CAP reform - The arable crops sector

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CAP reform: The arable crops sector

(July 1999)

Arable crops cover 40% of the European Union's utilised agricultural area, and are grown in all the Member States. Arable crops include a wide range of annual crops such as wheat, barley, maize, rye, colza, sunflower, peas, etc. Since 1992, they have been eligible for a hectare-based Community aid scheme which also includes "set-aside" measures for withdrawing land from cultivation. This system is the largest category of expenditure in the Union's budget. As such, it features prominently in the reform of the CAP resulting from Agenda 2000. A brief summary of the reform regarding arable crops and the new practical arrangements planned for the sector for the period 2000-2006 is provided in the pages that follow.

Guiding principles of the reform

The reform of the common agricultural policy (CAP) agreed by the European Council at its meeting in Berlin on 24 and 25 March 1999 is designed to prepare European /agriculture/ for the internal and external challenges awaiting it in the year 2000 and beyond.

This reform will encourage /agriculture/ to be more competitive but also more environmentally friendly. It marks a further stage in the policy of supporting farmers rather than products, and of remunerating not only farmers' output but also their additional contribution to society.

The reform will further provide the basis for the Union's stance in the next round of multilateral trade negotiations due to start in November 1999 within the framework of the World Trade Organisation (WTO).

In the longer term, the reforms now being undertaken will create the right conditions for the integration of the agricultural economies of the applicant countries, whose adjustment will be facilitated by the financing of structural "pre-accession" measures.

Meeting new challenges

Agricultural markets are increasingly operating in economic globalisation. The reform should make it easier for European /agriculture/ to participate in this process and guide production towards effective demand, while taking account of consumers' requirements in terms of quality. The lowering of intervention prices provided for in the reform, in particular for cereal crops and beef and veal, should bring market prices down, thus narrowing the gap between internal prices and world prices. As a result, agricultural production should become more competitive and encouraged to adjust to demand.

The increase in direct payments to farmers, either per hectare or per head of cattle, will help ensure the level and stability of their incomes.

Rural development policy has been confirmed as the "second pillar" of the CAP, with the purpose of improving the economic and social integration of all rural areas. With this in mind, a single regulatory framework will provide for a better use of rural development instruments designed to promote not only agricultural activities, but also economic diversification in rural areas. These instruments include agri-environmental measures, which have been strengthened.

The reform also aims to encourage more environmentally-friendly production methods by introducing the possibility of the "cross-compliance" principle, in other words subjecting direct payments to environmental criteria.

National authorities have been granted greater room for manoeuvre in the implementation of the reform, so as to bring the CAP closer to the realities and expectations of people in general and farmers in particular. Part of the direct payments can thus be allocated on the basis of national criteria and broken down into "national envelopes" managed by each Member State according to its own requirements. This system will need to respect Community criteria so as to avoid distortions of competition while it allows greater flexibility to respond to very diverse situations.

The reform of arable crops – Key features

In the cereal sector, internal prices are, on average, still higher than world prices. This makes it very hard to export European cereal crops and products processed from them without subsidies – the "refunds" which exporters receive to offset the difference between their purchase price on the European market and their sales price on world markets. The subsidised exports are limited each year in terms of both volume and value, as part of the Union's international commitments to the WTO.

Aligning Community prices with those on the world market should therefore make it possible to export without subsidies, and therefore without quantitative ceilings. Community products will therefore be able to benefit from opportunities in a world market where the volume of trade is expected to increase significantly in the medium term.

In addition, more competitive EU production of cereals compared with imported products will maintain marketing opportunities in the animal feed sector at a high level or even increase them.

As for oilseeds, the gradual alignment of payments per hectare with the aid planned for cereals and set-aside will eventually eliminate their specific character, thus freeing producers of the hectare limits set out in the Blair House agreement.

	1999	2000	2001	2002/2006
Cereals/maize in euros/tonne
- intervention price	119,19	110,25	101,31	101,31(1)
- compensation	54,34	58,67	63,00	63,00(1)
Protein crops in euros/tonne	78,49	72,50	72,50	72,50
Oilseeds(2) in euros/tonne/cereal equivalent	94,24*	81,74	72,37	63,00(3)
Seed flax in euros/tonne	105,10	88,26	75,63	63,00
Set-aside in euros/tonne	68,83	58,67	63,00	63,00(1)
Durum wheat(4) Supplementary payment per ha
- traditional areas	344,50	344,50	344,50	344,50
- other areas	138,90	138,90	138,90	138,90
Potato starch(5) per tonne
- minimum price	209,78	194,05	178,31	178,31(1)
- payment to producer	86,94	98,74	110,54	110,54(1)
Grass silage in euros/tonne	none	58,67	63,00	63,00(1)

*	subject to the reference price system. NB: no change for fibre flax.
(1)	Subject to change from 2002 depending on a possible lowering of the intervention price.
(2)	Up to 2001 inclusive, aids may be calculated on the basis of oil yield expressed as a cereal value, by applying a factor of 1.95. Starting in 2002, all aids will be calculated according to the cereal yield. During the whole of this period, the Blair House arrangements (reduction in aids) will apply in the event of the limit being exceeded.
(3)	Subject to change from 2002 depending on a possible lowering of the intervention price and/or overall review of the oil sector.
(4)	Subject to a maximum guaranteed area per Member State. The eligible area in Portugal has been increased from 59 000 to 118 000 ha.
(5)	Subject to quotas by Member State.

The new arrangements

The major innovation is a 15% reduction, in two stages, in the intervention price for cereals, combined with a progressive increase in direct aids.

Cereals

The intervention price (currently 119.19 euros per tonne) will fall to 110.25 euros per tonne for the 2000/2001 marketing year (the cereal marketing year begins on 1 July) and 101.31 euros for the 2001/2002 marketing year. A later reduction in intervention prices, combined with an adjustment in aid, may be decided on in the light of market trends. At the same time, direct aids will be increased from the current level of 54.34 euros per tonne of historical regional cereal yield to 58.67 euros and then 63.00 euros (to obtain the payment per hectare, this amount should be multiplied by the reference yield set out in the regionalisation plans drawn up by the Member States). The principle of monthly increases is maintained; these apply for seven months (November to May). Their value is currently one euro per tonne and per month.

Finally, with the concept of "standard quality" for common wheat, rye, barley, maize and durum wheat having become obsolete, the relevant regulation has been repealed. The Commission will nevertheless continue to set minimum standards (moisture and impurity content, etc.) that cereals will have to meet to be eligible for intervention.

Oilseeds

The basic amount applicable to direct aids per hectare, expressed in euros per tonne of historical regional cereal yield, will be brought down in three stages to the level for cereals and set-aside. It will be 81.74 euros per tonne for 2000/2001,72.37 euros per tonne for 2001/2002 and 63 euros per tonne from 2002/2003 onwards. Adoption of the latter amount – which will make it possible to establish a single aid for cereals, oilseeds and set-aside – will nevertheless depend on the outcome of a report which the Commission is to submit to the Council. In the meantime, the Member States which had chosen to calculate assistance for the oilseeds sector from the historical regional oilseed yield will be able to continue using this method. They will establish the basic amounts by applying a factor of 1.95 (which corresponds to the ratio between the historical average yields for cereals and oilseeds). Finally, the provisions of the Blair House agreement – which include reduced aid where agricultural areas are exceeded – will remain in force during the period 2000-2002, although the basic amount of aid finally paid may not fall below the amount applicable to cereals and set-aside.

Set-aside

The basic compulsory set-aside rate has been set at 10% for the period 2000-2006. It may be altered later in the light of market conditions. As has been the case up to now, producers may set aside more than 10% ("voluntary set-aside") up to a maximum which has been left for Member States to decide. In all cases, per hectare aid for set-aside is the same as for cereals.

Area payments for various products

The arrangements governing area payments remain broadly unchanged, as do the regionalisation plans previously drawn up by the Member States (on the basis of the concepts of "base area" and "historical national average yield" in particular). It is still possible to make a distinction between irrigated and non-irrigated crops, and between maize and other cereals. In contrast, extraordinary set-aside is permanently abolished. Furthermore, the payment period for aids (previously 16 October to 31 December) has been changed, and now extends from 16 November to 31 January.

With respect to Finland and some areas of Sweden, a special measure has been adopted for both oilseeds and cereals as of 2000. It provides for a supplementary standard premium of 19 euros per tonne of historical regional cereal yield, granted on account of both the low yields and the climatic conditions prevailing in these countries, which make grain drying more expensive.

Durum wheat

The standard additional per hectare aid remains unchanged, at 344.5 euros per hectare for the traditional areas and 138.9 euros per hectare for other areas, subject to the maximum guaranteed areas already set by Member State, and on condition that certified seed is used.

Protein crops

The payment per tonne of historical regional cereal yield will be set at 72.50 euros as of 2000.

Seed flax

The compensatory payment per tonne of historical regional cereal yield will be set at 88.26 euros for 2000, 75.63 euros for 2001 and 63 euros thereafter.

Maize

The possibility of setting specific yields and base areas for maize is maintained. In the relevant regions, a distinction has therefore been made between the yields for maize, other cereals, and all cereal crops together.

Grass silage

n regions where no maize is grown, areas bearing grass intended for silage are also eligible for the per hectare aid set for cereals on the same terms, i.e. within a specific base area.

Irrigated areas

The possibility of setting specific yields, according to a base area, for calculating per hectare aids has been maintained to allow for the significant variations in yield between irrigated areas.

Potato starch

Potatoes are not included among arable crops, but potato starch is covered by this common market organisation, as it is used as a substitute for starch from cereal crops. The reformed system provides for a lowering of the minimum price per tonne, which will fall to 194.05 euros in 2000 and 178.31 euros from 2001 onwards. Again, a further reduction may be decided in the light of market trends. At the same time, payment to producers per tonne of potatoes needed to produce one tonne of starch will change to 98.74 euros in 2000 and 110.54 euros from 2001 onwards. Payments will be made solely on the basis of cultivation contracts between potato growers and starch producers, within the limits of national quotas.

Small producers

The provisions applicable to small producers have been made more flexible. Producers who have submitted an application for aid equivalent to the aid provided for the production of less than 92 tonnes of cereals (i.e. an area of 12-30 hectares, depending on the region) will remain exempt from compulsory set-aside. However, they may – if their specific circumstances encourage them to do so – take advantage of the voluntary set-aside provisions. In addition, as of 2000, they will also be eligible for specific payments for oilseeds, protein crops, seed flax and maize.

The environment

The Member States must take the environmental measures they deem necessary, and lay down appropriate penalties for non-compliance. They will, in particular, be able to implement the principle of cross-compliance for area aid, by linking payment to compliance with general or specific environmental protection requirements. It will be possible to allocate funds not spent to, inter alia, agri-environmental measures.

Furthermore, the new rural development regulation provides that agri-environmental measures must figure in all rural development programmes of the Member States, according to their priorities. With this in mind, farmers who accept a five-year contract will receive a payment calculated in terms of the extra costs and income losses incurred. It has been confirmed that these measures will be applicable to sunflower and spring colza.

Imports and exports

Medium-term forecasts of global demand suggest there may be some recovery on world markets, which heralds favourable prospects for markets and average price levels. For cereals, and subject to the rules set by international agreements, the system for calculating import duties and the export refund mechanism remain, as does the possibility of export taxes as an exceptional safeguard measure. The purpose is to avoid sharp distortions in the event of a turnaround in the market, both inside and outside the Union.

Economic impact

More attractive world prices in the medium term will allow European producers to participate more actively in world trade, where demand should increase during the period covered by Agenda 2000. The reform is also an economic signal for the agricultural chain as a whole and in particular the producers themselves to seek improvements in the unit profitability of their products. This calls, on the one hand, for a streamlining of production techniques and farm structures and the steady incorporation of technical advances and research results, and on the other hand for the exploitation of new outlets, quality improvement and production cost-cutting.

In the shorter term, gradual implementation of the reform, combined with a 10% set-aside rate to slow down the growth in intervention stocks, should ensure sound adjustment to the economic situation and facilitate market balance.

Simplification

The reform of the CAP comprises a number of simplification provisions. In the arable crops sector, these notably include the abolition of extraordinary set-aside and individual base areas and the streamlining of compensatory payments for oilseeds.In addition, a single management committee will now be responsible for all arable crops.

Arable crops: the situation in the Community market

Arable crops include cereals, oilseeds, protein crops and non-textile flax (seed flax) together with a set-aside scheme. They make up one of the main sectors of European /agriculture/, which receives considerable budgetary support: some 17 billion euros, i.e. around 40% of the EAGGF budget. In 1998, it accounted for 53 million hectares and some 13% of agricultural gross domestic product. The main products involved are:

Cereals, with a total output of 208 million tonnes in 1998 composed mainly of common wheat (94 million), durum wheat (9), barley (51), rye (6), maize (35), sorghum (0.6) and products of first-stage processing from cereal processing (flour, groats, semolina, malt, starches, glucose, cereal-based preparations, bran, and wheat gluten), accounting for a total area of 37.2 million hectares.
Oilseeds (colza, sunflower and soya beans) with a total output of 15.1 million tonnes in 1998 (9.7 for colza, 2.3 for sunflower and 1.7 for soya beans, which have not been developed extensively in Europe) for an area of 5.9 million hectares (of which just over 400000 hectares are devoted to non-food uses).
Protein crops (peas for animal feed, broad beans, horse beans and sweet lupins), with 5.9 million tonnes produced from 1.5 million hectares in 1998.
Non-textile flax or seed flax (0.4 million tonnes from some 300000 hectares in 1998).

Market outlets

The main outlets for cereals are in the internal market of the Union: 85% of output in 1998, i.e. approximately 177 million tonnes. Over half of this (110 million tonnes) went to animal feed, about a quarter (43 million tonnes) to human consumption and the rest to industrial uses (17.5 million tonnes) and seeds (6 million tonnes). Exports account for 15% of production: around 28 million tonnes from the output of the 1998-1999 marketing year.

Oilseeds are used to produce oils and manufactured fats such as margarine, and also oil cake for animal feed. The European Union produces around 8 million tonnes of vegetable oils (excluding olive oil), of which around 60% comes from Community colza and sunflower seeds and most of the rest from soya bean crushing. With regard to oil cake, the Union imports around 13 million tonnes of soya cake and 15 million tonnes of soya beans free of customs duties.

The main outlet for protein crops is animal feed, where they account for about 10% of protein-rich feedingstuffs (while soya cake represents around 45%).

Changes in the level of intervention stocks (or public stocks) of cereals, and exports (cereals in grain form or after first-stage processing, including for food aid)

(million tonnes)

	Stocks at 30/06
	Exports

* Up to 1993/1994: Europe (12).

Glossary

Intervention price: price at which the storage agencies in each Member State have an obligation to purchase (= intervention buying-in) cereals offered to them by producers during the November to May period. The cereals entering public storage must comply with certain criteria (moisture content, composition, etc).
Import duty* (payable by the Community importer): provided for by the system of cereal trade with third countries, within the limits of international trade agreements. It cannot exceed the intervention price increased by 55% less the representative CIF price (CIF: cost, insurance and freight, i.e. the product cost + insurance + transport costs).
Export tax (payable by the Community exporter): can be decided by the Commission in exceptional circumstances (when the EU's supplies are threatened) to stabilise prices and restore balance to the internal market.
Export refund* (paid to the Community exporter): aimed at bridging the gap between European prices and world prices. Generally fixed by invitations to tender; export refunds are uniform throughout the EU. Refunds are also possible for food assistance outside the EU and, in certain circumstances, for processed products. There is a special system of refunds for the export of alcoholic beverages obtained from cereals.
Minimum price: applies to potatoes intended for the starch industry. The price manufacturers must pay the producers.
Set-aside: expressed as a percentage of the cultivated area receiving assistance. A producer can choose to exceed the compulsory basic rate. Crops intended for non-food use (biomass and biofuels) are permitted on set-aside land.
Per hectare aid: introduced by the 1992 reform to offset the fall in guaranteed prices. The aids are fixed and tied to the historical average yield (calculated for the period 1986-1990). To apply for them, each Member State draws up a regionalisation plan. Specific factors influencing yields, such as soil fertility, must be taken into account. The area concerned must not exceed the region's base area, i.e. the average number of hectares in the region allocated for crop-growing or set aside within the context of a public assistance scheme in 1989, 1990 and 1991. For colza, soya beans and sunflower, regionalisation is based on the average yields of either oilseeds or cereals. For protein crops and non-textile flax, compensation is based on the cereal yield. Finally, for maize, a specific yield can be set, possibly distinguishing between irrigated and non-irrigated areas. In the areas thus defined, per hectare aids are calculated by multiplying the basic amount per tonne by the historical average cereal yield for the area (possibly the specific average yield, in the case of oilseeds).

* Relates only to cereals, in this case. For oilseeds and protein crops, there are no import duties, and exports do not qualify for a refund.

Further information

Further details on the CAP and its reform, including regulations, are available from the Internet site http://ec.europa.eu/agriculture/index.htm. As regards the arable crop sector and rural development, the references of the new regulations adopted by the Council on 17 May 1999 (Official Journal No. L 160 of 26 June) are given below.

Common organisation of the market of cereals: Regulation (EC) 1253/1999
Support system for producers of certain arable crops: (EC) 1251/1999
Quota system for the production of potato starch: (EC) 1252/1999
Common rules for direct support schemes under the CAP: (EC) 1259/1999
Support for rural development: (EC) 1257/1999.