Within the EU cotton is grown almost exclusively in Greece and Spain. After harvesting, the fibres are separated from the seeds and waste material by a process known as ginning. The EU produces about 1,6 million tonnes of unginned cotton which provides a yield of about 0.5 million tonnes of fibres (ginned cotton). This level of production meets about 47 % of internal needs. The balance is made good by imports which enter the Community duty free and levy free.

A production aid scheme for cotton was introduced with the accession of Greece to the EEC and applied for the first time to cotton harvested in 1981. The scheme expanded when Spain and Portugal joined the EEC in 1986.

Community aid for cotton is greater than that paid for crops grown as an alternative and, since the inception of the scheme, EU production has grown from 0,3 million tonnes to an average of 1,6 million tonnes.

The overall objective of the scheme is to support the production of cotton and to allow the producers concerned to earn a fair standard of living. It is the ginners who receive the aid on condition that they have paid the producers a minimum price (an amount greater than the commercial value) for the unginned cotton purchased. The aid is the difference between what has been paid to the producers and a value placed on the unginned cotton acquired.

The amount of the aid varies with production levels and market prices. When market prices are low, the aid paid to the ginners increases to compensate and vice versa. This arrangement provides financial security for the ginners and allows EU produced cotton to compete on price with the imported product.

The objectives of the audit were to examine:

- the degree of monitoring of the operation of the scheme in the Member States;

- whether the scheme is an efficient and effective means of providing support to cotton producers;

- the impact of the scheme on production, the quality of the cotton produced, alternative crop production and the environment;

- the reliability of the internal control system operating in the Member States and the legality and regularity of payments made under the regime.

The main findings of the Court are:

- amending legislation introduced in 2002 defines eligibility criteria. Only cotton coming from areas declared under IACS and not from areas restricted for environmental reasons is eligible under the scheme. Greek authorities are constrained by failings in the operation of IACS when assessing the eligibility of cotton and the ability of the Commission to monitor this aspect of the scheme has been weakened. If ineligible production goes undetected, all producers are penalised through a higher penalty imposed by the stabiliser mechanism;

- for the 2001/02 marketing year, Greek authorities estimated that about 10 % of the land planted with cotton was either not declared under IACS or declared as planted with another crop. In the case of the latter, producers may receive aid twice for the same parcels of land, once on the basis of the arable crop declaration and again on the basis of the actual production of cotton;

- cotton production can have a negative impact on the environment and Member States should determine and adopt the measures they consider suitable to regulate the use of land for cotton production. Currently no information is available on the application of this provision since it is not continuously monitored by the Commission;

- budget neutrality cannot be assured as market prices for cotton can be volatile and Community expenditure rises in those years when market prices are consistently low. In contrast, in those years when market prices are high, additional support is paid to the producers provided certain conditions are met. This measure mitigates the effect of the stabiliser mechanism;

- the Commission is unaware of the effectiveness of the incentive given to the ginners to improve the quality of the cotton produced. In addition, it has not compared funding received by the ginners with the actual costs incurred by them.

The Commission had indicated that it wished to introduce a reform of the present scheme to be effective from the marketing year commencing on 1 September 2003. This deadline has not been met and it is intended to submit a proposal for a reform of the aid scheme for cotton to the Council and the European Parliament in the autumn of 2003.

The Court recommends that the Commission takes the opportunity of the proposed reform to address weaknesses in the present regime.

^{The only purpose of this information note is to give a summary. The special report, as adopted by the Court of Auditors, is available on its internet site ( HYPERLINK http://www.eca.eu.int http://www.eca.eu.int) and will be published shortly in the C series of the Official Journal of the European Union.}