The CAP Explained

The Common Agricultural Policy – A brief history and how it works.

1. Historic CAP: Historically (prior to 2003), farmers in the EU were paid an amount of money based on the amount of produce they were generating (a production subsidy), but this caused the very well publicised problems with food mountains and wine-lakes. A variety of quota systems were used to limit this, including set aside. World Trade Organisation reforms forced the EU to change tack. Successive reforms of the EU Common Agricultural Policy (CAP) have sought to move the payments away from production subsidies and on to an area based system of farm income support. This means that for every hectare owned by a landowner, a certain sum of money will be paid from EU funds every year, subject to a rather long list of conditions. This direct support money is known as Pillar 1 of the CAP.

There is also a residual market intervention process, such that if prices drop below a certain threshold, the EU will step in to purchase and store produce for later disposal on the market. This is known to have a disruptive effect on markets and so it is intended to be an emergency procedure only, recently invoked for some eastern and northern European countries in response to the Russian import ban and more dairy products in relation to the current over-supply “crisis” in the dairy sector. There are also general market support measures such as the school fruit and vegetable and milk schemes.  

In addition to Pillar 1, there is also a Pillar 2 of CAP, which is largely comprised of tax payers money given back by the EU for Member States to spend on rural development topped up with national contributions: Member State governments have the ability to take money out of Pillar 1 to put into Pillar 2, and this is known as modulation. Pillar 2 money can be distributed to the rural economy in general, rather than specifically to farmers only, so it is seen as a “fairer” pot of money to those who object to farmers receiving income support.

One note here: what is the purpose of supporting farmer’s income? Well, farms have to absorb the volatility inherent in weather and market disturbances, and income volatility leads to poor investment decisions. Supporting farmers income allows continuity of investment in growing crops, known as food security, and means that the Government/EU has a means of encouraging and rewarding farmers for the delivery of public goods i.e. landscape management, water catchment management, habitat management… Nearly all advanced economies support their agricultural industries in some way (even New Zealand has a substantial marketing programme for NZ produce, even if the farmers do not receive finance directly).  

Agriculture is a devolved matter in the UK, so there are different paying agencies in the four territories. British tax payers money sent to the EU is distributed back here in the England and Wales by the Rural Payments Agency, a DEFRA agency, who are responsible for monitoring eligibility, claims, mapping, inspections, enforcement and payments. For Pillar 1 payments, each farmer is given a number of “entitlements” related to the size of their land holding, and each year must “activate” these entitlements against an eligible land area in order to receive the Basic Payment Scheme. The deadline is always May 15th. Entitlements can be traded but have to be activated against a landholding.

In addition to these basic payments, farmers can also apply for environmental schemes, known as Countryside Stewardship mid-tier or higher tier, and administered by Natural England. All farmers in the UK have been able to apply for Countryside Stewardship but its complexity has caused a dramatic decline in the number of farmers renewing their environmental schemes from the old system.

2. Current Basic Payment Scheme: with effect from May 2015, all UK farmers now apply for their farm support under a revised scheme known as Basic Payment Scheme. This is pretty similar to SFP in terms of requiring payments to be based on land holdings (farmers receiving historic based output-payments in other MS should be phased off these by 2020) with a number of important modifications.

First is that there is a stricter definition of “active farmer”, so that only active risk takers in the industry can claim the payment. Certain types of land uses are automatically excluded via a negative list (airports, solar panels etc) unless it can be proved agricultural activity is significant.

Secondly, under SFP and in response to energy subsidies, there has been a big problem with mono-cropping of maize on the continent (i.e. growing maize year after year in order to feed anaerobic digesters). This form of cropping is not ideal for soil health and landscape reasons, and so the EU now requires all farmers to crop at least three different crops on their farm each year (the “three crop rule”) and also to retain land in a environmentally beneficial state alongside their normal cropping (known as Ecological Focus Areas) – EFAs amount to 5% of the agricultural area to be taken out of production.

Compliance with these “greening” measures entitles the farmer to 30% of the annual payment, with the remaining 70% conditional on compliance with the basic scheme. Both of the greening rules it is argued represent an unreasonable interference by the EU in farmers’ rational cropping decisions based on market signals. In the UK, the three-crop rule poses particular problems for small farmers using farm contractors to manage their land, where a much bigger block might have a three crop rotation, but not the particular small farm. With maize, you can see that the problem is the subsidised energy sector artificially enhancing the price of maize, not farmers’ decisions to grow it continuously to meet demand.  

The rules are, quite honestly, very complicated. The implementation of the 2014-2020 CAP programme gave Member States 70 different implementation decisions to make, in theory to tailor the basic scheme to best fit national agricultural priorities. England and Wales made very few modifications compared to many other Member States. For example, we did not elect to make any headage payments (i.e. a payment per head of sheep or cattle), two of only 3 EU Member States who did not (the other was Germany). One of the main problems that the national paying agencies continue to struggle with is the requirement for payments to be made against land areas, which requires extremely sophisticated mapping software. Aside from the problem of remote farm locations accessing internet based applications, the software itself has proved too complex. England and Wales abandoned online applications in 2015.

Scotland and NI retained an online system, but Scotland is suffering enormous delays and is still to make its payments for 2015 (bearing in mind that the application window for 2016 closes in May). Any errors in making payments to farmers exposes the national paying agencies to fines from the EU, known as “disallowance”. Fear of these fines creates a culture of paranoid compliance rather than innovation in the paying agencies and farming in general.

3. Post-Brexit farm support system: UKIP acknowledges that it is very important that we continue to support out agricultural industry. This is to ensure a level playing field with our near neighbours, to compensate for the delivery of public goods and to insulate farm income against market and weather volatility. However, we will not be in power after the Referendum and it will be up to the Conservative party to create farm policy in the event of an Out vote. We welcome the positive signs that, despite Treasury pressures, farming would continue to be supported by the present Government post-Brexit. UKIP has advocated a flat rate system of £80 per acre for all eligible active farmers, which the Conservatives at the NFU Conference in 2016 presented as their preferred option with only a slight modification.

We would like these payments not to be subject to modulation, cross compliance, three crop rules, greening etc, and to be capped at £120,000: this is designed to discourage the agglomeration of farm holdings into ever bigger units and to subsidise smaller, more diverse businesses that contribute more socially to the rural economy. We are taking every opportunity to influence the thinking of Tory members of the Out campaign in this regard.

From Stuart Agnew MEP
23-03-2016