Down on the Farm - Modulation, Decoupling and Degression

If you still think that biotechnology is the greatest issue facing UK agriculture then you really ought to get your head out of the sand. The potential for impact of biotechnology on UK agriculture is perhaps over-sold - on both sides of the argument - but what should not be brushed aside are the long-term consequences contained in the proposals for the Mid-term Review (MTR) of the Common Agricultural Policy (CAP). Before we can look at these proposals, we need to go back a few years to see where the most recent reforms occurred. This will also help us through the terminology as there is nothing like the twinning of farming and the European Union (EU) to throw up some pretty impenetrable language.

The CAP exists to maintain food security in the EU. Historically, this has been carried out by setting a threshold on prices and by subsidising production. Latterly, this subsidy on production has become known as the first pillar (of support) of the CAP, but as farming modernised from the seventies onwards, subsidy was recognised to create market distortions and a potentially faltering rural economy. There is also no avoiding the fact that subsidy is a major proportion of many a farmers income. Thus reforms of the CAP in the late nineties has led to a second pillar (of support) through the Rural Development Regulation (RDR).

The RDR allows for the modulation of first pillar support into nationally determined schemes for rural development, this being the England Rural Development Program (ERDP) that started in October 2000, and with Scotland, Wales and N. Ireland having their own versions. Modulation just means slicing a percentage off the total subsidy income each year (3.5 billion here at present) and using it instead to promote and finance activities that revitalise rural economies and improve the landscape. Thus 1.6 billion is being spent over the seven-year life of the ERDP on stewardship schemes, rural enterprise, vocational training, processing and marketing, farm woodland and bio-energy schemes (see my prior article "LAND USE IN THE ENGLISH COUNTRYSIDE"). As you can imagine, not all farmers are happy that part of their income was taken away from them and that they are being forced to do something different under a 'government scheme' to get it back.

Modulation is only the first, but a very important step in CAP reform. If nothing else, it provided national governments with scope to develop distinct and individual change and reform programs for their rural areas. More importantly, it provided a route by which CAP support could be progressively switched away from subsidising production, through increasing the percentage modulated each year into these programs. The plan was to reach at least 20% modulation into rural development, rising from the 3% at current. The MTR proposals have thrown a combine harvester into the path of that progression, and given us another few tricky terms to get used to.

The MTR has proposed a decoupling of subsidy payments from production. Put simply, subsidy payments in future will not be linked to actual farm production. Farmers who currently receive subsidy, some probably under a number of schemes that support different products (i.e. sheep, beef, dairy, arable) will instead from 2004 get a single decoupled payment (SDP) each year that initially matches the payments that they received under production subsidies. The entitlements to these payments will be based on a reference period of the three years from 2000 to 2002, but watch out for some undignified scrambling as people try to sell-off, buy or trade into entitlements. There will be conditions attached - there will be new and demanding standards required, based on EU legislation concerning the environment, public, animal and plant health, animal welfare and occupational safety. But wait a minute, these can only apply if the farmer actually produces something. What happens if the farmer just decides to take the money and produce nothing? Well, they have to keep their land in good agricultural condition, with member states setting their own rules as to what this constitutes. One last term before we weigh up what this all means.

Not all production subsidy is being decoupled because there is considered to be a need to stabilise markets for such things as durum wheat, protein crops, starch potatoes and rice. Help is also needed to bring about major restructuring and reform of dairy, sugar and other regimes in the EU, and there will have to be funding found to support farmers to meet the new standards, improve the quality of agricultural products, improve the welfare of animals, and pay for a new farm advisory service that will help farmers to comply with all these new requirements.

There will be no more money allocated to the CAP to pay for all this. Instead, there will be degression of the existing subsidy budget to provide the necessary funds. Degression is simply robbing the farmers of a proportion of their SDP by slicing off an increasing percentage to create a new pot of funds from existing money to do all these things. The degression will not bite farmers who receive an SDP of less than 5000 euros annually, but will take an increasingly larger percentage on greater subsidy incomes. In fact, year on year, the bite that degression will take will increase such that a fifth of large SDP incomes will be clawed back by the eighth year after its beginning. Degression will also be the means to dynamically increase the percentage modulation of subsidy into rural development, with the larger recipients again having proportionately more sliced off their subsidy income in successive years to reach that target overall of 6% modulation.

Should we pay farmers an income, irrespective of whether they produce anything? Does it make any sense? (Some analysts have calculated farm examples where the profit a farmer can make is higher if he just sits on his hands rather than go to the bother of producing anything.) What is the future of the countryside if farmers become stewards of land rather than users of land? Can the ordinary public have any say in how that land is kept? Will these measures - as intended by their writers - make EU farming more competitive and market orientated, simplify the CAP, remove environmentally negative incentives in current policy, and lead to more sustainable farming practices. I think they can if we a have a vision of land use that is mature, that we don't lose sight of the need for compliance with it (voluntarily would have been better rather than the incentive of the SDP) that the short term target for dynamic modulation is raised significantly from a constraining 6%, and that we make discussion of agriculture and rural land use more an issue of future understanding rather than trapping it in the beleaguered and arcane resort of propping it up with continuing financial support.

Mark Fisher, 1 April 2003