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Annex 1: Further details on draft legislative proposals for CAP Health Check

General background

The EC has published a draft Council Regulation " establishing common rules for direct support schemes for farmers under the common agricultural policy" as part of their CAP Health Check. If approved, this regulation will result in the repeal of existing Council Regulation 1782/2003 on " Common rules for direct support schemes under the common agricultural policy", subject to transitional arrangements. Other legislative proposals in the Health Check deal with intervention schemes and rural development.

Detailed implementing rules will provide further clarification on the precise interpretation and application of the proposed measures.

This Annex is intended to help consultees understand the potential implications of the Health Check in Scotland. More detail is available in the EC's Guide to the Health Check of the CAP as well as in the draft regulations themselves. Unless otherwise stated, references to Article numbers in this Annex relate to the draft Council Regulation " establishing common rules for direct support schemes for farmers under the common agricultural policy".

1. Definitions

The definitions of a "farmer" (Article 2 (a)) and "agricultural activity" (Article 2 (c)) remain the same; however, Article 30 (2) allows Member States to decide not to pay SFP to businesses " whose principal company's objects do not consist of exercising an agricultural activity".

Article 35(2)(a) defines "eligible hectares" as " any agricultural area of the holding, including, the areas planted with short rotation coppice ( CN code ex 06029041), that is used for an agricultural activity or, in the case areas are used as well for non agricultural activities, predominantly used for agricultural activities". Article 35(2) (b) (ii) extends the definition of eligible hectares to include areas that were eligible in 2007 and have been afforested under the Rural Development Regulation.

2. Cross-compliance

Annexes II and III of the draft new regulation indicate the proposed changes to the scope of cross-compliance. Through Annex II, the Commission has withdrawn certain elements of Statutory Management Requirements ( SMRs) that they consider are not relevant to farming activities. These include components of the SMRs 1 and 5 covering requirements in the "Conservation of Birds" and Conservation of Natural Habitats and Wild Fauna and Flora" Directives. These deleted measures will still remain mandatory requirements under the relevant domestic legislation but the linkage with cross-compliance is broken. The Commission has also made changes to the SMRs on animal identification and traceability requirements, deleting the existing SMR 7 and introducing a new SMR 8. These changes are intended to simplify cross-compliance to reflect changes in legislation and to ensure that the systems for identification and registration of animals under by EC Regulation 1760/2000 and EC Regulation 21/2004 are compatible with the systems provided for in the Commission's draft new regulation (Article 24).

Annex III of the draft new regulation shows the changes the Commission is proposing for Good Agricultural and Environmental Condition ( GAEC) in order to partly retain the environmental benefits from set-aside and to address issues of water management. A new GAEC "standard" has been added which extends the "Minimum level of Maintenance" issue, under retention of landscape features, by " including where appropriate hedges, ponds, ditches and trees in a line, in group or isolated and field margins"; this is to protect existing landscape features which can contribute to the environmental benefits from set-aside. Annex III also introduces two new water-related "issues" into GAEC, namely " Protection and management of water" and " Protect water against pollution and run-off, and manage the use of water". In order to address these new issues, two GAEC new standards are introduced. These are " Establishment of buffer strips along water courses" (to partly retain the benefits from set-aside) and " Respect of authorisation procedures for using water for irrigation" to meet water availability concerns.

The Commission will produce detailed rules in 2009 that will clarify exactly how any changes to GAEC should be implemented. There will also be detailed rules for the reductions and exclusions from payments in cases of non-compliance (Article 26).

3. Abolition of Set-aside

Market developments in the arable crop sector and the introduction of decoupled aids mean that set-aside entitlements can no longer be justified (preamble paragraph 27). The draft new regulation allows set-aside entitlements to be activated on hectares subject to the same eligibility conditions as any other entitlement; in effect they become standard entitlements, with no additional restrictions on their use. However, since, GAEC itself has been revised to include the maintenance of buffer strips along water; some environmental benefits that have accrued from set-aside land should continue to be retained under Pillar 1. The Commission also stresses that Pillar 2 allows the targeting of environmental benefits where they are needed most, for example, where set-aside may be lost.

4. Further decoupling

The new draft regulation proposes steps to encourage greater market orientation. The 2003 reforms have already resulted in 90% of direct payments being decoupled from production decisions, allowing farmers to make choices about what to produce according to market signals and simplifying direct payments. The draft new regulation continues this principle of decoupling, arguing that the extension of the SFP scheme to currently coupled sectors should help mitigate against price variability. Maintaining both coupled and decoupled support generates extra complexity for national and regional administrations in the Member States. The draft regulation therefore proposes both further decoupling of remaining partially coupled schemes (Articles 53 - 56) and of previously coupled schemes (Articles 71 - 108 and Annex X).

Scotland took the decision, under EC Regulation 1782/2003, to fully decouple payments from production. However, some Member States opted to retain a degree of coupling in some sectors: for example they could retain up to 25% of coupled support in the arable sector and up to 100% of the coupled support for slaughtering premium for calves. The new provisions outlined in Articles 53 - 55 of the draft new regulation, are mainly of interest to those Member States which retained some degree of coupling of the initial schemes. Further details on the schemes are provided in Annex X (point 2) and Article 66 outlines how further decoupling of these schemes can be achieved.

The Commission is also proposing changes to a number of other small support regimes for minor crops which still receive payments related to production. These schemes are currently covered under Title IV of the EC Regulation 1782/2003 and in general have little relevance to Scotland. However, two schemes that have been used in Scotland are the Protein Crop Premium ( PCP) and the Energy Crop Scheme ( ECS). Although these schemes do not generate significant sums in themselves they do still represent a positive cash flow to the producers concerned.

The ECS supports producers who grow energy crops on any land other than set-aside. Most of the land used to support these claims in Scotland has been used to grow winter oilseed rape (with only about 100 hectares planted with short rotation coppice willow). In 2006, 300 Scottish producers were paid £262,877 under ECS, an increase from the 142 producers paid a total of £116,355 paid in 2005. The area of energy crops in Scotland is relatively small, accounting for 4,180 hectares in 2005 and 9,600 hectares in 2006 or 0.4% and 1% of Scotland's total arable area respectively.

The ECS was established to encourage the bio-energy market to develop (preamble paragraph 38) and provided an area-based payment up to a specified maximum guaranteed area. Given the rapid growth in the bio-energy market, the preamble says there is no longer sufficient reason to continue to grant specific support for energy crops (preamble paragraph 38) and the scheme will therefore be abolished. There is no provision in the draft new regulation to transfer an equivalent payment into the SFP scheme. The Commission suggests that funding will be used to support research and development to bring down the costs of second generation bio-fuels, which will be key if Europe is to meet its targets for bio-energy and to alleviate some of the anxieties about the competition for resources between food, feed and fuel.

The PCP provides support to producers who grow protein crops that are used to feed livestock. In Scotland, field beans represents more than half of the area grown under the PCP scheme with the remainder being accounted for by crops of protein peas and sweet lupins. In 2006, 509 Scottish producers were paid a total of £288,477 under the PCP scheme; an increase from the 458 producers paid a total of £236,877 in 2005. The area of land concerned is relatively small amounting to 8,253 ha in 2006.

Under Annex X and Article 65 of the new draft regulation, the Commission intend to decouple the PCP from production and will make an equivalent sum available to each Member State's national ceiling (Annex I). This will allow these producers to receive payments through the SFP scheme. Thus future payments after 2010 will no longer be linked to the production of a protein crop.

5. National Envelope

Article 69 of EC Regulation 1782/2003 established the principle of a "national envelope" as a measure to facilitate the transition to full decoupling. Under this provision, a Member State could retain up to 10% of a particular sector's component of the national ceiling for measures related to the protection or enhancement of the environment or for improving the quality and marketing of agricultural products within that sector.

Scotland used this Article 69 option to fund the Scottish Beef Calf Scheme ( SBCS). In 2005 some 8,500 producers received total annual payments worth around £20.4m (€29.8m) per annum. However, the numbers of calves receiving support fell from 446,149 in 2005 to 437,265 animals in 2006 and the number of producers claiming SBCS support fell from 8,446 in 2005 to 8,134 in 2006. The decline in calf numbers probably suggests that support provided under the SBCS is not sufficient to maintain the long-term viability of beef enterprises in some parts of Scotland.

Article 68 of the Commission's draft new regulation develops the concept of the national envelope, further increasing its flexibility to facilitate further adjustments needed due to the CAP reforms. The Commission is now proposing:

• The removal of the restriction that the linear reductions stay within the same sector;

• Measures for specific types of farming which are important for the protection or enhancement of the environment; for improving the quality of agricultural goods; or for improving the marketing of agricultural products;

• Measures to address specific disadvantages for farmers in certain regions specialising in the dairy, beef and sheep, (goat meat and rice) sectors;

• The possibility of using retained amounts to top up entitlements in areas subject to restructuring and/or development programmes; (However, if this provision is used, then the related National Reserve provision (see section 6 below) may not also be used for this purpose);

• Support for some risk management measures in the form of contributions to crop insurance schemes for natural disasters and mutual funds for economic losses from animal and plant disease outbreaks;

These changes to the national envelope provision have potential implications for Scotland. The previous obligation to use additional funds for payments within the sector, from which the original deductions were made, is removed. For example, based on Scotland's national ceiling for the SFPS in 2007 a total of £43 million (€63 million) could be raised, if the rate for linear reduction is set at a maximum of 10%. However, measures which do not with certainty meet WTO Green Box requirements are to be limited to 2.5% of the national ceiling. This is a constraint on the measures in bullet points 2, 3 and 5 (regarding mutual funds).

The possible options to use national envelope funding for crop failure (Article 69) are relatively limited and require co-funding from domestic sources. For crops, compensatory funding may be provided to a farmer by the Member State to partially compensate insurance costs for formally recognised adverse climatic events that can destroy more than 30% of a farmer's average annual production. In these cases, a farmer may recover 60 - 70% of the costs of the insurance premiums, with 60% of this sum coming from national funds and 40% from the national envelope.

For animal and plant diseases, a Member State may contribute towards financial compensation for economic (or consequential) losses caused by an outbreak of animal or plant disease, which is paid to farmers from an established "mutual" fund (Article 70). Member States can contribute towards the administrative costs of setting up the mutual fund, the repayment of capital and interest on commercial loans taken by the mutual fund for the purpose of paying financial compensation to farmers or the amounts paid by the mutual fund from its capital stock as financial compensation to farmers. These financial contributions shall not exceed 60 - 70% of costs, with 60% of this sum coming from national funds and 40% from the national envelope.

6. National Reserve

The Commission has proposed measures in Article 42 to simplify and therefore increase the flexibility for the national reserve. The national reserve is still funded by the difference between the national ceiling and the total sum of the allocated for payment entitlements. The national reserve may be used either to increase the unit value and/or the number of entitlements allocated to farmers. In contrast to the current situation, there are no additional restrictions on the use of these entitlements, so that, from 2010, national reserve entitlements can be treated as regular entitlements. They will need to be used at least every two years (except in the case of force majeure) and can be traded without the need to have held them for 5 years.

Member States must use the national reserve in a way that ensures equal treatment between farmers and avoids market and competition distortions. The draft new regulation allows the national reserve to be used for new entrants to farming activity; it may also be used in areas subject to restructuring and/or development programmes relating to one or other form of public intervention. This latter provision for use of the national reserve may only be used where a Member State does not apply the revised national envelope provision (see section 5 above) for this purpose.

Article 44 (see section 8 below) gives Member States the option of deciding that part of the value of any payment entitlements which are traded should revert to the national reserve.

7. Minimum thresholds

EC Regulation 1782/2003 requires the area of a holding be more than 0.3 hectares before the Single Farm payment can be made. It also allows Member States the option of not paying claims of less than €100; however, Scotland chose not to enforce this provision. Currently 0.56% of Scottish SFP recipients receive less than €100.

The Commission notes that across EU-25, almost half of total direct payment beneficiaries receive less than €500 and this includes cases where the value of payment is below the administrative cost of managing it. The Commission therefore proposes to simplify and reduce the cost of future payments by introducing new minimum thresholds for payment (Article 30).

Under the new conditions, Member States shall apply either a minimum amount of payments of €250 or a minimum size of eligible area per holding of at least 1 hectare. Thus rather than being an option as at present, from 2010, a Member State would be required to apply one or other of the minimum thresholds.

The number of businesses in Scotland and the amount of SFP affected by the introduction of these thresholds is relatively small. Table 1 shows a breakdown of payments in Scotland. If a 1 hectare threshold is applied, then 236 businesses would be affected. However, farmers holding special entitlements would be exempt from a 1 hectare threshold but would be subject to a €250 threshold if introduced; 69 Scottish businesses currently claim special entitlements.

Table 1

Businesses and SFP payments affected by thresholds

8. Transfer of entitlements

The restriction on the sale of entitlements without land which currently requires 80% of entitlements to be used during a calendar year, will be removed. Rules for transfer of entitlements continue as at present. Member States may decide that part of the payment entitlements sold should revert to the national reserve or their unit value should be reduced in favour of the national reserve (Article 44 (3)).

9. Increasing Modulation

There is a continuation of the current franchise whereby the first €5000 of single farm payment is exempt from compulsory modulation deductions (Article 7). This €5000 franchise does not apply where deductions are made to a single farm payment due to voluntary modulation. Of the 19,937 businesses in Scotland that currently receive Single Farm Payments, 6,913 (35%) of payments fall below the €5,000 threshold and are therefore currently exempt from "compulsory" modulation but will continue to be subject to voluntary modulation deductions.

Article 7 of the draft new regulation proposes two main changes to the existing regime for modulation and these are both designed to increase the funding in Europe which is available under Pillar 2 rural development schemes to tackle four new strategic challenges (climate change, renewable energies, water management and protecting biodiversity).

The Commission propose that for payments above the €5000 franchise, the level of compulsory modulation will be increased from the current level of 5% by a further 2% per annum until 2012 - i.e. basic compulsory modulation will increase to 7% in 2009, to 9% in 2010, to 11% in 2011 and 13% in 2012.

In addition, to the proposed levels of compulsory modulation outlined above, the draft new regulation introduces a new additional progressive element to modulation, where deductions increase proportionately as the size of the payment increases. This progressive element will be applied at a level of 3% for payments of €100,000 to €199,999, 6% for payments between €200,000 to €299,999 and 9% for payments over €300,000.

Therefore, at most, where a Single Farm Payment exceeds €300,000 in 2012, a total of 17% additional compulsory modulation will be deducted (see Table 2).

Table 2

Proposed Increases in Rates Compulsory Modulation by Payment Threshold (2009-2012)

As at present, the Commission intends that the sum obtained from the first 5% of the compulsory modulation deduction will be used by the European Community to provide additional support for rural development programmes across the EU. Additional sums that are generated from the increased levels of compulsory modulation which are now being proposed by the Commission would be retained by each Member State and would be used within the Member State to support rural development schemes (see Article 9 of the draft new regulation).

Payments currently made in Scotland range from very small payments (see section 7) up to larger payments which exceed the €300,000 threshold being suggested by the Commission for the highest rates of modulation. Table 3 shows the distribution of SFP payments in Scotland in 2006.

Table 3

Distribution of SFP in Scotland in 2006 by Payment Size Band

Less than 0.5% of Scottish payment recipients (about 6% of the total amount paid out in SFP in Scotland) would be subject to the highest level of compulsory modulation being suggested by the Commission. In contrast over 93% of 2006 Scottish payment recipients are currently below €100,000 (accounting for over 65% of the total amount of Scottish SFP payments) and these would not be subject to the new progressive element of modulation.

Scotland uses voluntary modulation and Article 132 of the draft new regulation requires that there shall be an equivalent percentage point reduction in the level of voluntary modulation (down to zero) for every percentage point of compulsory modulation above 5%.

10. Move to a flatter rate

Scotland uses the historic implementation model for SFP. Article 46 of the draft new regulation allows Member States which opted for the historic implementation model of payments to decide by 1st August 2009 whether they now wish to alter the basis for existing entitlements from 2010. This provision allows Member States a transitional period towards a flatter area based system of payment. This provision is being allowed as a "regret clause" which allows Member States to change their mind about the appropriate basis for payment. The Commission notes that the historic model will become difficult to justify in the future as reference periods for payments become more distant.

The proposals allow existing payment entitlements to be progressively modified. There would need to be at least three pre-established annual steps and the reduction in value per step may not exceed 50% of the difference of its starting value and the value after the final step.

11. Milk quotas and dairy products

Milk quotas were introduced in 1984 as a response to overproduction. The market is now expanding and the Commission considers that quotas reduce market orientation because they distort a farmer's response to price signals and prevent efficiency gains in the sector by slowing down restructuring.

The Commission propose in their draft regulation " on modification to the common agricultural policy by amending Regulations ( EC) No 320/2006, ( EC) No 1234/2007, ( EC) No 3/2008" to introduce a "soft landing" for the dairy sector via a gradual annual increase of milk quota leading to its eventual phasing-out in 2015/16. Annex 1 of this draft regulation shows that a smooth transition to the ending of the dairy quota can be achieved by a 1% increase in market quota per year over a four year period from 2009 to 2013.

The Commission also recognises that certain regions, especially but not exclusively mountainous regions, are expected to face particular difficulties during this transition and propose that in these circumstances, the revised national envelope provisions may be appropriate (see section 5 above).

12. Intervention

The Commission argues that market supply controls such as intervention should serve as a real safety net rather than slow down a farmer's responses to market signals. The Commission therefore proposes to introduce a variety of changes to the various intervention systems.

The Commission also proposes to abolish private storage aid for cheese and certain disposal aid schemes for butter.

13. New challenges

The Commission has proposed revisions to the EC Regulation 1698/2005 on " Support for Rural Development by the EAFRD" to reinforce efforts on four new challenges (climate change, renewable energy, water management and protecting biodiversity). Generally speaking, across the EU, the increase in compulsory modulation will yield additional funding for this purpose. However, in Scotland the associated reductions in voluntary modulation will largely offset the effect of increased compulsory modulation and so this measure is not expected to yield significant additional funding for the SRDP.

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