June 10, 2003

DN: MEMO/03/128 Date: 10/06/2003

This release in PDF format: FR EN DE DA ES PT NL IT SW FI EL

Questions and Answers

Why reform, and why reform now?

One could ask, "Why later?" What will be better? Will the questions we have to answer be any
different? Will the challenges be any easier?

The simple answer is that there are new challenges that we need to meet now. We need to make our
farm products more market oriented and competitive now, we need to simplify our policy and we need
to do more now to ensure that our policy can respond to the environmental and social pressures that
are placed on it from the wider European public.

It would ill-serve our farmers if we were to wait until we are faced with the next major crisis before
carrying out reforms. Likewise, it would not be in their best interests to wait until negotiations begin
on the next financial framework in order to launch a reform. This is another reason why it is so
important that we make the necessary changes now to put the CAP on the right footing for the future.
Now is the time to show that our policy can provide real value for money and real services to citizens
throughout an enlarged EU.

Our WTO negotiating position also benefits if we reform now. We will strengthen our standpoint and
be able to support our arguments with clear evidence that we are continuing to practise what we
preach, with a policy that meets society's broader needs, while keeping our market open to trade with
third countries.

With enlargement now imminent, we should also take the opportunity to put our future perspective in
place to provide certainty to farmers both in new and existing member states. Prolonging our
discussions beyond the end of the year would be procrastination.

Our agricultural sector needs a boost now. By putting off the inevitable, we would effectively work
against our farmers in the long-term, continue to fall short of consumers' requirements, and leave
ourselves open to more criticism from our taxpayers.

What is the CAP reform looking to achieve?

The Commission proposal will provide EU farmers with a clear policy perspective to go with the
financial framework until 2013 for agricultural expenditure, as decided by the Heads of State and
Government in Brussels in October 2002. It also makes European agriculture more competitive and
market oriented, promotes a substantial simplification in the CAP, facilitates the enlargement process
and helps to better defend the CAP in the WTO. The proposed adjustments allow maximum flexibility
in farmers' production decisions while guaranteeing them income stability. The implementation of the
Commission reform would remove environmentally negative incentives of the current policy and
improve and provide encouragement for more sustainable farming practices. These adjustments are
necessary to ensure that the EU is able to provide a sustainable and predictable policy framework for
the European Model of Agriculture over the coming years. Such changes are made even more urgent
by the new budgetary framework. This will enable the EU to ensure a transparent and more equitable
distribution of income support for farmers, and to better respond to what our consumers and
taxpayers want.

To achieve these goals, the Commission proposes:

• to cut the link between production and direct payments (decoupling),
• to link those payments to environmental, food safety, animal welfare, health and occupational
  safety standards (cross-compliance),
• to increase EU support for rural development by a modulation of direct payments (from which
  small farmers would be exempted);
• to introduce a new farm advisory system,
• new rural development measures to boost quality production, food safety, animal welfare and
  to cover the costs of the farm advisory system,
• revisions to the market policy of the CAP, including arable crops, milk and rice.

What is the rationale behind proposing new rural development measures?

The Commission proposes to shift resources from agriculture market expenditure to rural
development. By reducing direct payments for bigger farms ("modulation") additional funds rising to
€1.48 billion in 2012 will be available for rural development.

The new measures (new chapters on food quality and meeting standards, the introduction of support
for animal welfare) target areas that are either not, or not sufficiently, covered at present.

They serve to better address concerns about food safety and quality, help farmers to adapt to the
introduction of demanding standards based on EU legislation, and promote high standards of animal
welfare. These are key objectives for promoting sustainable agriculture and responding to the wider
expectations of European society at large, and central to the CAP reform package as a whole.

How will farmers benefit from the strengthened rural development policy in practice?

New quality incentives for farmers

Incentive payments for farmers who participate in schemes designed to improve the quality of
agricultural products and the production process used, and give assurances to consumers on
these issues. Such support will be payable annually for a maximum 5 year period, and up to a
maximum of € 3 000 per holding in a given year.

Support for producer groups for activities intended to inform consumers about and promote
the products produced under quality schemes supported under the above measure. Public
support will be permitted up to a maximum of 70% of eligible project costs.

New support to help farmers to meet standards

Temporary and digressive support to help farmers to adapt to the introduction of demanding
standards based on EU legislation concerning the environment, public, animal and plant
health, animal welfare and occupational safety. Aid will be payable on a flat-rate basis, and
digressive for a maximum period of 5 years. Aid will be subject to a ceiling of maximum € 10
000 per holding in a given year. In no case will aid be payable where the non-application of
standards is due to the non-respect by an individual farmer of standards already included in
national legislation.

Support for farmers to help them with the costs of using farm advisory services. Farmers may
benefit from public support of up to a maximum of 80% of the cost of such services, subject
to a ceiling of € 1 500.

Covering the farmers' costs for animal welfare

Support for farmers who enter into commitments for at least 5 years to improve the welfare of their
farm animals and which go beyond usual good animal husbandry practice. Support will be payable
annually on the basis of the additional costs and income foregone arising from such commitments,
with annual payment levels of maximum € 500 per livestock unit.

What does decoupling mean in practical terms?

Decoupling means providing support payments to farmers in a way that is not linked to what they
produce. The Commission proposes to introduce a single decoupled income payment per farm. This
system would integrate most existing direct payments a producer receives from various schemes into
this single payment, determined on the basis of historical references. This shift of support from
product to producer has been pursued in an stepwise approach since the CAP reform of 1992 through
the reduction of support prices and the introduction of partially decoupled direct payments in cereals,
oilseeds, protein sectors and in the beef sector.

What will decoupling achieve?

The main objective of this payment to farmers is to stabilise their incomes. With decoupling, the
farmers get back their entrepreneurial freedom. With this move a major simplification in the support
of EU producers will be achieved. This will improve the overall market orientation of agriculture, and
will allow farmers to fully benefit from market opportunities in supplying the products that consumers
want. The EU will support farmers in a way that encourages them to focus on the quality of the goods
that they produce, and not the quantity.

At the same time, a single payment per farm based on historical references keeps the value of the
support constant. It means supporting farmers to perform the range of roles that society demands of
them, and encouraging them to farm for the market, and not for the subsidy. It does not mean, as
some critics suggest, paying farmers to do nothing.

Decoupled support is the most efficient support in terms of income. As a recent OECD study
underlined, it would actually allow more money to end up in farmers' pockets than other forms of
support that we have.

By combining all previous direct payments into a single income payment per holding, the system
would be much easier to manage, simpler and much more transparent.

Decoupling will strengthen the EU's hand in the WTO negotiations. Cutting the link between
production and subsidy makes direct payments non-trade distorting.

Haven't the U.S. tried decoupling and failed miserably?

The US FAIR act introduced degressive payments based on historical crop base areas and yields
(expressed in quantities) for US crops. This was a calculation based on the assumptions that these
payments guaranteed a higher level of support to farmers than the then alternative of traditional
payments, given the overly optimistic baseline of increasing prices and expected minimal budget
outlays under the continuation of previous policies.

When these forecasts proved wrong, successive "relief" packages compensated US farmers not so
much for the "income loss" with respect to previous levels of average income, especially in the initial
years, but more for "losses" of an expected stream of future income that was based on an unrealistic
market outlook.

In the end, a farm bill that was introduced for budgetary purposes (to save 13 billion dollars) ended
up costing double of its initial estimate over 6 years - 96 billion instead of 48 billion (mainly in five
crops).

To put it simply, Americans introduced degressive payments based on a wrong price assumption, on
the other hand we are introducing fixed payments based on society's expectations and farmers'
income needs.

Does decoupling mean paying farmers for doing nothing?

In no case would decoupling mean that farmers are being paid for doing nothing. The opposite is
true: Who would seriously claim that keeping land in good order, by keeping animals, managing land
or cutting hay, and meeting the standards we ask from the farmers is doing nothing? Following the
proposals, the full award of direct payments will be linked to respecting statutory standards - on the
whole farm - in the domains of environment, animal health and welfare, food safety and occupational
safety for farm workers. This will ensure that the public can be confident that farmers receiving direct
income payments respect these standards as well as land management obligations.

What will happen to farmers' incomes?

The European Commission has recently published six impact studies, which support the overall
orientation of the farm reform. The studies highlight that the reforms envisaged by the Commission
would significantly improve market balances. And the most important result of the simulations is that
there would be a positive effect on overall farm income, increasing it by 1.7%. As regards the beef
sector, the proposal to simplify the present premium system and to free producers from the direct
link between number of animals and payments would result in 7% price increase offsetting the drop
in production. Hence, the market revenue of beef producers would increase by 4%.

What does decoupling mean in WTO terms?

The proposals would strengthen the position of the European Union in the World Trade Organisation
(WTO) since decoupling would change the WTO nature of direct payments. They would no longer be
classified as blue box, but as green box. This latter (green) box includes those forms of domestic
support which are not, or only minimally, trade distorting.

What is in it for developing countries?

The proposed framework will improve the long-term coherence between the Common Agricultural
Policy and the Doha Development Agenda. The adjustment proposed, by reorienting support towards
more extensive agricultural practices and less trade-distorting domestic support, is expected to
improve market opportunities for developing countries. Direct payments will continue to play an
essential role in supporting farm incomes, but they will do so in a non-trade distorting way.

This move should be considered in an international environment where other WTO members are
substantially increasing product-based support, further distorting production and depressing
international prices.

How would "cross-compliance" be applied?

The full granting of the decoupled farm income payment and other direct payments will be conditional
on the respect of a certain number of statutory environmental, animal welfare and food safety
standards, as well as occupational safety requirements for farmers. Cross-compliance would also
contribute to the maintenance of rural landscapes. In the case of non-respect of cross-compliance
requirements, direct payments would be reduced while maintaining proportionality with respect to the
risk or damage concerned.

Why a further reform of the dairy sector?

With the proposals the Commission wants to make the dairy sector more market oriented and more
competitive in the long-term. To meet these challenges the proposals suggest a two-step approach:
first, line up the Agenda 2000 dairy reform with the CAP reform proposals in general, then implement
more, progressive increases in quota accompanied by cuts in intervention prices and further
compensatory payments for dairy farmers.

Intervention price cuts have to be greatest for butter, where the difference between our internal price
and international prices is the most significant. But the production of cheese and fresh dairy products,
for which the market is increasing, would benefit from lower milk prices. So, by introducing the
Agenda 2000 reforms sooner, and by taking them a step further, we can make real progress in
addressing the imbalances that still exist in this sector, whilst ensuring that producers do not lose
out. EU exports would be less subsidy dependent, we could satisfy our own sector's needs, get the
dairy sector in line with the CAP reforms in general and the Enlargement process, and get better in
touch with world markets.

Why cut the intervention price for cereals?

For the EU as one of the major exporters of cereals in the world, it is important that prices on the
internal market are as far as possible in line with those on world markets. Past experience clearly
demonstrates there can be strong fluctuations from one year to another and even within a given
marketing year, constraining the scope of exports. The appreciation of the € against the US$ adds to
this problem. The Commission therefore believes that is necessary to establish intervention as a real
safety net through the final 5% reduction of the intervention price from € 101.03/ton to € 95.35/ton
from 2004/05.

This reduction of the intervention price, together with the abolition of monthly increments, should
guarantee that EU wheat and barley remains competitive at a world level. In accordance with the
existing legal provisions, compensatory payments for cereals and other relevant arable crops will be
increased from € 63 to € 66/ton.

Will the proposals for the CAP reform result in a real simplification?

The proposals offer a simpler system of direct income support through the single farm income
payment. This approach should be of particular benefit to all farms and also the administration.
Instead of a multitude of aid applications, farmers will make only one, based on clear criteria. They
would then have to focus on meeting exactly what society wants them to do, and what they have
been asking the Commission to allow them to do: focus their efforts on the good management of
agricultural land, not on filling papers.

For public administrations, the farm income payment represents a considerable simplification of
implementation and control requirements through the introduction of a single payment for the sectors
concerned, and a single control framework. Another positive side effect of these proposals is that it
makes Enlargement easier. The simplification of the support system will ease the integration of the
new member states into the CAP.

What about other non-reformed market organisations such as sugar, olive oil, cotton,
tobacco and fruit and vegetables?

Separate proposals for other sectors scheduled for reform (sugar, olive oil, tobacco, cotton and
possibly fruit and vegetables) will follow in the coming months.