Home Economics Disaggregated impacts of CAP reforms : proceedings of an OECD workshop.
Compulsory and voluntary redistributing tools
Beyond the adopted model of decoupled support, EU members have implemented voluntary and/or compulsory tools which aim at redistributing historical direct payments. First, on a voluntary basis, national reserves of Single Farm Payments (SFPs) may be created by means of a linear percentage reduction in the holding reference amounts (up to 3% of the total entitlement value) and the incorporation of non-attributed SFPs or not activated for three years.
The objective of a national reserve is to grant additional decoupled payments to new farms or selected recipients. Awarding additional decoupled payments depends on features such as the absence of entitlements for farmers entering the sector; for farmers
who inherited land, leased out land or bought land during the reference period. Recipients can also be farmers who have restructured their production or invested in their holding during or directly after the reference period. The national reserve can be temporary, i.e. a transitory tool to ease the transition from coupled to decoupled direct payment scheme-for instance in Germany or the United Kingdom, which plan to close the reserve once the decoupling process has been completed. These two countries share a liberal view as regards the regulation of SFP markets (Kroll, 2008). The national reserve can also be permanent, i.e. it is conceived as an intervention tool for administratively managing entitlement transfers-as in most of the other member states.
Second, SFP tradability or transfer modalities may have a significant impact on the distribution of direct payments. Member states may decide that SFPs can be fully transferred or used within one specific territory, i.e. one dipartement in France, one Ldnd in Germany, one region in the United Kingdom8 or Italy, the whole country in Portugal or the Netherlands. In case of definitive (i.e. final) SFP transfers - with or without land - a part of the SFP value may be charged (taxed) and transferred to the national reserve. According to whether or not these restraints are activated, it becomes possible to create an administrative SFP market with a potentially redistributive impact. Table 11.1 presents some selected national situations (as planned), and Table 11.2 focuses on the taxation of French entitlement transfers.
Table 11.1. Selected planned modalities of SFP national reserve management
Source: Adapted from Kroll (2008) and Anciaux (2005); author's interpretation.
Table 11.2. SFP’s entitlement taxation in France from 2010 onwards
Utilised Agricultural Area (UAA) aggregates all arable areas including fallow, temporary and permanent grassland or land under permanent crops.
The departemental (or sub-departementa) threshold refers to two plot units as defined by Article L.312-5 of the French Rural Act.
A “relative” represents a family relationship up to the second generation, i.e. the purchaser should be the wife/husband, sister/brother, mother/father, or grandmother/grandfather of the transferor.
A “new farmer” has started a new agricultural business within five years.
A “young farmer” is new to the agricultural sector, i.e. she/he was not running an agricultural business for the last five years.
Source: Data from French Ministry of Food, Agriculture and Fisheries; author's interpretation.
Third, the 2003 reform introduced a stylised “cross-compliance” regime where payments are linked to farmers achieving certain environmental, animal welfare and quality standards. Cross-compliance makes full payment conditional upon some standards established at national levels. This may potentially exclude some historical direct payment recipients.
Fourth, Article 699 allowed the member states to adopt sector-based reorientation by using up to 10% of national sector-based ceilings to grant the corresponding sectors additional payments for “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”.10
Two redistributive tools have been made compulsory in order to fund Pillar 2 measures. The first is a compulsory modulation introduced by the 2003 reform which reduces all direct payments from Pillar 1 via a 5% uniform flat rate from 2007. A EUR 5 000 franchise (exemption from charging for every holding but creating a kind of low-threshold effect) exempts farmers receiving less than EUR 5 000 a year from the modulation.
Second, compulsory sector-based financial transfers were agreed in April 2004 for the tobacco and cotton regimes. They aim to reorient a share of the sector-based direct payments (taking into account, as for decoupled payments, a 2000-02 reference period) towards rural development programmes implemented in the respective production areas.
Finally, the financial discipline mechanism — if activated — may potentially affect the distribution of direct payments. The 2003 CAP reform introduced this new tool in order to prevent any overspending on direct payments with reference to annual budgetary ceilings for the 2007-13 period. In order to avoid any future overspending, the European Commission is able to propose reductions in EU15 direct payments.11 The modalities of such cuts may consider differentiated rates of reduction.
The 2009 CAP Health Check12 adjusted the 2003 reform redistributive mechanisms. It decoupled further direct payments, and allowed member states implementing a historic model to move towards a more regional one, especially in view of the progressive integration of further sectors into the decoupling scheme. Cross-compliance standards have been amended. The Health Check led to increments in the compulsory modulation rate to reach 10% in 2012 and to further 4% cuts for payments above EUR 300 000. It also introduced a EUR 100 and a 1 hectare minimum requirement. Article 68 replaced Article 69, and provided more flexibility in its implementation. It increased the scope of potential funded measures and split the historically supported sector constraint as regards new funded expenditures. Finally, member states had to review their rural development plans in order to consider crucial new challenges for European agriculture : climate change, renewable energy, water management, biodiversity and dairy restructuring measures.
Apart from compulsory modulation and cotton and tobacco sector-based reorientation, the implementation of measures which affect the distribution of CAP support depends on the decisions of member states. Within a common framework, they have the competency to partially retain or alter the distribution of CAP payments; see Figure 11.2, which schematises the institutional channels aiming at redistributing the support based on past price policy.
The per-hectare payments which followed the 1992 reform were computed on the basis of 1986-1991 yields. Hence, the departement scale has been privileged. In a few cases, a sub-departement scale has been settled on, in order to reflect yield differences more finely. These references could also distinguish irrigated land or irrigated corn in order to provide them with higher compensatory payments. Thus, the “crop plan” (plan cereales) distinguished: 1) 38 departements or sub-departements with a single reference yield for all arable crops — there is no specific support as regards corn or irrigation processes, 2) 57 departements or sub-departements with differentiated reference yields for dry or irrigated arable crops, and 3) 12 departements or sub-departements with differentiated reference yields for irrigated corn, dry and/or irrigated other arable crops. This fragmentation of administrative areas illustrates the strong political power of farm lobbies — which have thus been better able to capture past rents. The dispersion in crop yield references used in coupled direct payment computation is presented in Figure 11.4.
With the 1992 reform, the final per-hectare subsidy by departement (or sub- departement) was based on two thirds of the departemental (or sub-departemental) theoretical yield and one third of the national theoretical yield. In October 1997, the share of local and national theoretical yields has been balanced, each contributing equally to the per-hectare subsidy computation. This change resulted from the establishment of a new socialist government in June 1997 led by Prime Minister Lionel Jospin. Equity and territorial cohesion motivations led to this adjustment in the formula for direct payment computation.
The same government negotiated the 1999 reform. Agenda 2000 initiated a convergence of national rate of support for arable crops. Guaranteed prices for cereals were reduced by 15% between 1999 and 2001, and compensated by increases in the direct payment rate. At the same time, the national rates of support for arable crops have converged in line with the decoupling process. In 2002 and 2004 respectively, the rates of support for oleaginous and protein crops were decreased and converged with that for cereals (a specific per-hectare subsidy coupled to protein crop production was created in 2004 to compensate the decrease in compensatory payment rate).
Figure 11.4. Crop yield reference plan used in coupled direct payment computation by French departements/sub-departements
Quintal per hectare with average and number of French departements/sub-departements for each class
This crop yield reference plan has been fixed since 2002 in order to decouple direct payments partially. The final amount of subsidy per hectare results from the association of the departemental/sub-departemental yield reference and the national rate of support.
Source: Data from French Ministry of Food, Agriculture and Fisheries; author’s interpretation.
In addition, following the Agenda 2000 reform, France started to implement voluntary modulation through individual rates of direct payment cuts. For their computation, French authorities privileged small and family farms by considering three criteria for the addition of a flat and progressive rate: 1) the labour force used on the holding, 2) the Standard Gross Margin (SGM) evolution of the holding, and 3) the total amount of direct payment received (uniformity of treatment). The rationale of this formula rested on politics rather than economics. The modulation mechanism was aimed at financing a targeted contract for farmers (Contrat Territorial d’Exploitation or CTE) supporting rural development and environmental amenities within their farm activities.
However, French voluntary modulation was stopped in 2002 due to complex computation criteria (fostering farmers’ criticisms), the election of a new conservative government close to the farming lobby, and the lack of concluded CTEs. It was the last attempt by French authorities — prior to the 2009 CAP Health Check — to challenge the distribution of farm subsidies. The outcomes of the Health Check, negotiated by a French conservative government, illustrate that future CAP reforms may be independent of the political nature of the French government.
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