I am delighted to open this debate on full decoupling of payments under the Agenda 2000 mid-term review agreement that was reached by the Council of Ministers in Luxembourg on 26 June last.
The proposals presented by the European Commission comprised the most radical reform of the Common Agricultural Policy since its foundation. The agreement reached in the Agriculture Council in Luxembourg was the culmination of a long negotiating process. My objective in the negotiations was to safeguard the benefits to Irish agriculture and our rural communities which were achieved under Agenda 2000 and to ensure the best possible level of support and protection of our farming production base into the future.
The outcome of the negotiations contained substantial modifications to the Commission's proposals and represented a successful outcome from Ireland's point of view. The new agreement will reshape the Common Agricultural Policy and secure its future by making it more relevant to modern society and to consumer demands. We now have the opportunity to exploit the new situation to our advantage.
I am sure that the details of the agreement are well known at this stage, but I will outline the main issues briefly. First, the Agriculture Council agreed to amend the proposal for full decoupling of direct payments by giving member states options which would allow them to implement decoupling in a manner best suited to their requirements, thus fulfilling Europe's long held principle of democratic subsidiarity.
On 19 October last, having given careful consideration to the 200 or so submissions which were received under the public consultative process I initiated last July and to the outcome of the
independent research I had commissioned from FAPRI-Ireland, I decided that all direct payments for cattle, sheep and arable crops will be fully decoupled from production as and from 1 January 2005. I had already decided that the new dairy premium, to be introduced in 2004, should also be decoupled from production with effect from 2005. The overwhelming weight of opinion in the farming organisations was in favour of full decoupling and this was also reflected at the 40 or so information seminars held by my Department throughout the country. I believe that full decoupling is in the best interests of Irish agriculture and the development of a sustainable, market orientated agri-food sector.
Decoupling will allow farmers to respond to market demands, without the need to engage in production solely to qualify for direct payments. This will put the control of production back into the farmer's own hands for individual decision.
This view is backed up by independent analysis. In October, FAPRI-Ireland, a group of economists from Teagasc, the University of Missouri and certain Irish universities, published its analysis of the Luxembourg agreement and its effects on Irish agriculture. Out of the many options available, the study focused on three scenarios including partial decoupling of certain premia across all member states, full decoupling across all member states and full decoupling across the EU, with Ireland opting to couple the slaughter premium and decouple all other premia.
The analysis shows that full decoupling of all beef payments from production is the best option in terms of aggregate farm incomes. Full decoupling of beef premia would lead to a decline of around 18% in suckler cows and a consequent drop of 7% in the amount of beef produced. However, following an initial price decline, prices would subsequently increase and when combined with reduced input costs would result in an improvement in farm incomes by an aggregate 10%. The analysis showed that if the link between the slaughter premium and production was maintained, it would not be sufficient to halt the decline in suckler cow numbers. While there could be a small improvement in incomes for most beef producers, there would be a greater overall loss to the sector.
On the milk side, the analysis showed that the decision to decouple dairy compensation payments from production from 2005 will lead to a more gradual restructuring of milk quota and more dairy farmers in the long term. Less efficient dairy farmers will have the option to exit the sector while retaining their payments and this will leave a larger pool of milk quota for dairy farmers with the means and the initiative to expand. The analysis shows milk prices falling by a further 5% on top of the cuts agreed in the institutional prices as part of the Agenda 2000 agreement. Increased efficiency and scale should result in the incomes of dairy farmers keeping ahead of inflation in the period to 2012. The analysis also shows that while the national sheep flock was set to decline substantially under existing policies, the introduction of decoupling will accelerate the decline. However, this decline will be offset by increased prices, leading to a slight increase in the value of sheep output by 2012.
For the agriculture sector as a whole, FAPRI-Ireland finds that there would be a reduction in output value but this would be offset by a reduction in input costs brought about by lower animal numbers and more extensive production. There would also be environmental benefits to full decoupling with the reduction in livestock numbers bringing about a substantial drop in greenhouse gas emissions from the agriculture sector to approximately 14% below 1990 levels. In conclusion, the FAPRI-Ireland results showed that full decoupling would result in aggregate farm income being higher than would be the case if there were no policy change or if partial decoupling were implemented.
A second significant outcome for Ireland was the changes I negotiated in the areas of degression and modulation. The Commission's proposals for degression and modulation represented a serious threat to the level of direct payments in Ireland, which are of such crucial importance to farm incomes. On the issue of degression, I strenuously opposed the proposal to reduce direct payments by up to 13% to meet future financing needs. The compromise agreed requires the Council to review from 2007 onwards the annual financial circumstances and, if budget deficits arise, to take necessary action at that stage. This is a much more reasonable and acceptable approach.
As regards modulation, the rate has been reduced from 6% to 5% when fully operational. The €5,000 franchise or exemption will ensure that almost half of Irish farmers will not be affected by modulation. My objective in ensuring that modulated funds are retained in Ireland for agriculture-based rural development measures has also largely been achieved. Up to 85% of funds modulated in Ireland will stay in the agriculture sector here and will be distributed by my Department. The outcome was a major improvement on the original proposal, where the combined effect of modulation and degression, would have resulted in €464 million being siphoned off direct payments over the period 2006-12.
Much has been made of the decision of the Agriculture Council regarding the milk sector. I do not believe the level of criticism of the agreement, which was concentrated on this element only, is justified. The decision taken in Luxembourg on 26 June provides for a reduction of approximately 4% beyond the level already agreed in Agenda 2000. This is in contrast to the original proposals where an additional 10% reduction was provided for. In addition, I secured compensation of approximately 80% for the additional intervention price reduction of 4% which was agreed by the Council. Therefore, the potential losses to the dairy sector from the net effect of the 4% intervention price reduction and the value of the dairy cow premium, amount to less than €14 million annually, or 1% of the farm gate value of milk output. It is important to bear in mind that this reduction is an intervention price reduction and not a market price one. Farmers who concentrate on the market where the product should be sold will experience no loss if the industry concentrates on the marketplace. Depending on market prices, there could even be substantial gains. The agreement demonstrates emphatically that the dairy industry must realise that selling to intervention is not the way to build a viable industry capable of adequately remunerating its farmer suppliers for its raw material.
Notwithstanding the objective of reducing dependence on commodity products and on intervention purchases, I insisted that a reasonable period of time should be provided for the dairy industry to re-orientate itself to a lower level of intervention availability. The original Commission proposal was for a ceiling of 30,000 tonnes per annum on intervention intake of butter and this would have been disruptive in the short term in that it would not have given the industry sufficient time to remodel its production base and have a larger product mix. Against enormous opposition, I managed to have the annual intervention ceiling significantly increased to 70,000 tonnes initially, reducing over five years to 30,000 tonnes. Overall, the agreement on milk is most satisfactory given that the milk quota regime has been extended to 2014-15. While many farmers were anxious about the future of the milk quota regime, they now know that it will be in place for the next ten years and can plan accordingly. A small price was paid in terms of intervention price reductions for that major objective which will play a key role in supporting the milk price until 2014-15.
By way of compensation for the intervention price cuts, a new dairy premium will be introduced in 2004. The premium will be coupled to milk production in the first year and will be decoupled from production with effect from 2005. The original proposal was that the dairy premium would remain coupled to production until 2007. Following negotiations with the Commission on 29 September last, I secured agreement to have the dairy premium decoupled from production with effect from 2005. This was an important development in that it will allow dairy farmers to make important decisions in the period ahead about the sale and acquisition of quota and land and associated investment decisions. In taking the decision to decouple the dairy premium from 2005, I took into account the view expressed to me by representatives of dairy producers.
We also argued successfully against the proposal for a reduction of 5% in the intervention price for cereals. The original proposal for a ten year obligatory non-rotational set-aside was also dropped. This would not have been suitable in the Irish context. The new arrangements on set-aside are more workable in Ireland and allow for further set-aside obligations as market needs arise in the future.
The strengthening of support available to young farmers, by way of a special new incentive under the rural development measures is another positive outcome. The maximum support for young farmers undertaking investments within five years of setting up has been increased from 55% to 60% in less favoured areas and from 45% to 50% in other areas. Other changes in the proposals negotiated for young farmers include a more equitable calculation of single payment entitlements for those who entered farming during the reference period 2000 to 2002. For example, young farmers who came into the industry in those years would have found their entitlements being divided by three for the three years. Depending on what year the young farmer joined the industry, they will now be either divided by two or one. This was a significant achievement in the negotiations. There will be flexibility to create a national reserve of up to 3% of established entitlements that will be used in particular to provide single payment entitlements for young farmers who commenced farming after 31 December 2002. Young farmers who inherit farms will also inherit any entitlements established by the retiring farmer.
As I have said, my objective was to preserve the benefits of the Agenda 2000 agreement for Ireland and I firmly believe that I have been successful in this. Full decoupling of payments also has huge potential benefits in terms of reducing substantially the administrative and bureaucratic burden for farmers and my Department alike, while allowing farmers the freedom to farm and to respond to market demands. I assume Members' clinics will be quiet in the future, as no one will be seeking headage premia or other allowances. Under the single farm payment there will be one application and one payment. This will allow Members to leave their clinics early on Saturday mornings in future.