III. The Common Agricultural Policy

In December 1995, the Commission presented its Agricultural Strategy Paper to the Madrid European Council. This stressed the importance of improving the competitiveness of the European agricultural and agri-food sectors on internal and world markets, in the context of trade liberalisation and an expected growing world food demand. It highlighted the need for a further evolution of the CAP, by developing the approach successfully started by the 1992 reform. The Paper also outlined the need for an integrated rural policy which would accompany the reform process. Moreover, it called for a radical simplification of legislation at Union level and for a substantial decentralisation of policy implementation.

Later on, in November 1996, the First Cohesion Report argued in particular in favour of a more rational development of agricultural production, through a greater market orientation of prices and continuing structural adjustment. The Union should make a parallel effort to enhance the economic potential and the environmental value of rural areas and their capacity to provide sustainable jobs.

Building on these ideas, it is now time to formulate concrete proposals to reshape the common agricultural policy and prepare it for the next century.

1. The assessment of the reform process

• Agricultural market policy

After the 1992 reform, there has been a considerable improvement of market balances and a decrease of public stocks in most of the reformed sectors. In the case of cereals, set-aside has helped to keep production under control, while the increased price competitiveness has allowed significant additional quantities to be used on the domestic market, mainly for animal feed. In the beef sector, the market situation evolved favourably and intervention stocks were diminishing rapidly until the outbreak of the BSE crisis in March 1996.

The general evolution of agricultural income per capita has been positive since the reform was implemented growing by + 4.5 % on yearly average between 1992 and 1996, with a diversity of situations according to Member States and farm orientations. The improvement of the market situation, the strong adaptation capacity of farmers, the agri-monetary context and, last but not least, the continuing decline in agricultural employment have contributed to this result. In the case of cereals the market prices improved much more than originally expected. This has led to an over-compensation of producers in the last few years. In the case of oilseeds, too, the observed market prices have been most of the time significantly higher than the reference price so that producers have benefited from the franchise in four years out of five.

The reform effects on the environment are mixed. Some positive elements can be identified: the more rational use of fertilisers and pesticides resulting from price decreases, the possible environmental benefits of set-aside (if well managed), incentives for a long-term improvement in the territorial distribution of livestock rearing. But there are also negative elements, mainly the encouragement given to irrigated crops through the regionalisation of direct payments to cereals, oilseeds and protein crops, as well as the relative advantage given to intensive livestock farming through lower feed prices and subsidising silage.

The reduction of price support and the introduction of direct payments have benefited consumers as part of the burden of agricultural support has shifted away from them. Budgetary expenditure is therefore significantly higher in the sectors concerned. It is also under better control since factors of uncertainty (world prices, dollar exchange rate, level of intervention stocks) that strongly affected its past evolution have become less determining. At the same time the shift to direct payments has made the support for farmers more transparent.

• Rural development policy

Since almost two decades, attempts have been made to integrate agricultural structural policy into the wider economic and social context of rural areas. Experience gained shows how rural diversification can be exploited in a flexible way as a necessary complement to farming. Activities which had hitherto been marginal - the development and marketing of high-quality produce, rural tourism, investment projects linked with the environment or the region’s culture, small and medium-sized enterprises - have been developed and opened up new perspectives.

The 1992 CAP reform stressed the environmental dimension of agriculture as the largest land user. Among the accompanying measures of the reform, the agri-environmental measures are of key importance and have in general been welcomed by the public and well received by farmers. However, the scale of support still provided through prices and crop specific payments (e.g. silage maize and flax) may discourage farmers from committing themselves to more extensive practices or dedicating land to environmental purposes.

On the whole, as a result of these different developments, rural policy in the Union still appears as a juxtaposition of agricultural market policy, structural policy and environmental policy with rather complex instruments and lacking overall coherence.

2. Long-term outlook

According to the major forecasting institutes world-wide, the long term outlook for the main agricultural markets is favourable for exporting countries. Prospects for increased food consumption, mainly in developing countries, combined with the limited possibility of a proportionate growth in domestic production, are expected to boost world trade and sustain world prices over the next decade.

Two key factors influence food demand: population growth and rising incomes. The world population is expected to increase by more than 85 million people a year between 1995 and 2005. Moreover, growing urbanisation will influence the pattern of food consumption. The second factor determining increasing food demand is the favourable prospect for world incomes and economic growth, particularly in developing countries.

An increase in world agricultural production is expected over the next decade, but at a lower rate than in the past. In particular in many developing countries, the increase will be less than the growth in demand. This is firstly due to the limited availability of land, because of urbanisation and environmental constraints and, secondly, to a slowdown in the growth of yields. The development of genetic engineering, if well controlled, could enhance production but may raise questions of acceptability to consumers.

Almost all analysts expect generally strong prices for agricultural commodities up to 2006 and even beyond. Prices are projected to strengthen or remain strong for cereals, oilseeds, beef, poultrymeat, cheese, milk powder, but may weaken for pigmeat. However, price variability could increase in the future, as world stocks are expected to be relatively low compared to in the past.

Despite this favourable world context, the agricultural commodities outlook is not very promising at European level. Supposing that present policies continue, over the coming years a gap between Union and world prices will remain for many sectors. Taking into account current commitments under the Uruguay Round Agreement, in particular on export subsidies, non-exportable surpluses are likely to emerge after 2000, for the existing Union. A structural surplus was already projected for beef before it was made worse by the BSE crisis. Increasing problems may also appear for cereals, sugar, wine, olive oil, skimmed milk powder and some other dairy products, and the Union risks losing more and more of its share in expanding world markets.

New multilateral trade negotiations will start in 1999 as a follow-up to the Uruguay Round. Cutting border protection, reducing export subsidies and reshaping internal support towards more "decoupled" instruments will enhance the Union’s negotiating stance in the new Round. Another, increasingly sensitive, issue is the need to introduce environmental and social standards at international level and to take into account consumer concerns.

Eastward enlargement will add over a 100 million consumers, whose average purchasing power would however be only roughly one third of that of the current consumers in the Union. Agricultural area would be expanded by half and the agricultural labour force would at least double. The Central and Eastern European Countries have a serious need for structural improvement in their agriculture and up- and downstream sectors. Restructuring can be expected to reduce the labour absorption capacity of agriculture, implying a need for diversification of their rural economies.

If the CAP instruments, mainly support prices and direct payments, were applied at their present level by the Central and Eastern European Countries, particular problems would arise. Inordinate cash injections through direct payments would risk creating income disparities and social distortions in the rural areas of these countries. In addition, surpluses would increase, in particular for sugar, milk and meat, reinforcing the growing market imbalances predicted after 2000.

Consumer requirements from agriculture and the food industry are also evolving. Health, notably food safety, is the main one. Convenience (fast-food, ready-made meals and snacks) is becoming more and more important in the context of changing life-styles. But at the same time, typical, well-identified products, linked to specific areas or cultural values (traditional production methods, animal welfare, etc.) are increasingly sought after.

Rural trends in the Union show a sharp decline in the number of farms and in the number of people employed in agriculture. In terms of regional income and employment, agriculture (and forestry) no longer forms the main basis of the rural economy. It represents only 5.5 % of total employment on average, and in very few regions is its share higher than 20 %. The long term trend is a further drop in the number of farmers, at a rate of 2-3 % per year.

New activities and new sources of income are emerging on-farm and off-farm. Among those, the production of renewable raw materials, for non-food purposes in niche markets or the energy sector, can represent a new opportunity for agriculture and forestry and contribute to job creation in rural areas.

Society is increasingly conscious of the importance of the natural environment and of the environmental effects - both positive and negative - of human activity. Rural areas are in a unique position to respond to these concerns by maintaining and creating environmentally attractive living, working and recreational spaces. In this context, the concept of public payment for the protection of natural resources and the enhancement of the countryside is increasingly gaining acceptance and offers agriculture and forestry, as the main land users, both new challenges and fresh opportunities.

While the successive reforms have improved transparency and effectiveness, a number of inconsistencies and overlaps between different policies have developed. Too many programmes and measures can apply simultaneously in the same area under different policy headings, affecting consistency. There is an urgent need for a radical simplification of rules and a greater decentralisation of policy implementation, with more margin being left to Member States and regions. More decentralisation should not, however, lead to any renationalization of policies.

The CAP absorbs around 0.6 % of the Community’s GDP. Considering both the declining share of agriculture in the economy and the increasing budgetary constraints many Member States are facing, this public support has to be fully justified. This means that the crucial role that agriculture plays, in producing high quality food, in maintaining a living countryside, in protecting landscapes and preserving cultural values, has to be clearly demonstrated. While the generalisation of direct payments to farmers after the 1992 CAP reform made financial support for agriculture more transparent, it also increased the need for it to be economically sound and socially acceptable.

3. Policy objectives for the cap

In order to help European agriculture take advantage of the expected positive world market developments, further reform of the CAP must improve the competitiveness of Union agriculture on both domestic and external markets. Lower prices will benefit consumers and leave more room for price differentiation in favour of high quality speciality products). Greater market orientation will facilitate the progressive integration of new Member States and will help prepare the Union for the next WTO Round. It will also help the Union to reinforce its position as a major world exporter.

Prices are, however, only one aspect of competitiveness. Food safety and food quality are at least as important. It is a fundamental obligation to guarantee the safety of food to consumers both within and outside the Union, and this must therefore be a top priority for the CAP. As far as possible it will continue to support quality products, which are often linked to specific geographical origins or specific production methods identifiable by consumers.

Complete reliability from the point of view of food safety, and continuous efforts to improve quality, will also determine the image of European products on domestic and international markets. Of growing importance in this area too are questions of the environmental friendliness of production methods, and animal welfare considerations. In all these respects, European farmers are able to offer quality products deserving to be known worldwide.

Ensuring a fair standard of living for the agricultural community and contributing to the stability of farm incomes remain key objectives of the CAP. In this context the questions of differentiation, redistribution of income support among farmers and the preservation of sustainable farming are gaining importance, not least from the point of view of social cohesion.

The integration of environmental goals into the CAP and the development of the role farmers can and should play in terms of management of natural resources and landscape conservation are another increasingly important objective for the CAP.

The creation of complementary or alternative income and employment opportunities for farmers and their families, on-farm and off-farm, remains a major aim for the future, as employment possibilities in agriculture itself fall away. Rural areas are multi-functional, and farmers should be encouraged to exploit all opportunities for rural entrepreneurs.

Last but not least, while recognizing the need of all rural areas for improving agricultural competitiveness and enhancing economic diversification, agricultural and rural policies have to contribute to economic cohesion within the Union.

4. New Reforms

The Commission confirms the policy choice expressed in the "Agricultural Strategy Paper" of December 1995. It proposes deepening and extending the 1992 reform through further shifts from price support to direct payments, and developing a coherent rural policy to accompany this process. Direct payments will be set at an appropriate level while avoiding any overcompensation.

• Crop sector: Cereals, Oilseeds and Protein crops

Over the coming years, the areas devoted to the cultivation of these crops and to set-aside are expected to stabilize at a level of about 53.5 million hectares. In the present policy framework, and supposing that the set-aside rate returns to its reference level of 17.5 %, the areas devoted to each of the three crops would also be relatively stable over time.

Cereals yields are forecast to resume their upward trend and production is therefore expected to rise from 201 million tons in 1996 to 214 million tons by 2005. Total consumption of cereals is also forecast to further increase, though at a slower rhythm, in response to the development of white meat production. Up to 2000, the situation is likely to remain relatively tight, in particular for wheat. From 2001 onwards, the current GATT commitments on subsidised exports become constraining for both wheat and coarse grains, leading to a rapid increase in intervention stocks (some 58 million tons by 2005).

Oilseed yields are expected to increase very modestly and the area cultivated is strictly limited by the outcome of the Uruguay Round Agreement. Production is expected to increase slightly, from 12.2 million tons in 1996 to 12.8 million tons in 2005. Trade deficits in oilseeds and oilseed meals would remain very substantial.

In theory, it would be possible to react to new cereals surpluses by increasing the compulsory set-aside rate. But this could then risk gradually increasing to over 20 %. Furthermore, the Union could well fail to benefit from the positive developments expected on the world market, since internal prices could be expected to remain above world prices. A more offensive strategy could simultaneously avoid the routine use of export subsidies, reinforce the competitiveness of cereals on the Single Market, overcome the Uruguay Round constraints for oilseeds and, last but not least, bring a good deal of simplification.

The Commission therefore proposes the following measures:

• The cereals intervention price is fixed in one step (2000) at a safety net level of 95.35 ECU/ton, (presently 119.19 ECU/ton);
• A non crop specific area payment is established at 66 ECU/ton (multiplied by the regional cereals reference yields of the 1992 reform); this payment will be lowered if the market prices are sustained at a higher level than currently foreseen;
• Set aside: the reference rate for compulsory set-aside is fixed at 0 %, voluntary set-aside is allowed, extraordinary set-aside is abolished; set-aside areas get the non crop specific payment;
• Silage cereals (mainly silage maize) are excluded from the regime;
• Special cases: for protein crops, a supplementary aid is established at a level of 6.5 ECU/ton in order to preserve their competitiveness with cereals; for durum wheat the present supplements are maintained.

As it already is the case in the beef and sheep sectors, the Commission will table a proposal enabling Member States to make the granting of direct payments for arable crops and set-aside conditional on the respect of environmental provisions, allowing them to be increasingly used to pursue environmental objectives.

• Beef regime

Over the coming years, beef production will be influenced on the one hand by the short term measures adopted in 1996 (i.e. the calf processing and early marketing of veal calves schemes) and on the other by the elimination of adult cattle over 30 months in the UK from the food and feed chain. The first will be felt mainly in 1998 and 1999, whereas consequences of the second will continue until 2001. Beef consumption is expected to gradually recover from the 1996 shock and return to its long term (declining) trend.

These factors add to a cyclical downswing of production until 2000 and should lead to a substantial reduction in stocks over the next few years, from the levels built up during 1996 and 1997. After 2001 however, if the market policy remains unchanged, production would return to its full potential whereas consumption would continue its long term decline. Intervention stocks would tend to accumulate again (given the GATT limited export possibilities) and could reach some 1.5 million tons by 2005.

It is not acceptable in the long run to solve the problem of over-production in this sector by the slaughtering of young calves a few days after birth. Nor can the surplus problem be solved efficiently by pure supply management (quotas on animal numbers or on production), as this would present major administrative complications.

A more offensive strategy, on the other hand, could at the same time substantially reduce export refunds to traditional destinations, help develop new export outlets without subsidies and rebalance internal meat consumption to the benefit of beef. Moreover, it would reduce the incentive for higher carcass weights.

The Commission therefore proposes to gradually establish effective market support at a level of 1 950 ECU/ton (presently at 2 780 ECU/ton), over the period 2000-2002. It should be possible to stabilize market prices around or above this level through border protection, export measures and the introduction of a private storage regime, as already exists for pigmeat.

Single Market prices can be expected to remain higher than the new support price levels. In addition, as observed after the 1992 reform, farmers are likely to adjust their production systems and investment behaviour to save costs, and some input prices may well decrease. On the whole, the income loss farmers perceive due to the reform measures will probably be lower than a simple static analysis would indicate. Nevertheless there will be losses.

The Commission proposes to respond through direct income payments, gradually increasing and still paid per head of cattle and while avoiding overcompensation. In permanent regime, they would reach the following level (the present level is mentioned in brackets):

• Suckler cow (yearly payment) 215 ECU (145 ECU)
• Male bovine bull (one payment) 368 ECU (135 ECU)
  steer (two payments) 232 ECU (109 ECU)
• Dairy cow (yearly payment) 70 ECU no premium

The different mechanisms governing headage payments and favouring extensification (the density factor, individual and regional ceilings) would be adapted in order to take into account the termination of the silage maize regime. At the same time, the Commission will reflect on how incentives to extensify production can be strengthened with a view to improving their effectiveness in relation to environmental objectives, without a major change in the global level of support.

• Dairy regime

If milk quotas remain unchanged over the coming years, total milk production is forecast to decline slightly from 121.6 million tons in 1996 to 118.1 million tons in 2005, due to a small increase in milk fat content and adjustment of production to the quota level. Global milk demand (in whole milk equivalent) is expected to decline from 112.2 million tons in 1995 to 108.7 million tons in 2005. This is the net result of decreasing consumption of some dairy products, notably butter, and increasing demand for other products, such as cheese and fresh products. On-farm consumption (animal feed) should also drop in line with the expected decline in cattle numbers. The net surplus is likely to vary between 9.0 and 9.5 million tons of milk equivalent in the 1996-2005 period, with a tendency to increase by the end of the period.

Turning to the different milk products, which are all covered by GATT commitments, and supposing no policy changes, it appears that:

• further export growth in the cheese sector would appear to be constrained by GATT limitations on subsidized exports;
• intervention stocks of skimmed milk powder will tend to increase from 1998 onwards and reach some 200 000 tons in the first half of the next decade, as the GATT export commitments become binding;
• for butter, GATT export commitments give sufficient margin for subsidized exports, so that no accumulation of intervention stocks would necessarily be expected; it is however questionable whether real outlets exist on world markets for a quantity as large as the expected surplus of around 300 000 tons.

After an in-depth examination of the different options, the Commission discards radical solutions, such as drastic price cuts and rapid abolition of the quota system. Expected market developments do not justify such extreme measures. The Commission sees no strong reason for introducing fresh quota cuts either, since no major deterioration of the market balance is expected. Finally, the Commission also discards a double price - double quota system, which would raise serious questions of WTO compatibility, could be quite distortive, depending on how it were shaped and implemented, and would add to current administrative complexity and control problems.

However, dairy farmers should not be given the impression that the present system, with its intrinsic rigidities, can last for ever. The recent debate on long term prospects has revealed factors of uncertainty; in particular, the results of the next WTO Round could also affect the dairy sector.

The Commission therefore recommends a cautious approach at this stage. It proposes to:

• extend the quota regime up to 2006;
• improve flexibility and simplify the present common market organization;
• gradually decrease support prices, by an average of 10 % in total over the period;
• introduce a new yearly payment for dairy cows adjusted to average yield, at a level of 145 ECU.

Together with the new payment introduced for dairy cows in the beef context, the total dairy cow premium would be 215 ECU, equal to the suckler cow premium.

• Mediterranean products

As a continuation of the 1992 reform process, the Commission presented in December 1996 a report on the tobacco regime to the Council and the Parliament. This report gives a positive assessment of the 1992 tobacco reform and proposes further strengthening the market orientation of the sector, while recognising the important economic role it plays in some rural areas. In February 1997, the Commission presented a report on the olive oil regime. It suggests as a possible option a further shift from price support to direct payments and a radical simplification of these payments. As soon as the necessary debates have taken place, the Commission will table detailed legislative proposals on these two sectors.

For fruit and vegetables, a major reform was adopted by the Council in July 1996: budgetary efforts were shifted from supporting prices to strengthening producer organisations and their competitiveness, and emphasis was placed on the structural adjustment of the sector and on its environmental dimension. The Commission will follow the implementation of this reform carefully.

For wine, a reform proposal has been pending at Council level since 1994. In view of the latest developments, and in particular the new context created in this sector by the Uruguay Round Agreement, the Commission intends to review the pending proposal and to table a fresh one as soon as the 1997 situation has been fully analysed. The new proposal would take into account the guidelines which have in the meantime been defined in the 1995 "Agricultural Strategy Paper".

• Differentiation and ceilings for direct payments

The Commission intends to propose the introduction of an individual ceiling covering all direct income payments granted under the Common Market Organisations. In addition, while excluding renationalization, Member States would be allowed to introduce differentiation criteria according to commonly agreed rules.

• Rural policy

Over the coming decade, agriculture will have to adapt to further changes in market evolution, market policy and trade rules. These changes will not only affect agricultural markets, but also local economies in rural areas in general. Many of them are already confronted with acute economic development problems. Moreover, rural areas have increasingly important environmental and recreational functions to fulfil, and requirements linked to these functions may well imply additional adjustments for agriculture, as the main land user. Conversely the increasing importance of environmental and recreational needs will also offer new development opportunities from which farmers and their families should be able to benefit.

The Commission suggests that these developments should be encouraged and supported by a reorganisation of the existing rural policy instruments.

• Existing accompanying measures financed by the EAGGF, Guarantee Section (agri-environment scheme, afforestation, early retirement) will be supplemented by the Less Favoured Areas (LFA) scheme including its application in the regions lagging behind in their development (Objective 1 regions). All these measures will be applied horizontally and implemented in a decentralized way.
• For those rural areas which are located in regions eligible under Objective 1 of the Structural Funds, the current approach of integrated development programmes will be maintained, as described in the chapter on economic and social cohesion.
• In rural areas eligible under the new Objective 2, operations (formerly Objectives 5(a) and 5(b)) will be financed by the EAGGF Guarantee Section as accompanying measures. These measures will intervene together with the ERDF, the Social Fund and, where appropriate, the FIFG in the same programme within the Objective 2 region.
• In all rural areas outside Objective 1 and the new Objective 2, rural development measures to accompany and complement market policies will be co-financed by the EAGGF Guarantee Section. They will embrace all types of measures supporting structural adjustment and rural development as presently co-financed by the EAGGF Guidance Section. Included into the same legal framework as the present accompanying measures, they will be applied horizontally and implemented in a decentralized way at the appropriate level, at the initiative of Member States. The same approach will apply to fishery coastal areas as far as the interventions of the FIFG are concerned.

• Agri-environmental policy

In the coming years, a prominent role will be given to agri-environmental instruments to support a sustainable development of rural areas and respond to society’s increasing demand for environmental services. The measures aimed at maintaining and enhancing the quality of the environment shall be reinforced and extended.

With respect to better integrating the environment into the Common Market Organisations, the Commission will make a proposal enabling Member States to make direct payments conditional on the respect of environmental provisions.

A possibility which deserves further consideration is to take into account the considerable overlap between LFAs and areas of high nature value, and to gradually transform the related support scheme into a basic instrument to maintain and promote low-input farming systems. Such systems, because of specific geographic conditions or just as the result of centuries of traditional farming, often have a high landscape and nature value.

Moreover, targeted agri-environmental measures should be reinforced and encouraged through increased budgetary resources and, where necessary, higher co-financing rates. Most relevant are services which call for an extra effort by farmers, such as organic farming, maintenance of semi-natural habitats, traditional orchards or hedgerows, continuation of alpine cattle keeping, upkeep of wetlands. A high level of commitment is also needed where actions result in a significant loss of yield, for instance due to the establishment of buffer strips along rivers or field margins.