1.  As the lead organisation representing farmers, crofters and growers in Scotland, NFU Scotland welcomes the opportunity to provide evidence to the House of Lords Inquiry into the future of the European Union Common Agricultural Policy (CAP). We would be happy to expand on the views in this paper by giving oral evidence.

  2.  At present, the price obtained from the market for production in virtually all agricultural sectors does not provide a sufficient return for long-term farm business profitability and viability. The long-term objective of the CAP should be to provide support that allows farmers to make a fair living producing food and delivering wider, non-market benefits. NFU Scotland believes that food security will become a priority in the post-2013 period and global demand for food production will continue to rise. It is therefore essential that, at that stage, our farming businesses are in a position to respond positively to an increased need for domestic and global food production, as they have done historically.

  3.  Our understanding of the policy development process for the future of the CAP is very similar to that of the Committee and, with that in mind, NFU Scotland has been considering the future of the CAP as follows:

—  Changes required in the 2008 Health Check.

—  The likely scenarios that we should be planning against for the post-2013 period.

—  Against these scenarios, what should the objectives of CAP be for Scottish and European agriculture.

—  What sort of CAP Regime is needed to deliver these objectives?

2008 HEALTH CHECK

  4.  The key points to be addressed in the Health Check are:

—  Energy crop scheme—too little of this direct aid actually reaches producers. If this cannot be improved the funding would be better used on measures to stimulate demand and develop the energy crop supply chain.

—  Fruit, vegetable and potato production—the negative list is not effective and farmers should be able to activate entitlements on land used for fruit, vegetable and potato production. We support the Commission's proposal to decouple processing aid, but all Single Payment Scheme national ceilings should be increased to reflect the new entitlements required.

—  Capping—capping of aid is a blunt instrument that may reduce CAP spending but will discriminate against larger, more efficient farms and lead to artificial splitting of farm businesses.

—  Minimum area—the minimum area eligible for the Single Farm Payment should be increased from 0.3 hectares but should not exceed 3 hectares to be consistent with the eligibility requirements for LFA support.

—  Intervention and set-aside—options for weakening cereals intervention should be considered, without removing the system altogether. Compulsory set-aside should be abolished but, where land in set-aside has been delivering environmental benefits, the option of transferring to agri-environment schemes should be available.

—  Voluntary Modulation—we are opposed to modulation generally as we believe it is an unnecessarily bureaucratic means of transferring funds from Pillar I to Pillar II of the CAP and undermines the profitability of farming businesses, which are still heavily dependant on direct support. Scottish Executive figures suggest that across all sectors, every 5% of modulation reduces net farm incomes by 19%. We are particularly opposed to Voluntary Modulation as this discriminates against Scottish and UK farmers compared to their competitors in the rest of Europe.

—  Partial decoupling—we believe that the partial decoupling option should be removed as soon as possible. However, where there are strong reasons for retaining production, eg cattle and sheep for environmental purposes, simple and effective measures should be introduced to achieve this aim under Pillar II.

—  Euro exchange rate—the exchange rate for calculation of the Single Farm Payment into Sterling is currently calculated on a single day (30 September), which introduces a high level of risk of an unrepresentative rate. We believe that the exchange rate should be calculated on the average over a one-month period, as under previous schemes.

SCENARIOS FOR 2013 AND BEYOND

  5.  NFU Scotland has concluded that the most likely scenario is a continuation of the current situation where the price obtained from the market does not provide a sufficient return for long-term agricultural business profitability and viability. If anything, the situation is likely to get worse, particular if there is a WTO deal which results in reduced import tariffs and therefore increased import penetration.

FUTURE CAP OBJECTIVES

  6.  Direct support will therefore be vital to keep farm businesses going, justified on the basis of paying for the "non-market" goods that agriculture already delivers. These include environmental benefits, higher production standards (particularly in comparison to cheaper imports), supporting jobs in the food-processing sector, retaining rural infrastructure and the quality of life. In the longer term, NFU Scotland believes that food security will become a priority and that returns from the market will increase and it is therefore vital that the industry retains its ability to produce until then. However, NFU Scotland also recognises that CAP support has sometimes distorted the market in the past, with retailers using it as an excuse to reduce the price they pay to producers. It is therefore important that any revised system of support avoids creating or encouraging such distortion.

THE CAP REGIME NEEDED TO DELIVER THESE OBJECTIVES

  7.  A direct support payment in return for what farming is already delivering could straddle the existing Pillars I and II. In addition, serious consideration should be given to some sort of contingency payment that would be activated if prices fall dramatically. The European Commission has been looking at this in the context of crisis/risk management but concluded meantime that there is no EU-wide system to introduce across the board. Payments on this basis would make it difficult for retailers to use it as an excuse to reduce the price they pay. A direct support payment should be complemented by business development measures as are currently available through producer organisations and under Axis 1 of the Rural Development regulation; and diversification measures as currently available under Axis 3. Such business development measures would be aimed at helping farm businesses add value and reduce costs so that profitability becomes less dependent on direct support.

  8.  Turning now to the issues raised in the Committee's call for evidence, NFU Scotland's views are as follows.

OVERVIEW

  9.  The long-term objectives of the CAP should be to support the continuation of the European model of agriculture, so that farmers can continue to produce food and deliver wider, non-market benefits. As mentioned above, NFU Scotland believes that food security will become a priority in the post-2013 period and that global demand for food will continue to rise. It is therefore essential that our farming businesses are in a position to respond positively to an increased need for domestic food production, as they have done historically. It is also important that farmers throughout the European Union operate on a level playing-field and we therefore believe that it is vital that the CAP is common across all 27 EU Member States. Currently, the main pressures on the CAP are budgetary and opposition borne out of prejudice or ignorance. On this second point, it is crucial that decisions on policy precede decisions on the budget and that they are based on an objective view of what the CAP delivers today and can do in the future, as opposed to views on the CAP that are 20 years out of date.

THE REFORMED CAP

  10.  Under the reformed CAP, decoupling of support has given farmers a degree of "freedom to farm". As a result, we are beginning to see production that is market-driven as opposed to subsidy-driven. In some cases, this has resulted in a much-improved balance between supply and demand, for example malting barley. However, there are some down sides including a drift of cattle and sheep away from some of our poorest, hill and upland areas in the north and west of Scotland. If such movement were to continue or accelerate, the consequences would be detrimental in social, economic and environmental terms for some of our most fragile rural communities. We also have concerns that cross-compliance has added to the regulatory burden faced by farming businesses without delivering proportionate benefits.

THE SINGLE PAYMENTS SCHEME

  11.  In principle, NFU Scotland has always supported the decoupling of production-linked subsidies and amalgamation into the Single Farm Payment. In a decoupled regime, and to be compliant with WTO requirements, we believe that a Single Farm Payment is a good basis for the future of EU agricultural policy. However, as indicated above, we believe that this needs to be complemented by business development measures to help farm businesses to become more profitable in their own right. We believe that in future the Single Farm Payment should reflect the cost of delivering non-market benefits, which will vary between different farm types and regions. The system of entitlements should be simplified as far as possible—at present there are four types of entitlement and we believe that this can be rationalised. NFU Scotland also has some concerns about trading of entitlements, where this leads to leakage of support away from agriculture.

MARKET MECHANISMS

  12.  NFU Scotland believes that the system of milk quotas is nearing the end of its useful life and agrees with the Commission proposal to bring the regime to an end in 2015. A number of transitional measures have been suggested, of which we believe that increasing quotas on an annual basis is the only serious option. As mentioned above, we believe that options for weakening cereals intervention, without removing the system altogether, should be considered. Compulsory set-aside is incompatible with a decoupled support regime and should be abolished. The Commission would appear to be committed to abolishing export refunds by 2013. While this might not have any direct effect on much of what is produced in Scotland, there are potential knock-on effects. For example, beef that benefited from export refunds and was previously sold outwith the EU might now be marketed in Scotland or the UK, undermining domestic production. We believe that private storage aids are a useful tool for market management and should be retained.

RURAL DEVELOPMENT

  13.  We agree with the introduction of the European Agricultural Fund for Rural Development (EAFRD) as a means of rationalising and simplifying rural development support. Subject to comments about funding below, we believe that the second Pillar of the CAP is broadly meeting its objectives. In many rural communities in Scotland, agriculture remains central to the local economy and we therefore believe that support to the agricultural industry benefits the rest of the rural community. In addition, Axis 3 of the Rural Development Regulation is specifically aimed at improving the quality of rural life and therefore benefits all parts of rural society.

  14.  However, the allocation of EAFRD funding on the basis of historical spend by individual Member States discriminates severely against the UK. While this is a position partly of the UK's own making because of its historically low spend on Rural Development measures, it has placed an artificial limit on the adoption of Rural Development measures under programmes for the 2007-13 period. The Scottish Executive is to be congratulated on significantly increasing its contribution from domestic funding but one of the unwelcome consequences of the low level of European funding is the use of Voluntary Modulation in the UK, to the detriment of UK farmers in comparison to their EU competitors. As stated in our opening remarks, NFU Scotland is opposed to modulation in principle. However, if it has to be used we favour a single rate of Compulsory Modulation applied to the Single Farm Payment in all Member States with an absolute requirement by national governments to match-fund the monies so raised. Should Compulsory Modulation be increased from its current level of 5%, we also believe that there must be an absolute requirement on national or regional administrations to reduce Voluntary Modulation by the same amount.

WORLD TRADE

  15.  NFU Scotland believes that a successful outcome to the current round of WTO negotiations will bring benefits to the EU economy as a whole, but at the expense of agriculture. The shape of CAP support has altered dramatically as a result of the Agenda 2000 and 2003 Mid-Term Review reforms and is almost entirely compliant. The EU appears to be committed to removing export refunds by 2013, which will reduce the ability of farmers and processors to export some products outwith the EU. But the biggest impact will undoubtedly be from any further reduction in import tariffs, opening up EU markets to cheap imports, potentially not produced to the same high standards as within the EU. Ironically, the main beneficiaries will not be the poorest third world countries but those with highly-developed agricultural industries such as Brazil. Therefore, while other industries and sectors within the EU are likely to benefit from a WTO agreement, we believe that agriculture will be the main loser.

ENVIRONMENTAL PROTECTION AND CLIMATE CHANGE

  16.  Cross-compliance duplicates some regulatory requirements and in fact adds to the burden of regulation, while at the same time introducing an element of double jeopardy. By this, we mean that farmers may lose a significant proportion of their Single Farm Payment in addition to prosecution under the existing regulation now also covered by cross-compliance.

  17.  We believe that the CAP can contribute to the mitigation of, and adaptation to, climate change. The decoupling of support has allowed farmers to make management choices based on what their farm is best able to produce and what the market wants. This has opened up numerous possibilities including the production of biomass, crops for biofuels and diversification into wind and hydro power. We consider the role of biofuels to be highly important in this regard, not least because Scotland is well-suited to growing oil seed rape for the production of biodiesel. Long daylight hours mean that the oil content of crops grown in Scotland is much higher than elsewhere.

FINANCING

  18.  NFU Scotland shares Commissioner Fischer Boel's dissatisfaction at the financing agreement reached by Member States at the December 2005 Council. This has resulted in an almost 25% reduction in EAFRD funding from 88.5 billion Euros to 69.5 billion Euros for the 2007—2013 programming period. In addition, support payments to farmers in the new Member States of Bulgaria and Romania have had to be found from within existing resources, which will result in further cuts to those in existing Member States. Therefore, in Pillar I and particularly in Pillar II, there are insufficient funds to deliver the full range of measures that make up the CAP as a whole. We do not consider co-financing to be a possible way forward in financing the CAP, as we believe that this will only serve to exacerbate differences between Member States. For example, we do not believe that the UK government would co-finance to the same level as existing payments or at the same level as other Member States. This would place UK farmers at a financial and competitive disadvantage compared to their counterparts elsewhere in the EU. .

ENLARGEMENT

  19.  The main impact of the 2004 and 2007 enlargements of the EU have been on the available funding for the CAP. In addition, the policy of cohesion means that a relatively higher proportion of funding, particularly under Pillar II, will be allocated to improve the performance of the less economically well-developed agricultural sectors in the new Member States. The net result of this has been that the EU 15 Member States suffered a disproportionately high share of the reduction in EAFRD funding referred to above.

SIMPLIFICATION OF CAP AND OTHER ISSUES

  20.  We believe that there are a number of obvious steps that can be taken to simplify the CAP:

—  Rationalise the current system of entitlements.

—  Abolish compulsory set-aside.

—  Remove milk quotas by 2015.

—  Scrap modulation—if funds need to be transferred from Pillar I to Pillar II this should be done at budgetary rather than individual farmer level.

—  Simplify the application process for Pillar II schemes—too many require the input of consultants/advisers.

—  Alter the penalty system to differentiate between deliberate intention to defraud and genuine error.

11 June 2007