most effective in guaranteeing a higher uptake of measures/actions, 
although it implies higher administrative burden and complexity both at MS and EU level. 

83 

See note 5. 

EN 

127 

   EN 

 
 
                                                 
7. 

ANNEX TO CHAPTER VIII – LIST OF INDICATIVE ACTION TYPES 

Priority: Climate change  

Types of operations 

Articles and measures 

Potential effects 

Improve  efficiency  of  nitrogen  fertiliser  use 
(for  ex.  reduced  use,  equipment,  precision 
agriculture), improvement of manure storage 

Article 26: 
Modernisation of 
agricultural holdings 

Reduction  of  methane  (CH4) 
(N2O) 
and 
emissions. 

nitrous 

oxide 

Improvement of energy efficiency 

Soil  management  practices  (for  ex.  tillage 
methods,  catch  crops,  diversified  crop 
rotations) 

Land use change (for ex. conversion of arable 
land to pastures, permanent set aside, reduced 
use / restoration of organic soils) 

Article 39: Agri-
environment payments 

Article 26: 
Modernisation of 
agricultural holdings 

Reduction of carbon dioxide 
(CO2) emissions by saving 
energy. 

Article 39: Agri-
environment payments 

Reduction of nitrous oxide 
(N2O); carbon sequestration.  

Article 39: Agri-
environment payments 

Reduction nitrous oxide (N2O); 
carbon sequestration.  

Extensification of livestock (for ex. reduction 
stocking density, increase grazing) 

Article 39: Agri-
environment payments 

Reduction of methane (CH4). 

Afforestation 

Forest fire prevention 

Articles 43 and 45: First 
afforestation of 
agricultural and 
non-agricultural land 

Article 48: Restoring 
forestry potential and 
introducing prevention 
actions 

Reduction  of  nitrous  oxide 
(N2O); carbon sequestration. 

Carbon sequestration in forests 
and  avoid  carbon  dioxide 
(CO2) emissions. 

Priority: Renewable energies 

Biogas  production  –  anaerobic  digestion 
plants using animal waste (on farm and local 
production)  

Article 26: 
Modernisation of 
agricultural holdings 

Article 53: 
Diversification into non-
agricultural activities 

Substitution  of 
reduction of methane (CH4)  

fossil 

fuel; 

Perennial  energy  crops 
coppice and herbaceous grasses) 

(short 

rotation 

Article 26: 
Modernisation of 
agricultural holdings 

Substitution  of  fossil  fuels; 
carbon sequestration; reduction 
of nitrous oxide (N2O). 

Processing  of  agricultural/forest  biomass  for 
renewable energy  

Installations/infrastructure 
energy using biomass  

for 

renewable 

Substitution of fossil fuels. 

Substitution of fossil fuels. 

Article 28: Adding value 
to agricultural and 
forestry products 

Article 53: 
Diversification into non-
agricultural activities 

Article 54: Support for 
business creation and 
development 

Article 56: Basic 
services for the economy 
and rural population 

128 

   EN 

EN 

 
Priority: Water Management 

Types of operations 

Articles and measures 

Potential effects 

Water saving technologies, water storage  

Water saving production techniques  

Wetland restoration 

Conversion 
forest/agro-forestry systems 

agricultural 

of 

land 

into 

Improve  the  capacity  to  use 
water more efficiently. 

Conservation  of  high-value 
water  bodies;  protection  of 
quality water.  

Article 26: 
Modernisation of 
agricultural holdings 

Article 30: Infrastructure 

Article 39: Agri-
environment payments 

Article 41: Non-
productive investments  

Article 43 and 45: First 
afforestation of 
agricultural and 
non-agricultural land 

Development of semi-natural water bodies 

Article 57: Conservation 
and upgrading of the 
rural heritage 

Conservation  of  high-value 
water  bodies;  protection  of 
quality water.  

Types of operations 

Articles and measures 

Potential effects 

Priority: Biodiversity 

No application of fertiliser and pesticides on 
high nature value agricultural land 

Article 39: Agri-
environment payments  

Integrated and organic production 

Perennial field and riparian boundary strips 

Construction/management 
of 
biotopes/habitats  within  and  outside  Natura 
2000 sites 

Land  Use  Change 
management,  conversion  of  cropland 
pasture, long-term set aside) 

(extensive  grassland 
to 

Management of high nature value perennials 

Conservation of genetic diversity  

Articles 38 and 46: 
Natura 2000 payments 

Article 39: Agri-
environment payments  

Article 41: Non-
productive investments 

Article 47: Forest-
environment payments 

Article 57: Conservation 
and upgrading of the 
rural heritage 

Article 39: agri-
environment payments  

rich 
Conserved-species 
vegetation 
types,  protection 
and maintenance of grasslands. 

Protected  birds  and  other 
wildlife  and  improved  biotope 
reduced  entry  of 
network; 
in 
harmful 
bordering habitats. 

substances 

Conserved genetic diversity. 

EN 

129 

   EN 

 
 
 
8. 

SUMMARY TABLES 

8.1. 

Comparison between different options and their respective impacts – New challenges 

☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Option 0 – baseline 

Option 1 – Simply 
transfer funds  
to Pillar II 

Option 2 – 
Earmarking of 
transferred funds 

Option 3 – Higher 
co-financing rates 

Option 4 – Higher 
aid intensities 

Option 5 – Obligation 
to implement New 
Challenges measures 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

Economic 

Sectors lags in 
adaptation 
(cid:47) 

Social 

(cid:46) 

Response to  
public concerns 
☺ 

Response to  
public concerns 
☺ 

Response to  
public concerns 
☺ 

Response to  
public concerns 
☺ 

Environmental 

Increased risks from 
climate change  
(cid:47) 

Improvement due to 
higher uptake 
☺ 

Improvement due to 
higher uptake 
☺ 

Improvement due to 
higher uptake 
☺ 

Improvement due to 
higher uptake 
☺ 

Response to  
public concerns 
☺☺ 

Improvement due to 
higher uptake and 
better targeting 
☺☺ 

Administrative 
burden 

Simplification 

Other 

(cid:46) 

(cid:46) 

(cid:46) 

Reprogramming of RD 
required 
(cid:47) 

Reprogramming of RD 
and separate reporting 
required 
(cid:47) 

Reprogramming of RD 
and separate reporting 
required 
(cid:47)(cid:47) 

Reprogramming of RD 
and separate reporting 
required 
(cid:47) 

Reprogramming of RD 
and separate reporting 
required 
(cid:47)(cid:47) 

(cid:46) 

(cid:46) 

(cid:47) 

(cid:47) 

(cid:47) 

(cid:47)(cid:47) 

Increased uptake due 
to incentives  
☺ 

Increased uptake due 
to incentives  
☺ 

Increased uptake due 
to incentives  
☺ 

Obligation helps 
higher uptake 
☺☺ 

EN 

130 

EN 

 
  
8.2. 

Comparison between different options and their respective objectives – New Challenges 

☺☺ respecting objective; ☺ possibly respecting objective; (cid:46) neutral; (cid:47) objective possibly at risk; (cid:47)(cid:47) objective at risk 

OBJECTIVES  

Option 0 – 
baseline 

Option 1 – Simply 
transfer of fund to 
Pillar II 

Option 2 – 
Earmarking 

Option 3 – Higher 
co-financing rates 

Option 4 – Higher 
aid intensities 

Responsiveness 
to new challenges 

(cid:47)(cid:47) 

Greater uptake of 
RD measures 

Simplification 

(cid:46) 

(cid:46) 

☺ 

☺ 

(cid:46) 

EN 

☺☺ 

☺ 

(cid:47) 

☺ 

☺ 

(cid:47) 

☺ 

☺ 

(cid:47) 

131 

Option 5 – 
Obligation to 
implement new 
challenges 
measures 

☺☺ 

☺☺ 

(cid:47)(cid:47) 

EN 

 
  
E.b.  MODULATION 

1. 

BACKGROUND 

Modulation  is  a  means  of  budgetary  transfer  by  which  a  percentage  reduction  is  applied  to 
farmer direct payments (Pillar I) and the budgetary resources released are reassigned to rural 
development (Pillar II) measures. At present, compulsory modulation for all EU-15 Member 
states is 5% for all payments above €

 5 000. 

In budget terms, in 2006 it was initially calculated that compulsory modulation of 5% would 
release EUR 1 228 billion for re-distribution, as shown in the table below. Although in pure 
static  terms,  the  estimated  impact  on  farm  income  is  –1.7%  for  the  farms  affected,  this 
estimate excludes the benefits for farms from the impact of increased modulated funds on RD. 

DG AGRI has carried out a preliminary exercise to assess the associated indirect effects on 
farmers' income of rural development measures, which indicates that the income effectiveness 
of  Rural  Development  measures  for  the  period  2000–2006  could  have  been  somewhat  less 
than  100%  over  the  short/medium  term,  and  higher  over  the  long  term.  The  methodology 
developed relied on the calculation of the leverage effect of each €
 1 of EU funding on other 
national or regional fund (proportional to the EU co-financing rate) and, more critically, to an 
estimate  of  a  coefficient  of  income  effectiveness  of  each  RD  measure.  The  analysis 
represented  a  first  contribution  on  the  issue  and  will  have  to  be  complemented  and 
strengthened by in-depth quantitative analysis. 

Table 28. – The impact from the initial modulation on MS in budget year 2013 

EU-15 Distribution of modulation savings in 2013

mio EUR

Net mod'n 
of 5%*

Distribution

20% direct

Additional 
direct

 Key

Total

Net loss/gain

Percentage 
'return'

Allocation 
key

A

B

C

D

E

G=E-A

H=F/A

2003 data

Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
United Kingdom
EU-15

22,6
39,4
224,1
41,1
153,1
336,0
41,4
96,2
1,5
32,4
16,2
11,5
14,7
27,5
170,3
1228,0

4,5
7,9
44,8
8,2
30,6
67,2
8,3
19,2
0,3
6,5
3,2
2,3
2,9
5,5
34,1
245,6

4,2
8,8
42,3
0,0
0,0
32,3
1,1
0,0
0,4
0,0
0,0
0,0
0,0
0,0
15,2
104,3

9,3
14,9
114,6
48,0
170,0
169,3
23,8
105,8
0,5
20,3
36,3
44,6
15,5
18,3
86,9
878,1

18,0
31,6
201,7
56,2
200,6
268,8
33,2
125,0
1,2
26,8
39,5
46,9
18,4
23,8
136,1
1228,0

-4,5
-7,8
-22,4
15,1
47,5
-67,2
-8,2
28,8
-0,3
-5,6
23,3
35,4
3,7
-3,7
-34,2
0,0

79,9%
80,1%
90,0%
136,8%
131,0%
80,0%
80,2%
130,0%
80,0%
82,7%
244,1%
407,8%
125,4%
86,5%
79,9%

1,1%
1,7%
13,0%
5,4%
19,4%
19,3%
2,7%
12,1%
0,1%
2,3%
4,1%
5,1%
1,8%
2,1%
9,9%
100,0%

Source: DG AGRI Working Document of 3 August 2006 

EN 

132 

   EN 

 
 
The  released  funds  are  re-distributed  among  EU-15  according  to  a  common  key,  based  on 
certain criteria84. 

In two MS, UK and Portugal, voluntary modulation also applies85. The new MS, on the other 
hand, were exempted from modulation until the transition to the full level of direct payments 
is achieved86. 

2. 

PROBLEM DEFINITION 

The constraints that MS are facing, due to the cut in the expected Rural Development support 
following  the  2005  decision  on  the  Financial  Perspectives,  present  an  obstacle  to  the 
realisation of Pillar II objectives in the current budgetary period. 

In addition to the restrictions posed by this tight budgetary framework, reinforcement of the 
budgetary resources is necessary in order to: 

•  address  the  new  challenges  identified  in  the  HC  Communication  (climate  change,  water 

management and risk management); 

•  respond  to  the  need  for  increased  efforts  to  address  new  productivity  and  environmental 

challenges (biofuels; improved competitiveness in market sectors). 

3. 

OBJECTIVES 

In the context of the objective to improve the MS uptake of second pillar measures linked to 
new challenges, the specific objectives of modulation options examined should be to: 

•  reinforce  Rural  Development  funding,  in  order  to  address  the  shortfall  in  the  current 
budgetary  period  and  meet  the  extra  budgetary  resources  necessary  to  respond  to  new 
challenges; 

•  respect the agreement on the exemption of new Member States from basic modulation until 

they reach the same level of payments with the EU-15; 

•  find an appropriate balance for allocating funds generated through additional to MS 

4. 

POLICY OPTIONS 

Four  options  are  analysed  in  comparison  to  status  quo.  The  first  three  assumed  the  same 
overall  level  of  increase  in  modulation,  8%,  achieved  with  annual  2%  steps  from  2009 
onwards,  but took  into account different assumptions for new MS and re-distribution of the 
fund released. 

84 

85 

86 

The allocation criteria safeguard 1 percentage point of modulation to be distributed directly back to the 
MS  where  it  was  generated,  the  rest  being  distributed  between  the  Member  States  according  to 
agricultural area, agricultural employment and GDP. However, it is also guaranteed that any MS must 
receive back at least 80% of what it contributes to modulation (in case of Germany 90%). An analysis 
of the impacts of the current modulation is found in Tables A1-A3 in note 10 of Annex E. 
Portugal will apply from 2008 10% voluntary modulation with a EUR 5 000 franchise. In the UK the 
voluntary modulation is applied without franchise and the rates foreseen in 2012 are the following: 14% 
in England, 6.5% in Wales and 9% in Scotland and Northern Ireland. 
This will happen in 2013 for EU-10 and 2015 for Romania and Bulgaria. 

EN 

133 

   EN 

 
                                                 
The  fourth  option  looked  into  the  potential  impact  of  an  idea  under  consideration  in  the 
European Parliament that introduces a progressive element in modulation based on different 
thresholds of payments, thus addressing in parallel equity issues87. 

Table 29. – Policy options for modulation 

Option 

Modulation 

Description 

0 

1 

2 

3 

4 

Status quo – baseline 

Increase 
EU-15 
in 
compulsory  modulation 
by  8%,  using  current 
distribution key 

Increase 
EU-25 
in 
compulsory  modulation 
by  8%,  using  current 
distribution key 

EU-25 
in 
Increase 
compulsory  modulation 
at different rates 

Progressive modulation, 
current  distribution  key 
+  funds  remaining  in 
MS 

No  change  in  the  present  set  of  measures.  Currently,  reduction  in 
payments  under  the  CAP  is  made  through  the  linear,  5%  reduction  of 
payments above € 5 000 from compulsory modulation. 

Increasing  the  existing  (basic)  compulsory  modulation  by  with  a  higher 
level  of  compulsory  modulation  would  be  one  possibility,  based  on  the 
current EU-15 distribution key method employed. 

Increasing compulsory modulation to EU-15 fails to offer to new MS the 
opportunity to address the new challenges of the CAP through increased 
rural  development.  A  second  option  could  be  to  increase  the  basic 
compulsory modulation by the same amount as in option 1, but including 
the new MS (EU-25), using the same distribution key method for EU-25, 
updated with 2005 data88. 

The  limitations  of  applying  more  basic  modulation  only  to  EU-15  with 
the existing key (option 1) and the difficulties of opening up the current 
agreement on the exemption of new MS from basic modulation (option 2) 
could be potentially avoided by proposing changes to the re-distribution 
criteria. From the broad range of different re-distribution criteria, the one 
analysed applies 6% modulation for EU-15, but applies only a last step of 
2% for EU-25 because only in 2013 would EU-10 complete the transition 
to the full level of direct payments. To address the issue of redistribution, 
in  this  option  the  last  2%  of  modulation  for  both  EU-15  and  EU-10 
remains  within  the  MS,  the  6%  for  EU-15  being  allocated  based  on  the 
current distribution key. 

This option considers the economic size of the farm as an element in the 
calculation  of  modulation.  Part  of  the  funds  from  extra  "basic" 
modulation  is  to  be  distributed  in  accordance  with  the  prevailing  rules 
governing  modulation  funds,  while  additional  amounts  ("special 
modulation") are to remain within the MS in which they accrue. 

This  option  is  inspired  from  the  EP  COMAGRI  Report  on  the  HC 
Communication89.  However,  here  a  different  variant  is  applied  to  allow 
comparison with the previous three options. It keeps the present €
 5 000 
(to avoid two systems running in parallel), and changes the % reduction 
of  the  different  payment  thresholds  to  arrive  an  8%  reduction  at  the 
highest threshold. 

87 

88 

89 

In  order  to  make  comparisons  between  MS,  the  impact  of  increased  compulsory  modulation  on 
voluntary  modulation  has  not  been  calculated.  However,  it  is  assumed  that,  in  the  event  of  its 
application,  any  amounts  generated  by  compulsory  modulation  would  replace  equivalent  amount  of 
voluntary modulation. 
This option is purely hypothetical, and Romania and Bulgaria would be excluded because they do not 
reach high levels of direct payments until late in the period. Furthermore, since data are currently not 
available, they cannot be included in the simulations at this stage. 
The Report was presented by MEP Goepel, and implies a trigger threshold of € 10 000, above which 
basic modulation would apply. 

EN 

134 

   EN 

 
                                                 
Table 30. – Three options increasing basic compulsory modulation across EU-27 

EU-15 

EU-10 

EU-2 

Extra 
modulation 

Total 
modulation 

Extra 
modulation 

Total 
modulation 

Extra 
modulation 

Total 
modulation 

Option 1 

Option 2 

Option 3 

+ 8% 

+ 8% 

+ 8% 

13% 

13% 

13% 

0% 

+ 8% 

+ 2% 

0% 

13% 

2% 

0% 

" 

" 

0% 

" 

" 

Table 31. – Option 4: Progressive modulation across EU-25 

€5 000–100 000 

€100 000 –200 000 

€200 000–300 000 

above €300 000 

Option 4 

2012 

2013 

Extra  
mod'n 

2% 

Extra 
mod'n 

Special 
mod'n 

Extra 
mod'n 

Special 
mod'n 

Extra 
mod'n 

Special 
mod'n 

4% 

4% 

6% 

6% 

8% 

8% 

5. 

ANALYSIS OF IMPACTS 

The  modulation  options  under  consideration  were  analysed  and  evaluated  according  to 
economic and budgetary impacts (effect on farmer direct payments, potential economic return 
to  farmers  through  Pillar  II,  link  to  competitiveness  and  broader  economic  impacts  on  rural 
areas, and net budget impact by Member States), social impacts (income impact on farmers90, 
link  to  broader  rural  society  issues,  and  governance  issues  such  as  administrative 
consequences) and environmental impacts.  

The baseline for comparing the impact of the examined options is the current situation of 5% 
compulsory in EU-15, with no modulation in EU-12 (option 0). For the distribution of funds 
among MS, net modulation has been estimated on the basis of projected direct aids in 2013 
including  sugar,  fruit  and  vegetables  and  wine  for  all  options.  For  option  4,  the  progressive 
element  of  the  modulation  was  estimated  on  2006  data  of  actual  payments  (CATS).  These 
data differ somewhat from the data of the actual budget allocation. 

5.1. 

Global effects on budget and MS transfers 

Results presented here summarise two different aspects of each modulation option91. 

•  the  overall  budgetary  impact  of  each  modulation  option  on  the  level  of  funds 

released to MS (shift from Pillar I to Pillar II) at the EU level, 

•  the  impact  of  each  option  on  increasing  the  RD  funds  from  their  presently 

budgeted level. 

90 

91 

The data used for the simulations of direct payments per holding and income are the Farm Accountancy 
Data  Network  (FADN),  which  is  representative  of  the  commercial  farm  EU  population,  and  covers 
around 90% of EU agricultural production and 93% of total direct payments. 
More details are found in note 10 of Annex E. 

EN 

135 

   EN 

 
 
 
 
                                                 
The  table  presented  below  indicates  that  different  variations  of  allocating  the  8% 
modulation  increase  proposed  in  the  HC  Communication  would  transfer  between 
 2.0  and  2.2  billion  for  RD  funds.  The  difference  between  options  1  and  2,  an 
additional €
 200 million or 10% in total RD, is indicative of the potential share of the 
new MS in modulation when they enter into the system92. 

Table 32. – Overall budgetary impact of modulation options 

Option 1 

Option 2 

Option 3 

Option 4* 

EU-15 contribution 

EU-10 contribution 

8% 

0% 

Total EU funds released to RD  

1 985.15 

Total  increase  in  MS  funds  to 
RD**  

1 689.8 

8% 

8% 

2 183.6 

1 628.8 

6% + 2% 

2%+4%+6%+8% 

2% 

2%+4%+6%+8% 

2 034.7 

1 722.6 

660.32 

496.0 

Total increase in RD funding 

3 674.9 

3 812.4 

3 757.4 

1 156.2 

Source: DG  AGRI  calculations based  on net modulation of  budget  projections  for direct payments  in 2013 

and an estimate based on 2006 CATS data for progressive modulation. 

Note:*  The  corresponding  total  of  option  4  is  proportional  to  the  percentages  of  progressive  modulation. 

Thus the EP option would yield half of the funds presented here. 
Calculated on the basis of no change to current co-financing rates by MS. 

** 

The rather limited contribution of EU-10 is not only explained by the lower level of 
average payments in EU-10 compared to EU-15 (see section I), but also by the larger 
number of beneficiaries falling under the €5 000 threshold 93. 

With respect to the net effects on MS, results of the various options are summarised 
in the table below, which shows the effect of modulated funds on the percentage net 
returns of a MS from the CAP budget and the increase in their RD budget. The net 
effect  (A  in  the  table)  is  the  difference  between  the  modulated  funds  from  Pillar  I 
payments and receipts from these funds under Pillar II for each MS, and is presented 
as a percentage of their present position as recipients of CAP funds. 

The increase in RD funds (B in the table) is measured as the percentage change from 
the present RD expenditure foreseen. Under option 1, only EU-15 is affected by the 
extra  funding  available  at  EU  level  for  Pillar  II  measures,  which  would  amount  to 
 1 985  million  in  budget  year  2013.  The  increase  in  MS  match  funding  would 
 3 675 
amount  to  €
million.  The  main  net  beneficiaries  would  be  Portugal,  Greece  and  Spain,  and  the 
main net contributors France and Germany. 

 1 690  million,  giving  rise  to  a  total  increase  in  RD  funding  of  €

With  respect  to  the  current  allocation  of  funding  foreseen  for  Pillar  II  measures  in 
2013,  the  average  EU  increase  of  Pillar  II  funding  would  be  18%.  The  highest 
increase  would  be  for  Denmark,  and  the  Netherlands  (in  the  UK,  the  resulting 
significant  increase  is  assumed  to  compensate  an  equivalent  decline  in  voluntary 
modulation). 

92 
93 

Note that the above figure excludes Romania and Bulgaria. 
On the other hand, new MS have a much more significant level of RD funds than EU-15. 

EN 

136 

   EN 

 
€
 
€
                                                 
Table 33. – Impact of modulation options on MS net returns (A) and RD funds (B) 

Option 1 

Option 2 

Option 3 

Option 4 

net % change 

net % change 

net % change 

net % change 

A 

B 

A 

B 

A 

B 

A 

B 

– 20% 

+ 53% 

– 20% 

+ 53% 

– 15% 

+ 56% 

– 20% 

+ 13% 

– 20% 

+ 82% 

– 20% 

+ 82% 

– 15% 

+ 87% 

– 19% 

+ 22% 

Belgium 

Denmark 

Germany 

Greece 

Spain 

France 

Ireland 

Italy 

Luxemburg 

Netherlands 

Austria 

Portugal 

Finland 

Sweden 

– 10% 

+ 85% 

+ 19% 

– 20% 

+ 15% 

+ 22% 

– 20% 

– 20% 

+ 56% 

+390% 

+ 20% 

– 20% 

United Kingdom 

– 20% 

EU-15 

Cyprus 

Czech Republic 

Estonia 

Hungary 

Latvia 

Lithuania 

Malta 

Poland 

Slovak Republic 

Slovenia 

EU-10 

EU-25 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

+ 29% 

+ 20% 

+ 29% 

+ 48% 

+ 25% 

+ 16% 

+ 16% 

+ 62% 

+ 8% 

+ 15% 

+ 10% 

+ 15% 

+ 82% 

+ 18% 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

– 10% 

+ 25% 

– 11% 

– 20% 

– 20% 

– 11% 

– 20% 

– 20% 

+ 12% 

+ 29% 

+ 13% 

+ 21% 

+ 48% 

+ 17% 

+ 12% 

+ 16% 

+ 62% 

+ 6% 

– 8% 

+ 62% 

+ 15% 

– 15% 

+ 11% 

+ 17% 

– 15% 

– 15% 

+ 41% 

+232% 

+ 10% 

+284% 

– 12% 

– 20% 

– 20% 

n/a 

+ 49% 

+ 8% 

+ 15% 

+ 82% 

+ 32% 

+ 9% 

– 20% 

+ 11% 

+ 71% 

+ 7% 

– 19% 

+ 10% 

+363% 

+ 13% 

+292% 

+ 13% 

+ 17% 

+ 2% 

+856% 

+ 13% 

– 9% 

+157% 

n/a 

n/a 

+ 7% 

+ 7% 

+ 9% 

+ 20% 

+ 16% 

– 13% 

– 15% 

n/a 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

n/a 

n/a 

+ 29% 

+ 17% 

+ 27% 

+ 51% 

+ 24% 

+ 15% 

+ 17% 

+ 66% 

+ 7%  

+ 12% 

+ 10% 

+ 16% 

+ 87% 

+ 35% 

+ 2% 

+ 4% 

+ 1% 

+ 3% 

+ 1% 

+ 1% 

+ 1% 

+ 1% 

+ 2% 

+ 1% 

+ 2% 

+ 18% 

– 6% 

+ 11% 

+ 20% 

– 3% 

+ 3% 

+ 7% 

– 19% 

+ 13% 

– 8% 

– 2% 

+110% 

+ 17% 

+ 11% 

+ 125% 

–3% 

– 20% 

– 8% 

n/a 

+ 34% 

– 7% 

+ 39% 

– 4% 

+224% 

+144% 

0% 

+346% 

– 1% 

+101% 

n/a 

n/a 

+ 5% 

+ 4% 

+ 10% 

+ 23% 

+ 1% 

+ 2% 

+ 2% 

+ 4% 

+ 27% 

+ 10% 

+ 2% 

+ 7% 

+ 2% 

+ 5% 

+ 2% 

+ 3% 

+ 1% 

+ 2% 

+ 4% 

+ 1% 

+ 3% 

+ 6% 

Source:  DG AGRI calculations based on net modulation of budget projections for direct payments in 2013 and 

Note: 

an estimate based on 2006 CATS data for progressive modulation.  
Column  A  corresponds  to  net  gain/loss  with  respect  to  current  returns  from  CAP  budget, 
B corresponds to percentage increase in current RD budget. Where n/a, impact not applicable. 

EN 

137 

   EN 

 
 
 
 
Table 34. – Impact of modulation on MS average direct payments (A) and income (B) 

Option 1 

Option 2 

Option 3 

Option 4 

Net % change 

Net % change 

Net % change 

Net % change 

Belgium 

Denmark 

Germany 

Greece 

Spain 

France 

Ireland 

Italy 

Luxemburg 

Netherlands 

Austria 

Portugal 

Finland 

Sweden 

United Kingdom 

EU-15 

Cyprus 

Czech Republic 

Estonia 

Hungary 

Latvia 

Lithuania 

Malta 

Poland 

Slovak Republic 

Slovenia 

A 

–6% 

–7% 

–7% 

–3% 

–5% 

–7% 

–5% 

–5% 

–6% 

–6% 

–4% 

0% 

–5% 

–7% 

1% 

–5% 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

B 

–1% 

–3% 

–3% 

–1% 

–1% 

–3% 

–3% 

–1% 

–2% 

–1% 

–1% 

0% 

–2% 

–6% 

1% 

–2% 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

EU-10 

EU-25 

n/a 

n/a 

–4% 

19% 

A 

–6% 

–7% 

–7% 

–3% 

–5% 

–7% 

–5% 

–5% 

–6% 

–6% 

–4% 

0% 

–5% 

–7% 

1% 

–5% 

–3% 

–8% 

–5% 

–6% 

–4% 

–4% 

n/a 

–2% 

–8% 

–1% 

–4% 

–5% 

B 

–1% 

–3% 

–3% 

–1% 

–1% 

–3% 

–3% 

–1% 

–2% 

–1% 

–1% 

0% 

–2% 

–6% 

1% 

–2% 

–2% 

–4% 

–2% 

–3% 

–2% 

–2% 

n/a 

–1% 

–6% 

0% 

–2% 

–2% 

A 

–6% 

–7% 

–7% 

–3% 

–5% 

–7% 

–5% 

–5% 

–6% 

–6% 

–4% 

0% 

–5% 

–7% 

1% 

–5% 

–1% 

–2% 

–1% 

–1% 

–1% 

–1% 

n/a 

–1% 

–2% 

0% 

–1% 

–4% 

B 

–1% 

–3% 

–3% 

–1% 

–1% 

–3% 

–3% 

–1% 

–2% 

–1% 

–1% 

0% 

–2% 

–6% 

1% 

–2% 

0% 

–1% 

–1% 

–1% 

0% 

0% 

n/a 

0% 

–1% 

0% 

0% 

A 

1% 

0% 

0% 

1% 

0% 

0% 

1% 

0% 

0% 

1% 

1% 

2% 

1% 

0% 

1% 

0% 

0% 

–2% 

–1% 

–1% 

–1% 

0% 

n/a 

0% 

–2% 

0% 

–1% 

–2% 

0% 

B 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

0% 

1% 

1% 

0% 

0% 

0% 

0% 

–1% 

0% 

–1% 

0% 

0% 

n/a 

0% 

–1% 

0% 

0% 

0% 

Source: DG AGRI calculations based on FADN data. 

EN 

138 

   EN 

 
 
 
 
Budgetary  impacts  under  option  2  affect  all  EU-25.  The  extra  funding  available  at 
 2 184 million in budget year 
the EU level for Pillar II measures would amount to €
 1 629  million,  giving 
2013.  The  increase  in  MS  match  funding  would  amount  to  €
rise  to  a  total  increase  in  RD  funding  of  €
 3 812  million.  The  largest  net  transfers 
occurring from France and Germany, and the main net beneficiary Poland94. 

The interest of this option is not so much for the present, since new MS will not in 
fact  contribute  to  modulation  before  2013;  it  is  rather  as  an  indication  of  potential 
transfers in the future with the current distribution key. Only three EU-15 MS are net 
recipients of modulated funds under this option, while three new MS would also be 
net contributors.  

With respect to the current allocation of funding foreseen for RD measures in 2013, 
the average EU increase would be 20%, with Denmark and the Netherlands again the 
main beneficiaries. Yet, despite the net transfer of funds from EU-15 to EU-10, the 
relative impact on EU-10 RD programmes is rather small because of the already high 
level of Pillar II in the new MS.  

Budgetary  impacts  from  option  3  fall  between  the  first  two  options,  with  funding 
available  at  EU  level  for  Pillar  II  measures  would  amount  to  €
 2 034  million  in 
 1 723 
budget  year  2013.  The  increase  in  MS  match  funding  would  amount  to  €
million, giving rise to a total increase in RD funding of €
 3 757 million. However, the 
redistribution effect for this option differs because the special modulation would be 
retained by the Member State, which generated the savings. 

The  main  net  beneficiaries  would  be  Greece  and  Portugal,  and  the  main  net 
contributors  once  more  France  and  Germany.  The  current  allocation  of  funding 
foreseen for Pillar II measures in 2013 would increase by 19%, with Denmark and 
the Netherlands showing the biggest gains. 

Under option 4, funding available at EU level for Pillar II measures would amount to 
 114 million being retained by MS. The increase in MS 
 545 million, with an extra €
match funding would amount to €
 496 million, giving rise to a total increase in RD 
 1 156  million.  All  impacts  are  thus  considerably  below  the  previous 
funding  of  €
three options. The main net beneficiaries would be Portugal and Spain, and the main 
net contributors once more France and Germany. The current  allocation of  funding 
foreseen for Pillar II measures in 2013 would increase by 5%, with Denmark and the 
Netherlands showing the biggest gains. 

5.2. 

Economic and social impacts per farm 

One way of measuring the social impact caused by increased modulation is to look at 
the  effects  on  farmers'  income.  Each  percentage  point  of  modulation  results  in  an 
actual reduction of the income per AWU95. This reduction will be less than the effect 

94 

95 

These  results  reflect  the  weight  given  in  the  current  allocation  key  to  agricultural  area,  agricultural 
employment and GDP. 
As an income indicator, Farm Net Value Added per Annual Work Unit is used because it is the most 
comparable  between  Member  States.  The  FNVA  is  the  difference  between  the  output  plus  current 
subsidies  and  the  intermediate  consumption  and  depreciation.  With  this  amount  of  money  the  farmer 
still needs to pay the external factors (wages, rent and interest).  

EN 

139 

   EN 

 
€
                                                 
on the amounts of direct payments received, since farmers have other incomes than 
solely the direct payments. The data are presented in the table above. 

Under  option  1,  when  compulsory  modulation  is  increased  by  8%  in  EU-15,  the 
average  income  per  AWU  falls  from  €
 20 380,  corresponding  to  an 
income  cut  of  –2%  for  the  average  EU-15  farm.  Cuts  range  from  1%  (Belgium, 
Greece, Spain, Italy, and the Netherlands) to 6% in Sweden. 

 20 730  to  €

 16 610  to  €

Option 2 affects  all  EU-2596,  and results  in a  drop of average farm  income by 2%, 
 16 320  per  AWU.  The  range  of  cuts  per  MS  is  between  1%  for 
from  €
Belgium,  Greece,  Spain,  Italy,  the  Netherlands,  and  Poland  to  6%  for  Sweden  and 
Slovakia. 

Option 3 has the same impacts for EU-15 as option 1 but also affects EU-25, but in a 
more modest way for new MS. The average income in EU-10 declines from €
 6 310 
 6 280 per AWU (–0.5%). The average cut of 2% in EU-25 farm income ranges 
to €
between  –1%  in  Slovenia  and  –2%  in  Poland  to  –7%  in  Denmark,  Germany  and 
Sweden and –8% in the Czech and Slovak Republics. 

Option 4 has the more modest impacts. The average income in EU-25 declines from 
 16 560  per  AWU  (–0.3%).  The  average  cut  in  income  ranges  is  most 

 16 610  to  €
significant in the Czech and Slovak Republics, Sweden and Hungary. 

5.3. 

Environmental impacts 

All  options  increase  available  funds  in  Pillar  II.  As  a  result,  they  positively  benefit 
the availability of funds for agri-environmental programmes, and the higher the level 
of transfer to the second pillar, the higher this benefit for RD will be. However, the 
impact  per  farm  will  depend  not  just  on  the  impact  of  an  eventual  income  drop  on 
production,  which  is  general  is  minimal,  but  also  on  the  capacity  of  each  farm  to 
absorb funds from rural development programmes. 

All  these  effects  are  difficult  to  quantity,  but  they  generally  move  in  the  same 
direction. They would tend to support more environmentally friendly methods, while 
cross compliance would guarantee existing standards do not deteriorate. 

5.4. 

Administrative impacts 

In  terms  of  administrative  consequences,  applying  an  extra  8%  compulsory 
modulation across EU-15 (option 1), rather than the current situation of 5%, with the 
same  distribution  key  as  today,  would  not  be  expected  to  have  any  considerable 
impact on the administrative burden of MS, or farms. 

The  options  affecting  new  MS  would  potentially  increase  their  administrative 
burden,  but  not  with  respect  to  the  existing  baseline;  new  MS  will  enter  into  the 
system anyway (EU-10 by 2012). 

The  most  complicated  option  would  be  with  progressive  modulation,  because  it 
would imply a change in the present system of financial management. This burden is 
similar  to  the  one  discussed  under  the  upper  payment  limitations,  while  the  risk  of 

96 

EU-24 since Malta is not included at this stage. 

EN 

140 

   EN 

 
€
                                                 
farm splitting could also occur (although this risk is rather small as ling as the gap 
between the progressive cuts is also small). 

5.5. 

Supplementary analysis 

The  above  analysis  of  the  four  options  considered  has  demonstrated  that  option  4 
(progressive  modulation)  presents  the  advantages  of  combining  elements  of  both 
individual  payment  limits  and  modulation  and  of  minimising  distributive  effects 
between  MS.  However,  the  progressive  modulation  option,  as  analysed,  has  the 
disadvantage of bringing EU-10 into the modulation system earlier than foreseen, of 
generating relatively low levels of funding for reinforcing those RD measures needed 
to address the new challenges to agriculture and of being administratively complex. 

To  address  these  shortcomings  while  retaining  the  advantages  of  progressive 
modulation,  further  analysis  has  been  made  of  a  system  of  progressive  modulation 
based on the following principles: 

–  all receipts from modulation stay within the MS which generates them; 

–  for EU-15, basic modulation, applying to all payments above €

 5 000, is increased 

by 2% annually from 2009 until it reaches 8% in 2012; 

–  a progressive element is introduced, whereby payments are reduced by additional 
 5000 to €
 99 999; 
 299 999;  and  9%  above 

steps of 3% for successive payment thresholds levels (0% for €
 199 999;  6%  for  €
3%  for  €
 300 000); 

 200 000  to  €

 100 000  to  €

–  EU-10 become eligible for modulation in 2012 (with a basic rate of 3%); 

–  a new system for the financial management of direct aids, establishing net global 

ceilings per Member State, is introduced. 

The progressive modulation system would apply over time according to the schema 
below: 

Table 35. – Proposed schema for Progressive Modulation 

Budget Year

Current Modulation

EU-15 
Payment 
Level

Basic Rate

EU-15 
Payment 
Level

2007
2008
2009
2010
2011
2012
2013

100%
100%
100%
100%
100%
100%
100%

4%
5%
5%
5%
5%
5%
5%

96%
95%
95%
95%
95%
95%
95%

Budget Year

EU-10 
Payment 
Level

Basic Rate

EU-10 
Payment 
Level

Progressive Modulation Rates

0 - EUR 5.000 
(Franchise)

EUR 5.000 to EUR 
100.000

EUR 100.000 to 
EUR 200.000

EUR 200.000 to 
EUR 300.000

Above EUR 
300.000

0%
0%
0%
0%
0%
0%
0%

0%
0%
0%
2%
4%
6%
8%

0%
0%
0%
5%
7%
9%
11%

0%
0%
0%
8%
10%
12%
14%

0%
0%
0%
11%
13%
15%
17%

0 - EUR 5.000 
(Franchise)

EUR 5.000 to EUR 
100.000

EUR 100.000 to 
EUR 200.000

EUR 200.000 to 
EUR 300.000

Above EUR 
300.000

2013

90%

0%

90%

0%

3%

6%

9%

12%

The budgetary impacts of the proposed progressive modulation are presented in the 
table below. In this analysis, the impact on those Member States currently applying 
voluntary  modulation  (UK,  PT)  has  been  taken  into  account,  on  the  basis  that  any 
increase 
in  compulsory  modulation  amounts  substitutes  existing  voluntary 
modulation amounts. However, since it is assumed that the same rate of co-financing 

EN 

141 

   EN 

 
€
 
will  apply  to  the  new  compulsory  modulation  amounts  as  is  currently  the  case,  for 
the  UK  and  PT,  both  applying  voluntary  modulation,  the  net  increase  in  MS  RD 
funding  will  differ  where  there  are  different  co-financing  rates  applied  under 
voluntary modulation. 

EN 

142 

   EN 

 
Table 36. – Impact of progressive modulation on EU and MS RD spending 

Budget year 2013

EU RD 
contribution*

MS RD 
contribution

Total RD 
Spending

Current average 
co-financing rate

Proposed 
Progressive 
Modulation

Current 
Voluntary 
modulation

Adjusted 
voluntary 
modulation

Increase in EU 
RD funding

Increase in MS 
RD funding

Total increase 
in RD funding

Increase in 
currently foreseen 
RD funding

Belgium
Danmark
Deutschland
Ellas
España
France
Ireland
Italia
Luxembourg
Nederlands
Österreich
Portugal
Suomi/Finland
Sverige
United Kingdom
Cyprus
Czech Rep
Estonia
Hungary
Latvia
Lithuania
Malta
Poland
Slovak Rep
Slovenia
EU-25

A

54,5
61,6
1.131,1
619,2
1.041,1
905,7
307,2
1.258,2
11,8
66,6
511,1
564,1
271,6
239,2
267,4
21,0
418,0
113,3
578,7
151,2
253,6
10,7
1.850,0
317,3
112,0
11.136,03

B

94,5
53,4
711,2
229,0
966,3
773,6
257,2
1.282,8
36,5
66,6
511,0
151,9
601,1
274,0
267,3
21,0
118,8
33,3
205,8
46,6
75,2
3,3
557,6
95,6
32,2
7.465,6

C

148,9
115,0
1.842,4
848,2
2.007,4
1.679,3
564,4
2.540,9
48,3
133,1
1.022,0
716,0
872,7
513,1
534,7
42,1
536,8
146,6
784,5
197,7
328,8
13,9
2.407,7
412,9
144,2
18.601,7

D=A/C

E

F

G=F-E

H=E+G-F

I=(H/D)*(1-D)

J=H+I

K=J/C

37%
54%
61%
73%
52%
54%
54%
50%
24%
50%
50%
79%
31%
47%
50%
50%
78%
77%
74%
76%
77%
76%
77%
77%
78%
60%

36,6
69,5
440,6
71,4
265,7
537,5
68,2
222,4
2,2
54,9
28,7
32,9
24,7
43,6
292,1
0,6
49,8
2,1
46,4
2,0
5,2
0,1
27,7
20,8
0,8
2.346,5

0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
40,8
0,0
0,0
481,6
0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
522,4

0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
7,9
0,0
0,0
190,4
0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
0,0
198,3

36,6
69,5
440,6
71,4
265,7
537,5
68,2
222,4
2,2
54,9
28,7
0,0
24,7
43,6
0,9
0,6
49,8
2,1
46,4
2,0
5,2
0,1
27,7
20,8
0,8
2.022,4

63,5
60,3
277,0
26,4
246,6
459,1
57,1
226,7
6,8
54,9
28,7
0,0
54,7
49,9
0,9
0,6
14,2
0,6
16,5
0,6
1,5
0,0
8,3
6,3
0,2
1.661,6

100,1
129,8
717,6
97,8
512,3
996,6
125,3
449,1
9,0
109,8
57,4
0,0
79,4
93,5
1,8
1,2
64,0
2,7
62,9
2,6
6,7
0,1
36,0
27,1
1,0
3.684,0

67%
113%
39%
12%
26%
59%
22%
18%
19%
82%
6%
0%
9%
18%
0%
3%
12%
2%
8%
1%
2%
1%
1%
7%
1%
20%  

Source: DG AGRI calculations based on FADN data. 
* 

For UK and PT, both applying voluntary modulation, it is assumed that the same rate of co-financing will apply to the new compulsory modulation amounts as is 
currently the case. The net increase in MS RD funding will differ where there are different co-financing rates applied under voluntary modulation. 

EN 

143 

EN 

 
  
                  
                 
                  
                 
             
              
                
                 
             
              
                
              
                
                 
             
              
                  
                   
                  
                 
                
              
                
                 
                
                 
                
                 
                
                 
                  
                   
                
                 
                
                 
                
                 
                
                 
                
                 
                  
                   
             
              
                
                 
                
                 
         
               
            
               
               
               
                 
                
             
This option would release a total of €
 2 022 million of EU funds for transfer to and 
use  under  Pillar  II  (column  H,  table  above).  This  figure  is  comparable  to  that  of 
options 1 and 3 above and considerably higher than the amount released by option 4. 
Though  the  biggest  impacts  of  this  measure  would  fall  on  FR  (€
 537 million),  DE 
 222  million),  since  there  is  no  re-
(€
distribution of the EU funds generated, there would be no net budget impacts on MS. 

 266  million)  and  IT  (€

 441  million),  ES  (€

Assuming  the  same  EU  co-financing  rate,  as  currently  applied  in  each  MS,  it  has 
been calculated that the total contribution of RD funding by MS would increase by 

 1 661 million. Column I of the table above shows individual MS impacts. 

The  proposed  modulation  mechanisms  would  give  a  total  increase  (EU  plus  MS 
spending)  of  €
 3 684  million  for  Pillar  II  measures,  which  would  represent  a  20% 
increase at EU-25 level (column K). MS increases in RD spending would vary from 
+112% in DK and 82% in NL, to generally low increase in new MS. 

Further  analysis  of  the  social  impact  of  the  proposed  progressive  modulation  on 
farmer  incomes,  based  on  FADN  data,  is  ongoing.  It  may  be  expected  that  the 
average impact per MS will follow similar trends to those observed under option 4, 
which  already  contained  an  element  of  progressive  modulation.  A  more  detailed 
breakdown of impacts at farm level, including those by payment size, can be found 
in note 10 of Annex E. 

6. 

CONCLUSIONS 

In  relation  to  the  attainment  of  the  objectives  for  modulation,  the  status  quo  option,  though 
negative  in  terms  of  its  failure  to  address  the  budget  needs  for  the  current  programming 
period,  and  new  challenges  facing  EU  agriculture,  keeps  within  the  constraints  imposed  by 
the current rules regarding the exemption of new MS. The lack of ambition of the status quo 
option  would  be  the  main  reason  for  its  exclusion  in  the  light  of  the  new  challenges  of  the 
CAP. 

Increasing  modulation  at  EU-15  or  EU-25  level,  with  the  existing  redistribution  method, 
addresses  the  budget  issue  but  in  an  imbalanced  way.  Restricting  modulation  to  EU-15 
excludes  the  new  MS.  Modulating  EU-25  breaks  the  agreement  for  their  exemption  until 
2012.  The  differentiated  approach,  outlined  in  option  3,  contains  more  positive  elements: 
more funding is available, the rules for modulation are respected until 2012 and the last step 
of modulation finds a balance in terms of the redistribution effect. 

Option 4, progressive modulation, while bringing EU-10 into the system earlier than foreseen, 
lacks in ambition in terms of the funds released. However, this deficiency could be addressed 
by revising the percentage of basic modulation in the model, as well as the steps between the 
different payment thresholds.  

The  option  also  has  some  promising  features,  with  regard  to  the  fact  that  it  permits  MS  to 
retain the funds generated and it integrates an element of progressiveness in the payment cuts, 
thereby  addressing,  to  some  extent,  the  problem  in  relation  to  the  uneven  distribution  of 
farmer payments. 

EN 

144 

   EN 

 
€
Supplementary  analysis  of  a  progressive  modulation  option,  involving  higher  rates  of  step-
wise  modulation  and  which  would  be  applicable  to  new  MS  only  when  they  reach  an 
equivalent  level  of  direct  payments  to  EU-15  in  budget  year  2013,  has  shown  that  it  is 
possible to address the shortcomings of option 4 while retaining its positive features. 

EN 

145 

   EN 

 
7. 

SUMMARY TABLES 

7.1. 

Comparison between different options and their respective impacts – New challenges 

☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Option 0 – baseline 

Option 1 – Simply 
transfer funds to 
Pillar II 

Option 2 – 
Earmarking of 
transferred funds 

Option 3 – Higher 
co-financing rates 

Option 4 – Higher 
aid intensities 

Option 5 – 
Obligation to 
implement New 
Challenges measures 

Economic 

Sectors lags in 
adaptation 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:46) 

(cid:47) 

(cid:46) 

Response to public 
concerns 

Response to public 
concerns 

Response to public 
concerns 

Response to public 
concerns 

Response to public 
concerns 

☺ 

☺ 

☺ 

☺ 

☺☺ 

Increased risks from 
climate change 

Improvement due to 
higher uptake 

Improvement due to 
higher uptake 

Improvement due to 
higher uptake 

Improvement due to 
higher uptake 

☺ 

☺ 

☺ 

☺ 

Improvement due to 
higher uptake and 
better targeting 

☺☺ 

Reprogramming of 
RD required 

Reprogramming of 
RD and separate 
reporting required 

Reprogramming of 
RD and separate 
reporting required 

Reprogramming of 
RD and separate 
reporting required 

Reprogramming of 
RD and separate 
reporting required 

(cid:47) 

(cid:46) 

(cid:47) 

(cid:47) 

(cid:47)(cid:47) 

(cid:47) 

(cid:47) 

(cid:47) 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

Social 

Environmental 

Administrative 
burden 

Simplification 

(cid:47) 

(cid:46) 

(cid:46) 

EN 

146 

EN 

 
  
☺☺ very positive; ☺ positive; (cid:46) neutral; (cid:47) negative; (cid:47)(cid:47) very negative 

IMPACTS 

Option 0 – baseline 

Option 1 – Simply 
transfer funds to 
Pillar II 

Option 2 – 
Earmarking of 
transferred funds 

Option 3 – Higher 
co-financing rates 

Option 4 – Higher 
aid intensities 

Other 

(cid:46) 

(cid:46) 

Increased uptake due 
to incentives ☺ 

Increased uptake due 
to incentives ☺ 

Increased uptake due 
to incentives ☺ 

Option 5 – 
Obligation to 
implement New 
Challenges measures 

Obligation helps 
higher uptake  
☺☺ 

EN 

147 

EN 

 
  
7.2. 

Comparison between different options and their respective impacts – Modulation 

☺☺ strong positive impacts; ☺ positive impact; (cid:46) neutral; (cid:47) negative impact; (cid:47)(cid:47) strong negative impacts 

IMPACTS 

Option 0 – baseline 

Option 1 – Increase basic 
compulsory modulation 
by 8% in EU-15 

Option 2 – Increase basic 
compulsory modulation 
by 8% in EU-25 

Option 3 – Increase basic 
compulsory modulation 
at different rates in EU-
25 

Option 4 – Introduce 
progressive modulation 

Economic 

Social 

Insufficient to meet 
additional demands for 
RD measures  

EU-15 direct payments 
reduced by 5% 
(cid:47) 

EU-25 direct payments 
reduced by 5% 
(cid:47) 

EU-25 direct payments 
reduced by 5%  
(cid:47) 

EU-25 direct payments 
reduced by 1% 
(cid:46) 

(cid:47) 

2% farm income drop 

(cid:46) 

EU budget for RD up 
18% (€ 2.0 billion) 
☺ 

Farm income declines  
by a further 2% 
(cid:47) 

EU budget for RD up 
20% (€ 2.3 billion) 
☺ 

Farm income declines  
by a further 2% 
(cid:47) 

EU budget for RD up 
19% (€ 2.1 billion) 
☺ 

EU budget for RD up 5% 
(€ 0.6 billion) 
(cid:46) 

Farm income declines  
by a further 2% 
(cid:47) 

Farm income declines  
by less than 1% 
(cid:47) to (cid:46) 

RD strengthens 
☺ 

RD strengthens 
☺ 

RD strengthens 
☺ 

RD strengthens 
☺ 

RD strengthens 
☺ 

Environmental 

Insufficient to meet 
additional demands for 
RD measures  

Benefits from extra RD 
funding, but only in 
EU-15 

Benefits from extra RD 
funding to EU-25 

☺☺ 

Benefits from extra RD 
funding to EU-25, but 
small in EU-10 

Benefits from extra RD 
funding to EU-25, but 
small in EU-10 

(cid:47) 

☺ 

Administrative 

Simplification 

No additional impact, 
current rules in place  

(cid:46) 

No additional impact, 
current rules in place  

(cid:46) 

Present rules continue  

(cid:46) 

Present rules continue  

(cid:46) 

Modulation rules in 
EU-10 apply earlier 

(cid:47) to (cid:46) 

Modulation rules in 
EU-10 apply earlier 

(cid:47) to (cid:46) 

☺ 

(cid:46) to ☺ 

Present rules continue  

(cid:46) 

Modulation rules in 
EU-10 apply earlier 

(cid:47) to (cid:46) 

Present rules continue  

(cid:46) 

Introduces new rules and 
legislation 

(cid:47) 

EN 

148 

EN 

 
  
 
7.3. 

Comparison between different options and their respective objectives – New Challenges 

☺☺ respecting objective; ☺ possibly respecting objective; (cid:46) neutral; (cid:47) objective possibly at risk; (cid:47)(cid:47) objective at risk 

OBJECTIVES  

Responsiveness to 
New challenges 

Greater uptake of 
RD measures 

Simplification 

Option 0 – 
baseline 

Option 1 – Simply 
transfer of fund to 
Pillar II 

Option 2 – 
Earmarking 

Option 3 – Higher 
co-financing rates 

Option 4 – Higher 
aid intensities 

Option 5 – 
Obligation to 
implement new 
challenges measures 

(cid:47)(cid:47) 

(cid:46) 

(cid:46) 

☺ 

☺ 

(cid:46) 

☺ 

☺ 

(cid:47) 

☺☺ 

☺ 

(cid:47) 

☺ 

☺ 

(cid:47) 

☺☺ 

☺☺ 

(cid:47)(cid:47) 

7.4. 

Comparison between different options and objectives – modulation 

☺☺ respecting objective; ☺ possibly respecting objective; (cid:46) neutral; (cid:47) objective possibly at risk; (cid:47)(cid:47) objective at risk 

OBJECTIVES 

Option 0 – baseline 

Option 1 – Increase 
basic compulsory 
modulation by 8% 
in EU-15 

Option 2 – Increase 
basic compulsory 
modulation by 8% 
in EU-25 

Option 3 – Increase 
basic compulsory 
modulation at different 
rates in EU-25 

Option 4 – Introduce 
progressive modulation 

Reinforce RD funds 

Respect rules  
for new MS 

Respect current key 
for distribution of 
modulation 

(cid:47)(cid:47) 

☺☺ 

(cid:46) 

☺ 

☺☺ 

☺☺ 

☺☺ 

(cid:47)(cid:47) 

(cid:47)(cid:47) 

☺ 

☺☺ 

(cid:46) 

(cid:46) 

(cid:47) 

(cid:47) 

EN 

149 

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F – CONCLUSIONS 

1. 

SUMMARY RESULTS 

The  purpose  of  the  Health  Check  is  to  asses  the  experience  of  the  2003  CAP 
reform  and  introduce  adjustments  to  simplify  and  increase  the  effectiveness  of 
the policy and allow it to respond to present market opportunities and face new 
challenges. A wide range of possible options were examined, ranging from no 
policy change to fundamental reforms, against the CAP objectives of: 

•  a competitive agricultural sector, 

•  production  methods  that  support  environmentally  friendly,  quality  products 

that the public wants, 

•  a fair standard of living and income stability for the agricultural community, 

•  diversity  in  the  forms  of  agriculture,  maintaining  visual  amenities  and 

supporting rural communities, 

•  simplicity  in  agricultural  policy  and  the  sharing  of  responsibilities  among 

Commission and member states, 

•  justification  of  support  through  the  provision  of  services  that  the  public 

expects farmers to provide. 

The  analysis  of  the  status  quo  of  the  CAP  shows  that  the  current  policy 
framework, as reformed in 2003, contributes positively to fulfilling the principal 
CAP  objectives.  The  options  analysed  which  indicate  fundamental  policy 
changes, did overall not indicate the need for a radical reform in order to better 
meet  the  CAP  objectives.  However,  the  analysis  showed  that  there  are  areas 
where adjustments of the current policy would lead to more optimal solutions. 

The historic model of the SPS and optional partially coupled support enabled the 
smooth  transition  to  decoupling  in  MS  whose  variable  production  structures 
implied  a  need  for  successive  integration  into  the  SPS  in  2003.  However,  the 
time  now  seems  ripe  to  allow  MS  to  consider  a  targeted  adjustment  towards  a 
more  flat  rate  for  payments,  which  would  address  the  societal  concerns  of 
unequal  distribution  of  payments  between  farmers.  Another  way  of  addressing 
the  uneven  distribution  of  payments  is  through  the  introduction  of  progressive 
modulation  of  funds.  For  the  areas  where  the  SPS  does  not  address  specific 
concerns, solutions could be addressed through Article 69. A revision of Article 
69 would allow MS to use part of their available SPS support to target particular 
sectors  and  regions  with  specific  needs  from  an  economic,  social  or 
environmental point of view. This revision would allow for mitigating negative 
effects  on  income,  it  would  contribute  to  the  vitality  of  rural  areas  and  to 
promoting environmentally beneficial farming practices, while respecting WTO 
commitments.  

EN 

150 

   EN 

 
Revising  the  scope  of  cross  compliance,  by  deleting  and  adding  requirements, 
contributes  to  easing  the  administrative  burden  as  well  as  addressing  new 
challenges that were not as present at the time of the 2003 reform. At the same 
time, environmental  benefits  of set aside could be retained  through  GAEC  and 
Rural Development 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 situation. Moreover, 
restricting  intervention  quantities  to  zero  for  all  feed  grains  and  introducing  a 
tendering  system  in  all  sectors  would  make  the  system  more  efficient  and 
simple, while at the same time provide a safety net role. Within the current CAP 
there  would  also  be  an  increased  possibility  to  promote  the  use  of  risk 
management  tools  and  techniques  through  Article  69  and  Rural  Development 
funds. 

The  continuation  of  the  move  to  producer  support  and  full  decoupling  of 
remaining sectors would have a positive impact on farm income in most regions 
due  to  higher  transfer  efficiency  of  direct  support,  and  any  possible 
environmental and social effects could be addressed through Article 69 and by 
allowing transitional period for the sector to adjust. 

The  analysis  shows  that  most  new  challenges  are  being  addressed  in  the 
Strategic Guidelines for Rural Development that set EU priorities for the RDP in 
the period 2007–2013. In total, more than 25 sub-measures directly or indirectly 
related to climate change, renewable energies, risk and water management have 
been included in the programmes. The best way to strengthen their role within 
the Rural Development policy is to create mechanisms that guarantee that they 
are  taken  up  by  Member  States  and  that  ample  financing  is  provided  through 
modulation.  

2. 

IMPACT ON STAKEHOLDERS 

The overall impact of the proposals on farmers is positive. By enhancing their 
market orientation and reducing existing policy rigidities, proposals allow them 
to  better  grasp  existing  opportunities  and  respond  to  challenges.  The  overall 
income effect of proposal moving to a further decoupling is also positive, as the 
flexibility  in  production  choices  allows  farmers  to  adjust  to  what  is  more 
profitable  for  them..  There  are,  however, some  sectors  where  specific  pressure 
on  farm  income  may  emerge.  This  is  generally  the  case  in  regions  where 
alternative  production  choices  are  very  limited  and  a  significant  part  of  farm 
income is associated to the level of coupled support. In these cases, options have 
been identified that would allow the mitigation of such income pressures either 
by  continuing  existing  support  or  by  allowing  accompanying  measures  that 
would ease the transition of farming to an economically sustainable situation. 

EN 

151 

   EN 

 
The  overall  positive  effect  of  more  market  orientation,  further  decoupling  and 
the  removal  of  supply  control  will  enhance  the  competitiveness  of  the  EU 
industry, especially in the dairy industry. The expected impact on employment 
would also be positive overall. There are  however  specific regions and sectors 
where  potential  problems  on  employment  have  been  identified,  and  for  which 
the  impact  on  employment,  although  rather  limited  overall,  could  still  be  felt 
more strongly at the local level. In all such cases, existing measures both in the 
first pillar an especially in RD could facilitate necessary adjustments, especially 
since a transition period has been suggested to allow the industry to adapt. 

EU  consumers  should  benefit  from  the  Health  Check  mainly  through  the 
reduction of market intervention and the abolition of supply-management tools, 
notably  the  mandatory  set  aside  in  the  arable  crop  sector  and  the  production 
quotas in the dairy sector. These measures are expected to reduce the prices of 
arable  crop  products  and  the  prices  of  meat  products  (in  particular  those  of 
poultry  and  pig  meat).  Likewise,  the  phasing-out  and  eventual  abolition  of  the 
milk quota system is foreseen to induce a significant welfare gain for consumers 
through  the  decrease  in  farm  milk  price,  that  would  result  in  lower  dairy 
commodity prices.  

The  extent  to  which  final  consumers  will  fully  benefit  from  the  Health  Check 
measures is linked to the low and declining share of agricultural raw materials in 
food production costs and to the competitive structure of the food supply chain. 
Over  the  medium  to  long  term  there  is  no  significant  evidence  of  partial 
transmission of price changes between the farm and consumer levels, although 
this may happen in the short run in some sector/country specific situation. 

With respect to the environment, the Health Check will allow a further positive 
contribution of the CAP by a significant and targeted proposed shift of funds to 
RD  to  respond  to  new  challenges  including  climate  change,  biodiversity  and 
water.  The  loss  of  set  aside  could  be  compensated  by  a  combination  of 
adjustments in GAEC and by the use of some of the additional RD funding. 

Finally, with respect to taxpayers the overall contribution of the Health Check is 
not  so  much  in  term  of  the  overall  budget  which  is  fixed  in  the  Financial 
Perspectives. It is rather with respect to the increase in the transfer efficiency of 
the  existing  budget,  by  reallocating  existing  funds  and  better  targeting  these 
funds to meet the overall policy priorities of the EU. 

3. 

CROSS-CUTTING EFFECTS 

The  detailed  analysis  of  the  Impact  Assessment  focused  mainly  on  the 
individual areas of the proposals. However, there also are cross-cutting impacts 
both  because  the  overall  philosophy  of  proposed  adjustments  is  the  same  and 
because  there  are  linkages  between  the  various  areas,  whether  of  economic, 
environmental or social nature. The various options are summarised in tables 32 
while their cross-cutting effects and presented in table 33. 

EN 

152 

   EN 

 
From  the  latter  table  it  becomes  evident  that  impacts  associated  with  the 
additional risks related with proposed adjustments are more often cutting across 
the  various  areas,  while  the  revised  Article  69  is  considered  as  the  most 
appropriate  means  of  best  addressing  these  impacts.  The  linkage  of  cross 
compliance  and  new  challenges  is  also  one  that  requires  a  certain  balance  in 
proposed  solutions  since  changes  in  cross  compliance  affect  the  existing 
baseline  of  mandatory  standards  and  obligations  for  farmers,  and  as  a 
consequence  impact  on  the  compensation  for  higher  voluntary  standards 
introduced via RD measures linked to new challenges. 

Finally,  cross-cutting  effects  are  also  important  in  another  area,  that  of 
administrative costs. For farmers, HC proposals are either neutral or moving in 
the  direction  of  reducing  them.  With  respect  to  administrative  costs  for  public 
administrations, on the other hand, things are more complex because to a large 
extent they depend on the choices of MS. In terms of quantifying such costs, the 
relevant issue is not the overall costs, which are often referred to in the relevant 
debate. Most of these costs will be made anyway because they are linked to the 
need  of  scrutiny  not  just  of  public  support  but  also  of  the  implementation  of 
existing legislation. 

What  is  relevant  for  the  HC  is  the  marginal  cost  (or  cost  saving)  of  any 
additional  measures  linked  to  the  HC.  Yet  what  this  cost  is  depends  on  the 
existing  MS  administrative  structure  and  their  capacity  to  readjust  their 
implementing measures. In most cases, the qualitative assessment of such costs 
indicates very small changes with existing rules, but their exact level cannot be 
quantified.  It  is  only  in  the  area  of  new  challenges  that  certain  additional 
administrative  costs  could  be  identified  because  of  the  need  to  review  RD 
programmes  and  identify  necessary  adjustments,  yet  their  exact  level  is  not 
possible to quantify at this stage.  

4. 

BUDGETARY IMPACT 

Since  the  2003  CAP  reform,  the  CAP  has  an  in-built  mechanism  of  financial 
discipline if expected expenditure runs the risk of exceeding the financial ceiling 
for market expenditure and direct aids. Most CAP support is now fixed and the 
market outlook has significantly improved since 2003. As a result, the risk that 
the financial discipline is applied (i.e. reduction in direct aids) have diminished 
compared to previous expectations.  

in 

Proposals  for  modulation 
the  Single  Payment  Scheme  and  Rural 
Development are by design neutral with the respect to the EU budget, as it is a 
simple compulsory transfer between the second and the first pillar of the CAP. 
For  national  budget  the  increased  modulation  could  lead  to  additional  national 
expenditure 
in  Rural 
Development. This would mean that some Member States have the possibility of 
returning to the (higher) level of national expenditure originally foreseen before 
the decision on the Financial Framework 2007–2013. As regards the transfer of 
measures  into  the  Single  Payment  Scheme  there  could  be  moderate  financial 

the  necessary  co-financing  needed 

in  view  of 

EN 

153 

   EN 

 
consequences  for  the  EU-budget,  but  most  of  the  transfers  are  also  budgetary 
neutral. 

With respect to market measures, the recent increase in world prices has led to a 
clear  improvement  of  prospects  with  respect  to  expectations  when  the  2003 
reform  was  decided.  The  reform  of  maize  intervention  has  since  then  resolved 
part  of  the  previously  expected  problems  in  cereals  market,  and  the  present 
proposals on cereals intervention improve further the situation. Some additional 
expenditure  towards  the  end  of  the  present  financial  framework  is  relatively 
small.  In  dairy  the  impact  is  more  one  of  the  timing  of  expenditure  (before  or 
after 2013). 

The expiry of the dairy quota will bring additional pressure  in butter under all 
options. The present proposal, by initiating a gradual process of a quota phasing-
out,  is  overall  more  beneficial  not  just  for  the  sector,  but  also  for  long-term 
developments  of  the  CAP.  However,  the  need  for  some  limited  additional 
expenditure on butter exports cannot be excluded. Whether this materialises will 
depend  on  factors  that  are  at  this  stage  unknown  (DDA  Agreement,  world 
market developments). Therefore the present proposals include a review clause 
in  2012  that  would  allow  developments  in  dairy  markets  to  be  assessed  to 
determine  if  additional  measures  will  be  needed  to  avoid  any  increase  in  the 
budget.  Some  savings  are  foreseen  as  a  consequence  of  abolition  of  existing 
measures. However, the biggest budgetary effect of the soft landing on the milk 
quota is a loss of budgetary revenue due to the foreseen decrease in milk levy. 

EN 

154 

   EN 

 
5. 

SUMMARY OF DIFFERENT ANALYSED OPTIONS 

Option

SPS model

A.69

SPS model

Cross 
compliance

Partially 
coupled 
support

Upper limits

Lower limits

Cereal 
intervention

Set aside

Milk quotas

Other support 
schemes

Risk 
management 

New Challeges Modulation

Market

New Challenges

0

1

2

3

4

5

Status quo

Status quo

Status quo

Status quo

Status quo

Status quo

Status quo

Status quo

Quota extension

Status quo

Status quo

Status quo

Status quo

EU flat rate

Targeted 
revision

Better targetting 
the scope

Full decoupling

Fixed individual 
limits at a certain 
level

Current 
individual lower 
limits

reduction of the 
intervention to 
safety net level

removal of set 
aside

Quota expiry

Full decoupling

SAPS for all MS

Extended 
revision

Broadening the 
scope

Targeted 
selective 
decoupling

Progressive 
individual limits

Increased 
individual limits

restrict 
quantities to 
zero for all feed 
grains

5% 
environmental 
set aside

Quota phasing 
out

Targeted 
selective 
decoupling

Regional flat rate 
per hectare

Regional flat rate 
per entitlement

Tendering 
system

New GAEC 
environmental 
features

Strengthening 
set-aside in pilar 
II

EU wide frame 
work

Transfer of 
additional funds 
to Pillar II

Enhanced role 
of risk 
management in 
current CAP 
instrtuments

Earmarking

Higher co-
financing rates

Increase in 
compulsory 
modulation by 
8% in EU 15

Increase in basic 
compulsory 
modulation by 
8% in EU 25

Increase in basic 
compulsory 
modulation at 
different rates in 
EU 25

Higher aid-
intensities

Progressive 
modulation

Obligation to 
implement New 
Challenges 
measures

EN 

155 

EN 

 
  
 
6. 

SUMMARY OF CROSS CUTTING ISSUES BETWEEN ANALYSED OPTIONS 

Option

SPS model

A.69

Cross 
compliance

Partially 
coupled 
support

Upper limits Lower limits

Cereal 
intervention

Set aside

Milk quotas

Other support 
schemes

Risk 
managemen

SPS model

A.69

Cross 
compliance

Partially 
coupled 
support

Upper limits

Lower limits

Cereal 
intervention

Set aside

Milk quotas

Other support 
schemes

Risk 
management 

New 
Challeges

Modulation

Note: Impact is indicated by direction of arrow.

EN 

156 

EN 

 
  
 
 
G – MONITORING AND EVALUATION 

In  order  to  provide  for  monitoring  of  the  future  performance  of  the  CAP  and  in  particular 
evaluate how  the  Health Check attained its objectives, Commission services will follow the 
developments in the foreseen period of adjustments under the Health Check. 

The  monitoring  and  evaluation  will  use,  among  others,  the  following  indicators  (many  of 
them  used  for  the  impact  assessment  of  the  Health  Check  and/or  in  the  multi-annual 
evaluation programme for CAP policies): 

Single Payment Scheme: 

•  development in farm income, 

•  amounts of direct payments and their distribution between farms; 

Markets: 

•  volume of public stocks in intervention, 

•  agricultural export performance (e.g. EU share in world trade in agricultural products), 

•  international and domestic production; 

New challenges: 

•  rural development expenditure, 

•  uptake  of  Rural  Development  measures,  especially  those  addressing  new  challenges 

(climate change, renewable energies, water management, biodiversity), 

•  funds shifted to Rural Development through modulation. 

There  will  also  continue  to  be  evaluations  and  studies  on  particular  issues  of  CAP 
performance and the Commission will continue to follow relevant projects under the research 
framework programmes. 

EN 

157 

   EN