The NFU is very pleased to respond to submit evidence to the European Union Committee (sub Committee D) of the House of Lords on the future of the CAP. The NFU has more than 50,000 farming members in England and Wales and represents the great majority of full-time commercial farmers.

1.  The NFU had advocated the principle of decoupling some ten years before it came into effect. The NFU was virtually the only farm organisation in Europe to support the Commission's proposals for a radical reform of the CAP.

  2.  Reality has proved disappointing. In order to gain a majority in the Council in 2003 the Commission accepted a number of compromises and special national arrangements, which have resulted in very different implementation of the reform in different Member States. What is worse, the British government decided to adopt a radical and complicated system in England which has so far proved beyond the ability of Defra and its Agencies to implement correctly or effectively.

  3.  Wales, Scotland and Northern Ireland chose different models, so that even within the United Kingdom the same producer will be treated very differently, depending on the post code. The NFU represents farmers in England and Wales. This reform has meant that interests of farmers in England and Wales, and their views on further change, are now in some respects different.

  4.  What was intended to be a simpler common policy has now become more complicated and less common. The priority for the NFU, both short and long term, is to revert to the original intention of a simple common policy.

OVERVIEW

  5.  The NFU profoundly believes that European agriculture has passed a critical turning point. A combination of rising world population, and economic growth particularly in Asia, and global warming which is simultaneously creating demand for renewable energy and reducing production capability in some parts of the world, has significantly altered the balance of supply and demand. The issue is not now simply food security, as it was when the CAP was devised, but an amalgam of food, energy and environmental security.

  6.  All these mean that land, and land-based production, are key strategic issues for Europe. The long term objective of the CAP must be to preserve Europe's production potential. The title Common Agricultural Policy aptly describes that objective.

  7.  The NFU is not persuaded by the argument that the Common Agricultural Policy should be scrapped and replaced by a Common Rural Policy. The justification for a CAP is that agriculture is an industry with extensive government involvement and financial support, where farmers compete in an open single European market. A common policy is required to avoid competitive distortions. It is possible that financial support will decline in future, but in view of the strategic importance of farming it is unlikely that government involvement will reduce. No such justification attaches to a common rural policy, any more than for a common urban policy. There is, certainly, a need for a European policy framework to support under-developed regions, some of which may be rural, but that is a different issue.

  8.  The main pressures on the CAP have been relatively constant over the years. The main ones are:

—  Budgetary demands, particularly as the EU is expanding to include relatively poor countries with relatively larger farming sectors;

—  The tension between subsidiarity in an ever-larger and more diverse Europe and the need to maintain fair competition in a single market;

—  International pressure for greater liberalization and lower state support (it is disappointing that the efforts of the EU to make its policy non trade distorting have not been more widely recognized at home and abroad.)

—  The need to maintain public support for the policy; and

—  The need to maintain Europe's productive capacity while respecting the obligation to produce in a sustainable way.

THE REFORMED CAP

  9.  The significant change made in 2003 was to decouple support from production. This requires a total change in behaviour by the producer, who should not use the decoupled payment to subsidise current production; and by the rest of the food chain, which needs to recognise that supply will in future only be secured if the price offered is remunerative.

  10.  It was always recognized that these behavioural changes would not occur overnight; but progress has been frustratingly slow, particularly in the beef, sheep and dairy sectors. There have been some encouraging developments in contractual relations in the liquid milk sector this year, and the NFU believes that an appreciation of the dynamics of decoupling was one of the factors behind these moves. If so, this could be a turning point.

  11.  Implementation of the Single Payment Scheme in England has been a disaster. The story is well documented and has been the subject of a number of investigations. Many factors have contributed to the failure, but the most critical was the government's insistence on implementing a complicated and radical scheme in the belief that this would, in some way, advantage English farmers. In reality because it proved impossible to administrate it has caused financial hardship to thousands of farmers and exposed the UK to a huge risk of budgetary disallowance. And, because it has meant different treatment of farmers both in the UK and in the EU, it has created the perception, and in some cases the reality, of competitive distortions.

  12.  The NFU does not disagree that moving to a flat rate payment in England is ultimately the right approach. But this should have been attempted in phased steps, at a common pace throughout the EU. The lesson is that CAP Reform is a long distance race. Setting off at a sprint is not a winning formula.

THE SINGLE PAYMENT SCHEME

  13.  Despite the woeful inadequacy of the English implementation, the NFU believes that the Single Payment Scheme is a sound basis for the future of Europe's policy, for the foreseeable future. The scheme has, in principle, much to offer in terms being non-trade and non-market distorting. The urgent need is for incremental changes to make the SPS both more common and simpler. The CAP Health Check is a golden opportunity to make those changes. A priority is to reduce the number of different entitlements; this can be done by:

—  Abolishing the separate "authorisations" for fruit and vegetable production in countries (like England) that are operating an area-based system.

—  Abolishing set aside, which has no place in a decoupled system.

  14.  Other changes that the NFU is advocating in the Health Check are:

—  Abolition of the partial decoupling option.

—  An increase in the minimum area, (at the option of Member States) from 0.3ha to 5 ha.

—  An increase in compulsory EU modulation, to allow a corresponding decrease in voluntary national modulation.

  15.  Even with these changes, the EU would still go into the next financial period, beginning in 2013, with three very different single payment schemes operating in parallel, namely:

—  "historic" payments, in most of the old EU members states (including Wales and Scotland).

—  Flat rate area payments, most notably in England and Germany.

—  A "simplified area scheme" in most of the 12 new member states.

  16.  The NFU's insistence on a common policy means that it must support a move to a single system at some point, and our attachment to simplicity points to the new member state model; the key issue is one of timing. The NFU would certainly not support a headlong rush to a uniform system; it must be done in phases and together. The first step in the process would be for all "old" EU member states to move to an area based system, but, as signalled in the introduction, this does put English and Welsh farmers into opposition. English farmers would like the transition to be relatively short and start as soon as possible—in the health check if that is feasible—while Welsh farmers would like the process to be gradual and delayed as long as possible.

  17.  We mentioned simplicity in the previous paragraph. A move to a flat-rate system would mean that the entire system of payment rights/entitlements could be removed, with claimants making an annual subsidy application on the basis of hectares farmed, as already happens in most new member states. The payment entitlements introduced under the SPS will then simply have been a mechanism for converting previously coupled support based on livestock numbers/cropped area/sugar beet tonnage etc into a per-hectare payment over a transitional period.

MARKET MECHANISMS

  18.  The NFU recognises that the importance of market management is greatly reduced and further trade liberalisation will at some point render it inoperable. The key here is export subsidies, for once they are abolished there will be no guarantee that any produce taken off the market will ever find an outlet. Public intervention or private storage aids are more likely to weaken than to strengthen the market.

  19.  The NFU agrees with the Commission that milk quotas should end in 2015.

  20.  Set aside has no place in a decoupled system. In a freer global market place, insofar as set aside does impact on the market price it is much more to the benefit of our trading partners in the rest of the world, who do not idle land. In a decoupled system, farmers will increase or decrease their area of arable crops according to the forward price signals. The environmental benefits claimed for set-aside can be better achieved by other mechanisms.

  21.  The EU has signalled that the EU is ready to eliminate export subsidies. The NFU accepts this, provided that other forms of export aid, such as bogus food aid, over-generous credit and state trading enterprises are eliminated in parallel.

  22.  In the longer term there is a strong case for introducing some form of risk management, and some EU countries already have arrangements in place. There are a large number of practical problems that would need to be resolved; the NFU is following this issue closely.

RURAL DEVELOPMENT

  23.  It is too soon to form a judgement on the EAFRD, given that the programmes for the UK 2007-13 have yet to be submitted to the Commission, let alone approved.

  24.  The NFU supports most of the measures under Axis 2 (land management), but is more sceptical of the potential measures under Axis 1 (improving competitiveness) and Axis 3 (the wider rural community). In England these measures are determined and administered by the Regional Development Agencies.

  25.  Our experience so far does not give us confidence that these measures will be well targeted or effective. For example, £98 million has been ring-fenced by Defra under Axis 1 to help deal with the environmental challenges of the livestock sector, but this risks being so widely diffused as to render it ineffective. Similarly, the NFU fears that an opportunity to use funds under Axis 3 for kick-starting local power generation projects will be missed.

  26.  The NFU hopes that these concerns will be proved groundless, and that the RDAs will take on their new role in rural development effectively and efficiently. But until that has been demonstrated there is no case for higher levels of funding.

  27.  The NFU strongly supports an increase in compulsory EU modulation in the CAP Health Check. These extra funds must be used in the UK to make a corresponding reduction in voluntary modulation rates.

  28.  The NFU would also like to draw attention to potential distortions of competition that could arise from rural development progammes that are being run in some other member states that have a very generous allocation of core European funds. For example, Ireland is proposing to operate programmes that are close to being coupled support for beef and sheep production.

WORLD TRADE

  29.  As an exporting region with internal prices generally above world levels, the process of trade liberalisation in agriculture was always going to be difficult for the European Union, and our interests tend to be more defensive than offensive.

  30.  If there is to be a conclusion of the Doha Round, the European Union will have to go beyond its initial offer, particularly on the level of tariff reductions. This will cause serious difficulties for some sectors of European agriculture.

  31.  By the same token, some of our competitors, most notably the USA, will have to make serious changes to their internal support arrangements. While the EU has reduced its support, and made much of it non trade distorting, the USA has increased support and much of it—notably the counter-cyclical payments—is very trade distorting. The reduction of such programmes is the major gain that the EU can expect from the WTO Round.

  32.  The gain to the European economy is more likely to come from a further liberalisation of trade in manufactured goods and services. It is important that a WTO settlement includes these issues and is not restricted to agriculture.

ENVIRONMENTAL PROTECTION AND CLIMATE CHANGE

  33.  Cross compliance and agri-environmental schemes (which now cover more than 4 million hectares of farmland) have made a positive contribution to environmental protection. The full extent of the improvement is yet to be quantified, but the fact that these measures are in place should allow a moratorium on new prescriptive legislation through, for example, the Water Framework Directive and the proposed Soil Framework Directive.

  34.  Agriculture has a major role to play in climate change mitigation and adaptation.

  35.  Agriculture is only a minor contributor to CO2 emissions, but is a major producer of other greenhouse gases like Nitrous Oxide and Methane. The NFU believes it is urgent to find integrated and cost-effective ways of reducing these emissions, and is a partner in a project to find ways by which British agriculture can continue to produce, while reducing its environmental footprint. Integrated solutions are vital; when addressing greenhouse gas issues we must not create new environmental problems.

  36.  The NFU applauds the binding EU commitments of 20% of energy production and 10% of transport fuel from renewable sources by 2020.

  37.  In the short term, production of bio-ethanol and bio-diesel are the most easily accessible opportunities, and production in the USA, Brazil and Germany have already had an impact on world cereal, sugar and oilseed prices.

  38.  In the medium and longer term other types of renewable energy production are likely to be much greater land users; this would include micro-generation from bio-digesters and local CHP plants. The enhanced Renewable Obligation Certificates proposed in the May Energy White Paper should provide an important stimulus to investment in such technology. The NFU believes that Rural Development Programmes in England and Wales should be used strategically to support these types of development.

  39.  The NFU has the ambition that every farm in England and Wales should have the opportunity to become a net energy exporter.

FINANCING

  40.  The budget for 2007-13 seems, on the face of it, to be inadequate to finance the accession of Bulgaria and Romania and any other new member states that may arrive in this period. So far, however, the CAP budget has kept well within its limits.

  41.  A serious issue for the NFU is the historical legacy of inadequate core funding of Rural Development in the UK, which has lead to a level of national modulation that will rise to 14% in England, while being unknown in virtually the whole of the rest of Europe. This is an issue that must be addressed in the next funding period.

  42.  The NFU is strongly opposed to co-financing and agrees with the Commission that this would be a step to the disintegration of the CAP.

  43.  In our view, it would require a Treaty change to make co-funding obligatory on Member States, and this would inevitably be resisted by the poorer Member States. The most likely way that it would come about would be to introduce the same mechanism that applies to pillar 2 funding, namely that European funding would be contingent on a certain level of national funding. This is precisely what led to a chronic level of under-funding of rural development in the UK.

ENLARGEMENT

  44.  Apart from the budgetary aspects, noted above, the experience of enlargement has been of net benefit to agriculture in the old member states, including the UK. Far from providing low priced competition, the general experience has been that accession countries have proved to be valuable new markets for high quality products. There is no reason to suppose that future enlargements will not follow the same pattern.

  45.  British agriculture, and horticulture in particular, increasingly depend on migrant labour. The NFU regrets the restrictions that were placed on immigration from the 2007 accession countries; and is very concerned at the impact that the phasing out of the well-established Seasonal Agricultural Workers Scheme (SAWS) will have.

SIMPLIFICATION

  46.  Our views on simplification have been covered in answers to other questions.

June 2007