Report from the Commission to the European Parliament and the Council in accordance with article 7 of Council Regulation (EC) No 378/2007 of 27 March 2007 laying down rules for voluntary modulation of direct payments
Date: 2009-07-29
Institutions: European Commission
Subjects: EU financing arrangements, agricultural product, aid system, common agricultural policy, farmers' income, production aid, rural development

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 29.7.2009 
COM(2009) 407 final 

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

in accordance with article 7 of Council Regulation (EC) No 378/2007 of 27 March 2007 
laying down rules for voluntary modulation of direct payments 

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REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

in accordance with article 7 of Council Regulation (EC) No 378/2007 of 27 March 2007 
laying down rules for voluntary modulation of direct payments 

The  present  report  has  been  prepared  pursuant  to  Article  7  of  Council  Regulation  (EC) 
No 378/2007,1 which provides that "before 31 December 2008, the Commission shall submit 
to  the  European  Parliament  and  to  the  Council  a  report  on  the  application  of  voluntary 
modulation, accompanied, if needed, by appropriate proposals."  

In the meantime, the Health Check of the Common Agricultural Policy (CAP) has responded 
to  the  need  to  increase  funding  for  rural  development  by  increasing  the  rate  of  compulsory 
modulation.  The  Member  States  applying  voluntary  modulation  will  gradually  replace 
voluntary modulation by compulsory modulation, thus better aligning modulation rates across 
the EU. 

The  Commission  does  not  foresee  any  further  initiatives  on  voluntary  modulation  in  the 
current programming period 2007-2013. 

1. 

Background 

1.1. 

The concept of 'modulation' 

The  term  'modulation'  refers  to  the  transfer  of  budgetary  resources  from  direct 
payments to farmers (1st pillar of the CAP) to rural development measures (2nd pillar 
of the CAP). 

The CAP reform of 2003 introduced compulsory modulation, starting with a rate of 
3%  in  2005,  4%  in  2006  and  5%  from  2007  onwards,  coupled  with  a  franchise  of 
EUR 5,000 below which there is no reduction of direct payments. 

In  addition,  it  was  agreed  in  2005  that  the  United  Kingdom  and  Portugal  may  use 
further voluntary modulation under the terms of Regulation (EC) No 378/2007. 

1.2. 

The legal framework for voluntary modulation  

Regulation (EC) No 378/2007 gives the possibility to apply voluntary modulation in 
the  period  2007-2012  to  the  United  Kingdom  where  voluntary  modulation  already 
applied and to Portugal pursuant to a derogation granted in Article 70(4a) of Council 
Regulation (EC) No 1698/2005.2  

Voluntary  modulation  takes  the  form  of  a  reduction  in  direct  payments  that  is 
additional to the reduction resulting from compulsory modulation.  

A  single  rate  of  reduction  per  calendar  year  must  be  applied;  however,  the  United 
Kingdom  that  applies  the  single  payment  scheme  at  regional  level  may  also  apply 
regionally differentiated rates. The maximum rate of reduction is 20%.  

1 

2 

Council Regulation (EC) No 378/2007 of 27 March 2007 laying down rules for voluntary modulation of 
direct  payments  provided  for  in  Regulation  (EC)  No  1782/2003  establishing  common  rules  for  direct 
support  schemes  under  the  common  agricultural  policy  and  establishing  certain  support  schemes  for 
farmers, and amending Regulation (EC) No 1290/2005, OJ L 95, 5.4.2007, p. 1. 
Council Regulation (EC) No 1698/2005 of 20 September 2005 on support for rural development by the 
European Agricultural Fund for Rural Development (EAFRD), OJ L 277, 21.10.2005, p.1. 

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As  is  the  case  with  compulsory  modulation  a  franchise  of  EUR  5  000  is  foreseen. 
However,  contrary  to  compulsory  modulation,  MS  are  allowed  to  derogate  and  not 
apply it (as done by UK). 

The  Commission  fixes  the  net  amounts  resulting  from  the  application  of  voluntary 
modulation  on  the  basis  of  the  rate(s)  communicated  by  the  Member  States 
concerned.  

These additional modulated funds are used to finance rural development measures in 
the same Member State. There is no obligation of national co-financing, that is, the 
additional funds are not subject to the ceilings for the different axes set out in Article 
70(3) of Regulation (EC) No 1698/2005.  

The Member States concerned must provide impact assessments, in particular on the 
economic  situation  of  farmers  and  their  competitive  position  in  the  agricultural 
sector,  taking  into  account  the  need  to  avoid  unjustified  unequal  treatment  of 
farmers. On this basis, the Commission must report to the European Parliament and 
the Council on the application of voluntary modulation before the end of 2008. 
The  implementing  rules  set  out  in  Commission  Regulation  (EC)  No  1236/20073 
provide  a)  for  the  inclusion  of  the  amounts  resulting  from  voluntary  modulation  in 
the  financing  plan  for  each  rural  development  programme  (Annex  II,  part  A,  point 
6.1  of  Regulation  (EC)  No  1974/2006),  and  b)  for  repealing  the  old  voluntary 
modulation regime in Regulation (EC) No 1655/2004.  

1.3. 

Limitation of the economic impact analysis 

It  is  still  very  early  to  draw  any  firm  conclusions  on  the  impact  of  voluntary 
modulation on the economic situation of farms. 

In  UK  the  first  voluntary  modulation  budget  to  be  spent  on  the  UK  Rural 
Development  Programmes  under  Regulation  (EC)  No  378/2007  has  only  been 
available since October 2007. In the case of Northern Ireland the Rural Development 
Programme was amended to include voluntary modulation from November 2008.  

In the case of Portugal it is too early to assess any impact since the amounts resulting 
from voluntary modulation will only be available in rural development programmes 
from 2010.  

It  is  also  important  to  acknowledge  that  during  a  particularly  volatile  period  of 
change  voluntary  modulation  deductions  are  only  one  of  a  wide  range  of  factors 
affecting the economic situation of farms in 2007-2008. Other factors have had more 
impact  on  farm  incomes,  such  as  rising  commodity  prices,  rising  input  prices,  the 
credit  crunch  and,  in  the  case  of  UK,  the  weakening  of  the  Sterling  relative  to  the 
euro,  extreme  weather  conditions  and  animal  health  outbreaks.  However,  in  this 
Member State, the overall income development was positive due to the high increase 
in commodity prices. 

3 

Commission  Regulation  (EC)  No  1236/2007  of  22  October  2007  amending  Regulation  (EC)  No 
1974/2006 for the purpose of implementing Council Regulation No 378/2007 on voluntary modulation, 
OJ L 280, 24.10.2007, p. 3.  

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2. 

Application of voluntary modulation in the United Kingdom 

2.1. 

Communication pursuant to Article 2(1) of Regulation (EC) No 378/2007 

On  12.6.2007  the  United  Kingdom  communicated  to  the  Commission  the  rates  of 
voluntary modulation for 2007-2012 together with an ex ante impact assessment. 

The United Kingdom fixed the following annual rates per region, and did not foresee 
the application of a franchise:  

YEAR 

England 

Wales 

Scotland 

2007 

2008 

2009 

2010 

2011 

2012 

12.0 % 

13.0 %

14.0 %

14.0 %

14.0 % 

14.0 %

0 % 

2.5 %

4.2 %

5.8 %

6.5 % 

6.5 %

5.0 % 

8.0 %

8.5 %

9.0 %

9.0 % 

9.0 %

Northern Ireland 

4.5 % 

6.0 %

7.0 %

8.0 %

9.0 % 

9.0 %

As regards national co-financing, all regions provide co-funding which adds up to an 
additional EUR 1.6 billion. The national co-financing rates are shown below:  

England 

N. Ireland 

Scotland 

Wales 

AXIS 1 

AXIS 2 

AXIS 3 

AXIS 4 

0 % 

0 % 

55.21 % 

45.00 % 

40.00 %

62.00 %

55.21 %

45.00 %

0 % 

0 % 

0 %

0 %

55.21 % 

65.00 %

45.00 % 

0 %

According  to  the  United  Kingdom,  voluntary  modulation  would  allow  for  a  better 
balance between the two pillars of the CAP, given a ratio between the 1st and the 2nd 
pillar  for  2007-2013  before  voluntary  modulation  of  14:1  and  after  modulation  of 
7:1.in the UK compared to an EU-15 average of 5:1. 

2.2. 

Commission Decisions 2007/679/EC and 2007/680/EC 
Commission  Decision  2007/679/EC4  fixed  the  net  amounts  resulting  from  the 
application  of  voluntary  modulation  on  the  basis  of  the  regionally  differentiated 
annual rates communicated by the United Kingdom as follows: 

4 

Commission  Decision  of  22  October  2007  fixing  the  net  amounts  resulting  from  the  application  of 
voluntary modulation in the United Kingdom for the calendar years 2007 to 2012 (2007/679/EC), OJ L 
280, 24.10.2007, p. 25. 

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YEAR 

2007 

2008 

2009 

2010 

2011 

2012 

Total  (EUR 
million)  

362.0 

424.0

464.4

475.5

481.6 

481.6

Commission Decision 2007/680/EC5 adjusted accordingly, on the one hand, the net 
balance  available  for  EAFG  expenditure,  and  on  the  other  hand,  the  amounts 
concerning  the  United  Kingdom  and  the  total  amounts  of  Community  support  to 
rural development for 2007-2013. 

As a result, a total of EUR 2,689 million obtained from the application of voluntary 
modulation would be transferred from the 1st to the 2nd  pillar  in  the  programming 
period  2007-2013,  more  than  doubling  the  budget  for  rural  development  in  the 
United  Kingdom  (from  EUR  1,910  million  to  EUR  4,599  million)  and  raising  the 
total EU rural development budget to EUR 91.9 billion in the same period. 

2.3. 

Report pursuant to Article 5 of Regulation (EC) No 378/2007 

The  report  submitted  by  the  United  Kingdom  in  December  2008  covers  the  period 
from  March  2007  to  September  2008.  And  since  the  voluntary  modulation  receipts 
have only been available since October 2007, it is according to the United Kingdom 
too early to draw any firm conclusions.  

2.3.1.  Use of additional funds from voluntary modulation 

The additional funds are used primarily for environmental purposes under axis 2 as 
shown below: 

AXIS  

ENGLAND 

SCOTLAND 

N. IRELAND 

WALES 

1 

2 

3 

Leader 

Total 

10.45 %

76.09 %

8.74 %

4.72 %

100 %

14.29 %

17.00 % 

68.58 %

65.04 % 

11.57 %

0.00 % 

10 %

80 %

10 %

0 %

5.57 %

100 %

17.96 % 

100 % 

100 %

2.3.2.  Farm income 

The communication states that the most recent statistics on farmers' income "would 
suggest  that  the  UK  agricultural  industry  is  in  a  relatively  healthy  and  competitive 
state even though voluntary modulation has been applied since 2001" (in the period 
2000-2006 the total amount paid out was around EUR 4,500 million). 

5 

Commission Decision of 22 October 2007 amending Decision 2006/410/EC, setting the amounts which, 
pursuant  to  Articles  10(2),  143d  and  143e  of  Council  Regulation  (EC)  No  1782/2003,  are  made 
available to the EAFRD and the amounts available for EAGF expenditure, and Decision 2006/636/EC 
fixing  the  annual  breakdown  by  Member  State  for  Community  support  to  rural  development  for  the 
period from 1 January 2007 to 31 December 2013 (2007/680/EC), L 280, 24.10.2007, p. 27.  

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The  first  new  voluntary  modulation  deductions  were  made  in  2007.  The  analysis 
conducted by the United Kingdom based on data for 2007 found no direct correlation 
between the voluntary modulation deductions and changes to total income from farm 
(TIFF); 

YEAR  UK 

VM RATE  VM 

TIFF (£M)  CHANGE  

CHANGE

REGION 

DEDUCTED 

(£M) 

IN VM 

IN TIFF  

DEDUCTIONS 

6
0
0
2

7
0
0
2

England 

N. Ireland 

Scotland 

Wales 

6.0 % 

4.5 % 

4.5 % 

0.5 % 

 101.0

1555

11.0

19.9

 1.2

160

537

52

England 

12.0 % 

218.0

1631

117.0 

N. Ireland 

Scotland 

Wales 

4.5 % 

5.0 % 

0 % 

11.0

22.7

0.0

233

628 

46

0 

2.7 

-1.0 

76.0

73.0

91.0

-6.0

Voluntary  modulation  should  not  impact  significantly  on  the  economic  situation  of 
farmers  and  their  competitive  position  in  the  agricultural  sector  in  2008.  Other 
factors  have  had  a  greater  impact  on  total  income  from  farming  (TIFF)  than 
voluntary  modulation,  not  least  exchange  rate  changes.  Higher  cereal  prices  in  the 
first part of 2008 and higher meat and milk prices contributed to an increase in the 
value of output, which is expected to be only partly offset by the increased costs of 
fuels, fertilisers and animal feed. In real terms, total income from farming and total 
income  from  farming  per  person  are  forecast  to  rise  slightly  in  2008  following  the 
rises seen in 2006 and 2007. 

Moreover, farmers will benefit in the longer term from the economic impacts of rural 
development  support  increased  by  voluntary  modulation;  the  vast  majority  of 
additional  funds  benefits  farmers  directly  in  the  form  of  agri-environmental 
payments which provide a degree of certainty and stability in farm income. 

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The estimated impact on farmers' income is summarized in the following table: 

ENGLAND 

NORTHERN 
IRELAND (NI) 

SCOTLAND  WALES 

12%-14% 

4.5%-9% 

5%-9% 

2.5% - 6.5% 

Non available 

-3% / -6% 

Non available 

-3.9% / -10.2% 

Non available 

non available 

-0.5% / -4.3% 

-1.5% / -4.4% 

Voluntary 
Modulation 
(min and max) 

rates 

Estimated 
on 
total 
from farming 

impact 
income 

Estimated 
on cash income 

impact 

The  competitive  position  of  UK  agriculture  should  not  be  affected,  while  co-
financing  should  restrict  the  reduction  in  farm  receipts.  In  fact,  due  to  national  co-
financing  of  voluntary  modulation,  there  will  be  a  net  increase  in  overall  CAP 
spending  in  the  UK  (+  EUR  1  billion  in  the  programming  period  2007-2013  for 
England only). 

2.3.3. 

Impact on environment 

In  England,  99%  of  voluntary  modulation  total  public  expenditure  (EUR  131.5 
million)  was  paid  for  agri-environment  payments,  mainly  on  the  entry-level 
Environmental  Stewardship  Scheme.  This  scheme  requires  a  basic  level  of 
environmental management and participants can choose from a wide range of more 
than 50 management options. These cover all farming types and include things such 
as hedgerow management, stone wall maintenance, low input grassland, buffer strips, 
and arable options  

Since  January  2007,  over  10,500  new  agri-environmental  agreements  have  been 
signed up all funded with voluntary modulation. It would not have been possible to 
expand  the  Environment  Stewardship  scheme  at  this  rate  without  voluntary 
modulation. In Scotland, all of EUR 34.9 million (total public expenditure) was used 
in  2008  on  less  favoured  area  payments.  In  Wales,  which  chose  not  to  make  any 
voluntary  deduction  from  single  payment  scheme  2007  payments,  the  voluntary 
modulation,  once  available,  will  be  sharply  focussed  on  supporting  agri-
environmental measures at a lower scale to support farm/forestry based training and 
business adaptations.  

In  Northern  Ireland,  voluntary  modulation  will  be  targeted  at  those  measures  that 
provide  direct  support  for  farmers  (training  and  information  actions,  modernisation 
of  agricultural  holdings,  Less  Favoured  Areas  compensatory  payments,  agri-
environmental payments, forestry measures and diversification into non-agricultural 
activities).  

A  wide  range  of  environmental  benefits  is  expected  through  agro-environmental 
measures.  These  should  mitigate  possible  negative  effects  of  reduced  direct 
payments,  like  reductions  in  suckler  cow  numbers  (which  could  lead  to  under-
grazing  of  some  important  habitats)  and  possible  intensification  in  dairy,  beef  and 
arable sectors that might affect water quality and soil erosion. 

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3. 

Application of voluntary modulation in Portugal 

3.1. 

Communication pursuant to Article 2(1) of Regulation (EC) No 378/2007 

On  18.6.2007  Portugal  communicated  to  the  Commission  the  rate  of  voluntary 
modulation for 2007-2012 and the ex ante impact assessment.  

The  annual  rate  communicated  was  10%  starting  in  2008.  When  the  franchise  is 
taken  into  account,  this  amounts  to  an  effective  rate  of  6.1%  of  reduction  of  direct 
payments. 

As regards the impact on farmers' income, the expected reduction should vary from a 
maximum of -13% for beef cattle farms and 'mixed farms' to a minimum of -2%/-3% 
for  farms  specializing  in  permanent  crops  and  milk  beef.  The  gap  between  the 
highest and lowest farm income would at the same time be reduced, with more than 
half  of  the  envelope  paid  by  farmers  receiving  more  than  EUR  50,000  in  direct 
payments per year. 

3.2. 

Commission Regulation (EC) No 333/2008 and Commission Decision 2008/788/EC 
Regulation  (EC)  No  333/20086  fixed  the  national  ceiling  for  the  total  amount  of 
additional aid granted to farmers (the franchise) at EUR 20.4 million per year.  

On 12.9.2008 Portugal informed the Commission that it intended to apply voluntary 
modulation of direct payments only as from 2009. 
Commission Decision 2008/788/EC7 of 3 October 2008 fixed the annual net amounts 
resulting from the application of voluntary modulation in Portugal and already took 
into account the decision of the Portuguese authorities by fixing the net amounts only 
from 2009 onwards: 

Year 

2009 

2010 

2011 

2012 

EUR million 

41.6

40.8

40.8 

40.8

As a result, EUR 164 million would be transferred from the 1st to the 2nd pillar.  

3.3. 

Use of additional funds from voluntary modulation 

According to a commitment in its Rural Development Programme for Mainland, the 
additional  funds  from  voluntary  modulation  would  be  equally  divided  between 
reinforcing  support  for  the  Natura  2000  network  including  new  additional  sites 
(under axis 2) and projects improving farm structures (under axis 1). 

As indicated before on 12.9.2008 Portugal informed the Commission that it intended 
to apply voluntary modulation of direct payments only as from 2009.  

Portugal  has  confirmed  that  it  will  find  alternative  means  to  respect  the  above 
mentioned commitment in the Rural Development Programme for Mainland.  

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7 

Commission Regulation (EC) No 333/2008 of 11 April 2008 laying down the ceilings applicable to the 
additional amounts of aid to be made to Portugal as part of the voluntary  modulation provided for in 
Council Regulation (EC) No 378/2007, OJ L 102, 12.4.2008, p. 19.  
OJ L271 of 11.10.2008, p. 44.  

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4. 

Impact of the Health Check 

The  Health  Check  of  the  CAP  (Council  Regulations  (EC)  No  72/2009,  No  73/2009  and 
74/2009  of  19  January  2009)8  aims  at  helping  farmers  better  respond  to  market  signals  and 
face new challenges.  

To  this  end,  the  rate  of  compulsory  modulation  will  increase  in  four  steps  reaching  10%  in 
2012 while the EUR 5,000 franchise is maintained. In addition, progressive modulation for a 
further 4% for payments over EUR 300,000 is introduced.  
As a result, EUR 3.24 billion will be transferred to the 2nd pillar over 4 years. The additional 
funds will be used in the same Member State for 'new challenges': climate change, renewable 
energies,  water  management,  biodiversity,  innovation  linked  to  these  challenges  and  dairy 
accompanying  measures.  The  co-financing  rate  for  these  operations  is  90%  in  convergence 
regions and 75% in non-convergence regions.  

The  Member  States  applying  voluntary  modulation  will  reduce  the  rates  accordingly.  This 
means  that  the  Health  Check  will  reduce  the  importance  of  voluntary  modulation  for  the 
United Kingdom and Portugal and have no impact on total modulation, as shown in the table 
below: 

Table: Amounts of voluntary modulation substituted by compulsory modulation after Health 
Check 

Million € 

United 
Kingdom 

Portugal 

2009 

2010 

2011 

2012 

Total in  

67.4 

100.6

134.3

167.7 

470.0

8.8 

 11.8

 15.8

 19.8 

56.2

In  addition  modulation  as  increased  by  the  Health  Check  will  narrow  down  the  financial 
margin for other than new challenges.  

5. 

Conclusions 

Voluntary modulation based on Council Regulation (EC) No 378/2007 has either been used 
for  a  short  period  (UK)  or  still  has  not  been  implemented  as  expected  under  the  rural 
development programmes (Portugal). It is therefore very early to draw any firm conclusions 
on  the  impact  of  voluntary  modulation  on  the  economic  situation  of  farms  and  their 
competitive  position.  Other  factors  (e.g.  rising  commodity  prices,  rising  input  prices,  the 
credit  crunch)  have  had  probably  a  greater  impact  on  total  income  from  farming  than 
voluntary modulation. 

As regard other impacts it should be noted that in UK a wide range of environmental benefits 
is expected mainly through agro-environmental measures where a significant increase in agri-
environmental agreements has been observed. 

The  Health  Check  of  the  Common  Agricultural  Policy  (CAP)  has  responded  to  the  need  to 
increase  funding  for  rural  development  by  increasing  the  rate  of  compulsory  modulation. 
There is therefore no need to come forward with appropriate proposals as suggested in Article 
7 of Regulation (EC) No 378/2007. 

8 

OJ L 30 of 31.1.2009 p. 1. 

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