Considerations for Landowners from the 2003 CAP reform

The regulation 1782/2003 was published on 29th September 2003, and is

available on www.europa.eu.int . An abbreviated version is available in the
website of the England and Wales Country Land and Business Association,
www.cla.org.uk .

Decoupling
The key decision of this reform is to decouple existing direct payments from
production in the cereals, oilseeds, proteins, beef, sheep and dairy sectors.
All these direct payments will be consolidated into a Single Farm Payment
(SFP) which is the property of the active producer (the tenant in the case
of let land) for which no particular pattern of production is necessary.
Recipients of SFPs must be active farmers, but they may farm any eligible
land. The producer is free to decide how to use the resources at his disposal
according to market conditions rather than in response to rules for collecting
subsidies. In the extreme producers can choose to produce none of the
formerly supported product at all, and still receive his Single Farm Payment,
(but see cross compliance conditions below).

This market orientation, and simplification of the rules for CAP support has
been welcomed by the European Landowners Organisation (ELO). It
releases the private sector to do what it does best, to invest and to produce
for the market.

When to decouple
The regulation proposes the SFP is introduced in 2005, but allows this to be
delayed for up to two years. The ELO argues that producers in countries
which decouple earlier will be at a competitive advantage, as they are free to
choose how much to produce, whereas those in countries who delay
decoupling may have to incur costs to produce crops and livestock which are
uneconomic.

Full or partial decoupling

The regulation permits Member States to leave a proportion of COPs, sheep
and beef payments coupled to production, ie producers are required to
produce these commodities in order to receive the coupled part of the
payments. The ELO advises that less than full decoupling imposes
restrictions and, potentially, costs on producers and therefore is inadvisable.
The main concern that partial decoupling is intended to combat is the
abandonment of farming. It is far from clear that using partially coupled
payments to force producers to produce beyond their chosen economic
margins is a sensible way of avoiding abandonment. The ELO suggests
Member Organisations seek more targeted and effective instruments to deal
with this problem. The Article 69 so-called ‘National Envelopes’ may provide
such an instrument.

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How to decouple?
Individual Historic Claims…
The architecture of the regulation is built around the assumption that the SFP
for each individual producer will be based on the claims of that producer in the
reference period of the three calendar years, 2000-2002. The hectares and
livestock numbers claimed for the relevant products are aggregated, averaged
over the three years, multiplied by the claim rates for 2002. This reference
amount is divided over the claimed crop areas plus all forage hectares
declared by the claimant. The regulation thus speaks of the number of
entitlements (hectares) and the rate €/ha of each claimant. This will be the
SFP of the claimant. This entitlement is tradable with or without land.

…or, Regionalised Average Payments?

Although the regulation was framed around the idea that the total support of
each Member State will be distributed on the basis of the individual historic
claims of farmers, there is an option to regionalise the distribution of the total
SFP and to offer the same payment rate per hectare over all eligible
agricultural land. This is the Regionalised Average Payment option.

Choosing between Individual Historic Claims (IHC) and Regionalised

Average Payments (RAP).
From a purely landowner perspective, the historic basis for allocating the
support has two severe disadvantages. First, it creates huge uncertainty and
perhaps penalties for farms which have restructured since the beginning of
the reference period. An extreme case is a farmer who purchased land in,
say, October 2002, and who had no claims on that land for any of the three
reference years. On the face of it he has no SFP relating to that land. This
belongs to the vendor of the land, who may or may not be able to claim his
SFP depending on what other land he has or acquires.
The second problem concerns the tradability of entitlements (which the ELO
actively opposed). This creates big uncertainty for landowners who let their
land. Their tenants are free to sell off the entitlement, leaving their land bare
of entitlements potentially reducing rents and land value.
Both of these problems are reduced if not eliminated by the Regionalised
Average Payment approach. Because all eligible land may receive SFP when
the scheme comes in, this correctly rewards the current occupant of the land
avoiding the complications for farms in transition. Once the SFP is allocated
in this way, it is expected that it will be transacted (sold or leased) with the
land. With virtually all land receiving SFP, the market in entitlements is only
likely to involve a tiny area.
However, compared to the historic entitlements, the regionalised average
payments will certainly involve a redistribution of the support: some farms
losing, perhaps a lot, and other farms gaining. The extent of this redistribution
depends on farming structures and patterns, and in particular the relative
importance of the supported and unsupported products. In southern Member
States where unsupported crops are a very significant part of total agricultural
area there would be such a large dilution involved in spreading the total
payments over the whole agricultural area that it would be extremely difficult

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to contemplate the RAP approach. Deeper analysis of this issue is available
in papers to be found on the CLA website, see above.
The National Envelope (article 69)
Another part of the optional implementation of decoupling is the provision in
this article which allows member states to reduce the entitlements relating to
specific sectors by up to 10% to create an ‘envelope’ of money which can be
then used to support specific types of farming which are important for the
protection or enhancement of the environment or for improving the quality and
marketing of agricultural products. These funds have to be retained within
specific production sectors, effectively they permit a general reduction of
payments in the relevant sector to help specific types of farming in that sector
or marketing objectives. The vagueness of the objectives of this article, and
the complexity of creating further sector-specific environment or marketing
schemes do not make this an attractive option.

Cross compliance conditions

Receipt of the Single Farm Payment will be conditional on a variety of cross
compliance conditions, and if they are not respected, payments will be
reduced or withdrawn completely. The main conditions are that recipients of
the SFP must respect 18 existing EU directives on plant and animal health,
environment and animal welfare, and also claimants must keep their land in
“good agricultural and environmental condition”. These conditions are to be
defined by the Member States based on some broad guidelines in the
regulation (Annex IV) concerning soil erosion, soil organic matter and soil
structure and general maintenance of the land and its biodiversity. For
landowners the challenge is to ensure that these cross compliance conditions
are practicable, yet meaningful. There is scope for non-business
organisations to pursue their own agendas and impose unworkable and costly
conditions. It is for landowner and farmer organisations to prevent this
outcome.
However we must tread carefully on this issue. It would be very difficult to
justify the continuation of financial support to land managers if it is perceived
that the payments are for ‘doing nothing’. The ELO approach is that ultimately
this support is to pay for the environmental and cultural landscape services
supplied by farmers and other land managers which the public values but for
which there is no market. They are also part of the process in assisting rural
development by enabling farmers to diversify. The ELO would prefer that
such agri-environment payments and rural development support were offered
in more directly targeted and structured schemes, but in the interim the SFP is
the best current political compromise.
There are other conditions involving the continuation of the existing
mandatory 10% set aside, and also restrictions that the area of permanent
pasture as of December 2002 must not be reduced. Member States are
obliged to set up advisory systems to provide advice to land managers to help
them understand and abide by these conditions. The detailed application of
these provisions are complex and landowner organisations will wish to involve
themselves in these details to protect their members’ interests.

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Modulation and financial discipline
The Single Farm Payment, once calibrated and allocated in 2005, will not
remain constant thereafter. First, there is a schedule of National Ceilings of
these payments which have to be respected each year. Second, they are
fixed in constant Euro. They will therefore decline with general inflation, and
for non Euro zone Member States they will vary in national currency as
currencies vary against the Euro. Third, they will be cut by up to 3% to create
a National Reserve (this is likely to be lower if Regionalised Average
Payments are used). Fourth they will be cut by 3% in 2005, 4% in 2006 and
5% in 2007 and thereafter under compulsory modulation – to switch funds to
pillar two Rural Development. Countries already using voluntary modulation
have arrangements to allow their existing, and planned Rural Development
programmes to be accommodated. Fifth, the SFP will be cut by such further
amounts as are necessary from 2007 onwards to keep the CAP within its
budget guideline agreed at the October 2002 Brussels Council. Thus funds
required to bring about reforms of other sectors like sugar, and to finance part
of the Eastern Enlargement will come from cuts in the SFP in the EU-15.
The Rural Development Regulation
This has been extended by the addition of two new chapters, one to help
farmers meet higher environmental and animal welfare standards, and
another to help farmers produce and market higher quality produce. The
funding of these helpful new instruments will depend on new resources
available as a result of the modulation.

A0842643
rd
3 November 2003,
European Landowners Organisation
67 Rue de Tréves, Brussels 1040 Belgium.