CAP Reform Agreed (Mostly)

The shape of Europe’s farm policy for the years to 2020 has been agreed.  After a marathon negotiatingsession the Irish Presidency finally cajoled Farm Ministers, MEPs and the EU Bureaucrats into a deal on CAP reform.  However, in order to meet their self-imposed deadline of the end of June, some parts of the package relating to financial issues have been put to one side.

This article sets out the situation as we currently understand it.  it is rather long.  For those of you that might want to read it in a more usual ‘Newsflash’ format, click on the ‘Past Bulletins’ tab above and you will be able to access a pdf of the following text.

Where are We?

A political deal was concluded yesterday (26^th June) on the main elements of reform.  The EU announcement can be found at – http://europa.eu/rapid/press-release_MEMO-13-621_en.htm.  However, we have not yet seen the draft legal texts outlining the agreement.  Therefore the level of detail we have is limited in some areas.  The legal texts are not due to be formally adopted until the autumn, but they will no doubt emerge in leaked and draft versions before then. We will obviously fill in the gaps as more information emerges. 

However, the main Council Regulations often do not contain the level of detail we need as farm advisors.  This is contained in the Implementing Regulations – rules written by the EU Commission to transpose the overall CAP plans into a working system.  Apparently, some work on these has already been done.  How quickly they appear is open to question though. 

National Governments will also have to make their decisions on how they wish to implement the reforms.  We should expect a round of consultations in the autumn.  England, Wales and Scotland will all run their own consultations.  Until these national choices are made, the precise shape of farm support will remain unclear. 

One important point to note is that the CAP deal left all financial issues to be resolved in the talks on the Multi-Annual Financial Framework (MFF), or EU Budget.  This includes some important areas (see below), so we cannot really say the reform is yet complete. 

Note that when we refer to the ‘original proposals’ these are the Commission plans published on 12^th October 2011 and set out in our Technical Note of the 25^th October. 

Issues to be Resolved

Anything to do with financing the CAP was side-lined.  The following issues are included under this heading, but it is still possible to see where the final agreement is likely to end up;

• Capping.  In its strictest sense, capping seems to be off the table.  (In the original proposals there would have been no payment at all above a €300,000 threshold).  However, the concept of ‘degressivity’ looks set to be introduced.  This would see payments above €150,000 cut by a set percentage (5% has been suggested).  It is not clear whether there would be a higher deduction above, say €300,000.  This would be mandatory for all Member States.  As this is far less draconian than the original plans we are assuming that the labour mitigation proposals would not be required – Member States always had a horror of these due to the bureaucracy involved.    
• Modulation.  The transfer of funds between the two CAP Pillars is likely to be allowed, up to a maximum of 15%.  With a very low Rural Development allocation all UK administrations will probably make use of this to some extent – in England we would be surprised if DEFRA does not switch the full 15% from the Basic Payment to Rural Development. 
• Co-financing Rates.  Any money switched between Pillars has had to be match-funded in the past.  The MFF deal (see 8^th February Newsflash) stated this would not be required in future.  Whether this will be changed in the final agreement is not clear.  This lack of co-financing would be bad news for UK farming – it would mean less funds were generated for each Pound modulated. 
• External Convergence.  This is jargon for all Member States getting a fairer share of Pillar 1 funding.  The current plan is that 30% of the gap between a Member State’s average ‘per hectare’ payment rate and 90% of the EU average payment should be closed by 2020.  This looks likely to be agreed.  In practical terms this has little effect on the UK as a whole, as we are close to the EU payment average.  In fact our allocation rises a little under this arrangement.  A bigger argument is how the UK’s total fund is divided across the four devolved regions.  The Scottish Government is making a big play for a bigger share. 

Turning away from things that are unclear, we can start to look at what has been agreed.

Entitlements and Redistribution

A new Basic Payment Scheme (BPS) will replace the Single Payment Scheme.  In many ways it will be very similar, with entitlements having to be matched against eligible land which then generates a yearly payment as long as certain land management rules are followed (cross-compliance).  Some key elements of the changeover are as follows;

• Entitlement Roll-over.  Although the legal texts are not yet available we are assuming that the derogation for countries operating the regional payment system (e.g. England) to roll-over existing entitlements remains.  Although not a done deal we would expect DEFRA to take this up.  This means there would be no re-grant of entitlements in England – farmers’ SPS entitlements they hold at the end of 2014 will be converted into BPS ones for 2015. 
• Entitlement Grant.  Countries operating on the historic system (including Wales and Scotland) will be required to issue new BPS entitlements.  The latest agreement departs from the original proposals.  The idea is that the reference year for creating entitlements will be 2014 (instead of the first year of the BPS).  This seems to suggest that there will be a pre-allocation of BPS entitlements before they are claimed on in 2015 – i.e. establishment and claim will not run together.  Rather than alink back to claimants in 2011, the grant of entitlements will only go to those who made an SPS claim in 2013.  This is an area where we will need more detail before we can really judge the implications.  There will be a ‘national reserve’ set up, comprising up to 3% of funds to deal with hardship claims etc.
• Entitlement Limit:  Member States can limit the number of BPS entitlements granted to either 135% or 145% of the area declared under the SPS in 2009.  Whether Scotland, with its large area of ‘naked acres’ would be interested in this is not yet clear. 
• Internal Convergence.  This is jargon for the move to a flat rate regional payment in countries currently operating the historic system.   However, there will be no requirement for a fully-flat rate to be reached.  By 2019 Member States are only required to ensure all farmers get at least    60% of the average regional payment.  On top of this, losses for individuals can be limited to 30% of their present payment.  This was pushed for by a number of countries, worried about the redistribution of support away from the most productive farmers.  Again, both the Welsh and Scottish administrations may look at this option as a way of limiting payment changes to individual businesses. 

Top-Up Schemes

The Basic Payment Scheme will form the bedrock of the new support arrangement, but there will be a complex system of top-up payments possible out of the Pillar 1 budget.

• Redistributive payment.  This is a new concept which appeared late in the negotiations, pushed by France.  It basically provides a top-up in payment on the first few entitlements held by each claimant.  This will be limited to the initial 30 hectares, or the average national farm size if larger.  The top-up would be capped at 65% of the regional average payment rate, and total funding limited to 30% of the BPS fund.  In some ways this is like a ‘reverse capping’ – instead of taking payments from large farmers, it gives extra money to small ones.  Indeed, the option has been floated that countries that spend over a set proportion of their budget on this redistribution payment would not need to implement capping or degressivity.  This payment is optional for Member States, so another thing for UK Governments to consider.  
• Young Farmers Scheme.  This will be compulsory for Member States to implement under Pillar 1.  It will be funded by 2% of the total BPS budget and provide a 25% top-up in the value of entitlements to those under 40 years of age for five years.  There will be a limit on how many hectares qualify – the average farm size in the region, but with a minimum and maximum area of 25 and 90 hectares.  Although this was pushed hard for by the European Parliament it is difficult to see it contributing much in the way of ‘generational renewal’ in the farming industry.  A rough calculation suggests that, even at the upper limit of 90 hectares, the extra payment would be worth a maximum of around £3,500 per year.  As a compulsory element, it will have to be made available in all parts of the UK however.
• Small Farmers Scheme.  This will be optional for Member States.  Participants would face less stringent cross-compliance regime and not be subject to greening in return for a fixed annual payment.  We would be surprised if any of the UK administrations took this up. 
• Hill Support.  It will be possible for Member States to pay additional support to hill areas from the Pillar 1 (BPS) budget.  This will be limited to 5% of total funds and will be in the form of a top-up to entitlement values.
• Coupled Support.  Countries will be able topay 8% of total BPS funds as coupled payments, plus another 2% for specific aid for protein crops.  Countries which have used high levels of coupled support in the past (over 5% of funds) will be able to pay 13%, plus the 2% for proteins.  Where over 10% of funds have been coupled, a rate higher than 13% may be possible.  England will almost certainly not want to go back to having coupled payments.  The Scottish Government is likely to be very keen to use the maximum flexibility to retain and expand its production-linked support such as the current Scottish Beef Scheme.  The position of the Welsh Government is less clear.  This will create distortions across the United Kingdom where, for example, some beef producers will be getting headage payments, whilst others won’t.

Greening

If there is a ‘big idea’ in this reform (which is notably short on big ideas) it is probably ‘greening’.  The concept of getting farmers to provide environmental benefit in return for their direct payments is seen as a way of making farm support more acceptable to Europe’s taxpayers.   The three basic EU measures of crop rotation, permanent pasture retention, and Ecological Focus Areas (EFAs) from the original proposal remain.

• Crop Rotation.  On arable areas of 10-30 hectares two crops will be required.  Three crops will be needed when the arable area is above 30 hectares.  No crop should cover more than 75% of the farm area and the two main crops together should be a maximum of 95% of the area. 
• Permanent pasture.  There is still a requirement to retain at least 95% of the permanent pasture area compared with a base year.  It is not yet clear what the base year will be, and what the definition of permanent will be (both 5 and 7 years in grass have been mooted).  However, the permanent pasture ratio can be set at a national or regional level and not simply farm by farm.  We would be surprised if this national option is not taken up – this would mirror closely what happens now and be far less restrictive for individual farmers. 
• Ecological Focus Areas.   EFAs will initially be set at 5% of a farm’s eligible arable area.  This could rise to 7% after 2017 if a study backs the move.  Countries will be able to choose from a list of possible features to decide what qualifies as an eligible EFA.  This includes landscape features (hedges and trees), buffer strips, fallow land, protein-fixing crops, agro-forestry and short-rotation coppice.  A matrix system will be worked out which may give some features extra weight – e.g. one hectare of especially environmentally valuable land could contribute 2 hectares of EFA.  EFA would not be required on farms where more than 75% of the land is grassland (subject to a 30 hectare maximum).  Up to 50% of the country’s EFA requirement could be implemented at national level – it is not quite clear to us what this might mean in practice. 
• Equivalence.  The concept of equivalence is retained – if a country can demonstrate to the EU Commission that existing or proposed schemes provide equivalent environmental benefit to greening, then this can replace the basic greening requirement.  This means the proposed exemption from greening for organic farmers is retained.   We had thought that DEFRA would be very keen to use equivalence – introducing an ELS-lite to be the system in England.  However, as our article of the 19^th June stated, this now looks rather less likely. 
• Double funding.  This will not be allowed – simplistically, payments under the Rural Development Regulation (ELS/HLS etc.) will be reduced if they include measures that are now part of basic greening. 
• Payments.  It remains that 30% ofthe BPS funding goes to greening.  However, there looks set to be a complex transition where individuals’ greening payments are also set at 30% of their yearly payment.  Therefore the greening payment will change as a result of the ‘internal convergence’ mechanism set out above.
• Penalties.  Penalties for not complying with greening will not be introduced until 2017.  This is to give farmers time to adjust to the new system.  In 2017 non-compliance will mean that only the greening element is lost.  The following year there will be an additional 20% penalty on the BPS, and 25% the following year.  Therefore, in 2019 not doing greening will see 125% of the greening payment foregone. 

Restrictions on Aid

• Active Farmer.  The original proposals had a very complex active farmer test looking at whether direct payments were at least 5% of the claimant’s total income.  Thankfully this test has been junked.  The new rules will have a simple ‘negative list’ of entities not eligible by default for the new Basic Payment – e.g. airports, water companies, railways, sports grounds etc.  If they can prove they have eligible farming activity they may still be eligible for the BPS.  The original proposals also had a further test of keeping land in good agricultural condition and also the possibility for Member States to set minimum activity levels (perhaps of interest in Scotland).  It is not clear whether this is still included. 
• Financial Discipline.  The threshold for financial discipline will be set at €2,000 (previously it has been €5,000). 

Rural Development

• Areas with Natural Constraints.  The introduction of the new system of Areas with Natural Constraints (AwNC) to replace LFAs will not be introduced until 2018.
• Spending.  The old ‘axes’ approach with minimum spending levels has been discontinued.  However, 30% of Rural Development funds must go on agri-environment and climate change measures, and a further 5% is earmarked for LEADER.

Other Issues

• Sugar.  It has been agreed that sugar quotas will end on 30^th September 2017.  This means, beyond the end of the current IPA, there will be two more seasons of ‘managed production’ – the 2015 and 2016 crops.
• Milk Market.  Despite strong pressure from the European Parliament, moves to put some new market management mechanisms in place after the end of milk quotas in March 2015 have been rejected.
• Conversion Rate.  For countries outside the Euro the conversion of Pillar 1 aid can be on the average of exchange rates in September.  This is instead of simply using the official 30^th September exchange rate and should help reduce the effect of currency fluctuations. 

As ever, in all of this the devil is likely to be in the detail.  We will keep you informed of developments as they occur over the coming months (and years).  For those interested, we will be running a series of Seminars on CAP reform in the autumn.  For more details please go to – https://www.theandersonscentre.co.uk/Seminars.asp