Health check architecture Three proposals make up health check New draft direct payments regulation to replace Regulation (EC) No 1782/2003 Modification to single CMO Regulation (EC) No 1234/2007 and other market regulations Modification to rural development Regulation (EC) No 1698/2005 and the Community strategic guidelines Proposals are interlinked Transfer of coupled sCMO support to decoupled direct payments Transfer of sCMO animal disease measures to direct payments (“ex-Article 69”) Additional/progressive modulation of direct payments used for new challenges under rural development Proposals are one political entity Increase market orientation and competitiveness whilst dealing with new challenges

Direct Payments (DP) proposal - Overview Legal structure - New text replaces Regulation 1782/2003, unreadable due to many amendments, with a new clean - Outdated provisions deleted, specially those related to initial introduction of SPS: ex: - old Art. 33 on eligibility related to payments in the reference period - old Art. 37 on calculation of reference amounts - old Art.71 on optional transitional period - Text intended to allow MS to continue with their chosen model + new revision option - Simplification of current provisions/requirements (…/…)

Direct Payments proposal - Overview Simplification of current requirements - No additional payment (ex-Art.12) for the 5000 euro excluded from modulation. A real “franchise” is applied instead. - No more restrictions on enitlements issued from the National Reserve (currently no transfer possible in 5 years) - Payments can be done in two instalments - Now it will be possible to concentrate fractions of entitlements - For MS currently applying SPS: no more need to activate 80% of entitlements before allowing transfer - Simplification connected to policy decisions: -end of set-aside entitlements; -more decoupling (simplifies eligibility and thus, controls); -direct payments in outermost regions will be covered by POSEI support programs.

Direct Payments proposal - Overview Legal structure (No major changes) Title I : Scope and Definitions Title II: General provisions (CC; modulation; FAS; IACS; general rules) Title III: SPS (general rules; regional and partial implementation; shift from SAPS to SPS; integration of coupled support and specific support (ex- Article 69) Title IV: Other aid schemes (coupled; includes national aid for nuts; special issue: cotton) Title V: DP in NMS (phasing-in; SAPS; separate payments; specific support (new “Art.69” for NMS; CNDPs (top-ups) and Cyprus State Aid) Title VI: Financial transfers (restructuring for cotton and tobacco regions) Title VII: Implementing, transitional and final rules 15 Annexes: Main new elements: -Annexes III and IV (CC) modified (netting out) -Annexes X and XI on integration of coupled support into SPS.

DP- Main elements – Modulation Existing modulation (5%) is increased additional and new progressive modulation by new Existing franchise of 5 000 EUR is kept New additional modulation: 4 steps of 2% increase from 2009 to 2012 New progressive modulation of 3% by “tranche” for 100k to 200k; 200k to 300k and over 300k Additional + Progressive modulation results in following increases (to be added to current 5%): Impact on EU-10 and top-ups (2012) Funds from new modulation stay in MS and go to New Challenges in RD Thresholds (in €) 2009 2010 2011 2012 1 to 5 000 0% 5 000 to 99 999 2% 4% 6% 8% 100 000 to 199 999 5% 7% 9% 11% 200 000 to 299 999 10% 12% 14% Above 300 000 13% 15% 17%

DP- Main elements- Minimum requirements Minimum requirements (art. 30(1)) - No payment shall be made in (only) one of these situations. - For amounts under 250 EURO - For holdings of less than 1 hectare - MS chooses the option - Special rules are provided for MT and CY.

DP- Main elements Optional exclusion clause for non-agri companies (art. 30(2)) - Optional for Member State - To be applied only to companies and firms (Article 48 ECT) and not individuals… - … whose “principal company’s objects” are not exercising an agricultural activity - Why? to exclude beneficiaries not related to agricultural activities To be read together with eligibility of land: Eligibility of land (art.36(2)(a)) - Now more precise: land used for agricultural activity, but if it is used “as well” for non-agricultural activity, only land predominantly used for agricultural activities eligible. Why? to exclude land mainly used for non-agri activities.

DP- Main elements Cross-compliance - netting-out of certain requirements - few additional GAEC requirements related to end of set-aside and new challenges (water management)

DP – Single Payment Scheme – Overview More decoupling (…/…) End of set-aside obligation Towards flatter rates (…/…) Some adjustments Non activation of payment entitlements: PE revert to the NR after 2 years of non use (vs 3 years in 1782/2003) National Reserve: Streamlined: provisions related to first implementation are deleted (special situations); No limit to transfer of PE issued from NR No value limitation for PE issued from NR (vs regional average in 1782/2003) Special entitlements: Existing special entitlements continue to exist, but will become “normal” PE upon transfer

DP – Single Payment Scheme- Towards flatter rates Within historic model Art. 46 – value of existing payment entitlements can be recalculated From historic to regional Arts. 47 and 48 – new payment entitlements are allocated with partly flat value and partly historic based value (“hybrid”) At second step, values can be drawn closer – Art. 49(1) Within regional model Dynamisation of static regional model – review of steps in dynamic model. Art. 49(2) Common features Optional for Member State Gradual process: minimum 3 year process; 50% reduction in first year.

DP – Single Payment Scheme – Partial coupling More decoupling End of partial coupling for arable crops, beef and veal other than suckler cow, hops and seeds For beef and veal other than suckler cow (male bovines and slaughter), there is a transitional period of 2 years at 50% May remain partially coupled: Suckler cow and sheep and goat premia (no re-coupling) Transitional Fruit and Vegs Kept coupled Rules for integrating partially coupled support into SPS Arts. 65 and 66 – farmers in sector concerned + representative period

DP – new Member States Shift from SAPS to SPS No major changes Option for NMS : introduce an historic element (within regional system) when allocating PE

DP- SPS – Specific support (ex-art.69) - overview Specific support – General elements Specific direct support measures (art. 68(1)(a) – (c)) Crop insurance Against losses caused by adverse climatic events (art. 69) Mutual funds For animal and plant diseases (art. 70) New Member States applying SAPS Similar provision in Article 119

DP- SPS – Specific support General rules Support limited to 10% of national ceiling; 2.5% for “coupled measures”, art.68(1) and (4) Funds to be raised from NR or by linear reductions of PE value (special rule for mutual funds) Art 68(8) Consistency clause, Art. 68(7) Measures to be supported Specific types of farming important for environment; quality of agri products or marketing of agri products Address specific disadvantages in dairy, beef, sheep and goatmeat and rice sector in areas vulnerable economically or environmentally Against abandonment of areas and/or compensate for particular disadvantages for farmers in regions covered by restructuring and/or development plans Crop insurance premia Mutual funds for animal and plant diseases Form of support: Additional payments (limit of 2.5%) Increase number or value of PE Contributions to mutual funds

DP-SPS- Specific support- Crop insurance Insurance against adverse climatic events “Green box” conditions Destruction of more than 30% of the 3 yrs average annual production Adverse event shall be formally recognised by the MS Financial contributions 60% of the insurance premium (possible up to 70% if MS so decides) Co-funded: the community supports 40%. MS can cover their contribution by obligatory systems of collective responsibility: Farmer: 40% (or 30) Community funds: 40% Member State 20% (or 30%)

DP-SPS- Specific support- Mutual funds Scope To cover economic losses caused by outbreak of animal or plant disease: economic losses: additional costs because of reducing supply to market or loss of productivity Needs to be accredited by MS Financial contribution for following eligible costs: Setting up Reimbursement of commercial loans Financial contribution paid from capital stock Funding: Financial contribution limited to 60% (MS choice to go up to 70%) Community funding: 40% of the eligible amounts Community funding to be raised by linear reduction of payments under Title IV (SPS and amounts partially excluded from SPS) MS co-funding may be covered by obligatory systems of collective responsibility

Direct Payments – other aid schemes (Title IV) Further decoupling Aids kept coupled (title IV): Cotton (!) Aid for sugar beet and cane producers Transitional soft fruit payment Direct Aids decoupled (title IV of 1782/2003): Durum wheat Protein crop premium Crop specific payment for rice (transition) Area payment for nuts / National aid mainteined (article 109) Aid for starch potato (transition) Aid for olive groves CMOs aids decoupled: Dried fodder, Long fibre flax, Potato starch processing aid Integration into SPS: articles 65 and 66 and Annex X Abolition of energy crops aid

Dates of application Applicable from 1.1.2009 Regulation 1782/2003 repealed from same date BUT some articles of 1782/2003 to still apply in 2009 (see art.133): partial coupling for arable crops, hops, seeds and old article 69 apply in 2009 Coupled payment integrated in SPS: olive oil and nuts, apply in 2009 Tobacco aid applies in 2009 (last year of application as foreseen in 1782/2003) Energy crop aid, applies in 2009

Single CMO proposal - architecture Structure No fundamental change to sCMO structure in health check Integration of all sectors into sCMO Fruit and vegetables already integrated – Regulation (EC) No 361/2008 Wine integration to be proposed soon and to run in parallel with health check: coherence between texts needs to be ensured Health check does integrate potato starch into sCMO until phased out in Articles 84a and 95a – Regulation (EC) 1868/94 to be repealed Other modifications of sCMO Possible proposals on school fruit scheme and most deprived persons scheme Coherence between texts will need to be ensured

Single CMO proposal – intervention/buying-in Buying-in system simplified, streamlined and made into a real safety net Abolished for pig meat, rice and durum wheat Quantitative limit for barley and sorghum at “0” as already done for maize Cereals: period for opening harmonised across EU as 1 November – 31 May Wheat buying-in through tendering may be suspended during periods of high prices Tendering introduced for all sectors (currently beef and partly butter and SMP) Tendering may be regionalised Applicable from 2009/10 marketing year Articles 8, 10, 11-24, 41, 43, 48 sCMO / Article 4(1)-(4), (9), (10), (13) and 8(a) of proposal

Single CMO proposal – intervention/private storage Private storage aids made simpler and better targeted to market situation Private storage aid for butter no longer mandatory but opened depending on market situation Private storage aid for cheeses abolished as unnecessary under present and future market situation Changes applicable from start of 2009/10 marketing year Articles 28-31, 34a and 36 sCMO / Article 4(5)-(8) and 8(a) of the proposal

Single CMO proposal – market support/animal diseases Exceptional support measures for animal diseases abolished in sCMO and transferred to direct payments regulation Articles 44 and 46(1) sCMO : Article 4(11) and (12)(a) of proposal Article 70 DP proposal (mutual funds)

Single CMO proposal – potato starch Regime integrated into sCMO Quotas: Articles 55(1)(c), 84a, 85(d) sCMO / Articles 4(14)-(16) of proposal Aid scheme: Article 95a sCMO / Article 4(21) of proposal Existing Regulation (EC) No 1868/94 repealed: Article 7(1) of proposal Quota scheme extended to 2012/13 marketing year Same as linked direct payment in Article 75 DP proposal Article 204(5) and Annex Xa sCMO / Article 4(33) and Annex II of proposal Aid scheme extended until 2010/11 marketing year Decoupled into SPS thereafter Article 95a sCMO Production refund for starch abolished from 1 July 2009 Article 96 sCMO deleted/ Article 4(22) and 8(b) of proposal

Single CMO proposal – dried fodder Dried fodder regime abolished from 1 April 2011 Decoupled into direct payments thereafter Articles 86-90 sCMO / Article 4(17) and 8(c) of proposal

Single CMO proposal – flax and hemp Long flax fibre aid phased out EUR 200/tonne for 2009/10 and 2010/11 marketing years EUR 100/tonne for 2011/12 and 2012/13 marketing years Abolished thereafter Decoupled into direct payments in same stages Articles 91, 92 and 94 sCMO / Articles 4(18)-(20) and 8(b) of proposal Maximum guaranteed area system maintained for same period Short flax fibre and hemp aids: already abolished with effect from 2009/10 marketing year No change proposed in health check

Single CMO proposal – dairy aids and milk quotas Milk quota increase of 1% per marketing year from 2009/10 to 2013/14 Additional to 2% increase for 2008/9 decided already by Council Report from the Commission by 30 June 2011 Article 204 and Annex IX sCMO / Articles 4(32) and (34) and Annex I of the proposal Reform of dairy aids to reflect new market situation Aids for skimmed milk power used as animal feed and casein no longer mandatory but opened depending on market situation with aids fixed by tendering Disposal aid for cream and butter abolished as no longer needed From start of 2009/10 marketing year Articles 99-101 sCMO / Articles 4(23)-(24) and 8(b) sCMO

Single CMO proposal – producer organisations Possibility for Member States to recognise producer organisations with Community “statut” in all sectors Currently possible at national level only Optional for Member States No change for sectors already covered at EU level (hops, F&V, olive oil, silkworms) Articles 122 and 124 sCMO / Article 4(29)-(30) of proposal

Cross-cutting – State aid provision. Ensure all Member State payments made pursuant to and in accordance with CAP Regulations are exempted from application of state aid rules (Articles 87-89 of the Treaty) Direct payment proposal (Art. 126) Single CMO - Harmonisation and cleaning-up of rules in all market regulations Outermost regions Regulation (EC) No 247/2006 / Article 1 of proposal Sugar restructuring Regulation (EC) No 320/2006 / Article 2 of proposal Aegean Islands Regulation (EC) No 1405/2006 / Article 3 of proposal sCMO Articles 46(3), 102(2), 103e(2), 105(2), 180 / Article 4(12)(b), (25)-(27), (31) of proposal Promotion Regulation (EC) No 3/2008 / Article 5 of proposal New wine CMO (or sCMO if integrated at same time) / Article 6 of proposal Rural development proposal (Art. 1(9), new Art. 88(1) 2nd subpara Regulation (EC) No 1698/2005) No substantive changes intended

Rural Development – current situation Regulation (EC) 1698/2005 on rural development: Flexibility within the commonly agreed EU core policy objectives (axes) Policy objectives (Axes) Improving the competitiveness of agriculture and forestry Supporting land management and improving the environment Improving the quality of life and encouraging diversification of economic activities in rural areas Measures With reference to axes, a menu of measures is provided from which MS can choose on the basis of the subsidiarity principle and for which they receive Community financial support in the context of integrated rural development programs (a minimum funding for each axis is required to ensure some overall balance in the programmes)

Rural Development – current situation Council Decision 2006/144/EC on Community strategic guidelines for rural development Strategic priorities for rural development (2007-2013) at Community level with a view to implementing each of the axes identified in Regulation 1698/2005 Basis for the national strategy plans, adopted by each MS as the reference framework for the preparation of rural development programmes

Rural Development proposal – purpose The new challenges: climate change, bioenergy, water management, biodiversity The agricultural sector faces now challenges that were not as pronounced in 2003: Fighting climate change Making the most of the opportunities offered by bioenergy More efficient management of water Preservation of biodiversity Purpose of the proposal is to strengthen capacity to improve the response to the above mentioned new challenges using the existing RD measures

Rural Development proposal – purpose Proposed amendments Obligation for MS (from 1/1/2010) to provide in rural development programmes for operations related to new challenges. MS may base their choice of new challenges related operations on the indicative list of types of operations set out in the Annex Review of the Community strategic guidelines in order to identify the new challenges related priorities on the basis of which modified NSP will be adopted by MS Additional + progressive modulation, in order to finance the operations related to the new challenges. The additional amounts can be spent only for new challenges related operations and only for those approved after 1/1/2010 Possibility to increase the aid intensity rate and the amounts of the support concerning the new challenges related operations Completion of the rules on cross compliance under the second pillar

Rural Development proposal – content Examples of new challenges related operations Climate change Improve efficiency of nitrogen fertiliser use, improvement of energy efficiency, soil management practice, land use change, extensification of livestock, afforestation Renewable energies Biogas production, perennial energy crops, processing of biomass for renewable energy, installations for renewable energy using biomass Water management Water saving technologies, wetland restoration, development of semi-natural water bodies, soil management practices Biodiversity No fertilizer and pesticides on high nature value agriculture land, integrated and organic production, construction/management of biotopes/habitats within and outside Natura 2000 sites, land use change, conservation of genetic diversity

Rural Development proposal – content The specific provisions on the additional modulation in new article 69(5a) and (5b) of the RD proposal An amount equal to the amounts resulting from the application of the compulsory modulation shall be spent by Member States in the period from 1/1/2010 to 31/12/2015 as Community support under the current rural development programmes for the new challenges related operations approved after 1/1/2010 If at the closure of the programme, the total amount spent on the new challenges operations is lower than the amount available from the additional modulation, the difference shall be reimbursed by the Member State to the Community budget

Rural Development proposal – content Cross compliance New rules on liability as regards rural development cross compliance in order to ensure consistency with first pillar Measure of tolerance for minor cases of non compliance with the cross compliance requirements provided for in Article 51 of Regulation (EC) 1698/2005 Cases in which reduction/exclusion from payments resulting from the non respect of the cross compliance does not apply

Rural Development proposal – impact No fundamental changes in the structure and no additional measures New Priorities do not constitute new objectives since they cut across the different axes The additional financing of the new challenges does not affect the calculation of the minimum financial contribution per axes (balance between axes) The fact the additional amounts can finance only operations approved after 1/1/2010 qualifies the added value of the scheme The additional rural development financing is entirely covered by the additional/progressive modulation; stays under the ceiling of the overall CAP expenditure as fixed until 2013