Ms Shelby Matthews and Mr Simon Michel-Berger

3 MARCH 2005

  Q388 Chairman: We are getting rather used to starting our meetings with apologies. Yesterday it was because we got stuck behind a train going to Paris and today evidently there has been a bomb scare at the European Parliament, so we have spent the last hour in a bus. I am sorry that we are late and I hope it is not too inconvenient for you and your colleagues if we take some time from now on, is that all right?

Ms Matthews: That is fine. May I welcome you all to COPA-COGECA. We just moved into these buildings, so it is quite new for us. We are not as organised as well as we might be. My name is Shelby Matthews. I am Director for General Affairs. My colleague, Simon Michel-Berger, who is of German origin but you would not notice it from the way he speaks—he has been in England for quite a time working on the NFU as well—is policy advisor particularly on the CAP reform measures, the budget and those issues. We have received your questions. I will hand over to you to see how you would like to handle the discussions.

  Q389Chairman: Thank you very much indeed. I think we would like to start with a general question about where do you think the reform of the CAP and the financing of the reform is going to come from and then move on to Single Farm Payments and then to rural development and perhaps, finally, to Doha. As the appropriate Committee of the House of Lords, we are conducting this inquiry into future financing of the CAP against the background of the decisions that the Commission have already taken. In general terms, our first concern would be, given the pressure from the five contributing countries that the budget should be restricted to 1 per cent of national income, to what extent on the decisions made by the European Commission are they likely to be able to maintain their undertakings as far as the agricultural sector is concerned? Or, because of the pressure on money, in your judgment, at this early stage, are these undertakings likely to be compromised?

  Ms Matthews: First of all, I could take those questions as such but I think it would be useful to just give an overview at some point.

  Q390Chairman: Please do. Would you like to do that at the start?

  Ms Matthews: Maybe I should start with an overview of the issues facing agriculture because this reflects on the direct payments and so on. The big issues facing agriculture which have been emerging over the last 10 or 15 years, and going on, are first of all enlargement, WTO, the concentration on the agri-food business as a whole, and the other big issue is this shift in society's attitude and growing concerns about a whole range of issues, which I do not have to go into, you know them very well: the environment, animal welfare, food safety and all those issues. If I leave aside for the moment the question of concentration on the agri-food business, because I do not think that is being tackled at this stage, and also enlargement, which is a specific issue. Obviously it has an impact on the reform as such but in a way those numbers are now part of the EU and they are going to face the same issues that rest of us in the European Union will face. Taking the two big issues, one is the WTO and the other is these growing concerns. What we are seeing in WTO is this reflection of the pressure for liberalising trade in agriculture being pushed by certain major trading countries in particular, including the US, which is pushing down farm prices and getting rid of support linked to production. On the other hand, we have these growing concerns in European society which, if you put them in a nutshell, are for sustainable production and those are increasing the production costs of farmers. This is really the problem facing agriculture, the pressure on prices and the increasing costs. If you look at the reform measures you have to take the three major reforms that we have had since 1992. They are part of a series of a continuous policy, as we see it. If you look at the measures you have to conclude that the main reason behind those reforms was WTO and that was the main push for it. If you look at McSharry in 1992, it was a pre-Uruguay Round reform, and the main thing was to reduce support prices because that was required in GATT at that time. If you look at Agenda 2000, it was reducing support prices in preparation for the Doha Round, quite an early preparation, and there was a further cut in prices. As soon as we had done that, our partners said "Yes, that is fine, you have done that, now we want some more", so we had the mid-term reform which was the next step to tackle milk on the price side, which was the last big sector, and also to tackle the direct price support on Mediterranean crops: cotton, olive oil and tobacco. The big thing was to shift from our blue box to the green box, so to decouple payments to meet WTO requirements. We have cut our support and we have almost reduced our amber box by nearly three-quarters. We have removed the major part of our blue box into the green box. We have partially compensated farmers for those cuts but, in a way, we have not tackled the issue of these growing concerns in society about animal welfare and environmental concerns. We have in a way but this is where I see the problem and the link with rural development. In the last reform a lot of people made a big thing of the fact that it was a reform to take into account all of these new concerns and the way it was done was by introducing some new measures in the rural development policy, a change in the rural development policy as such, but in fact no new money coming, at least for the EU15, for those measures. I think this is where the question on the future of the Single Payments is important because there is this thesis put forward, particularly by OECD, that you can have a free market for agricultural products and all of these non-trade concerns, if I can put it that way, can be dealt with through direct payments under a green box or rural development policy. This is where I think the problem is because you can do that to some extent for certain services that farmers provide when they are specific services like planting copses, you can identify it and you can pay an aid for that service to the farmer under rural development or something like that. Most of these concerns impact directly on production costs. If you look at the reform measures in annex three and annex four, they are to do with plant health and safety, environmental issues and animal welfare, which are part of cross-compliance. These are all related to production costs and increasing the production costs of farmers and they are daily costs. What we are saying is there is no way that farmers can meet those requirements, which they are perfectly willing to do. For us, society fixes the rules and farmers have to meet those rules as best they can. There is no way they can meet those rules and be competitive at world market prices because our other competitors are not under the same constraints. The type of production that you have been to around the world and seen and the way production is moving is not a way of production often that is acceptable in the European Union and, for example, animal welfare concerns are just not an issue in these other countries. For us, the direct payments are enabling farmers to survive with prices going down to world price levels, therefore it is essential for them to be maintained. The other problem is that a lot of these rules and regulations are not new, farmers have been complying with a lot of these measures, but they are increasing and, therefore, the costs will continue to go up and we see quite a big increase coming forward on these regulations which are going to impact on farmers' costs. We do not think that the rural development policy, as such, can deal with that.

  Q391Chairman: Why not? Is there not enough money committed to it at the moment, or what?

  Ms Matthews: The direct payments which are part of Pillar 1 are decoupled so one could say they could go in Pillar 2 but, as the rural development policy is at the moment, the amount of money there is less than it has been in the past for the EU15, it is going down under the new proposals, and it is possible to use that money for direct specific measures to pay for particular services. It is also possible to pay, as it is in the new measures, for farmers to adjust for certain investments they have to make to make the structural adjustments and so on.

  Q392Lord Lewis of Newnham: In other words, there is not compatibility between what is available there and what is necessary in the other?

  Ms Matthews: If you look at the direct payments, they are getting on for around

30 billion in total and there is no way that farmers can survive and compete at the world price level without those direct payments, they are part of the cost of producing food in the European Union.

  Q393Lord Haskins: They are going to be there until 2013 and at the most pessimistic level the direct payments will be 70 per cent of the present level.

  Ms Matthews: Yes, I saw that in your note.

  Q394Lord Haskins: Six or seven years is quite a long period for the adjustments to take place in European agriculture. The adjustments have to take place and they have been taking place for the last 20 years. It is quite a significant amount of money still being put in to help farmers adjust to the future.

  Ms Matthews: Yes, but the point we are making is that surely farmers can continue to modernise and there is scope for quite a bit of structural change in the European Union without becoming massive farms with beef flocks of 200,000 cattle or whatever. It is the daily production costs they have to pay and you can increase your productivity but you cannot get away from the fact that you have those daily costs which other competitors on the world market do not have.

  Q395Earl Peel: Do you think that the Single Farm Payment in the UK is sufficient to cover the additional costs that farmers have to comply with under cross-compliance? Is there a correlation between the two? I have also wondered whether this was done on a cost analysis basis or whether a figure was just plucked out of the sky.

  Ms Matthews: What happened was they were based on—

  Q396Chairman: History.

  Ms Matthews: They were based on the cut in support prices but with—

  Q397Earl Peel: It was what was put on top, the cross-compliance conditions, and whether it related to the amount of money that the farmer was actually receiving.

  Ms Matthews: No, I do not think there was any correlation. Basically, we lost x number of euros per tonne and the compensation was between 50 and 60 per cent of that loss. Farmers have already faced this loss because they have been partially compensated. All you can do is to say that is how farmers can survive at the moment with the cross-compliance measures that they have to comply with at the moment and that level of direct payment and this is the situation we have.

  Q398Earl Peel: So you would be reluctant to see money modulated from Pillar 1 to Pillar 2 because of the stability that it offers to farmers?

  Ms Matthews: What we see happening is that the costs are going to be going up and, although we have not yet seen what is going to come out of WTO, we know there is going to be more pressure, prices are going to come down more and, therefore, it is essential to maintain these payments. You could discuss whether it is best to maintain them under Pillar 1 or Pillar 2 but it amounts to the same thing in the end as far as the budget is concerned. We need to maintain those payments from our point of view.

  Q399Chairman: You have said, and in a sense you have repeated, that it is the WTO pressure that has particularly moved the Commission and then the Council in this direction. To be a bit provocative, is there not also a very general large feeling in the EU that in these days of global trading when food is available and in general terms much cheaper from elsewhere, there is somewhere wrong about more than 40 per cent of the EU money being spent on the CAP? You must get some strong reflection of that attitude.

  Ms Matthews: Yes. I know it is there, of course, and it is very strong in the UK. The whole question is do you want agriculture in Europe and what sort of agriculture do you want. We are faced with mounting pressure from imports. Brazil is only just starting and the pressure coming from there and countries like that is going be considerable, although it depends a little bit on what the growth is going to be in the Pacific area and the developing countries and so on. Obviously the retailers and the processors want to get the cheapest food, but when people have got all of these concerns about sustainable production and farmers in Europe are trying to produce in a sustainable way, in the way that they want, is it right that we say, "No, that is too expensive, we will forget that and we will import products which are not produced in a sustainable way. We will import it from Brazil, for example, where they are cutting down the forests in order to produce this food"?