Document originated:	11 March 1997
Original language:	French
Forwarded to the Council:	-
Circulated by the Council in the original language:	18 March 1997
Circulated by the Council in English:	3 April 1997
Deposited in Parliament:	7 May 1997
Basis of consideration:	EM of 7 April 1997
Previous consideration:	None
Committee's assessment:	Politically important
Committee's decision:	Cleared

Background

65.1  The Commission'sannual price proposals are contained in three Volumes. VolumeI (the Explanatory Memorandum) provides an assessment ofthe agriculture economy in 1996, considers the main agriculturalmarkets in terms of production and demand, farm incomes and thebudgetary situation and describes the proposals in the packageproduct by product, with tables comparing the 1997-98 proposalswith the 1996-97 price decisions. Volume II is concerned withthe financial implications, while Volume III covers thelegal instruments containing proposals for 16 draft regulationswhich complement the 1997-98 price package.

65.2  We considered the1996-97 proposals and recommended debate on the Floor of the Houseon 27 March 1996[170]. That debate took place on 15 and 16 May 1996[171].

Volume I: The agriculturaleconomy in 1996

65.3  The Commission reportsthat 1996 was the second year of full implementation of the 1992reform package. In general terms the economic situation of farmingimproved and certain sectors, particularly the arable sector,strengthened further. Climatic conditions were generally satisfactorywith the end of the prolonged drought in Spain. The market forbeef and veal, on the other hand, was adversely affected by theBSE crisis which was reflected in sharply lower consumption andproducer prices and large scale intervention buying.

65.4  The Commission reportsthat the production of cereals in 1996 is estimated atsome 202 million tonnes, "the highest level the EuropeanUnion has ever achieved and 27 million tonnes more than in 1995." The reasons given are an increase in the areas sown, followingrelaxation in the amount of set-aside required, and a spectacularrise in yields, which averaged about ten per cent above that ofthe previous year for all cereals taken together. Marketing conditionswere exceptionally favourable because of a fall in world productioncombined with a greater demand for cereals for use in animal feedwithin the Community. For the first half of the marketing yearthe market price exceeded the intervention price by 20 per centfor wheat, 40 per cent for barley, and 45 per cent for maize. Market prices fell back towards the level of intervention pricesin the second half of the year when the figures for the 1996 harvestbegan to emerge.

65.5  The areas sown tooilseeds fell again in 1996 as it had in the two previousyears. This reflected a reduction in oilseed for non-food useswhich fell by 300,000 hectares, compared with an increase in thearea used for other oilseeds of almost 200,000 hectares.

65.6  Sugar production,which had previously been affected by drought, increased markedlywith autumn rains and a level of production comparable to thatin the previous year was achieved.

65.7  Similarly for wineproduction, output returned to its traditional level - that is,before the drought in Spain and elsewhere reduced it dramatically. First estimates put wine production in 1996 at around 174 millionhectolitres, almost 25 million hectolitres more than in 1995. Most of this increase occurred in Spain. The prices for winedeclined steadily throughout the year, particularly in Spain andItaly, and at the end of November were lower by 19 per cent inSpain and 24 per cent in Italy than at the same time in 1995.

65.8  The production ofbeef and veal fell by about 4 per cent in 1996 becauseof the adult cattle slaughter policy in the United Kingdom. Betweenthe end of March and the end of August 1996, market prices forbeef fell by about 15 per cent from levels which had already beenfalling. Prices have since risen and stabilised at a level closeto that before the crisis, due to extra market support measures.

65.9  Milk productionin 1996 is expected to be the same as in 1995 (121.3 million tonnes). This is the result of smaller herds with higher yields. Cheeseproduction grew but butter consumption declined. World demandwas lower and there were reduced export possibilities. As a result,market prices for butter fell by over 10 per cent and at the endof November were 5 per cent below the intervention price, havingbeen 6.4 per cent above it at the beginning of the year.

65.10  Poultrymeatproduction rose by 2.8 per cent and prices increased as a resultof the reduction in beef consumption.

65.11  Similarly, pigmeatprices benefited from increased demand following a fall in beefconsumption, rising by over 20 per cent from April to June 1996,but from the end of the summer prices returned to the previoustrends.

65.12  Production of sheepmeatand goatmeat remained stable, but prices reached levelswell above those recorded in the three previous marketing yearsdue to higher demand.

65.13  Overall the indexof producer prices for crop products rose in nominal terms byan average of 3.7 per cent with fruit (6.4 per cent), fresh vegetables(15.1 per cent), wine (6.7 per cent), olive oil (25.9 per cent)and dry vegetables (10.1 per cent) recording above average rises,with producer prices for potatoes falling by 38 per cent and foroilseeds by about 6 per cent. In the livestock sector, the steepfall for cattle (down 13.3 per cent) and calves (down 10.7 percent) was compensated by a sharp rise for pigmeat (13 per cent)and poultrymeat (7.4 per cent). The price of milk fell slightly.

65.14  The effect in MemberStates varied considerably. Producer prices fell by 14.7 percent in Finland, 5.1 per cent in Sweden, 4.8 per cent in Irelandand between 2 and 3 per cent in Denmark and the United Kingdom. On the other hand, prices rose in Belgium by 2.5 per cent (comparedto minus 9.8 per cent in the previous year), 1.4 per cent in Italyand 1 per cent in Greece, giving an average for the Communityof 0.6 per cent. The final figure for the effect on farm incomeswill not be known until later in 1997. However, the assessmentof farm incomes based on commodities no longer fully reflectsthe underlying situation because compensatory payments now constitutea key component in agricultural incomes, particularly for cerealsand beef. Operational subsidies received by agriculture whichare not commodity-related total over 25 per cent of gross valueover the Community as a whole. The Commission's first impressionof the trend for 1996 is that farm incomes will continue to growin most Member States, consolidating substantial improvementsin 1994 and 1995.

The budgetary situation

65.15  In the 1997 budget,the guideline for the EAGGF[172](Guarantee Section) is 41,805 million ECU (£29,845 million)[173],which represents an increase of 977 million ECU (£697 million)on 1996. The 1997 budget takes into account the consequencesof the special measures in the beef sector. The Commission commentsthat

"the agreementbetween the different branches of budgetary authorities to have1997 at 'zero' growth led to a 1 billion ECU reduction of itscredits to 40,805 million ECU, resulting in a linear reductionof 2.8 per cent of the credits for all sectors, beef excepted."

1997-98 price proposals andaccompanying measures

65.16  No changes areproposed in the animal production sector, nor for those crop sectorsfor which reform is expected such as tobacco, olive oil and wine. Some changes are proposed in the textile sector and the costof reimbursement of monthly increments for cereals and rice hasbeen adjusted downward to reflect lower interest rates. The Commission'stable setting out the price proposals in ECU for various agriculturalproducts appears below (Annex A). The proposals do not coverthe cut in arable crop compensatory payments to apply in 1998as these are already before the Council.

Volume II: Financial Implications

65.17  Table I summarisesthe financial implications of the proposals of the EAGGF GuaranteeSection expenditure and agriculture own resources.

65.18  The Commissionhas also presented a new estimate of expenditure for 1997 takingaccount of economic developments. The 1997 budget adopted on18th December 1996, brought EAGGF Guarantee Section appropriationsto 40,805 million ECU, which was 1,000 million ECU below the agriculturalguideline, although the appropriation requirement estimate usedto draw up the budget was at the same level as the guideline. The reduction resulted from less support on sheepmeat and goatmeat,a significant reduction in the milk and milk products sector,a downward revision of the quantities for beef intervention andreduced requirements for the early slaughter premium for calves,and a fall in requirements for oilseeds due to reduced production. Other reductions were in respect of sugar, dried fodder, fruitand vegetables, tobacco, eggs and poultry and food aid. On theother hand, agri-monetary aid was increased and more was spenton olive oil, fibre plants, rice, wine, high refunds on non-AnnexII products, pigmeat (where payments in respect of swine fevercompensation were higher than anticipated) and increased expenditureon "accompanying measures" (agri-environmental measures). As with previous budgets, the out-turn will depend on the relationshipbetween the ECU and the dollar.[175] There is a margin of 755 million ECU between the estimate andthe agricultural guideline for 1997.

65.19  For 1998, the provisionalestimate of the guideline is around 43,300 million ECU, an increaseof 3.6 per cent compared with 1997. However, the Commission saysthat the agricultural budget should share the general budget disciplinein the Union and not exceed that for 1997 by more than 3%. Thisprinciple has been observed in drawing up a budget substantiallylower than the preliminary draft budget. The Commission drawsattention to the reduction in compensatory aid for arable cropsalready proposed and the alignment of aid for set-aside with theaid for cereals which would result in a saving of almost 1,400million ECU. The figures below show the expenditure in real termsover the last six years, expressed as an index. Expenditure inthe period 1989-90-91 is taken as the base for the index.

65.20  There is thus noreduction in overall expenditure in real terms. Employment inagriculture continues to fall and there continues to be a slightincrease in net value added by agriculture. Prices of intermediateconsumption have also fallen slightly.

65.21  The detailed viewsof the previous Government on each element of the package werecontained in the Explanatory Memorandum submitted on 7 April. Since the change of Government, the Ministry of Agriculture,Fisheries and Food has confirmed to us that these views are endorsedby the present Administration. It is on that basis that viewsare quoted in the paragraphs below.

The Government's view

65.22  In his ExplanatoryMemorandum of 7 April, the then Minister of State at the Ministryof Agriculture, Fisheries and Food (Mr Baldry) said that the Commission'sproposals were extremely limited because there were a number ofseparate reports or proposals on individual régimes whichwere already before the Council and the European Parliament. These included reform of the wine régime, tobacco and oliveoil, proposals for changes in durum wheat and bananas and newmeasures for honey and potatoes. In addition the Commission wascommitted to presenting proposals for reform of the beef, dairyand cereals regime later this year. The then Minister of Stateexpressed disappointment that the price proposals did not beginthe process of bringing Community support prices closer to worldlevels in fulfilment of the Commission paper prepared for theMadrid European Council, which emphasised the need for the CAPto evolve to a more liberal policy which would enable the Communityto obtain a strong position in World Trade Organisation (WTO)negotiations and also help with the process of enlargement.

65.23  The new Governmentis of the same view, and also accepts the proposal to adjust monthlyincrements for cereals to reflect interest rate movements. Itsupports the Commission's proposals for cuts in arable aid arealso supported, although believing that the balance between thereductions proposed for the different crops will need to be examined. The previous Government expressed disappointment that there wasno cut in the price for sugar and considered that the proposedcuts in storage refunds should be reinforced by a substantialcut in sugar support prices. The previous Government also agreedwith the Commission's proposals for flax and hemp.

65.24  In the livestocksector, the previous Minister of State expressed surprise thatthe Commission proposed no action on beef prices as the marketwas clearly out of balance and would be so even without the bovinespongiform encephalopathy (BSE) crisis. In his view prices hadto fall if market balance were to be restored. He also expresseddisappointment that no action was proposed for the milk régime. The overall effect of the proposals on public expenditure forthe UK would be neutral.

Volume III: Legislative proposals

65.25  This volume setsout, by commodity, proposals for 16 draft regulations. Annex Bbelow gives the summary of the financial impact of the proposalsand related measures. At Annex C we provide a commodity indexgiving cross-references to the proposals set out in Volume III,to the Explanatory Memorandum Annex numbers, and to the commodityreferences in Volumes I and II.

Cereals

65.26  The proposal wouldfix the monthly increases for 1997-98 reducing the interventionprice for common wheat, durum wheat, rye, barley, maize and sorghumfrom 1.1 ECU/tonne (£0.79/tonne)[177]to 1.0 ECU/tonne (£0.71/tonne). There will be no other changes. The Commission considers the proposal necessary to take accountof a decline in interest rates. The Government supports the proposedreduction in the value of the monthly storage increments.

Rice

65.27  This proposal wassimilarly fixed at the monthly increases in the intervention pricefor rice for 1997-98 reducing it from 2.28 ECU/tonne (£1.63/tonne)to 2.0 ECU/tonne (£1.43/tonne). Again there is Governmentsupport for the proposed reduction.

Sugar

65.28  There are two proposalson sugar. The Commission proposes maintaining prices in 1997-98at the previous year's level and reducing the storage aid from4.2 ECU/tonne/month (£3.12) to 3.5 ECU/tonne/month (£2.60). The standard quality of beet would remain unchanged; it shouldbe of sound and merchantable quality and have a sugar contentof 16% at the reception point. Sugar remains one of the un-reformedrégimes, with prices increasingly out of line with thosefor other arable crops. The Explanatory Memorandum argues thatprices are too high and should be cut in this year's price-fixinground. The reduction in the amount paid for storing sugar (thestorage refund) should, if the storage levy is also reduced, leadto lower prices to sugar uses, which the Government welcomes. The freeze will also apply to supplies from the African, Caribbean,and Pacific (ACP countries) which follow the Community's interventionprice for raw sugar.

Olive oil

65.29  The reform of theolive oil régime is still under consideration. If agreed,the changes would not apply before the 1998-99 marketing year. The Commission's price proposals for the 1997-98 marketing yearwould maintain the structure (and complexities) of the presentarrangements, with the only change an increase in the percentageof consumption aid to be retained to finance the expenses of thetrade organisations which administer the aid. This percentagewould be increased from 5.5% to 8%. The Government considersthat a major reform of the olive oil régime is long overdueand the régime should be replaced by one which is simpler,less open to fraud and costs less. It would prefer a reductionin aid rates for the forthcoming year and opposes increasing thepercentage withheld from consumption aid to finance expenses oftrade organisations. In the Government's view this indicatesthat consumption aid is too high in the first place, and it ispressing for the abolition of consumption aid as part of the oliveoil reform. The table below sets out the 1997-98 price-fixingproposals in more detail.

Currency exchange using the April1997 exchange rate of 1 ECU = £0.7139

Flax and hemp

65.30  The proposal wouldmaintain the aid for fibre flax at the 1996/97 level of 858.86ECU per hectare (£582/hectare) but would reduce the promotionalaid to zero. This would save the Community budget of 49.62 ECUper hectare (£35.42). A similar reduction would be madein the aid for hemp.

65.31  The Government'sview is that aid rates for flax and hemp are high in comparisonto other arable crops. The régime is unreformed and theCommunity flax area has more than doubled in the past four years. In the UK it has increased tenfold, with new industrial marketsfor the fibre established with industry. The Commission has proposedtwo measures to limit expansion, a Maximum Guaranteed Area (MGA)and compulsory contracts between growers and primary producers. Compulsory contracts will be implemented for the 1997-98 marketingyear together with a requirement for the provision of securitiesto ensure processing takes place. The Government's view is thatMGAs and differentiated aid would discourage development of theflax industry in the UK and that a cut in aid over a period ofyears would be a better approach.

65.32  The area of hemphas nearly doubled and the UK area has increased in line withthat of the Community. Aid rates remain at a high level comparedto other arable crops and the Commission's proposal to reduceaid by 7.5% would bring hemp back into line with flax and discourageexcessive expansion. The Government supports the Commission'sapproach.

Silkworms

65.33  The rate of aidfor silkworms is fixed annually. The proposal would fix the aidrate for 1997-98 at the same rate as for 1996-97, 133.26 ECU perbox (£95.13). The Government considers that the aid rateshould be reduced as the régime is unreformed.

Milk

65.34  The Commissionproposes an unchanged target price for milk and intervention pricefor butter and skimmed milk powder. There have been no pricecuts since August 1994. The Government disagrees with the Commission'sview that there is no need for action on prices. It considersthe opportunity should be taken to evolve a market orientatedreform of the dairy sector. They consider a 5% cut in interventionprices for butter and skimmed milk powder would be a significantfirst step and could be combined with a 1% milk quota increaseto meet the increased consumption without endangering the Community'sGATT commitments.

171  OfficialReport 15 May 1996, cols.96-1046, and 16 May 1996, cols. 1087-1174. Back

172  EuropeanAgriculture Guidance and Guarantee Fund. Back

173  Aprilexchange rate of 1 ECU = £0.7139. Back

174  Pourmémoire. Expenditure is not anticipated. Back

175  Thebudget was based on $1 = ECU 0.78. Back

176  Thisfigure is a revision of the previous year's figure which was givenas 111.3. Back

177  Usingthe April 1997 conversion rate of 1 ECU = £0.7139. Back