The Agricultural situation in the European Union - 1999 Report - VOLUME I - Report in conjunction with the General Report on the Activities of the European Union - 1999 BRUSSELS AND LUXEMBOURG, 2000

TABLE OF CONTENTS

1. ECONOMIC SITUATION AND FARM INCOMES

1.1. Overview

1.2. Production levels

1.3. Prices

1.4. Input prices

1.5. Farm incomes

1.6. Farm accountancy data network (FADN)

1.6.1. Farm incomes

1.6.2. Income by type of farming

2. Policy developments and legislative initiatives in 1999

2.1. The Berlin agreement on Agenda 2000

2.1.1. Lower institutional prices, as a means of encouraging competitiveness

2.1.2. A fair standard of living for the farming community

2.1.3. Strengthening the European Union's international trading position

2.1.4. Focusing on quality

2.1.5. Integrating environmental goals into the CAP

2.1.6. A new rural development framework: the second pillar of the CAP

2.1.7. Decentralised management

2.1.8. Further simplification

2.2. Quality policy

2.3. Organic farming

2.4. Promotion of Agricultural Products

2.5. Agricultural Research

2.5.1. Introduction

2.5.2. Quality of life and management of living resources (QoL) specific programme (1998-2002) under the Fifth Framework Programme

2.5.3. Management of RTD contracts

2.5.3.1. Fourth Framework Programme (1994-1998)

2.6. Projects concerned with genetic resources in agriculture

2.7. Simplification of agricultural legislation

2.7.1. Simplification

2.7.1.1. Simplification of the rules of the CAP

2.7.1.2. Consultation of the national paying agencies

2.7.2. Transparency

2.7.2.1. Informal consolidation of agricultural legislation in the eleven official languages

2.7.2.2. Repeal of all agricultural legislation that is no longer applicable

2.7.2.3. Standardisation of Commission publications covering export refunds

2.8. State aids

2.8.1. Introduction

2.8.2. Belgium

2.8.3. Denmark

2.8.4. Germany

2.8.5. Greece

2.8.6. Spain

2.8.7. France

2.8.8. Ireland

2.8.9. Italy

2.8.10. Netherlands

2.8.11. Austria

2.8.12. Portugal

2.8.13. Sweden

2.8.14. United Kingdom

2.9. Assistance to the needy

2.10. The outermost regions

3. agricultural markets

3.1. The 1999/2000 prices package

3.2. Agenda 2000 reforms

3.2.1. Arable crops

3.2.2. Milk and milk products

3.2.2.1. Regulations

3.2.2.2. Intervention prices

3.2.2.3. Quotas

3.2.2.4. Compensatory aid

3.2.2.5. National envelopes

3.2.2.6. Quota management

3.2.3. Reform of the wine sector

3.2.4. Reform of the beef and veal sector

3.3. Market developments - Crop products

3.3.1. Cereals

3.3.1.1. World market

3.3.1.2. Community market

3.3.2. Oilseeds

3.3.3. Peas, field beans and sweet lupins

3.3.4. Linseed

3.3.5. Grain legumes (chick peas, vetches and lentils)

3.3.6. Non-food production

3.3.7. Rice

3.3.8. Starch

3.3.9. Sugar

3.3.9.1. World market

3.3.9.2. Community market

3.3.10. Potatoes

3.3.11. Dried fodder

3.3.12. Fibre flax and hemp

3.3.12.1. Fibre flax

3.3.12.2. Hemp

3.3.13. Cotton

3.3.14. Silkworms

3.3.15. Olive oil

3.3.16. Fresh fruit and vegetables

3.3.16.1. World market

3.3.16.2. International trade

3.3.16.3. Community market

3.3.16.4. Main developments in legislation and policy

3.3.17. Bananas

3.3.17.1. Reform of the market organisation for bananas

3.3.17.2. Community production

3.3.17.3. ACP imports

3.3.18. Processed fruit and vegetables

3.3.18.1. World and Community markets

3.3.18.2. Main legislative and policy developments

3.3.19. Wine

3.3.20. Tobacco

3.3.20.1. Market developments

3.3.21. Seeds

3.3.21.1. Market developments

3.3.21.2. Changes in the market organisation for seeds

3.3.22. Hops

3.3.22.1. World market

3.3.22.2. Community market

3.3.23. Flowers and live plants

3.4. Market developments -- Animal products

3.4.1. Milk and milk products

3.4.1.1. World market

3.4.1.2. Community market

3.4.2. Beef and veal

3.4.2.1. Market situation

3.4.2.2. Labelling of beef/veal

3.4.3. Sheepmeat and goatmeat

3.4.4. Pigmeat

3.4.5. Poultrymeat

3.4.6. Eggs

3.4.7. Honey

ECONOMIC SITUATION AND FARM INCOMES

Overview

1. The 1999 agricultural year saw higher output for most crops (except cereals), an increase in the volume of livestock production and a marked reduction in producer prices, in particular in the livestock sector. Given that the reduction in the cost of inputs failed to compensate for the fall in producer prices and that agricultural subsidies themselves were slightly down in 1999 after the increase recorded in recent years, it will come as no surprise that the year as a whole again showed a reduction in farm incomes (of the order of 3%), on top of the one experienced in the last two years. The somewhat sluggish state of agricultural markets thus continues to have an adverse effect on farm incomes, following the tangible improvement recorded in 1994-96, a development which coincided with the implementation of the reform of the CAP and a significantly more favourable international economic situation.

2. In terms of climate the 1999 agricultural year was characterised by excessive soil moisture in northern Europe at the time of the autumn sowings, resulting in some of the latter being delayed and in some areas being held over for spring crops. The winter was, on the whole, fairly mild in northern and central Europe, thus assisting crop growth in those regions. In the South, however, insufficient rainfall had an adverse effect on sowings and on the growth of winter crops. Later on, the agrimeteorological situation evolved fairly satisfactorily, not to say very favourably in the case of the summer crops. The only exception was a severe drought in southern Spain which, combined with very high temperatures, considerably reduced the production potential in the areas concerned. Generally speaking, yields were fairly good in the case of summer crops (in particular beet and maize), but less spectacular in the case of winter crops (viz. common wheat and, above all, durum wheat).

3. Internal demand for cereals is estimated to have been more or less unchanged, after the sharp increase in consumption in recent years, especially by the feedingstuffs and other industries. In the case of livestock products the salient feature was the fairly remarkable recovery of beef/veal consumption after the sharp drop caused by the BSE (bovine spongiform encephalopathy) crisis in 1996. In spite of that recovery, the overall trend of beef/veal consumption per head of the population is still downward, from more than 23 kg in 1986 to about 20 kg in 1999. Pigmeat consumption again showed a major rise in 1999, while the increase in the consumption of poultrymeat was less marked than in previous years, when it had been driven up by the drop in demand for beef/veal caused by the BSE crisis. Moreover, since the spring, the poultrymeat sector has had to withstand the adverse effects, on both production and consumption, of the dioxin contamination of poultry feed.

4. The international context, too, points to a situation on agricultural markets which, although in some respects better than it was in 1998, is nonetheless very much down on earlier years. In the case of cereals in particular, while wheat and coarse grain prices have recovered slightly in relation to the levels to which they had fallen in 1998, they are still about 20% below the average for 1994-96. Similarly, while world oilseed prices appear to have bottomed out in the second half of 1999 after falling for three consecutive years, they are still almost 50% down on the peak they reached in 1997. In the case of pigmeat and poultrymeat, too, world prices are down on earlier years or remain sluggish at fairly low levels. For their part, milk and milk products have not yet fully absorbed the effects of the crisis in Asia, Russia and Latin America.

5. In spite of this unpromising international context, the European Union turned in, for some products at least, better export figures in 1999, following the downturn recorded in 1998. This is true in particular of cereal exports which, in the first nine months of the year, were appreciably up in volume on the same period in 1998. It is also true of pigmeat, exports of which reached an all-time high (+26% in volume for the period from January to September), beef/veal (+20%) and skimmed milk powder (+40%). Most of the other sectors, however, did not perform as well as in 1998: sugar (-24%), fruit and vegetables (-4% and -16% respectively in the first nine months of the year), seed oil (-15%), butter (-6%), cheese (-17%), wine (-16%) and poultrymeat (-2%). Moreover, even where exports were up in terms of volume, they often rose by a smaller percentage in terms of value (cereals: +2%, beef/veal: +5%, skimmed milk powder: +19%) or actually fell (pigmeat: -3%) because of lower export prices.

6. The level of intervention stocks over the year is a fairly good indicator of the deterioration on agricultural markets in the European Union. In the case of cereals the quantities actually in public storage at the end of each month went up from 13.5 million tonnes in August 1998 to 17.6 million tonnes in July 1999, before going back down to 12.8 million tonnes at the end of October 1999. Butter stocks, which had been less than 4 000 tonnes in August 1998, exceeded 49 000 tonnes in October 1999. Similarly, stocks of skimmed milk powder went up from 200 000 to 212 000 tonnes in the same period after exceeding 270 000 tonnes in July 1999. On the other hand, thanks to lower production and increased outlets on both internal and export markets, beef intervention stocks went down from 472 000 tonnes in August 1998 to 139 000 tonnes at the end of October 1999. In the case of pigmeat, private storage aid was introduced in September 1998 to underpin a market hit by the Russian crisis. Over a twelve-month period a total of 428 000 tonnes of pigmeat benefited from this measure and was stored for a period which could in no case exceed six months.

Production levels

7. After the previous year's bumper crop, cereal production was appreciably down in 1999 (-4% according to provisional estimates) as a result of a reduction in acreages and yields. The drop in production was more marked in the case of common wheat (-5.4%), barley (-5.2%), durum wheat (-6.3%) and rye (-12.6%). Maize production, on the other hand, recovered (+4.8%) after the fall recorded in 1998 without, however, matching the record level it reached in 1997. In addition to the increase in compulsory set-aside (from 5% to 10%), the reasons for the reduction in acreages include excess soil moisture in some northern European regions in the autumn of 1998, something which, as pointed out above, gave rise to problems in connection with the sowing of winter cereals and led to some growers switching to spring crops or opting for voluntary set-aside.

8. The fall in average yields is due above all to the very low figures recorded in Spain, where there were long periods of drought and excessively high temperatures during the growing season. In most other Member States yields continued to rise in 1999, even reaching record levels in some cases. Another factor which helped to bring down average cereal yields was the reduction in the total area under common wheat, the cereal which, together with maize, produces the highest yields. The resulting adverse effects were, however, mitigated by a significant improvement in maize yields, that crop having benefited from much better weather than did winter cereals.

9. In 1999 the total production of oilseeds (rape, sunflower and soya) reached an all-time high (15.4 million tonnes, i.e. about 1% more than the previous year) thanks to increased acreages and better yields. The increase was, however, restricted to oilseeds for non-food uses, the figures for oilseeds used for food purposes being down on the previous year. The increase in production, moreover, concerns rape only, the output of which rose by more than 15% in 1999, following a spectacular increase in acreages. The production of both sunflower and soya, on the other hand, is sharply down on the previous year (-19% and -35% respectively) as a result of an appreciable reduction both in acreages in Italy - in the wake of the stiff penalties imposed the previous year - and in yields and acreages in Spain as a result of drought.

10. In 1999, after two years of marked increases, the production of protein plants also fell (-18%), as a result of the reduction in acreages brought about by low oilcake prices at the time of the spring sowings. The production of non-fibre flax, however, has increased spectacularly for the third consecutive year (+91%), area aid having proved very attractive to producers, especially in the United Kingdom and in Germany.

11. A slight reduction in the area under beet notwithstanding, sugar production exceeded 17 million tonnes in 1999, a year-on-year increase of 6.8%, although yields had fallen in 1998 as a result of unfavourable weather in the autumn. Unlike the previous year, weather conditions were - from sowing to harvest - generally favourable to beet-growing. Sugar yields thus reached exceptionally high levels in most Member States.

12. After two harvests which were down on the 1996/97 level of close to 170 million hl, the forecasts for 1999/2000 suggest that wine production exceeded 173 million hl in 1999, i.e. an increase of about 7% on the previous wine-growing year. Production is appreciably up in Germany (+21.1%), France (+11.6%) and Portugal (+92.8%), but more or less unchanged in Italy and Austria, and even slightly down in Spain and Greece.

13. Early reports in mid-January 2000 suggest that olive oil production totalled about 1.6 million tonnes, a year-on-year reduction of 12.3%.

14. After the fall recorded in 1997 as a result of late frosts in central and southern Europe, and a return to more normal conditions in 1998, fruit production again increased in 1999. Total fruit production rose about 9%, with peaks of over 15% in some Member States. The production of vegetables is about 2% up on 1998, while potato production recovered sharply after the major fall recorded the previous year.

15. Beef/veal production continued to fall in 1999 (-0.8% according to provisional estimates), although at a slower rate than in recent years. The reduction is the result of two factors: a cyclical drop in production after the peak recorded in 1996 and the impact of the emergency measures adopted in October 1996 following the BSE crisis. [1] The beef/veal production cycle - which, as stated above, was accentuated in terms of amplitude if not duration by the BSE crisis - bottomed out in the second half of the year. As in 1997 and 1998, beef/veal consumption continued in 1999 the recovery (+0.7% according to early estimates) it began after the fall recorded in 1996 (-7.4%), thus reverting to the long-term trend, which nevertheless shows a gradual reduction in consumption per head of the population.

[1] The following measures in particular were introduced after the BSE crisis:

16. After the sharp increase recorded in 1998 (+8.2%), pigmeat production continued to rise in 1999, albeit at a slower pace (+1.8%), and this in spite of particularly low pigmeat prices in the second half of 1998. Even though consumption has continued to rise and exports are expected to reach an all-time high in 1999, the pigmeat market had to absorb over 1.5 million tonnes more than in 1997, something which has continued to have an adverse effect on market prices.

17. The production of poultrymeat increased slightly in 1999 (+0.9%), after a series of appreciable increases in earlier years. The slowdown is attributable on the one hand to a fall in exports and, on the other, to the adverse effects on consumption of the dioxin crisis in Belgium in the spring of 1999.

18. With a slight increase in 1999 (+0.8%) on top of the more substantial rise (+2.5%) recorded in 1998, the production of sheepmeat and goatmeat reverted to the level it had reached before the fall which occurred in 1997, when bad weather led to farmers - especially in the United Kingdom and Ireland - retaining animals which would normally have been sent for slaughter.

19. In spite of a reduction in the Community herd (-1.7%), milk production reached about 120.5 million tonnes in 1999, i.e. about the same level as the preceding year. As in the past, increased yields have compensated for a reduction in the herd. Deliveries to dairies are slightly up, in spite of the overshoot of the reference quantities observed in preceding years in some Member States. Milk delivered to dairies in the first eleven months of 1999 is 1.1 million tonnes up on the previous year.

20. After falling in 1998 in line with a trend observed since 1995, butter production showed a slight increase in 1999 (+1.3%) reflecting delivery levels and the difficulties experienced on certain external markets in other milk products such as cheese. While continuing to follow a long-term downward trend, butter consumption per head of the population rose slightly in 1999. The upward trend which cheese production has been following for 20 years or so slowed down. This was due above all to export difficulties on certain markets, in particular Russia, following the economic and financial crisis experienced by that country, since the summer of 1998. Internal consumption has continued to rise, but at a slower pace.

Prices

21. According to early estimates at the end of December 1999, the index of agricultural producer prices for 1999 went down by 2.8% in nominal terms compared with the preceding year. The fall in prices was more marked in the case of livestock products generally (-4.6%), in particular pigmeat (-7.3%), poultrymeat (-8.4%), animals intended for slaughter or export (-4.9%), and eggs (-10.0%). Significant falls were also recorded in the case of milk (-3.3%) and bovine animals (-2.6%). The fall in prices affecting crop products was less tangible (-1.1% on average), except in the case of fruit (-9.4%). For some products there has even been a fairly marked improvement in prices compared with the preceding year, in particular olive oil (+11.3%) and root crops (+1.4%).

22. When inflation is taken into account, the producer price index shows a reduction averaging 4.6% in real terms for the European Union as a whole. The fall was above the average in Belgium (-6.1%), Denmark (-8.0%), Greece (-5.3%), Ireland (-7.1%), Italy (-6.2%), the Netherlands (-9.3%) and Portugal (-6.2%), and below the average, again in real terms, in Germany (-2.8%), Spain (-1.9%), France (-3.7%), Luxembourg (-1.1%), Austria (-3.8%) and Finland (-3.6%), while in Sweden (-4.8%) and the United Kingdom (-4.4%) the reduction was about average.

23. After reaching an all-time low at the beginning of the 1998/99 marketing year, when a bumper European crop coincided with world prices recording a five-year low, market prices of cereals recovered slightly in the spring of 1999 thanks to better disposal prospects, and expectations that the harvest would be sharply down on the preceding year. Throughout 1999, however, the cereal market was adversely affected by the large stocks carried over from the previous year and by fairly low world prices compared with earlier years, despite the upturn recorded in the summer. Thus, although the harvest was smaller and of good quality, the price of common wheat was almost unchanged compared with July, while barley and, above all, maize prices even began to fall that month. Only durum wheat showed a sustained improvement in the first half of 1999/2000, after the fall recorded the previous marketing year.

24. Olive oil prices recovered sharply after the falls recorded towards the end of 1999. In mid-January 2000 the market price for extra virgin olive oil was well above the price at which private storage is activated, both in Italy (+38%) and in Spain (+22%).

25. After showing a significant improvement in the two preceding years, the market price for wine deteriorated throughout 1999, for both red wine and white wine. Compared with a year earlier, the market price for red wine at the beginning of January 2000 was 15% down in Italy, 9% down in France and more or less unchanged in Spain; for white wine there were reductions of 14% and 10% in Italy and Spain respectively, whereas for France there was no substantial change.

26. A significant increase in the volume of production, combined with difficulties in disposing of overabundant production are at the root of the reduction in market prices compared with the preceding year in the fruit and vegetable sector. The picture was roughly the same throughout the sector and in most Member States. Potato prices, on the other hand, showed a slight increase (+3.1% on average compared with the preceding year).

27. The price of butter, which had been falling since the summer of 1998 as a result of export difficulties and increased production, continued on a downward course until the beginning of May 1999, when it was equivalent to 91.3% of the intervention price, and thereafter held at that level. It recovered to some extent after July, to end the year at about 95% of the intervention price. The price of skimmed milk powder was almost unchanged until February, when it began a rise which took it to the level of the intervention price towards the middle of June, a level which it was later to exceed.

28. In the beef/veal sector the market price for reference quality R3 uncastrated male adult bovine animals, which had been falling since August 1998 following the loss of the Russian market, gradually recovered in the first six months of 1999 before settling at a level slightly above the intervention price, the threshold for the activation of market support. For their part, the prices of R3 castrated young bovine animals continued to fall throughout the first half of 1999, whereupon they showed an appreciable improvement to end the year at a much higher level than at the end of 1998.

29. In the spring of 1999 the poultry market, which had begun the year fairly promisingly, was hit by the crisis resulting from the contamination of poultry feed by dioxin. This resulted in a sharp fall in demand and in prices not only in the Member State where the crisis had occurred (Belgium) but also in the European Union generally. The worst of the crisis was felt at the end of June, when market prices were about 20% below the level they had reached twelve months earlier. Prices later recovered, but remained below the levels recorded in preceding years.

30. After experiencing fairly favourable conditions in 1996 and 1997 which helped to bring about a considerable increase in the herd, the pigmeat market has in the past two years been characterised by overproduction, a situation which has been exacerbated by disposal difficulties on the Russian market from the summer of 1998 onwards. Market prices fell throughout 1998, reaching their lowest point at the end of November (ECU 88.5/100 kg carcase weight, i.e. about 40% less than at the same period in 1996 and 1997). The situation then improved somewhat, especially in the summer, when production stabilised and exports picked up and also because private storage measures were implemented from the end of September 1998 until the middle of September 1999. Nevertheless, the situation again worsened in the second half of the year, when production exceeded the quantity that could be disposed of. At the end of the year, in spite of relatively low prices for compound feedingstuffs, pigfarmer profit margins were appreciably lower than normal.

31. Market prices in the sheepmeat and goatmeat sector, which had fallen by 24% in the second half of 1998, reverted to normal levels in the spring of 1999, only to collapse as a result of a sharp increase in production in the United Kingdom and Ireland. Following a significant improvement from the autumn onwards, however, prices at the end of the year were more than 30% up on those recorded a year earlier.

Input prices

32. The index of purchase prices for staple goods and services in agriculture fell by an average of 1.8% in nominal terms in 1999 as a result of lower prices for feedingstuffs (-5.3%) and fertilisers (-3.3%). There was an increase in nominal terms, however, for most of the other headings, in particular energy (+1.8%).

33. When inflation is taken into account the index of purchase prices for staple goods and services in agriculture reveals a fall averaging 3.5% in real terms in the European Union as a whole. The fall was above the average in Italy (-3.8%), Austria (-3.9%), Portugal (-3.9%), Finland (-3.7%), Spain (-4.7%) and the Netherlands (-5.0%), but below the average in the other Member States, in particular in Germany (-1.5%), Ireland (-1.7%) and the United Kingdom (-1.6%).

Farm incomes

34. According to revised Eurostat estimates based on information received from the Member States in January 2000 in accordance with the new methodology for economic accounts in agriculture, farm incomes [2] fell by an average of about 3% in real terms compared with a year earlier. The fall was above the average in France (-4%), the Netherlands (-6%), Belgium (-9%), Denmark (-11%) and Ireland (-12%). It was below the average in the United Kingdom (-2%), Italy (-2%), Austria (-1%), Greece (0%) and Finland (-2%), while in Spain and Germany it was at the average level for the EU as a whole (-3%). In three Member States, however, there was an increase in farm incomes compared with a year earlier: Luxembourg (+2%), Sweden (+6%) and Portugal (+16%).

[2] Measured as the net value added at factor cost per unit of work.

35. As a result of the change in the methodology used for drawing up the economic accounts in agriculture, [3] and the delays which occurred in most Member States in compiling historical series in accordance with the new methodology, it is impossible to assess the changes recorded in 1999 in relation to the long-term trend in farm incomes or even in relation to recent years. In many Member States, moreover, changing over to the new methodology has not been without its problems. The information provided to date has not always been of the highest quality or homogeneous between Member States. In addition, not only have several revisions arising from the new methodology affected the definition of certain aggregates, they have also brought about changes in certain sources of data, thereby restricting comparability with the earlier series. It is accordingly difficult at this stage to measure to what extent the early estimates of farm incomes in 1999 have been influenced by factors other than the deterioration in agricultural markets or the reduction in subsidies compared with the preceding year.

[3] The introduction of the new methodology for the economic accounts in agriculture has resulted in many changes in data, as a result both of the change in the methodology itself and of the use of new sources of data. Some of the changes have had a direct impact on the measurement of farm incomes, whereas others have altered only the level of certain aggregates without, however, affecting the measurement of income. An overview of the changes and of the factors that explain the movements in farm incomes in 1999 can be found in the Eurostat brochure Statistics in Focus - Theme 5 (24/1999).

Changes in nominal producer prices of agricultural products

in 1999 and 1998

(%)

>TABLE POSITION>

Source : Eurostat

Changes in nominal agricultural input purchase prices

in 1999 and 1998

(%)

>TABLE POSITION>

Source : Eurostat

Deflated producer price indices

(1990=100)

>TABLE POSITION>

Source : Eurostat

Deflated indices of purchase prices for staple goods and services

in agriculture

(1990=100)

>TABLE POSITION>

Source : Eurostat

Farm accountancy data network (FADN)

Farm incomes

36. Output, costs and incomes of commercial farms in the EU are calculated from observed data collected in a survey of harmonised farm accounts (see Chapter VII, Table 3.2.1). The survey provides valuable information about how farm incomes vary according to type of farming, size and location, which is not apparent from the global averages in the results for the agricultural sector as a whole. This section presents variations according to type of farming. For an explanation of the various types of farming, see Chapter VII, Table 3.2.2.

37. The results set out here are all based on observations, and the variations are calculated in real terms (adjusted for inflation). At the time of going to press, some results for 1997 were not yet available and those available were still provisional. Detailed results (in current euro) for the different types of farming and different business levels of economic size of farm are given in Chapter VII, Tables 3.2.3 and 3.2.4.

Income by type of farming

38. The large differences in average income between Member States (see Figure 1) are inherent in the structure of their agriculture. The Member States with the highest average incomes are generally speaking those with a large number of large-sized farms specialising in arable crops or involved in the most competitive sectors of production (pigs and/or poultry, horticulture and dairy). The southern Member States, with a large number of small farms engaged in mixed farming (crop and livestock production) or 'other permanent crops' (mixes of different cropping enterprises) have average incomes below the EU average.

39. In the 1997/1998 accounting year average farm incomes in real terms were up on 1995/1996 in several Member States: Spain, Ireland and especially the Netherlands. For the other available countries the figures were lower than in 1995/1996.

40. Figure 2 shows the wide range of incomes from one Member State to another for each type of farming. It also shows a lack of uniformity regarding the changes in income between 1996 and 1997: for all sectors there are some Member States with an increase in income, while other(s) had a decrease.

41. Figure 3 shows the value of production of the average holding (in real terms). Between 1996 and 1997 more Member States experienced an increase than a decrease.

42. Figure 4 shows the evolution of net public subsidies (balance between public subsidies and taxes) per farm since 1995. Between 1996 and 1997 five countries had a negative evolution: Belgium, Denmark, France, Austria and Sweden. The others had an increase in net public subsidies.

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Policy developments and legislative initiatives in 1999

The Berlin agreement on Agenda 2000

43. The conclusions of the Berlin Summit on Agenda 2000 in March 1999 resulted in the adoption of ten new regulations [4] and the decision on the level of allocations for the reform of the agricultural sector. The agricultural budget will be restricted to an average of EUR 38 000 million annually for market policy (including veterinary and plant health measures) and EUR 4 300 million for rural development measures.

[4] OJ L160, 26.6.1999, p. 1; OJ L179, 14.7.1999, p. 1.

44. The new regulations, which, except in the case of milk, are all applicable from the beginning of 2000, concern the arable crops, beef, milk and wine sectors, the new rural development framework, the horizontal rules for direct support schemes and the financing of the CAP. The amended regulations for the olive oil and tobacco sectors have to be added to this list, even though they were not adopted in the context of the Agenda 2000 reform package.

45. While in some respects the policy as finally agreed is not as far-reaching as had originally been proposed, it remains the most radical and wide-ranging reform in the history of the common agricultural policy. The reformed CAP represents a step towards supporting the broader rural economy rather than agricultural production and ensures that farmers are rewarded not only for what they produce but also for their general contribution to society.

46. More specifically, the reform provides for the following:

Lower institutional prices, as a means of encouraging competitiveness

47. Reductions in market support prices ranging between 15% for cereals and 20% for beef will be introduced. A cut of 15% will apply to the milk sector from the year 2005/2006. The cuts will be introduced gradually, with a view to bringing European prices closer to world market prices, something which, via a positive impact on both internal demand and export levels, will help to improve the competitiveness of agricultural products on domestic and world markets.

A fair standard of living for the farming community

48. The reductions in institutional prices will to some extent be offset by an increase in direct aid payments, thus helping to provide farmers with a fair standard of living. The move away from price support and towards direct income support for farmers means a further decoupling of aid from production.

Strengthening the European Union's international trading position

49. Greater market orientation will pave the way for the integration of new Member States and strengthen the European Union's position in the coming WTO round. As stated in the Berlin European Council conclusions on Agenda 2000: "the decisions adopted regarding the reform of the CAP within the framework of Agenda 2000 will constitute essential elements in defining the Commission's negotiating mandate for the future multilateral trade negotiations at the WTO".

Focusing on quality

50. The reform takes full account of increased consumer concerns over food quality and safety, environmental protection and animal welfare in farming. Compliance with minimum standards in the field of environment, hygiene and animal welfare is a requirement, in terms of both market support and the new rural development policy.

Integrating environmental goals into the CAP

51. Member States have to undertake what they regard as appropriate environmental measures. In this respect, Member States will have three options. The first of these, implementing appropriate agri-environmental measures under rural development programmes, may be sufficient on its own. The second allows them to make direct payments under the market organisations, subject to the observance of general environmental requirements. By virtue of the third, they may attach specific environmental conditions to the granting of such payments. In the latter two cases, payments would be proportionally reduced or cancelled altogether in the event of non-compliance.

A new rural development framework: the second pillar of the CAP

52. The new policy on rural development seeks to establish a coherent and sustainable framework for the future of Europe's rural areas. It will complement the market sector reforms by promoting a competitive, multifunctional agricultural sector in the context of a comprehensive integrated strategy for rural development.

53. As a coherent package of measures, it has three main objectives:

- To create a stronger agricultural and forestry sector, the latter being recognised for the first time as an integral part of rural development policy;

- To improve the competitiveness of rural areas;

- To maintain the environment and preserve Europe's rural heritage. The Council adopted Leader+, a new Commission Initiative for rural development for the period 2000-06.

54. The agri-environmental measures are the only compulsory element of the new generation of rural development programmes and therefore represent a decisive step towards the recognition of the role of agriculture in preserving and improving Europe's natural heritage. The agri-environmental aid scheme will encourage farmers to introduce, or to continue using, farming practices that are compatible with environmental protection and natural resource conservation.

Decentralised management

55. Compared with 1992 there has been a change in the arrangements for direct payments to producers. Those for the beef and dairy sectors will partly take the form of a national financial envelope from the EAGGF budget, an envelope which Member States can distribute in such a way as to target specific national or regional priorities. Each Member State will be able to allocate resources freely, subject to certain Community requirements designed to prevent distortions of competition.

Further simplification

56. The CAP reform contains important elements of simplification in various sectors. In the wine sector, for instance, there is now one Regulation where previously there were twenty-three. Equally, in rural development there is now only one Regulation instead of nine. The Commission has, however, also sought to encourage the process by decentralising, streamlining and simplifying programming procedures.

57. To conclude, the new reform will contribute to the development of a genuinely multifunctional, sustainable and competitive agriculture, thus helping to secure the future of the more fragile rural regions. It recognises that agriculture has a key role to play in preserving the countryside and natural spaces and maintaining the vitality of rural life. It also seeks to respond to consumer concerns over food safety and quality and animal welfare. Lastly, the reform of the CAP is aimed at ensuring that the rural environment is protected and improved for future generations.

Quality policy

58. It is becoming increasingly clear, particularly in the light of the events of 1999, that producers cannot afford to ignore the growing concerns of consumers over food quality. Food safety must, of course, remain a basic requirement but, having ensured this, demand for quality products must be satisfied from a wide range of foodstuffs whose objective characteristics are known and guaranteed. What is more, guaranteeing this choice will create opportunities for agricultural diversification, particularly in the Union's less-favoured rural areas. It is against this background that Community policy on the use of quality labels to identify products has continued to develop.

59. The Commission has, under Council Regulation (EEC) No 2081/92 on the protection of geographical indications and designations of origin for agricultural products and foodstuffs, [5] made additions to the list of registered names, which now stands at 526.

[5] OJ L 208, 24.7.1992, p. 1.

60. In terms of both the Member States and the types of products concerned, the new product registrations reflect growing interest in the protection of foodstuffs which consumers can associate with a particular production method and geographical origin.

61. By its very nature, however, the procedure can lead to disputes. In its judgement of 16 March 1999, the Court of Justice cancelled the registration of the name "Feta" - essentially because of an alleged lack of basis for such registration - but did not express an opinion on the generic nature of the name. The application for registration is still pending before the Commission and will be re-examined in the light of additional information now being received. In other cases, the Court of Justice confirmed the Commission's approach and procedures for registration.

62. Operators are increasingly beginning to use the Community PDO and PGI logos - which were adopted in 1998 [6] - to increase the visibility of their products where the latter are covered by those Community quality guarantee schemes.

[6] Regulation (EC) No 1726/98 (OJ L 224, 11.8.1998, p. 1).

63. Very little use has been made of Regulation (EEC) No 2082/92 [7] on certificates of specific character and introducing the "guaranteed traditional speciality" indication, with only six specialities being registered. In accordance with the rules, the Commission addressed to the Council and Parliament a report on the application of the Regulation, detailing the difficulties encountered, in particular with the procedure for objecting to registrations and the type of legal protection given to names.

[7] OJ L 208, 24.7.1992, p. 9.

64. The information campaign to make the public aware of the indications PDO (protected designation of origin), PGI (protected geographical indication) and GTS (guaranteed traditional speciality), which was completed at the end of 1998, is currently undergoing evaluation.

65. There was a major development in 1999 in the WTO (World Trade Organisation) negotiations on the application of the Agreement on Trade-Related Aspects of Intellectual Property Rights (the TRIPs Agreement). With this Agreement, the protection of geographical indications and designations of origin takes on an international dimension. Regulation (EEC) No 2081/92 will have to be amended to specify how non-member countries which are members of the WTO can register products as PDOs or PGIs and submit objections to the registration of Community PDOs or PGIs where they have a legitimate interest in doing so.

66. With the adoption, in 1991, of Regulation (EEC) No 2092/91 on organic production of agricultural products and indications referring thereto on agricultural products and foodstuffs, [8] the Community created a legal framework for ensuring that organic products comply with a number of well-defined production rules and are subject to special inspection arrangements in order to meet the expectations of the consumers concerned.

[8] OJ L 198, 22.7.1991, p. 1.

>TABLE POSITION>

ist of PDOs, PGIs and GTSs registered in 1999

Organic farming

67. The Austrian Government and the Commission held a conference on "Organic farming in the European Union - The prospects for the 21st century" in Baden (Austria) on 27 and 28 May 1999. During the Conference it was pointed out that the area devoted to organic farming or in the process of conversion to organic farming had increased from around 900 000 hectares in 1993 to approximately 2.9 million hectares in 1998. It was recognised that there was further potential for growth in the sector, from the current 2% of the European agricultural area to an average of between 5% and 10% by 2005. In addition to the effects of the above-mentioned legislation and the Community's financial support for environmentally friendly farming practices, the reason for the growth appears to be an upsurge of interest among both consumers and farmers in farming practices that respect the environment.

68. On 19 July 1999 the Council adopted Regulation (EC) No 1804/99, [9] which includes livestock products in the scope of Regulation (EEC) No 2092/91. As a result, from 24 August 2000, the date on which the Regulation becomes applicable, all organic agricultural products and foodstuffs, with the exception of a few livestock products of minor importance, will be subject to the rules of production and the inspection measures laid down in that Regulation.

[9] Council Regulation (EC) No 1804/1999 of 19 July 1999 supplementing Regulation (EEC) No 2092/91 on organic production of agricultural products and indications referring thereto on agricultural products and foodstuffs to include livestock production (OJ L 222, 24.8.1999, p. 1).

Promotion of Agricultural Products

69. Programmes run directly by the Commission: 1999 saw the start of a new two-year campaign for textile flax, and the launch of the seventh campaign for olive oil. The latter takes account of the assessment reports and informs consumers and nutritionists on the health aspects of the product.

70. The programmes run indirectly by the Commission comprised a continuation of the promotional campaigns for milk and milk products, quality beef, apples, citrus fruit and grape juice. For these sectors too, the assessment reports were encouraging. The year also saw the completion of the campaign to promote the logo identifying agricultural products from the EU overseas departments.

71. The promotion of quality beef and veal continued and helped stabilise consumption. Based on Council Regulation No 2702/1999, [10] information measures were drawn up for the new labelling system for beef and veal.

[10] (OJ L 327, 14.12.1999, p. 7).

72. The third set of promotion programmes for flowers and live plants was launched in 14 Member States.

73. The Council adopted a framework Regulation on information and promotion measures for European agricultural and food products in third countries, which will afford fresh opportunities to increase awareness of Community products.

74. The budget amounts were as follows (in EUR million):

// Amount set in 1999

Olive oil

Textile flax

Grape juice

Apples/citrus fruit

Information on beef labelling

Quality beef

Milk and milk products

Quality products from outermost regions

Flowers and live plants // 18.2

2.5

7.1

6.5

1.0

* With effect from 2000

Agricultural Research

Introduction

75. Research activities in the field of agriculture, forestry and rural development were carried out through the implementation of the specific programme "Quality of life and management of living resources" under the ongoing Fifth Framework Programme for Research and Technological Development [11] (1998-2002). Concomitantly with this, there was further progress on research activities in the field of the conservation, characterisation, collection and utilisation of genetic resources in agriculture under Regulation (EEC) No 1467/94.

[11] Decision 182/1999/EC (OJ L 26, 1.2.1999, p. 1).

Quality of life and management of living resources (QoL) specific programme [12] (1998-2002) under the Fifth Framework Programme

[12] Decision 1999/167/EC (OJ L 64, 12.3.1999, p.1).

76. The Fifth Framework Programme comprises four thematic and three horizontal specific programmes. The specific programme "Quality of life and management of living resources" (QoL) addresses RTD priorities in agriculture, forestry and rural development. It consists of six key actions, generic activities and support for research infrastructures. Key Action 5, "Sustainable agriculture, fisheries and forestry and integrated development of rural areas including mountain areas" and Key Action 2 "Control of infectious diseases" are the main vectors of RTD activities in the relevant disciplines.

77. The first call for proposals for the QoL programme was published on 6 March 1999 and featured two deadlines:

- A total of 1 020 proposals were submitted in respect of the first one, in June 1999. Altogether, 192 research proposals were received for Key Actions 2 and 5. Following independent evaluation, seven proposals on infectious animal diseases were put on the main priority list under Key Action 2, and 34 proposals (four on diversification, 14 on plant health, four on animal health and welfare, seven on forestry and five on support for the CAP) were put on the main priority list under Key Action 5. Contract negotiations were completed by November 1999 and the projects began in February 2000. The total Community contribution is EUR 54 million.

- The second deadline was 15 November 1999. Shortlists will be drawn up and contracts launched in 2000.

78. Proposals for training grants, accompanying measures and specific measures in favour of SMEs were also submitted, evaluated and selected in the areas of agriculture, forestry and rural development following open calls for proposals.

79. The Commission is, in its management of the specific programme as a whole, assisted by the Member States via the Programme Committee. In addition, RTD priorities are addressed at key action level by External Advisory Groups. These consist of independent experts representing, in a personal capacity, all the fields covered by the key actions.

80. In addition to the Agreement established with the EEA countries, cooperation agreements have been signed with the 11 applicant countries and Israel. Under the agreements, organisations in these countries are given equal access to the Fifth Framework Programme for RTD.

Management of RTD contracts

1.1.1.1. Fourth Framework Programme (1994-1998)

81. Of the 183 projects being implemented at the beginning of 1999 under the FAIR specific RTD programme, 63 were completed before the end of the year. A total of 12 RTD projects are currently being carried out in the field of transmissible spongiform encephalopathies.

Projects concerned with genetic resources in agriculture

82. Following a call for proposals subject to a 9 July 1998 deadline, six proposals were selected for a total Community contribution of EUR 2.6 million in 1999. The Directorate-General for Agriculture is, in its management of the programme, assisted by a Committee on Genetic resources made up of representatives of the Member States.

83. Lastly, it should be noted that, following the restructuring of the Commission, the management of research activities under RTD Framework Programmes was transferred to the Directorate-General for Research as of 1 October 1999.

Simplification of agricultural legislation

84. The work on simplification carried out by the Commission in 1999 focused on two main areas: reducing the administrative workload the common agricultural policy (CAP) imposes on farmers and administrative authorities and making agricultural legislation as clear, transparent and easily accessible as possible.

Simplification

1.1.1.2. Simplification of the rules of the CAP

85. Simplification applied to various sectors is a major feature of the CAP reforms under the Agenda 2000 package. In addition, Agenda 2000 has led to a considerable reduction in the number of regulations in force, making the legislation much more comprehensible and accessible. Furthermore, the olive oil reform introduced some changes in June 1998 which will facilitate management and improve the control of the system.

1.1.1.3. Consultation of the national paying agencies

86. The Commission has invited the EAGGF national paying agencies to put forward proposals for the simplification of administrative rules and procedures. Some of the proposals have already been implemented under Agenda 2000 or are the subject of separate Commission decisions, while others are still being worked on and may lead to further proposals for simplification.

Transparency

1.1.1.4. Informal consolidation of agricultural legislation in the eleven official languages

87. As agricultural legislation is amended by successive legal acts, the modifications are integrated into single, correct and updated versions and are gradually made available to the general public and to national administrations via the Internet. Although non-binding, the consolidated versions substantially facilitate the search for rules in force by all those concerned by the CAP. They thus eliminate confusion and minimise the risk of misinterpretation. A first set of consolidated acts is already available, and the process will be completed for all agricultural legislation within the next few years.

1.1.1.5. Repeal of all agricultural legislation that is no longer applicable

88. Agricultural legislation which is formally still in force but no longer applicable is to be repealed. This will simplify user access to the legislation that is still relevant. The Commission has undertaken to monitor all agricultural legislation and take appropriate measures. Around 300 acts have been repealed so far.

1.1.1.6. Standardisation of Commission publications covering export refunds

89. Different systems are currently in use in the different sectors to indicate destinations in connection with the fixing of export refunds. The present systems are often complex and make the rules on export refunds difficult to read and understand. This represents a clear risk of misunderstanding and error. In order to overcome these problems, the Commission has been working on a standardisation of Commission publications concerned with export refunds. Once adopted, the new system will facilitate the electronic exchange of data and information between the Commission and the Member States and improve the implementation of the rules.

State aids

Introduction

90. In 1999 the Commission received 292 notifications of State aids measures to be granted in the agricultural and agro-industrial sector. Most of the notifications came from Italy and Germany and, as a result of the dioxin crisis, from Belgium. The actual numbers are not necessarily significant, however. Some of the notifications concern individual cases and/or one-off measures, which can vary in complexity from relatively straightforward promotional aid to complex cases of restructuring aid. Other notifications concern aid schemes of indefinite duration, often drafted in the form of comprehensive national or regional acts aimed at providing all-embracing frameworks for State aids in the Member State or region concerned and including different types of aid measure. In 1999 the Commission also began examining 42 aid measures which had not previously been notified under Article 88(3) of the EC Treaty. The Commission concluded two reviews of existing aids which resulted in proposals for appropriate measures pursuant to Article 88(1) of the EC Treaty. Altogether, the Commission approved 249 measures, several of them after the Member States concerned had amended them to bring them into line with the Community rules on State aid or had undertaken to do so. The Commission initiated the procedure provided for in Article 88(2) of the EC Treaty in 16 cases in which there were serious doubts as to whether the measures were compatible with the common market. The Commission closed the procedure provided for in Article 88(2) of the EC Treaty in respect of 25 cases, taking a final negative decision in 13 of them. In all cases where a negative decision was taken, and State aids had already been granted by the Member State concerned, the Commission requested recovery of the aid paid.

91. Policy developments: In 1999, following multilateral consultations with the Member States, the Commission adopted new comprehensive Community guidelines for State aid in the agriculture sector. [13] Together with the entry into force of Council Regulation (EC) No 1257/99, [14] the need to provide a clear guide to Commission practice with regard to the different types of aid which may be considered compatible with the common market prompted a move to revise, update and consolidate the rules followed by the Commission when assessing proposals from Member States to grant State aid in the agriculture sector and applying a derogation under Article 87(2) and (3) of the EC Treaty. In providing a clear new framework for the different types of State aid allowed, the guidelines take particular account of new developments in agricultural policy, especially the need, on the one hand, to improve and promote the quality of agricultural products and, on the other, to preserve the environment and the traditional heritage in the countryside.

[13] OJ C 28, 1.2.2000, p. 2.

[14] OJ L 160, 26.6.1999, p. 80.

92. The following overview covers just some of the cases, those which raise interesting, although at times problematic, issues in terms of State aid policy in the agricultural and agro-industrial sector. Where no specific reference is made to the publication of a decision in the Official Journal of the European Communities, the decision has not yet been published. The authentic texts of the decisions approving aids, less any confidential information they may contain, can generally be found at http://europa.eu.int/comm/sg/sgb/state_aids.

Belgium

93. State aids for "exceptional occurrences" falling under Article 87(2)(b) of the Treaty: In 1999 the Commission authorised a Belgian Government aid package for producers and undertakings affected by the crisis resulting from dioxin-contaminated feedingstuffs. The Commission took the view that, although the chemical contamination of foodstuffs could not be regarded as an "exceptional occurrence" within the meaning of Article 87 (2)(b), the Belgian authorities' announcement of the contamination and the urgent measures subsequently adopted made it impossible for the operators concerned to market their products, thereby plunging them into a crisis situation which, in terms of its character and effects, was quite unusual and outside normal market conditions. The Commission was of the opinion, however, that the concept of "exceptional occurrence" could apply only to those producers who were victims of a situation which was beyond their control.

94. National aid for farmers initially took the form of compensation and repayable advances. [15] The first were paid to poultry farmers and the second to pig farmers, cattle farmers and egg producers. The Commission subsequently authorised the conversion of the repayable advances into definitive compensatory payments set at 80% of the cost price of the animals concerned, but not exceeding the market price where this was less than 80% of the cost price. [16] The aim of the measures adopted by the Belgian Government was to compensate and assist farmers following the slaughter/destruction of animals and eggs, either because the said animals/products were dioxin-contaminated or because they had passed the optimum marketing stage and had had to be destroyed for animal welfare or public health reasons. The latter measures were aimed in particular at farms which, being under precautionary distraint, were prohibited from marketing their production.

[15] Cases NN 87/99, NN 88/99, NN 89/99, N 380/99 and N 386/99 - Commission Decision of 20.7.1999 (OJ C 253, 4.9.1999, p. 14).

[16] Cases N 510/99, N 511/99, N 512/99 and N 513/99 - Commission Decision of 29.9.1999 (OJ C 326, 13.11.1999, p. 10).

95. The aid to owners of products of animal origin also took the form of repayable advances and was intended to prevent bankruptcy among operators whose contaminated products had to be destroyed or whose products had passed their sell-by date because of the Belgian Government's precautionary measures. [17] The Commission authorised a further measure, aimed at owners of fresh meat and meat products obtained from pigs, cattle or poultry that had possibly been contaminated by dioxin, and designed to compensate them for losses sustained as a result of the order to destroy such products. [18] The products had been placed under precautionary distraint or destroyed because they could not be released for marketing and the possibility of contamination could not be ruled out altogether. The measure, aimed at protecting consumer health, was deemed compatible with the common market under Article 87(3)(c) since it constituted aid to facilitate the development of the sectors concerned. The Commission also authorised the Belgian authorities to bear the costs of the tests and of the destruction of the animals and products covered by the above measures. [19] In line with its normal practice, the Commission permitted payment of all the costs concerned because the quality checks on, and the destruction of, the products were obligatory under Community and/or national rules.

[17] Cases NN 95/99 and N 384/99 - Commission Decision of 20.7.1999 (OJ C 253, 4.9.1999).

[18] Cases N 434/99, N 435/99 and N 447/99 - Commission Decision of 16.8.1999 (OJ C 264, 18.9.1999).

[19] Case NN 90/99 - Commission Decision of 20.7.1999 (OJ C 253/99, 4.9.1999); Cases N 514/99 and N 509/99 - Commission Decision of 29.9.1999 (OJ C 326, 13.11.1999).

96. Also in connection with the Belgian dioxin crisis, approval was given to State aid included in an agreement between the Belgian authorities and the Belgian Banking Association. [20] The Agreement concerned a loan scheme to prevent basically sound agricultural undertakings from failing as a result of a loss of income brought about by market disruption following the contamination of certain animal feeds by dioxin and the measures taken to deal with this. The scheme was based on equal contributions from the public and private sectors whereby the public sector would guarantee 50% of the loan amount and the banking sector would underwrite the remaining 50% and forgo its normal margin on the interest rate, the latter not exceeding the Belgian prime rate less 30 base points (cost price to the banks). Eligibility was restricted to undertakings which, although basically sound and viable, had suffered a major drop in turnover in June to September 1999 (25% over a two-month period or 40% in a single month). The notification contained two aid elements within the meaning of Article 87(1) of the EC Treaty. Firstly, the principal aid element was the provision of a State guarantee. Secondly, the fees of the accountants certifying the losses were to be met by the State. The State guarantee element was considered compatible under Article 87(2)(b) of the EC Treaty, given that the Commission had concluded in previous cases that the nature and extent of the restrictions needed to protect public health in connection with the dioxin crisis affecting foodstuffs and animal feed produced in Belgium amounted to an exceptional occurrence within the meaning of Article 87(2)(b) of the EC Treaty. The State guarantee amounted to a subsidy of less than 6.05% of the total loan. Moreover the Belgian authorities undertook to ensure that individual recipients would not be overcompensated for their losses. Payment by the State of the accountants' charges was considered a soft aid, for which the Commission's established practice is to accept aid rates of up to 100%.

[20] Case N 499/99 - Commission Decision of 7.9.1999 (OJ C 288, 9.10.1999).

97. The Commission decided to initiate the procedure provided for in Article 88(2) of the EC Treaty against a measure notified by the Belgian authorities [21] granting aid to farmers as compensation for restrictions on the spreading of manure (the maximum quantities concerned vary year by year). This measure possibly qualified under point 3.4 of the Community guidelines on State aid for environmental protection [22] whereby operating aids may, in exceptional cases, be allowed if: (i) the aid only compensates for extra costs by comparison with traditional costs; (ii) the aid is temporary and in principle degressive; and (iii) the aid is necessary to offset losses in competitiveness, particularly at international level. Furthermore, the Commission normally takes account of what the firms concerned have to do in return to reduce their pollution. In this case the Commission initiated the procedure provided for in Article 88(2) of the EC Treaty because it had doubts as to whether those conditions had been met. The signs were that the aid was neither temporary nor degressive, that it was not needed to offset losses in competitiveness and that the farmers did not have to take any steps to reduce pollution. Furthermore, the amount of manure that could be spread per hectare under the measure appeared to constitute an infringement of the nitrates Directive (Council Directive 91/676/EEC of 12 December 1991 concerning the protection of waters against pollution caused by nitrates from agricultural sources). There therefore appeared to be no justification for granting the aid.

[21] Case C 12/99 (ex N 380/98) - Commission Decision of 17.2.1999 (OJ C 129, 8.5.1999).

[22] OJ C 72, 10.3.1994, p. 3.

Denmark

98. In a Danish case [23], the Commission applied for the first time in the agricultural sector its notice on the application of the State aid rules to measures relating to direct business taxation [24]. The case involved the reintroduction of a ceiling on the Danish local land tax levied by the municipalities on land used for primary production purposes. The measure, which was in the form of an amendment to the 1990 local land tax law, was intended to apply to the 1999 and 2000 fiscal years. The ceiling proposed by Denmark (0.008%) was lower than that approved by the Commission (0.015%) in its previous two decisions on the land tax, which dealt with the 1994-96 and 1997 fiscal years respectively and covered land used for agriculture, horticulture and seed nurseries. The latest measure also involved the extension of the tax ceiling to forestry. The ceiling is intended primarily to counteract increases in land prices - and, by the same token, in land taxes - that are caused by factors not attributable to primary production. A considerable reduction in variations in the tax rate (from 0.006-0.024% to 0.006-0.008%) would also be achieved. In its previous decisions on the land tax, the Commission considered that the land tax ceiling did not constitute aid. The Danish authorities gave assurances that the factors on which the Commission had based its previous decisions had not changed. In its Decision the Commission reiterated its position in the previous two cases, i.e. that although selective, the measure did not constitute State aid within the meaning of Article 87(1) of the EC Treaty. As additional arguments in favour of this conclusion the Decision took into account the special nature of the land used for primary production and the fact that the measure applied to the entire primary production sector.

[23] Case N 53/99 - Commission Decision of 9.6.1999 (OJ C 213, 24.7.1999).

[24] OJ C 384, 10.12.1998, p. 3.

99. The Commission decided to initiate the procedure provided for in Article 88(2) of the EC Treaty against an aid measure notified by Denmark and involving an amendment of the Danish parafiscal Poultry Levy Fund, a parafiscal aid scheme. [25] The specific purpose of the measure notified was to allow the Poultry Levy Fund to finance part of the cost of preventive vaccination of broilers against gumboro, a poultry disease responsible for increased mortality rates among birds intended for slaughter. The aid was paid retrospectively to owners whose non-infected flocks were vaccinated as part of a vaccination campaign. As the disease in question was not covered by Danish or Community legislation on animal diseases, the aid did not entirely satisfy the cumulative requirements that, in accordance with established Commission practice, have to be fulfilled before State aid for combating epizootic and plant diseases can be declared compatible with the common market under Article 87(3)(c) of the EC Treaty (compulsory Community or national provisions, infections of public concern, preventive and/or compensatory nature of the aid, no overcompensation of individual undertakings, and compliance with Community veterinary legislation). In addition, the Commission had doubts as to whether the requirement that the aid had to cover only infections of public concern and could not be granted to defray costs relating to normal business risks had been satisfied, in particular in the light of a previous gumboro outbreak in the 1990s and the existence of a voluntary industry gumboro fund. The notification was withdrawn by the Danish authorities after the procedure was initiated.

[25] Case C 15/99 (ex N 489/98) - Commission Decision of 23.6.1999.

Germany

100. In 1999 the Commission communicated to Germany the adoption of a final negative decision on the aid granted by the German Government under the Entschädigungs- und Ausgleichsleistungsgesetz (EALG). [26] This introduced a scheme for the purchase of land at reduced prices in the former GDR that amounted to the granting of State aid to some beneficiaries. The Commission argued that while for the category Wiedereinrichter (resettled farmers) and juristische Personen (legal entities) comprising at least one of the former, the benefit of a reduced-price purchase could constitute compensation for a loss suffered (expropriation and/or the possible deterioration of the farm's inventory), this was not true in the case of the Neueinrichter (newly settled farmers), the other legal entities and possibly other beneficiaries not included in the law in question. For the latter category, the aid would constitute State aid under Article 87(1) of the EC Treaty, given that they had not suffered expropriation or similar damage. The aid rate appeared to be too high in relation to the rates which the Commission could ordinarily accept for the purchase of farmland in normal areas (i.e. those not classified as less favoured). In addition, the aid in question appeared to be discriminatory and thus to infringe Articles 12, 34(3) and 43 of the EC Treaty, given the requirement that certain beneficiaries had to have been resident in the former GDR on 3 October 1990, a condition that in practice could be fulfilled only by former East German nationals.

[26] Case C 17/98 - Commission Decision of 20.1.1999 (OJ L 107, 24.4.1999).

101. In the course of 1999 an amended version of the land purchase programme was notified to the Commission, which has approved the new version. [27] The problems which had led to the partial negative decision have been resolved:

[27] Case N 506/99 - Commission Decision of 22.12.1999 (not yet published).

- In its partial final negative decision of 20 January 1999 regarding the old EALG, the Commission takes the view that making residence on a given date a requirement for eligibility under the programme - a requirement which in practice could be met by former East German nationals only - constitutes discrimination. No such date is specified in the new programme.

- The Commission further objected to the aid intensity for the purchase of agricultural land in areas other than less-favoured areas. The aid rate has been brought fully in line with the rates the Commission usually accepts. Any excess aid granted under the old EALG will be recovered, with interest, as stipulated in the Commission Decision of 20 January 1999.

102. In the light of the assurances provided by the German authorities, the Commission has established beyond doubt that there is sufficient land to overcome any potential discrimination without rescinding the contracts concluded under the old EALG. Insofar as residual elements in the new scheme would, all other things being equal, give priority to Eastern Germans, such preference would be in keeping with the objective of restructuring agriculture in the new Länder, while at the same time ensuring that potential purchasers who had lived and worked in the GDR for several decades, or whose family had lived and worked there for such a period, would be able to take part. This objective, which has been accepted as legitimate in the Commission Decision of 20 January 1999, has not been challenged.

103. The Commission takes the view that the new scheme proposed by the German government will facilitate the development of economic activities in the sector and that it therefore falls within the scope of Article 87(3)(c) of the Treaty.

104. The Commission decided to initiate the procedure provided for in Article 88(2) of the EC Treaty against promotion aid granted by Germany (Mecklenburg - Western Pomerania). The aid consisted of several measures that could be divided into "soft aids" and promotional aids. It is established Commission practice to allow aids with a 100% aid intensity for soft aids such as aid for participation in trade fairs and seminars, aid for market research, etc. Promotional aids have to comply with the Commission communication concerning State involvement in the promotion of agricultural and fisheries products [28] and, if the promotion is in the form of advertising, the Framework for national aids for advertising of agricultural products and certain products not listed in Annex II to the EEC Treaty, excluding fishery products. [29] One of the main conditions for promotional aids is compliance with Article 28 of the Treaty. An earlier Decision had regarded this condition as having been fulfilled. [30] Before adopting the current decision, however, the Commission examined the sample promotional material sent in by the German authorities. It seemed, on the face of it, that the sole message contained in the said promotional material was that the products were from Mecklenburg - Western Pomerania. Therefore, both the existence of a reasonable balance between references to the qualities and varieties of the product and its national origin (a requirement of the above-mentioned communication) and compliance of the measure with Article 28 of the Treaty appeared to be in doubt. Furthermore, since the measure restricted the benefit of the aid to undertakings with a registered office in Mecklenburg - Western Pomerania, it appeared to constitute an infringement of Article 43 of the EC Treaty. In reply to the initiation of the procedure, the German authorities indicated that they would amend the measure: what had been put forward as an example of the promotional material would not be used. Furthermore the national authorities gave an undertaking that future promotional material would comply with Article 28 of the Treaty and that they would send the Commission an annual report with examples of the promotional material used. Lastly, the requirement to have a registered office in Mecklenburg - Western Pomerania in order to be eligible for aid would be abolished. In the light of those amendments the Commission decided to close the procedure by taking a positive decision. [31]

[28] OJ C 272, 28.10.1986, p. 3.

[29] OJ C 302, 12.11.1987.

[30] Case NN 27/97 - Commission Decision of 18.6.1997 (OJ C 334, 5.11.1997).

[31] Case C 23/99 - Commission Decision of 25.11.1999 (OJ L 37, 12.2.2000, p. 3).

105. In a German case, the Commission took the view that an exemption from tax on electricity and oil which was applicable in part to the agricultural sector [32] complied with point 3.4 of the environmental guidelines. [33] The exemption had been notified by the German authorities for a three-year period, and was therefore temporary, but it was not degressive. However, having regard to its existing practice in the interpretation of the guidelines, the Commission waived the requirement of degressivity in this case. Although in the agricultural sector the mere fact that most other countries do not yet have energy taxes is not an acceptable justification for the payment of the aid, in this case the Commission accepted that the limited temporary relief provided by the aid measure was necessary to enable farms to adapt to new conditions of competition. Furthermore, although the Commission noted that there was no legal obligation on the agricultural sector to do anything in return, it was ultimately accepted that farmers would invest to reduce their energy consumption. Given the limited nature of the tax exemption in the agricultural sector (the producers still have to pay 20% of the tax) and the large net additional tax burden that resulted from the measure, it appeared that primary agricultural production had a substantial incentive to make energy savings.

[32] Case NN 47/99, Commission Decision of 21.4.1999 (OJ C 166, 12.6.1999).

[33] OJ C 72, 10.3.1994.

106. The Commission also initiated the procedure in the case of three aid projects for the rescue or restructuring of companies in the new German Länder. [34] Following the initiation of the procedure, one of the notifications was withdrawn. The examination of the others is still under way.

[34] Cases: C 71/99 (ex N 258/98) - Commission Decision of 13.10.1999 (OJ C 359, 11.12.1999); C 73/99 (ex NN 90/97) - Commission Decision of 26.10.1999 (not yet published); C 16/99 (ex NN 108/98) - Commission Decision of 3.3.1999 (OJ C 120, 1.05.1999).

Greece

107. In 1999 the Commission adopted a final negative decision on the operation of the Greek Cotton Board (GCB), on the grounds that the latter was financed by a parafiscal tax of 1% on the overall value of imported cotton. [35] The GCB is a public body carrying out official tasks in, and granting State aids to, the cotton sector (technical assistance, quality controls and research). The Commission took the view that although the aids - in the strict sense of the term - were compatible with the common market, they were financed by means of a parafiscal tax imposed not only on domestic products but also on imported cotton. As well as being incompatible with Commission policy on parafiscal taxes, the measures appeared to be incompatible with the Treaty of Accession of Greece. As a consequence of the Decision, Greece is required to modify the scheme, notify the Commission of the amendments introduced and recover the amounts unduly paid.

[35] Case C 60/94 - Commission Decision of 20.7.1999 (not yet published).

Spain

108. The Commission adopted two negative decisions with demand for recovery in respect of two aid schemes implemented by the Autonomous Community of Extremadura in Spain. Aid No C 37/99, [36] introduced by Decree 35/1993, provides for financing to meet the capital requirements for a single marketing year in order to develop agricultural and agri-food activity. The beneficiaries are farmers, agricultural cooperatives and other associations and processing undertakings in Extremadura which conclude contracts with agricultural and livestock holdings in Extremadura for raw materials for industrial processing. The aid takes the form of an interest-rate subsidy for loans. Aid No C 38/99, [37] introduced by the Decree of 8 July 1998, provides for aid for agricultural products for industrial processing for the 1997/98 marketing year. The beneficiaries of the aid are producers of horticultural products for industrial processing in Extremadura who concluded contracts with processors in 1997/98. The aid provided for is between ESP 1.5 and ESP 5 per kilogram for peppers, gherkins, cabbages, onions, broccoli, cauliflowers, spinach, broad beans and potatoes. The two aid schemes are restricted to Extremadura producers who conclude contracts with Extremadura processors and vice versa, two requirements which constitute a restriction on the free movement of goods between Member States and constitute an infringement of Articles 28 and 29 of the Treaty. In addition, the aid is granted to promote the production of products subject to a common organisation of the market (Council Regulation (EC) No 2200/96 of 28 October 1996 on the common organisation of the market in fruit and vegetables), which is to be considered as a complete and exhaustive system which denies the Member States any powers to take measures which might derogate from or undermine it. With regard to aid No C 38/99, any aid whose amount varies with the quantities produced is deemed to constitute operating aid and is, as such, incompatible with the common market. Furthermore, Aid No C 37/99 does not fulfil the criteria laid down in the Commission communication on State aids: subsidised short-term loans in agriculture. [38]

[36] Case C 37/99 (ex NN 25/99) - Commission Decision of 22.12.1999 (not yet published).

[37] Case C 38/99 (ex NN 26/99) - Commission Decision of 22.12.1999 (not yet published).

[38] OJ C 44, 16.12.1996, p. 2.

France

109. The Commission decided to open the examination procedure provided for in Article 88(2) of the Treaty with respect to a measure notified by France to promote the production of wine that meets consumer requirements in the Charentes Region. [39] The purpose of the aid is to improve the quality of vineyards and encourage cognac producers to switch to "local wine" production by promoting the use of certain vine varieties. The Commission took into account the fact that the new Council Regulation (EC) No 1493/1999 of 17 May 1999 on the common organisation of the market in wine, [40] which entered into force on 21 July 1999 and is applicable from 1 August 2000, contains provisions on the abandonment of wine-growing areas and the restructuring and conversion of vineyards. The Commission took the view that, since the programme presented by the French authorities sought a long-term solution to the problem, the measures envisaged must take account of the new guidelines set out in the common organisation of the market. The Regulation concerned establishes a system for the restructuring and conversion of vineyards, the objective of which is to adapt production to market demand. Article 15(c) provides for, inter alia, the inclusion, in the implementing rules to be adopted by the Commission, of provisions aimed at preventing an increase in production potential arising out of the application of the conversion measures. The information supplied indicates that the conversion measures involve the production of new "local wines" and, therefore, an overall increase in the production of such wines. In addition, Article 2(1) of this Regulation lays down that planting with vines classified as wine-grape varieties is prohibited until 31 July 2010. It has to be concluded, therefore, that one of the objectives of the new common organisation of the market is to prevent an increase in wine production. While it agrees that varietal conversion of the vineyards in the Charentes has the advantage of reducing the production of wines for which there is no market, the Commission considers that the resulting increase in "local wine" production in France is incompatible with the principles contained in the new organisation of the market in wine and is likely to distort competition on a wine market which shows no signs of growth. It should be borne in mind that the wines resulting from the conversion of these vineyards would enter the ordinary wine market, while current production by definition goes to other destinations outside this market. Consequently, there is a strong risk that the general conversion of these vineyards would shift the problem to other markets, by leading to an overall net increase in the quantity of wine placed on the market, something which is incompatible with the objectives of the new common organisation of the market.

[39] Case C 70/99 (ex N 79/99) - Commission Decision of 29.9.1999 (OJ C 359, 11.12.1999).

[40] OJ L 179, 14.7.1999, p. 1.

Ireland

110. The Commission also initiated the procedure provided for in Article 88(2) of the EC Treaty in respect of two aid measures notified by Ireland. [41] The first, a submeasure (Ewe Premium) of the Ewe Supplementary Measure, provides for slaughter facilities for about 100 000 cull mountain ewes in six counties in the West of Ireland affected by weather conditions and difficult soil types. [42] The Commission considered that this measure appeared to constitute aid to sheep producers and expressed doubts as to whether Article 87(2)(b) was applicable. Indeed, the measure appeared to counteract problems resulting from an economic downturn in the sector and could, therefore, be regarded as compensation for damages due to an exceptional occurrence. Furthermore, by permitting the meat obtained from "boner ewes" to be sold on for human consumption, and thus compete in the marketplace with other meat whose slaughter costs had not been subsidised, it appeared that the Irish authorities had failed to take the steps necessary to minimise the effects of the measure on competition.

[41] Case C 44/99 (ex NN 23/99 and ex NN 79/99) - Commission Decision of 8.7.1999 (OJ C 280, 2.10.1999).

[42] Case C 44/99 (ex NN 23/99, ex N 678/98).

111. The second measure against which the procedure was opened was the Assistance Scheme for Winter Fodder Losses. [43] This consisted of three sub-measures aimed at providing relief to farmers who suffered winter fodder losses. In the case in particular of compensation granted by the Special Fodder Hardship Fund (SFHF) to farmers who did not qualify for aid under the other measure, the Commission expressed doubts as to whether the compensation was conditional on, and proportional to, losses of winter fodder due to wet weather. In fact the assistance appeared to be provided to any farmer who could show that his cattle was suffering or was likely to suffer from malnutrition due to a shortage of fodder, irrespective of the actual reason. The Commission therefore considered that the measure could constitute pure operating aid.

[43] Case C 44/99 (ex NN 79/99, ex N 90/99).

Italy

112. Aids for restructuring: In 1999 the Commission communicated to Italy its decision to open the procedure provided for in Article 88(2) of the EC Treaty on a notified project to grant aids for restructuring undertakings operating in the sector of protected agricultural products (flowers and horticultural products) in the Sardinia Region in Italy. [44] The Commission took this decision because the measure notified, which envisaged financial measures (repayment and renegotiation of debts), structural measures (investments) and technical assistance, did not appear to satisfy the conditions upon which an aid scheme for restructuring holdings in difficulty could be approved under the Community guidelines on state aid for rescuing and restructuring firms in difficulty. [45] Aid for restructuring raises particular competition concerns among other producers who are coping without aid, and among other Member States. Therefore restructuring aid can be allowed only in circumstances in which it can be demonstrated that its approval is in the Community interest. This will only be possible when strict criteria are fulfilled and full account is taken of the possible distortive effects of the aid. In the case at hand the Commission had doubts concerning, in particular, the following aspects: (1) the state of financial difficulty of the potential recipients; (2) the restoration of viability of the holdings concerned through the measures envisaged by the notified scheme; (3) the avoidance of undue distortion of competition; (4) the proportionality of the aid in relation to the restructuring costs and benefits; and (5) the fact that not all the beneficiaries might fully satisfy the requirements for qualifying as SMEs under 3.2.4 of the guidelines. A further reason for opening the procedure was that the national authorities had not dispelled doubts of a possible duplication of aid for the repayment of debt paid to the same beneficiaries who might not yet have repaid the aid which the Commission, by a previous decision, had declared incompatible with the common market and whose recovery it had ordered. According to the Court of Justice, the failure to repay the unlawful aid constitutes, in these circumstances, an essential factor which is lawfully taken into account when the compatibility of the new aid is examined (Judgement of the Court in Case C-355/95 P Textilwerke Deggendorf GmbH (TWD) v Commission of the European Communities and the Federal Republic of Germany [1997] ECR I-2549). The planned budget for the aid measure amounted to ITL 60 billion (around EUR 30 million).

[44] Case C 83/98 (ex N 40/98) - Commission Decision of 22.12.1998 (OJ C 187, 3.7.1999, p.2).

[45] OJ C 283, 19.9.1997, p. 2.

113. Some sophisticated types of measures to provide financing to undertakings were notified by Italy in 1998 and 1999. In particular, in 1999 the Commission notified Italy of its approval of an aid scheme aimed at supporting investments in the agri-food sector through the State-owned holding company RIBS. [46] The scheme provides for the acquisition by RIBS of capital holdings in the beneficiaries' undertakings and the provision of loans at subsidised rates for up to 15 years. Approval of this aid scheme made it unnecessary to notify the Commission of individual investment projects below a certain threshold, thus reducing the time required for their approval, which is given at national level only. The national authorities undertook to send the Commission an annual report on the implementation of the scheme. On the basis of this report, the Commission will be able to propose possible modifications to the aid scheme. Investment projects in the sugar sector and projects involving a total contribution by RIBS of more than ITL 50 billion (about EUR 25 million), however, were expressly excluded from the aid scheme and will be notified individually to the Commission. In 1999 the Italian State also notified, as a precaution, a series of measures by State-owned holding companies that were deemed to take place "under market conditions". Due to a long-standing tradition of support to the food sector, the Commission required, in particular in relation to RIBS' operations, that the Member State notify, pursuant to Article 88(3), any such measures with the exception of some very obvious cases. These measures, which normally take the form of acquisitions of holdings in the capital of other undertakings, are often linked to development projects, including investments, promotion, marketing, organisational changes, etc. In these cases the State-owned holding company is expected not only to recover its capital but also to obtain an acceptable return on the capital invested. Thus far the Commission has cleared one of these types of measure. [47] Other cases were notified in 1999 and are currently under examination.

[46] Case N 619/98 - Commission Decision of 22.12.1998.

[47] Case N 191/98 - Commission Decision of 22.12.1998.

114. In 1999 the Commission also adopted a final negative decision on several Italian State aid measures in the sugar sector granted through the State holding company RIBS between 1988 and 1992. [48] These aids, linked to the operation of two sugar plants in Central Italy (Abruzzi and Tuscany), varied in nature and amount. The aids included commercial guarantees, capital holdings to cover losses, capital holdings for investments, extension of capital holdings, waiver of preferential credits, favourable conditions on the sale of public property and loans at subsidised rates. The Commission declared most of the above aids incompatible with the Treaty and required Italy to recover the amounts unduly granted within two months of notification of the decision and to inform the Commission within the same deadline as to the measures taken to comply with the decision. Italy decided to challenge the final negative decision of the Commission before the European Court of Justice. Following this decision, the Commission was notified of another five cases where aids were granted through the State-owned holding RIBS to undertakings operating in the sugar sector between 1989 and 1992.

[48] Case C 56/96 - Commission Decision of 11.5.1999 (OJ L 236, 7.9.1999, p. 6).

115. The Commission also adopted a final negative decision in case C 36/98 [49] with respect to aid which Italy intended to grant to small and medium sized enterprises in the South in the form of guarantees and subsidised loans for the consolidation of debts under Article 2 of Law No 341 of 8 August 1995. Since these loans and guarantees were not linked to investment and were not granted for the rescue and restructuring of companies in difficulty, the Commission concluded that they had to be regarded as operating aid which is prohibited in the agricultural sector.

[49] Case C 36/98, Commission Decision of 10.11.1999 (not yet published).

116. In 1999, the Commission took a final negative decision with respect to an aid Italy intended to grant for the maintenance of female breeding animals of the Chianina breed. [50] The aid formed part of a package of three measures which, according to Italian authorities, was designed to counter the decline which had affected this local Tuscan breed over the previous ten years. Of the three schemes only this aid measure was considered by the Commission to be incompatible with the common market. The aid was granted in the form of a premium for the maintenance, until first calving, of adult female animals of the Chianina breed meeting specific requirements and was aimed at encouraging stockfarmers to use females as breeding animals rather than sell them or fatten them for slaughter, these being regarded as more profitable and less risky operations. The Commission has generally considered compatible with the common market aids granted for the maintenance of male breeding animals on account of the role played by such animals in the genetic and qualitative improvement of the livestock sector and of the high costs involved in keeping them, which are generally not recovered by stockfarmers. This is not the case with female animals, which can simultaneously be used profitably by stockfarmers for calving, milk production and the improvement of beef/veal production without any of these operations resulting in a reduction in market value. In this respect, the Commission considers that any aid granted for the maintenance of female animals would merely constitute operating aid intended to alleviate the costs normally associated with farming. The only case in which the Commission has consistently authorised aid for the maintenance of both female and male animals is where the breeds concerned are in danger of extinction according to Community criteria. In this case the aids are in fact considered to favour genetic diversity within the framework of Regulation (EEC) No 2078/92. The data submitted by the Italian authorities clearly showed, however, that the Chianina breed is far from being in danger of extinction, and no exception to Article 87(1) of the EC Treaty could therefore be granted with respect to the aid concerned.

[50] Case C 57/98, Commission Decision of 10.11.1999 (not yet published).

Netherlands

117. Aids granted pursuant to Article 87(2)(b) of the EC Treaty in order to make good the damage caused by natural disasters: The Dutch authorities notified an aid scheme providing compensation for damage, in affected areas, to all the sectors concerned, although most of the potential beneficiaries were agricultural undertakings. [51] In agriculture, the Commission has customarily held that weather conditions such as frost, hail, ice, rain and drought cannot be regarded as natural disasters within the meaning of the Treaty unless the damage caused to the individual recipient of the aid reaches a certain minimum threshold, normally 30% or more (20% or more in less-favoured areas) of production in relation to a normal period. Because of the seasonal variability of agricultural production, it is necessary to ensure that such a threshold is applied in order to prevent alleged adverse climatic conditions from being used as a pretext for the payment of operating aids. In this specific case, the Dutch authorities indicated that heavy rain had caused floods in certain regions. Since a flood is regarded as a natural disaster within the meaning of Article 87(2)(b) of the EC Treaty, compensation for damage to agricultural production in those regions was in conformity with Commission policy. As regards the remainder of the affected areas, only limited floods within the traditional meaning of the term (i.e. the bursting of riverbanks) had occurred. Nevertheless, in this particular case, the Commission considered that there had been a very unusual combination of geographical and climatic circumstances that could be regarded as a natural disaster within the meaning of Article 87(2)(b) of the EC Treaty, so that there was no need to require the usual 30% production loss for damage compensation. The weather conditions in the affected areas had been exceptionally harsh: at least 100 mm of rain had fallen in two days, an event which, according to the Dutch Royal Meteorological Institute, can be expected to occur only once every 125 years. According to the information provided by the Netherlands authorities, the problems arose in a polder area, situated below sea level and with heavy clay soil rendering natural drainage more difficult. A strong wind coming in from the sea made it impossible to drain the water seawards - on the contrary, water was being driven towards the land. There was a breakdown in the water-management systems in the region, with the result that the level of the water table rose and the land became saturated from below. The consequences of this chain of events were therefore very similar to those that would have occurred had the land been flooded in the traditional sense. In reaching this conclusion, the Commission also took into account the fact that the Netherlands compensation scheme was general in scope. It was open to private individuals, bodies covered by public law, and non-commercial bodies (schools, municipalities, religious bodies, etc.), commercial businesses operating in all sectors and agricultural producers. The Netherlands authorities had confirmed that the calculation of the losses would be undertaken individually for each beneficiary, who would be expected to bear a proportion of the losses themselves. In the agricultural sector, the calculation of losses would be based on the losses incurred in comparison with the average yields over the previous three years, which corresponds to normal Commission practice for the calculation of losses. There was therefore no risk of overcompensation under the scheme. In these circumstances, any risk of abuse of the scheme for payment of operating aids, which normally warrants the use of the 30% threshold in case of adverse weather conditions, seemed to be excluded.

[51] Case NN 136/98 (ex N 561/98) - Commission Decision of 9.12.1998 (OJ C 72, 16.3.1999). See also Case N 19/99 - Commission Decision of 12.3.1999 (OJ C 92, 1.4.1999).

118. In 1999 the Commission adopted a final negative decision on the proposal for an amendment to an existing aid scheme concerning flower bulbs in the Netherlands. [52] The existing aid scheme, concerning aids for the promotion of ornamental plants and flowers, is financed by parafiscal taxes and is compatible with Community rules, as regards both the promotional activities and the current system of financing, which explicitly exclude taxation of products imported from other Member States. The Netherlands authorities, however, notified an amendment to the scheme whereby products imported from other Member States would also be subject to the levy. The yield of the levy would be repaid to a representative organisation established in each Member State of origin and be used on promotional activities in that country. A final negative decision on the proposed amendment was adopted by the Commission for the following reasons: even in the case of generic promotional activities, which do not refer to the origin of the product and therefore guarantee formal equality of treatment, it appeared that on a practical level such promotional and advertising activities would favour national specialisations, needs and shortcomings. In particular, it is likely that the timing of promotional activities and the choice of varieties to be emphasised during promotional campaigns would be based on national characteristics, to the detriment of imported products. Furthermore, the Netherlands proposal to transfer the yield of taxes on products imported from other Member States to representative organisations in those Member States to be used on promotional activities in the Member States concerned did not appear to modify this assessment. In the first instance, the Netherlands authorities were unable to answer the concerns expressed by other Member States about the representativeness of the organisations to which the money would be transferred. Secondly, in some cases producers in other Member States may be paying compulsory levies to finance promotional activities in their own country. This would raise the problem of possible double taxation in the country of production and in the Netherlands. The Netherlands authorities offered to reimburse the tax where an importer could show that he had paid an equivalent tax in the Member State of production. However, such arrangements would require the establishment of additional administrative formalities solely for the movement of goods in intra-Community trade, something which appears contrary to Article 28 of the EC Treaty. Thirdly, the Dutch authorities provided no convincing explanation of how the administrative costs of such a system would be covered and how they would avoid further administrative formalities for products moving in intra-Community trade, which may be contrary to the Treaty. In view of the foregoing, the Commission decided that the system proposed by the Dutch authorities had an adverse effect on trading conditions, which was contrary to the common interest. The general principle based on the Court ruling in Case 47/69 was therefore applied, i.e. that aid financed by parafiscal charges which are also levied on products imported from other Member States is in principle incompatible with the common market.

[52] Case C 34/97 - Commission Decision of 20.7.1999 (not yet published).

119. The Dutch authorities also notified a modification to the parafiscal tax financing an existing State aid for market intervention in the flower bulbs sector in the Netherlands. [53] Under the existing aid scheme, where there is a glut on the market, the Productschap Tuinbouw (Product Board for Horticulture) can decide to make use of its intervention system and set (minimum) intervention prices. In such cases flower bulbs which fail to reach the minimum price are bought by the Stichting Bloembollensurplusfonds (intervention body) from the producers concerned at the intervention price. When the amendment was notified, the Commission took the opportunity to re-examine the aid scheme as a whole, which concerns a national market-intervention system for agricultural products (flower bulbs) which are subject to a common market organisation. According to the European Court of Justice's well-established case-law in this respect, the existence of a common organisation of the market precludes national measures in the areas covered unless Community legislation provides otherwise, and Member States must therefore refrain from taking any measures which might derogate from or harm that market organisation (see, for example, Case 111/76 Officier van Justitie v Van den Hazel [1977] ECR 901; Case 177/78 Pigs and Bacon Commission v Maccarren [1979] ECR 2161 and Case 190/73 Van Haaster [1974] ECR 1123). The basic criterion for assessing the lawfulness of national measures is thus whether the exercise of the residual power resting with the Member States affects or may affect the proper functioning of the common market organisation. Not only can the rationing of production be regarded as a measure having an effect equivalent to quantitative restrictions, an intervention system can also qualify as such, as it is capable of affecting trade between Member States. Such quantitative restrictions or measures having equivalent effect in the internal trade of the Community are explicitly prohibited by Article 10 of the common organisation of the market. The nature of the national intervention system is such that products are taken out of the market. Obviously, this has an effect on prices and on the flow of trade (products taken out of the market cannot be sold and the intervention price will effectively become the minimum price). In the absence of the intervention system, the normal freedom of commercial transactions under conditions of genuine competition would prevail. The Court has accepted that an open market and effective competition underlie the market for flower bulbs (see Case 94/79 Vriend [1980] ECR 327). Similarly, products that are of a satisfactory quality are, by virtue of the national intervention system, eliminated from the market. Apart from this question of principle the Netherlands national market-support scheme may not be compatible with the common market since only Dutch products and not those from other Member States can benefit from it. The argument that the imported products benefit indirectly through the reduction of output on the market is difficult to accept. After the Commission communicated to the Netherlands authorities their initial view that, for the reasons explained above, the scheme was incompatible with the common market, the Dutch authorities indicated that the scheme would be withdrawn.

[53] Case N 212/97.

120. The Commission also decided to initiate the procedure under Article 88(2) in respect of a Dutch measure regarding the rationalisation of the cattle slaughter sector. [54] The original measure aimed at reducing existing overcapacity in the cattle-slaughter sector, with the Stichting Sanering Runderslachterijen (Fund for the Reorganisation of Cattle Slaughterhouses) set up by the Productschap voor Vee en Vlees (Product Board for Cattle and Meat) buying up slaughter capacity. Since new overcapacity has arisen the Fund wants to buy up additional capacity that comes onto the market following bankruptcy or the closing down of cattle slaughterhouses. The Netherlands authorities have notified an increase in a parafiscal tax, the proceeds of which will be used to buy up a slaughter capacity of 120 000 animals per year (the capacity of a company which had gone bankrupt), thus reducing slaughter capacity to 1.26 million animals. To that end, the parafiscal tax has to be further increased. The Netherlands authorities are of the view that the measure can be approved on the basis of the Commission policy on the abandonment of production. However, the Commission expressed doubts on the justification provided by the Netherlands authorities, mainly for the following reasons: the amount paid for a promise not to use the facilities for slaughtering seemed high in view of prevailing market conditions, since the abandoned capacity could turn out to be valueless and the risk of overcompensation could not be ruled out. Furthermore, no proof had been submitted demonstrating a possible interest in the acquisition of the bankrupt company. Such interest would have proven the need for the aid and provided a yardstick for determining the correct level of aid for buying up capacity.

[54] Case C 55/99 (ex N 534/97) - Commission Decision of 20.7.1999 (OJ C 280, 2.10.1999).

121. In 1999 the Commission approved the granting of partial relief from a CO2 tax to the glasshouse horticulture sector. [55]

[55] Case N 589/B/98 - Commission Decision of 8.12.1999 (not yet published).

122. The original version of the Law on environmental taxes [Wet belastingen op milieugrondslag] was approved by the Commission on 3 December 1992. Various amendments were made to this Law, inter alia, the introduction of a regulatory energy tax. The purpose of the regulatory energy tax is to contribute to reducing CO2 emissions and to promote energy conservation. The Netherlands Government amended the energy tax rates applicable with effect from 1 January 1999, increasing the rates and adjusting the tax brackets, with the revenue generated by the increase paid back to households and businesses in the form of a tax reduction on wages and income. The Dutch government expects the increase in tax on energy consumption to have a positive effect on CO2 emissions.

123. Under the regulatory energy tax a zero rate is applicable to natural gas used in glasshouse cultivation. The Dutch authorities asked for the zero-rate on natural gas used for this purpose to be extended for at least one more year. If there is no natural gas connection, a zero rate applies to middle oil, gas oil and liquefied petroleum gas.

124. Following contacts with the Commission services, the Dutch authorities amended the measure: the zero-rate would be limited to 1999. In 2000 and 2001 the sector would be taxed on a (gradually increasing) basis similar to other energy-intensive sectors. The Dutch authorities undertook to renotify the scheme in 2002.

125. The measure falls within the scope of application of the Community guidelines on State aid for environmental protection because the objective of the law is environmental protection. It is intended to reduce energy consumption through an increase in energy taxation. The tax exemption would appear to be an operating aid. The Community guidelines apply strict conditions on operating aids given in relation with environmental problems:

- The aid should be temporary and in principle degressive: the Dutch authorities have provided a clear end date by which the zero-tariff will end and be brought gradually within the general framework. The measure is degressive since a zero-tariff continues to apply in 1999, whereafter a gradually increasing taxation will take place.

- The aid should be necessary to offset a competitive disadvantage: the Commission has taken account of the fact that the glasshouse horticulture sector has below average relative labour costs, the undertakings concerned will derive only very limited benefits from the offsetting reductions in labour taxes. The pre-existing preferential pricing system for natural gas to the glasshouse horticulture sector was discontinued at the end of 1998.

- A counterpart must be provided by the beneficiaries: a covenant has been concluded with the sector which also sets targets for renewable energy use: 4% of the energy use in 2010 must consist of renewable energy. Energy efficiency must improve by 65% compared with 1980. A further counterpart can be found in the increasing total tax burden. Indeed, the new measure, which provides for a gradually increase in taxation on gas (and for full taxation on electricity use), provides a clear incentive to glasshouse horticulture in terms of rational use of energy and reductions in CO2 emissions.

126. The Commission concluded, therefore, that the measure meets the requirements applicable under the environmental guidelines.

Austria

127. The Commission initiated the procedure provided for in Article 88(2) of the EC Treaty in respect of an aid scheme notified by the Austrian authorities for granting operating aid to encourage farmers in Lower Austria to keep she-goats. The Austrian authorities had stated that the aid would help to develop goat-rearing practices and, therefor, the sector concerned and that, since goats were in danger of extinction in Austria, they were eligible for support under Article 2(1) of Regulation (EEC) No 2078/92. The Commission decided to adopt a final negative decision on the measure, however, as its effect and purpose were merely to cut the production costs of the beneficiaries for the duration of the aid, without any long-lasting benefit for the sector concerned and, furthermore, there was no indication that goats were in danger of extinction in Lower Austria. [56]

[56] Case C 82/98 - Commission Decision of 8.12.1999 (not yet published).

Portugal

128. In 1998 the Commission initiated the procedure pursuant to Article 88(2) of the EC Treaty in respect of the restructuring and privatisation plans of both the publicly owned cereal trading company EPAC and the port handling company Silopor. [57] Although Portugal initially showed interest in exploring with the Commission the possibility of rendering the restructuring plans compatible with Community rules on rescuing and restructuring companies in difficulty, no result has been achieved so far. Meanwhile, the EPAC cases relating to Portugal's failure to comply with the Commission Decision of 1997 - to the effect that the State guarantee provided to EPAC was an illegal and incompatible State aid - were heard by the European Court of Justice. The decisions of the Court on these cases are expected at the beginning of the year 2000.

[57] Case C 51/98 (ex N 852/97 and N 6/98) - Commission Decision of 29.7.1998 (OJ C 363, 25.11.1998).

129. The Commission decided to open the procedure provided for in Article 88(2) of the EC Treaty against Portugal in respect of an aid scheme for pig producers facing market difficulties at the end of 1998. [58] The scheme consists of two measures. The first one involves a one-year moratorium on existing short-term loans and a reduction of interest rates on those loans (up to 100%). The second measure involves a subsidised short-term loan (one year), with a subsidy rate of up to 100%. The Commission took the view that that these aids appeared to constitute operating aids to pig farmers which exceeded the maximum amount allowed under the Commission policy on subsidised short-term loans in the agricultural sector. The measure may also infringe the rules of the common market organisation of the market in pigmeat.

[58] Case C 31/99 (ex N 704/98) - Commission Decision of 4.5.1999 (OJ C 220, 31.7.1999).

Sweden

130. Under the general principle whereby Member States may not grant pure operating aid, the Commission decided to initiate the procedure provided for in Article 88(2) of the EC Treaty in respect of non-notified aids granted by Sweden to a meat processing company. [59] Based on a complaint, a number of newspaper articles and some information provided by the Swedish authorities, the Commission concluded, in its decision to open the procedure, that the following measures granted in 1995-97 by a municipal property company in Skellefteå in Sweden possibly involved State aid to Nya Holmlunds Livs AB ("Holmlunds"), a meat-processing company in Skellefteå: (1) rental payments under an agreement between a municipal property company and Holmlunds in respect of the meat processing factories where Holmlunds operated; (2) a sale and leaseback operation involving two sets of agreements whereby the property company bought Holmlunds' material and intangible assets and leased them back to Holmlunds; (3) Holmlunds' repurchase of the assets from the property company under a 1997 agreement in connection with the transfer of Holmlunds' shares to a new owner. The Commission's suspicions that State aid had been involved were based on an evaluation of the property company's measures from the point of view of the "market economy investor principle". The possible aid linked to the situations listed above seemed to the Commission to have been in the nature of operating aid: preferential rates of rent in respect of the old and the new factories owned by the property company, as well as preferential rates of lease payments in connection with the sale and leaseback of the assets. During the period when the measures were taken by the municipal property company (1995-97), Holmlunds apparently constituted an undertaking in difficulty. However, it was clear to the Commission that the measures did not fulfil any of the relevant rules as regards agricultural undertakings in financial difficulty. To the extent that the measures may constitute operating aid, they would appear to be incompatible with the common market and to constitute an infringement of the common market organisations concerned (pigmeat, beef and veal).

[59] Case C 72/99 (ex NN 149/98) - Commission Decision of 13.10.1999 (OJ C 359, 11.12.1999).

United Kingdom

131. After initiating the procedure provided for in Article 88(2) of the EC Treaty, the Commission adopted a favourable decision on the United Kingdom "Pig Welfare Slaughter Compensation Scheme" which applied in Northern Ireland in September 1998. [60] Following an accidental fire on 20 June 1998, the major pig slaughtering plant in Ballymoney, Northern Ireland, was destroyed, leading to the loss of an estimated 40% of the slaughtering and butchering capacity for pigs in the region. Many producers were left with nowhere to take their animals for slaughter and butchering so that by the middle of August 1998 20-30 000 pigs were awaiting slaughter, and the situation was deteriorating by the day. Consideration was given to the possibility of transporting these animals to slaughterhouses in Great Britain or the Republic of Ireland, but the overall depressed market situation and disease control restrictions militated against this. Thus producers were left with an increasing number of animals which basically could not be sold. Furthermore, as a result of the increasing backlog of pigs on farms, serious animal welfare problems had arisen due to over-crowding and feeding difficulties. The animals were faced with overcrowding, heat stress and tail-biting, causing them unnecessary suffering. The "Pig Welfare Slaughter Compensation Scheme" provided for aid payments for slaughter and rendering costs and compensation payments for producers of overweight clean pigs (that is to say, pigs of a minimum live weight of 110 kg, excluding in-pig gilts and breeding sows and boars) of up to GBP 30 per head.

[60] Case C 76/98 - Commission Decision of 9.6.1999 (OJ L 227, 28.8.1999, p. 27).

132. In its final decision, the Commission did not accept the United Kingdom's argument that the fire should be regarded as constituting an exceptional occurrence within the meaning of Article 87(2)(b) of the EC Treaty. As a derogation from the general principle of incompatibility of State aid contained in Article 87(1), the provisions of Articles 87(2)(b) have to be interpreted restrictively. In this case, the Commission noted that as regards material loss, the main victims of the fire, the owners of the Ballymoney facility, were not receiving aid and indeed appeared to be covered by normal commercial fire insurance. From the point of view of the pig producers, in economic terms the effects of the fire are the same as if the plant had closed for other reasons, for example because it was not profitable, or as a result of the insolvency of the owners. Since in normal commercial transactions there is always a degree of risk, albeit a small one, that one of the parties may cease trading for reasons which are beyond the control of the other parties, such events do not constitute exceptional occurrences within the meaning of Article 87(2)(b) of the EC Treaty.

133. Nevertheless, in view of the very specific situation of the Northern Ireland pig market at the relevant time, and in view of the various steps taken by the United Kingdom authorities to try to resolve the problem, the Commission concluded that the measure could be regarded as facilitating certain activities or certain economic areas within the meaning of Article 87(3)(c) of the EC Treaty.

Assistance to the needy

134. The European Union continued to implement its food aid programme for the needy. [61] This involved making agricultural produce and processed agricultural produce from intervention stocks available to organisations working in the field in the Member States.

[61] Regulation (EEC) No 3730/87 of 10 December 1987 (OJ L 352, 15.12.1987, p. 1); Commission Decision 98/657/EC of 12 November 1998 (OJ L 313, 21.11.1998, p. 25).

135. The table below gives a breakdown of the total budget and shows the quantities, as adjusted during the year, that can be withdrawn from intervention stocks by each participating Member State.

>TABLE POSITION>

ree distribution of agricultural products (1999)

The outermost regions

136. In 1991 and 1992, in order to overcome the social and economic backwardness - aggravated by permanent factors (remoteness, island status, limited local markets) - of the outermost regions, the Commission set up three programmes: Poseidom (for the French overseas departments of Martinique, Guadeloupe, Guiana and Réunion), Poseima (for the Portuguese archipelagos of Madeira and the Azores) and Poseican (for the Canary Islands). The programmes are tailored to the specific characteristics of each region and cover several sectors. Their very substantial agricultural component comprises aid supplementary to the CAP or specific aid for a wide range of products. The aid is financed by the EAGGF Guarantee Section and falls into two categories:

- specific supply arrangements: forecast supply balances for the main agricultural products for human consumption and local processing are adopted each year or marketing year by the Commission under the management committee procedure. No customs duty is payable on imports from non-member countries for the quantities concerned. Aid equivalent to the import duty exemption is granted for deliveries from the Community.

- aid supplementary to the CAP or specific aid for production, marketing or processing is granted for agricultural products from these regions.

137. The work preparatory to the revision of the basic Regulations for Poseican and Poseima (Regulations (EEC) Nos 1601/92 [62] and 1600/92 [63]) and the revision of that part of the Poseidom Regulation (Council Regulation (EEC) No 3763/91 [64]) which concerns the specific supply arrangements is in hand.

[62] OJ L 173, 27.6.1992, p. 13.

[63] OJ L 173, 27.6.1992, p. 1.

[64] OJ L 356, 24.12.1991 p. 1.

138. Altogether, three reports on the implementation of these arrangements over the period 1992-98 have been drawn up for transmission to the Council and Parliament.

139. External evaluations of these arrangements were carried out under the Directorate-General for Agriculture's SEM 2000 programme. The executive summary of the report on Poseican can be found on the Commission's Internet site, at: http://europa.eu.int/comm/dg06/eval/reports/poseican/index_es.htm. The Poseidom study will be completed by the end of 1999, while the Poseima study is now under way and should be available early in 2000.

agricultural markets

The 1999/2000 prices package

140. The 1999/2000 prices package was agreed by the Council on 14 and 15 June 1999. It includes almost all the proposals [65] the Commission had presented with a view to continuity and stability.

[65] COM(1999) 38 final, 3 February; OJ C 59, 1.3.1999, p. 3.

141. Many points of the package had already been settled under the reforms introduced from 1992 onwards and, in the matters of market management that remained to be settled, the Commission proposed unchanged amounts, except for a reduction in sugar storage costs. It also proposed some adjustments for arable crops, wine and seeds.

142. As well as adopting the Commission's proposals on the amounts themselves (prices and aids), the Council took decisions:

- advancing authorisation for new vine plantings by several months to 1 January 2000 for up to 20% of the rights opened by Agenda 2000 (in compliance with the conditions laid down);

- maintaining until 2001/2002, and then scrapping, the aid differentials for the three types of perennial ryegrass;

- introducing technical changes to the regionalisation of rice aid (the Commission may, where appropriate, submit proposals on the lines of the provisions for arable crops);

- extending until 31 December 2003 at the latest the derogation on the fat content of drinking milk in Finland and Sweden;

- increasing the Portuguese quota for processed tomatoes (by 83 468 tonnes for 1999/2000 and in line with specific criteria for 2000/2001).

143. The Council asked the Commission to act on various matters within its sphere of responsibility:

- the easing of certain set-aside criteria (e.g. minimum parcel width of 20 m) in return for environmental improvement;

- derogations from intervention quality criteria for cereals (moisture content, shrivelled grains in Sweden and Finland, suspension of the reduction for barley in a specific case);

- examination of requests by Austria concerning the differentiation of fibre flax aid by production zone and the comparability, between Austria and the other Member States, of goat farming in mountain and hill areas.

Agenda 2000 reforms

Arable crops

144. The combination of intervention price cuts and increased area payments for cereals which is contained in the reform package adopted by the Council on 17 May 1999 in the wake of the Berlin European Council continues the process launched in 1992. The main features are outlined below.

145. The Council adopted a 15% cut in the intervention prices for cereals, in two equal stages, starting with the 2000/2001 marketing year. The impact of this price cut will be partially offset by an increase in the area payment, from the current EUR 54.34/tonne of the historical regional yield to EUR 58.67/tonne in 2000/2001 and EUR 63/tonne in 2000/2002.

146. The intervention prices and area payments may be changed in the light of production and market developments. In particular, depending on market developments, a decision may be taken on a final cut in the intervention price, to apply from the 2002/03 marketing year.

147. The arrangements for durum wheat, which were amended in 1997, remain unchanged.

148. For oilseeds a separate scheme from that for cereals is maintained until the 2002/03 marketing year. From then on, the area payment will be the same as for cereals. During the 2000/2001 and 2001/2002 marketing years, the area payment per tonne of the regional historical yield of oilseeds will be EUR 81.74 and EUR 72.37 respectively. The planned arrangements for oilseeds will also be subject to change if there is an appreciable reduction in the production potential.

149. The area payment for linseed will also be aligned on that for cereals in 2002/03. For the marketing years 2000/2001 and 2001/2002 the area payment per tonne of the regional historical yield will be EUR 88.26 and EUR 75.63 respectively.

150. To keep protein crops profitable compared with other arable crops, the level of aid is set, from the 2000/2001 marketing year, at EUR 72.5 per tonne of the regional historical yield, compared with EUR 78.49/tonne at present.

151. Compulsory set-aside is retained as a management tool, its basic rate being set at 10%. It will also be possible to take more land out of production under the voluntary set-aside scheme, for which the Member States set their own maximum limits, although they must offer a rate of at least 10%.

152. In addition, the Member States which are not traditional producers of maize may make grass silage eligible for area payments on the same terms as for arable crops.

153. As for silage cereals, including maize, the present arrangements are kept.

154. In Finland and part of Sweden an additional amount of EUR 19 per tonne of the regional historical yield will be granted for cereals and oilseeds, the aim being to compensate for the disadvantages caused by the climate, which makes agriculture particularly difficult in these regions and increases grain-drying costs.

Milk and milk products

1.1.1.7. Regulations

155. In May 1999 the Council adopted Regulation (EC) No 1255/1999 on the common organisation of the market in milk and milk products [66] (which replaces, among others, Regulation (EEC) No 804/68) and Regulation (EC) No 1256/1999 amending Regulation (EEC) No 3950/92 establishing an additional levy in the milk and milk products sector. [67]

[66] OJ L 160, 26.6.1999, p. 48.

[67] OJ L 160, 26.6.1999, p. 73.

156. The reform of the milk sector is postponed until 2005/2006, apart from some specific increases in milk quotas. The future of this market organisation will be reviewed in 2003. The main elements of the milk sector reform are as follows.

1.1.1.8. Intervention prices

157. The intervention prices for butter and skimmed-milk powder will be cut by 15% in three equal stages, starting in 2005/2006.

1.1.1.9. Quotas

158. The milk quota scheme will remain in force until 2007/2008. The quotas will be increased by 1.5% in three stages over a period of three years, in parallel with the price cuts starting in 2005, except for Italy, Greece, Spain, Ireland and Northern Ireland, for which there will be a special increase in quotas in 2000 and 2001. By the end of the implementation period (the next eight years) the quotas will have been increased by about 2.4%

159. Austria has been authorised to transfer 150 000 tonnes in quotas from its direct sales to its deliveries to take account of structural changes in milk production. This measure will take effect from the 1999/2000 marketing year.

1.1.1.10. Compensatory aid

160. An aid scheme designed to protect farm incomes will be phased in, over three years, to offset the price cuts. Producers will qualify for a dairy premium, which will be granted per calendar year, per holding and per tonne of individual reference quantity eligible for the premium and available on the holding. This premium will be worth:

- EUR 5.75 per tonne for the calendar year 2005;

- EUR 11.49 per tonne for 2006;

- EUR 17.24 per tonne for 2007.

1.1.1.11. National envelopes

161. Payments in connection with the national envelopes, which cover the additional funds allocated as a top-up aid to the Member States, will be made from 2005 to 2007.

1.1.1.12. Quota management

162. The Member Sates will be able to postpone the deadline for authorising temporary transfers of reference quantities from 31 December until 31 March.

163. So that the milk quotas are allocated only to active producers, the Member States, acting in compliance with the general principles of Community law, may take the measures described below.

164. Where the reference quantities have been or are to be transferred with or without the corresponding land in connection with leases or by other means having comparable legal implications, the Member States will be able to decide, on the basis of objective criteria, whether all or part of the reference quantities must go to the national reserve and on what conditions.

165. The Member States may opt not to apply the provisions on quota transfers with land.

166. If, during a period of twelve months or more, a producer does not use at least 70% of the individual reference quantity at his disposal for either deliveries or direct sales, the Member State, in compliance with the general principles of Community law, will be able to:

- decide whether all or part of the unused reference quantity should be transferred to the national reserve and, if so, on what conditions (unused reference quantities will not, however, be transferred to the national reserve in the event of force majeure or in duly justified cases recognised by the competent authority as affecting the production capacity of the producers concerned) and

- set the conditions on which a reference quantity is to be reallocated to the producers concerned.

Reform of the wine sector

167. The adoption of Council Regulation (EC) No 1493/1999 of 17 May 1999 [68] marks the introduction of a new common organisation of the market in wine, to apply from 1 August 2000. It simplifies the legislative structure by combining 23 Council regulations in a single one.

[68] OJ L 179, 14.7.1999, p. 1.

168. As far as wine-growing potential is concerned, in order to maintain market equilibrium, the ban on planting remains. However, new rights corresponding to 68 000 hectares (17 000 ha forming a Community reserve) will enable wines with good market prospects to develop, and 20% of these rights will be available from 1 January 2000, following a Council decision forming part of the 1999/2000 prices package). A new scheme with a reserve of planting rights has been introduced to improve the management of replanting right transfers. Vineyard improvement measures are introduced in the form of restructuring and conversion aimed at maintaining market equilibrium and adapting quality to developments in demand. The abandonment premiums have been confirmed. The reform also includes provisions concerning the recognition of producer groups and sectoral organisations.

Reform of the beef and veal sector

169. The aim of the overall approach adopted by the Community with regard to beef and veal is to improve the balance between supply and demand on the internal market, primarily by cutting intervention prices, but also by introducing a set of measures designed to restore lost market share. These measures include provisions for better labelling of beef and veal, schemes for the electronic identification of animals and promotion campaigns for quality meat. This should also help to improve the competitive position of Community beef on the world market.

170. The new basic Regulation, adopted by the Council in May 1999 [69] as part of the Agenda 2000 package, provides for a gradual reduction of 20% in the intervention price. On 1 July 2002, when the last cut takes effect, the present intervention arrangements will be replaced by a new private storage scheme, similar to that for pigmeat. It will be possible to grant storage aid if the Community price, based on the prices of eligible class R3 carcases, is below EUR 229.1/100 kg. It will also be possible, from that date, to buy in beef in a Member State or region if the average market price in that Member State falls below EUR 1 560/tonne (safety net). As in other sectors, the new measures provide for increased direct aid to producers:

[69] Council Regulation (EC) No 1254/1999, 17 May 1999 (OJ L 160, 26.6.1999, p. 21).

- The special premium will reach EUR 210 for bulls and EUR 150 for steers in 2002. This will be paid in a single instalment in the case of bulls and in two instalments in the case of steers;

- In the interests of effectiveness the deseasonalisation premium is based on the relative importance of steer production in the Member State concerned;

- The suckler cow premium will go up to EUR 200 in 2002. A maximum of 20% of the premium rights claimed may be for heifers;

- The slaughter premium for all adult bovine animals from the age of eight months will be EUR 80 and, for calves aged more than one month but less than seven months and with a carcase weight of less than 160 kg, EUR 50 in 2002.

- The present extensification premium will be substantially increased, to EUR 100, as part of the reform. The maximum stocking density qualifying for the premium will be 1.4 LSU per hectare. Member States will have the option of modulating the premium if they choose to apply different stocking density criteria (between 1.4 and 2.0 LSU/ha). The eligibility criteria will be stricter: all adult bovines actually present on the holding will be taken into account and the animals must be turned out during the normal pasture-growing season.

171. As for supply management, there will be regional ceilings on the number of premium rights for male animals. The suckler cow premium continues to be based on individual ceilings, but will be limited by national ceilings on the total number of premium rights. In addition, the slaughter premium will be limited to the number of animals (adult males and calves) slaughtered or exported to non-EU countries in 1995.

172. A national envelope for each Member State has been set to enable additional payments to be made to livestock farmers per head and/or per hectare of permanent pasture available to each farmer so as to better reflect the specific production situation in each Member State. As in the milk sector, national provisions must be strictly compatible with the principles of the single market.

Market developments - Crop products

Cereals

1.1.1.13. World market

173. World production of cereals (excluding rice) in 1998/99 was down on the previous marketing year, on account of a decline in wheat production in China and Russia. However, as a result of the relatively high world prices in previous marketing years, the area under cereals in all the main producer countries was still very large. According to International Grains Council figures, the 1998/99 world harvest totalled 1 482 million tonnes, compared with 1 505 million tonnes the previous year.

174. World production of wheat fell from 610 million tonnes in 1997/98 to 585 million tonnes in 1998/99. Production in China, the world's leading wheat producer, totalled 110 million tonnes (-11%). The total wheat harvest in the CIS countries was down (55.3 million tonnes as against 79.2 million tonnes in 1997). The United States, the European Union, Australia and North Africa all harvested more wheat than in 1997. Production of feed grains was little changed at 897 million tonnes in 1998/99.

175. World consumption of wheat in 1998/99 is estimated at 589 million tonnes, i.e. 4 million tonnes more than the harvest. Consumption of feed grains is put at 879 million tonnes, slightly less than the previous year (885 million tonnes) but falling short of production.

176. World cereal stocks returned to a level similar to that at the beginning of the 1990s. At 278 million tonnes (127 million tonnes of wheat and 151 million tonnes of feed grains), they exceeded by 13 million tonnes the figure recorded at the end of 1997/98 (265 million tonnes).

177. The volume of world trade in cereals totalled 191 million tonnes - including 95 million tonnes of wheat - in 1998/99, as compared with 185 million tonnes (96 million tonnes of wheat) in the previous marketing year. Imports of wheat and feed grains by most of the importing countries remained stable. The fall in Russia's production was partially offset by special aid from the Community and the United States.

178. For the 1999/2000 marketing year, the International Grains Council's forecasts as at 30 September 1999 point to a decline in world production (1 453 million tonnes compared with 1 482 million tonnes for the previous year), as a result of, among other things, a decrease in cereal production in the Community and the Middle East. Consequently, world stocks are expected to be down from 278 to 263 million tonnes. World trade in cereals can be expected to increase in volume (198 million tonnes, including 100 million tonnes of wheat).

1.1.1.14. Community market

179. Community production of cereals in 1998/99 is estimated, on the basis of Eurostat's figures, at 211 million tonnes for the 15 Member States, i.e. 5 million tonnes more than in 1997/98.

180. The area sown to cereals in 1998/99 totalled 37.4 millions hectares, compared with 38.1 million hectares in 1997/98, i.e. 1.9% less, while yields were up on 1997 (5.67 t/ha as against 5.39 t/ha).

181. Production of common wheat (94.4 million tonnes) and durum wheat (9.0 million tonnes) was up by 7.8% and 23% respectively as a result of higher yields. Maize production, on the other hand, was appreciably down, from 39.5 million tonnes to 36.5 million tonnes (-7.4%). Rye production, at 6.4 million tonnes, was up 4.6%.

182. For the 1998 harvest, the set-aside requirement remained at 5%, representing an area of 1.9 million hectares. However, voluntary set-aside of nearly 2.3 million hectares brought the actual total rate of set-aside to 10.4%, with Spanish, Swedish and Finnish farmers in the forefront.

183. Together with the cut in cereal prices under the 1992 reform, high prices for oilseeds and protein crops up to the end of 1998 boosted the use of cereals for livestock feed. In addition, white meat production (pigmeat and poultrymeat) was boosted by the drop in prices for compound feedingstuffs. The use of cereals in the feedingstuffs sector totalled 110 million tonnes for the Fifteen in 1998/99, over 23 million more than during the period preceding the reform.

184. Community exports (including processed products and food aid) rose to 29 million tonnes in 1998/99, as against 25.1 million tonnes the previous marketing year. Commercial exports totalled 14.1 million tonnes of common wheat (including flour), 11.7 million tonnes of barley (including malt) and 1.3 million tonnes of rye and rye flour. Durum wheat exports remained below average.

185. In spite of a steady increase in exports and in internal consumption, the rise in production in 1998/99 led to an increase in intervention stocks, from 13.6 million tonnes at the start of the marketing year to some 18 million tonnes by the end, the latter figure being made up of 6.4 million tonnes of common wheat, 7.8 million tonnes of barley and 3.7 million tonnes of rye.

186. The Council left the monthly increases in the intervention price for the 1999/2000 marketing year unchanged, at ECU 1.0/t/month. However, in view of the level of stocks and harvests and the situation on the world market, the Council had increased the rate of compulsory set-aside to 10% for the 1999 harvest.

Cereals (1999)

Area planted (million hectares) // 37.4

Production (million tonnes) // 211

Imports (million tonnes) // 5.2

Exports (million tonnes) // 29

Sources: European Commission (Eurostat)

Oilseeds

187. Oilseeds yield two products: oil, chiefly for human consumption, and cake for animal feed. This means that the economic position of the sector depends on price movements for seed, oils and cake. Vegetable oils may be consumed without further processing or as prepared oils and fats, e.g. margarine.

188. The European Union is a net importer of oilseeds, vegetable oils and oilcake, annual import volumes being largely dependent on the relative prices of seeds, cake, oils and competing feed products (cereals, corn gluten feed, etc.) and on the opportunities for exporting oils and cake from the EU. Total imports of oilseeds amounted to 17.2 million tonnes in 1998 and 16 million tonnes in 1997. Soya accounts for most of this quantity (80%).

189. Altogether, 32.3 million tonnes of oilseeds were crushed in the European Union in 1998/99, as against 30.2 million tonnes in 1997/98. Most of these were soya beans (around 49%), followed by rapeseed (around 31%) and sunflower seeds (around 20%).

190. Since 1993/94, the support arrangements for producers of oilseeds (rapeseed, sunflower seeds and soya beans) have been part of the support scheme for producers of certain arable crops (cereals, oilseeds, protein plants and linseed), which requires growers taking part in the general scheme to set aside land. Under these arrangements, a basic payment of EUR 433.50/ha is made. The amount actually paid to growers varies regionally according to historical yields of cereals or oilseeds and is adjusted where necessary in line with world price fluctuations beyond a certain margin.

191. For 1998/99 a total of 5 345 897 hectares qualified for the crop-specific compensatory payment, i.e. more than the maximum guaranteed area (MGA) of 4 933 800 ha. The compensatory payment therefore had to be adjusted. The adjustment was applied in those Member States which had exceeded their national reference area. The reductions amounted to 2.70% in Germany, 16.75% in Greece, 7.88% in France, 16.93% in Ireland, 21.30% in Italy and 18.32% in the United Kingdom. These reductions were in addition to those applied for the overrun of the MGA for the previous marketing year. The reference price observed for the 1998/99 marketing year was EUR 226.816 per tonne, more than the projected reference price of EUR 196.8 per tonne. Taking account of the 8% margin, this observed price resulted in a 7% reduction in compensatory payments.

192. Total oilseed production in 1998/99 was 15.1 million tonnes (including 1.2 million tonnes of non-food production), as against 14.5 million tonnes (including 1.1 million tonnes of non-food production) in 1997/98.

Oilseeds (1998/99)

Area planted ('000 hectares) // 5960

Production (million tonnes) // 15.1

Imports (million tonnes) // 17.2

Exports (million tonnes) // 0.97

Peas, field beans and sweet lupins

193. These products, which go chiefly to the feed industry, compete with a wide range of other raw materials.

194. From 1993/94, the system of aid to processors and minimum prices was replaced by the aid scheme for certain arable crops (cereals, oilseeds, protein plants and linseed), which requires producers taking part in the general scheme to set aside land. The regionally differentiated aid is EUR 78.49, multiplied by the historical cereal yield.

195. Compensatory aid was paid for around 1.5 million hectares in 1998/99. Total production amounted to 5.9 million tonnes.

Linseed

196. The European Union produces both fibre flax, which is grown primarily for use in the textile industry but also gives seeds, and seed flax, which is grown exclusively for linseed. Linseed is either used without further processing or is crushed to obtain oil (for industrial applications) and cake used for animal feed.

197. The European Union imports large quantities of linseed (around 575 000 tonnes a year). Canada is its major supplier.

198. In order to control production, a better balance between the support granted for linseed production and that for other current crops was sought. From 1993/94, linseed was added to the list of arable crops qualifying for area payments under the reform adopted in 1992. The compensatory payment granted is EUR 105.1 per tonne, multiplied by the cereal yield.

199. The area sown to linseed in 1998 totalled 308 000 hectares, and the estimate for 1999 is 560 000 hectares.

Grain legumes (chick peas, vetches and lentils)

200. Council Regulation (EEC) No 762/89 [70] introduced a specific measure for grain legumes in 1989. Its period of validity was extended by Regulation (EEC) No 1577/96. [71] The measure comprises area payments for a maximum guaranteed area (MGA) not covered by the arable crops scheme.

[70] OJ L 80, 23.3.1989, p. 76.

[71] OJ L 206, 16.8.1996, p. 4.

201. The aid per hectare is set at EUR 181, and the MGA is 400 000 hectares. Should the MGA be exceeded, the aid is proportionally reduced during the marketing year in question.

202. In 1998/99 the area under grain legumes totalled 440 323 hectares; overrun of the MGA led to adjustment of the aid, which was set at EUR 164.42 per hectare; the area for the 1999/2000 marketing year is estimated at 510 000 hectares.

203. Following the report on the application of the aid for the production of certain grain legumes for the period 1996-1998, the Commission proposed that the Council allow the scheme to continue, with the MGA subdivided between, on the one hand, vetches and, on the other, lentils and chick peas, on the basis of a 60:40 ratio in order better to reflect the different end-uses of the products in question, i.e. animal feed for vetches, and human consumption for lentils and chick peas.

Non-food production

204. During the period covered by this report, Council Regulation (EEC) No 1765/92 [72] was repealed and replaced by Council Regulation (EC) No 1251/1999 of 17 May 1999 establishing a support system for producers of certain arable crops. [73]

[72] OJ L 181, 1.7.1992, p 12.

[73] OJ L 160, 26.6.1999, p. 1.

205. The new rules set out the provisions on set-aside under the Agenda 2000 package. The basic percentage for compulsory set-aside was set at 10% from 2000/2001 to 2006/2007 inclusive. Voluntary set-aside of 10% minimum and as much as 100% of the agricultural area may also constitute an appropriate framework for additional growing of non-food products. The area payment for set-aside land will be EUR 58.67 per tonne for 2000/2001, rising to EUR 63.00 per tonne - the same amount as for oilseeds, cereals and linseed - thereafter.

206. The new implementing regulation thus recasts the old Regulation, but at the same time introduces, in line with the objective of simplification, several amendments concerning new possibilities of production or questions of procedure, i.e.

- the possibility of producing biogas on the holding;

- the possibility of growing biennial crops;

- the possibility of transferring the security between processors;

- the classification of certain raw materials which, by virtue of their characteristics, are used exclusively for non-food purposes.

207. It is also worth noting that the new Regulation (Council Regulation (EC) No 1257/1999 on support for rural development from the European Agricultural Guidance and Guarantee Fund (EAGGF) and amending and repealing certain Regulations [74]) lists the encouragement of non-food production among the activities eligible for support for rural development. It also provides for aid to cover the costs of planting short-rotation trees.

[74] OJ L 160, 26.6.1999, p. 80.

208. According to the latest information available, land set aside in the European Union and used for the production of non-food crops totalled 474 000 hectares in 1998/99, compared with 451 000 hectares in 1997/98. This is attributable to greater interest on the part of producers in the non-food sector, against the background of an unchanged set-aside rate (5%). For 1999/2000 the figures suggest that the area used for non-food production will more than double. While this is of course due to a large extent to the set-aside rate being set at 10%, it again confirms the increase in interest shown by farmers and industry in this area.

209. Of the 474 000 hectares used for non-food purposes in 1998/99, some 397 000 hectares were under oilseed crops, i.e. rapeseed and sunflower, with about 60% of this production being used for manufacturing biodiesel and 40% for lubricants and chemicals.

Rice

210. The world harvest in 1998 totalled about 386.3 million tonnes of milled rice equivalent, 1 million tonnes up on 1997 (385.3 million tonnes).

211. The volume of world trade in 1998/99 amounted to some 23.6 million tonnes, i.e. about 6% of world production.

212. In the Community, the production of milled rice sold on the market totalled 1 537 100 tonnes in 1998. This was about 8% less than in 1997 (1 667 919 tonnes) and can be attributed to the smaller area sown and to lower yields.

213. Production of indica rice was up by about 17%, to 397 232 tonnes, equivalent to around 50% of consumption (43% in 1997/98); production of japonica was down by about 14% at 1 139 868 tonnes, about 20% more than consumption (46% in 1997/98).

214. Throughout the marketing year, market prices for paddy rice were below the intervention price. They were especially low for indica rice in Greece.

215. Although the surplus of japonica and the shortfall of indica were smaller in 1998/99, the volume of the harvest and the continuing strength of imports resulted in a total of 283 306 tonnes of paddy rice being bought into intervention, bringing total stocks at the end of the marketing year to 495 402 tonnes of paddy rice.

216. Forecasts for 1999/2000 indicate that the total area sown will remain unchanged with an increase of about 20% in the area under indica rice and a reduction of about 11% in the area under japonica.

Rice (1998)

Area planted ('000 hectares) // 408

Production ('000 tonnes) // 2 615

Imports ('000 tonnes) // 553

Exports ('000 tonnes) // 291

Starch

217. Overall, the production of starch and starch derivatives such as glucose continues to progress, providing an essential raw material for the food sector and other industries such as biotechnology and paper manufacture. About 15 to 20% of the starch produced is exported to countries outside the EU.

218. Wheat starch is responsible for the growth in production. Production of maize starch, which accounts for about half of total starch production, is levelling off.

219. EU production of potato starch amounted to 1.66 million tonnes in 1998/99, some 10% down on the previous marketing year, as a result both of the voluntary efforts of some producers to restrict production and improve the market, and of bad weather in some regions. Potato starch continues to be subject to a quota scheme; under the Agenda 2000 decisions, the total European Union production quotas were cut by 2.7% for 2000/01 and by an additional 2.9% for 2001/02. The Council decided on this cut in order to neutralise the additional budget expenditure entailed by the fact that payments to potato growers to compensate for price cuts are higher than those to cereal producers.

Sugar

1.1.1.15. World market

220. In 1998/99 the world sugar balance showed a surplus for the fifth consecutive year, this time of 9.0 million tonnes. At the end of the year, stocks stood at 56.2 million tonnes, -- equivalent to 45% of total consumption -- the highest level ever.

221. As in 1997/98, early forecasts of production figures had to be revised upwards in 1998/99, the surplus for the year finally rising to a very high 9 million tonnes. The continuing yearly excess of production over consumption led to real surplus stocks of more than 15 million tonnes over and above normal functioning needs. The higher total of the accumulated surpluses over recent years, as shown in the table, also covers increased demand.

222. Comparing end-of-year stocks of 45% of consumption with the figure of 28% recorded ten years earlier illustrates dramatically how the world sugar balance has worsened.

223. The biggest increases in production were in Brazil, India and Thailand and, to a lesser extent, China and Cuba, whereas the largest single drop in production was recorded in the European Union. Brazil is now the largest single sugar producer and exporter in the world, ahead of the European Union.

224. The relationship between cane and beet sugar production is being altered by the continuous rise in sugar production. Total beet sugar production has decreased because of a serious decline in Eastern Europe's sugar industry, with the result that beet production now represents just 27% of total sugar production, compared with 37% in 1990/91.

225. Prices were already depressed at the start of the new marketing year when it was announced that a substantial surplus was expected. The fact that recent large importers were likely to be absent from the market at that time of the marketing year also had a negative influence: Russia introduced prohibitive import duties for six months, and China and India were expecting good harvests of their own. The futures markets also contributed to this bearish outlook through speculative positions. Later, however, the speculative funds were supportive in expectation of a resumption of Russian imports. Nevertheless, the devaluation of the Brazilian real at the beginning of January 1999 and the delayed resumption of Russian purchases together drove down prices to a historical low in April 1999. Although a slow recovery from then on was underpinned by unexpectedly high Russian imports and speculative positions on the futures markets, prices at the end of the marketing year were 2-3 cts/lb lower than a year earlier.

226. The table below shows the prices (EUR/t) for the 1998/99 marketing year, the preceding marketing year and the latest month of the next marketing year for which they are available.

>TABLE POSITION>

227. The initial 1999/2000 global sugar balance estimates do not point to an improvement in sugar prices. On the contrary, in addition to the fact that the final revised figures for 1998/99 all tend upwards, the new production figures are such that even higher surpluses are expected. It is therefore likely that hopes of seeing better world market prices will have to be put on hold until the 2000/01 marketing year, when a rebalancing of supply and demand may be possible. The key factors in such a rebalancing will be, first of all, a reduction in Brazilian production and, secondly, a further recovery of consumption, in particular in Asian countries, fuelled by low prices and renewed economic growth.

228. Although production growth rates have for some years now been higher than the corresponding figures for consumption, the 1998/99 marketing year was particularly marked by low consumption. Since its growth in sugar consumption had in past years been above average and since it accounts for the biggest share of world consumption (38%), Asia had helped to absorb part of the rise in production. In 1998/99, however, the growth rate for Asia was below 1% and, in the east Asian countries that were particularly hard hit by the crisis there was no growth at all.

229. As a consequence of this slow growth in consumption, imports increased only marginally. Nevertheless, prices were underpinned by imports as some countries, in particular Russia and Indonesia, imported more than was required for internal consumption. This helped to some extent to absorb the enormous increase in Brazilian exports, the latter being buoyed by a currency devaluation midway through the marketing year.

1.1.1.16. Community market

230. Beet areas were reduced by 2.4% (1 993 000 ha) in 1998, compared with the previous marketing year. The average yield reached the high level of 8.07 tonnes of sugar per hectare, representing a decrease of 5.6% from the preceding year, but still 8.03% above the average for the five years from 1994 to 1998. France in particular contributed to this result by recording an average yield of 10.3 tonnes/hectare. This helped total EU production (white sugar equivalent) to reach 16.382 million tonnes, of which 16.076 million tonnes came from beet, 257 000 tonnes came from cane and 49 000 tonnes came from molasses.

231. At around 12.700 million tonnes, total internal consumption of sugar was stable compared with the previous year. Of this, 312 000 tonnes was used by the chemical industry, a significant increase over the previous marketing year.

232. The surplus, built up by internal production and preferential (ACP sugar protocol, India Agreement, special preferential sugar and most-favoured-nation reduced-tariff quotas) and non-preferential (mainly in processed goods) sugar imports (in total 2.316 million tonnes) in excess of internal consumption, is either exported or carried forward as blocked sugar (non-quota production to become quota sugar in the following marketing year). Blocked sugar carried forward from 1997/98 totalled 1 195 000 tonnes, whereas 1 340 000 tonnes of sugar was carried forward from 1998/99 to 1999/2000. Exports of sugar in the natural state totalled 4.971 million tonnes in 1998/99. Of this total, 2.021 million tonnes was exported as C sugar and 2.950 million tonnes as Community sugar. Exports of sugar in its natural state within the quota take place mainly under a weekly tender system, with a refund. C sugar has to be exported without a refund.

233. Exports decreased as a consequence of the lower crop; however, stocks were more than 200 000 tonnes up on 1997/98. This can be seen as the Community's positive reaction to the oversupplied world market.

234. Like sugar, production of isoglucose and inulin syrup is regulated by quotas within the common market organisation. As in past years, no isoglucose in excess of the A and B quota was produced. Production of inulin syrup, however, has not yet reached the maximum level fixed by quotas. There was even a decrease of 28% from 1997/98 to 1998/99, with production reaching 156 344 tonnes as a result of low chicory harvests in Belgium and the Netherlands.

235. The forecasts are that, in spite of another 2.4% reduction in acreage, beet and sugar production will be significantly higher next marketing year because of higher yields (up 7.8%).Total EU production is expected to reach about 17.200 million tonnes, i.e. an increase of 0.8 million tonnes or 5.1%.

Sugar (1999)

Area planted ('000 hectares) // 1 945

Production ('000 tonnes) // 17 213

Imports ('000 tonnes) // 1 814

Exports ('000 tonnes) // 6 357

Source: Agriculture DG

Potatoes

236. Potatoes are one of the few products for which there is no market organisation. The Commission did present a proposal for a common organisation of the market in potatoes in 1993, but the Council has still not taken a final decision on the matter.

237. The total area under cultivation is nearly 1 400 000 hectares, making potatoes a major crop in the EU. They are grown in all the Member States, although, because of climatic and soil conditions, they are more widely grown in northern regions.

238. The Union is self-sufficient in potatoes with the exception of early varieties. These are imported in winter and early spring from Mediterranean countries when no, or only limited, Community production is available. The main suppliers are Cyprus, Egypt, Morocco and Israel. During the past few years, an annual average of some 400 000 tonnes of early potatoes have been imported from non-member countries.

239. EU production of potatoes totalled 48 million tonnes in 1997, whereas in 1998 the figure was down to 45.4 million tonnes. According to available estimates, the 1999 harvest is likely to total 48.4 million tonnes.

Potatoes (1998)

Area planted ('000 hectares) // 1 373

Production ('000 tonnes) // 45 446

Imports ('000 tonnes) // 405

Exports ('000 tonnes) // 827

Sources: Eurostat, Agriculture DG and FAO

Dried fodder

240. Dried fodder is made up of protein-rich (minimum 15%) products, derived from the artificial drying (dehydration) or natural drying (sun drying) of lucerne, other leguminous crops and certain grasses.

241. In 1998/99 aid was granted for 4 610 000 tonnes of dehydrated fodder (104.5% of the MGQ) and 151 366 tonnes of sun-dried fodder (34.1% of the MGQ).

242. For the first time since the 1995 reform, subsidised production of dried fodder exceeded the MGQ, by about 4.5%. The co-responsibility clause, whereby the amount of aid is cut in all the Member States when the MGQ is overrun by up to 5%, thus came into play. In all the Member States the aid per tonne was reduced (from EUR 68.83/t to EUR 65.88/t) to safeguard budget neutrality. On the other hand, the aid was paid in full for sun-dried fodder, the subsidised production of which was well within the MGQ.

Dried fodder (1998)

Area planted ('000 hectares) // 371

Production ('000 tonnes) // 4 761

Imports ('000 tonnes) // 5

Exports ('000 tonnes) // 175

Sources: Eurostat and Agriculture DG

Fibre flax and hemp

243. On 10 November 1999, in connection with Council Regulation No 1308/70 [75] on the common organisation of the market in flax and hemp, the Commission proposed a reform which includes these two crops in the support scheme for producers of certain arable crops under Council Regulation (EC) No 1251/1999 [76] and provides additional help for authorised processors via aid for processing flax and hemp straw for fibre production (COM(1999) 576).

[75] OJ L 146, 4.7.1970, p. 1.

[76] OJ L 160, 26.6.1999, p. 1.

244. The proposal also provides for budgetary limits. Firstly, it is proposed that the aid per hectare granted to producers be subject to the stabiliser mechanism that already exists for arable crops. Secondly, the aid per tonne of long fibres or per tonne of short fibres granted to processors would be subject to national guaranteed quantities (NGQ).

245. Given the biological similarities between industrial hemp and that used to obtain psychotropic substances, specific measures for hemp would be maintained or tightened up so that illegal crops do not bring discredit on the growing of hemp for fibre production. Aid would thus be granted only for varieties with a tetrahydrocannabinol (THC) content not exceeding 0.2%. For 2000/2001, however, the limit would be 0.3%.

246. The proposal would also mean that Commission Regulation (EEC) No 1524/71 laying down detailed rules concerning private storage aid for flax and hemp fibres [77] would lapse.

[77] OJ L 160, 17.7.1971, p. 16.

1.1.1.17. Fibre flax

247. The total world area sown with fibre flax in 1998 was 520 000 hectares, producing around 636 000 tonnes of fibre, of which 368 000 tonnes was produced in China and 50 000 tonnes in Belarus. There is no significant trade in flax straw between the European Union and third countries. Fibre imports, on the other hand, sometimes reach levels capable of disrupting the Community market. The Union has a deficit in medium- and low-quality fibres, which it imports from Eastern Europe, Egypt and China. On the other hand, it supplies the whole world with high- and very high-quality fibres, since these are not produced anywhere else. In 1998 the Union exported 62 000 tonnes: 47 000 tonnes of long fibres and 15 000 tonnes of short fibres. The main destinations were China, Hong Kong and Brazil.

248. The Community area planted with fibre flax increased substantially between 1992 (44 000 ha) and 1998 (171 000 ha). Since an increase on this scale was likely to outstrip the processing capacity available in the EU, the Council introduced a system of compulsory contracts between growers and authorised primary processors from 1997/98. The initial effect of this measure was to stabilise areas in 1997 at 133 000 ha. Then, buoyed by growth in the primary processing industry, especially in Spain the Community area again showed an appreciable increase. France, Belgium and the Netherlands have traditionally been the principal producer Member States. Flax straw is processed into fibres by about 150 retting and scutching companies in the north-west of France (30), Belgium (100), the Netherlands and Germany. There are also outlets for the product in non-textile sectors (paper-making in particular), at generally very low prices.

249. The situation on the market in flax fibres was poor for several years but improved towards the end of the 1992/93 marketing year. The balance on the market continued through the 1994/95 and 1995/96 marketing years. However, during the two following marketing years it became harder to dispose of scutched flax. Despite efforts to diversify by seeking new outlets, this market is still very much dependent on fashion in the clothing industry.

250. Aid for fibre flax in 1999/2000 has been kept at ECU 815.86 per hectare. It is graduated by production area and harvesting method according to the traditional seed yield per hectare.

1.1.1.18. Hemp

251. The world area planted with hemp has fallen sharply in recent years: 85 000 hectares were sown in 1998, as opposed to an average of 480 000 hectares for 1979-81. China, North Korea, India and Russia are the main producers. Production in the European Union is limited but increasing rapidly. It has traditionally been concentrated in France and, to a lesser extent, in Spain, although a few other Member States (the United Kingdom, the Netherlands and Austria) are now producing this crop again. They were joined in 1996 by Germany and in 1997 by Finland and Portugal. The 1999 EU harvest totalled about 32 000 hectares. Trade with third countries is very limited. Aid for hemp has been kept at EUR 662.88 per hectare.

Cotton

252. The world area under cotton in 1999/2000 is put at around 33.0 million hectares, with production estimated at some 18.9 million tonnes, compared with 32.6 million hectares and 18.3 million tonnes in 1998/99.

253. Unginned cotton is not traded internationally, but the European Union, whose cotton-spinning capacity by far exceeds its fibre production, imports substantial quantities: more than 1 million tonnes from 1988 to 1993 and 857 000 tonnes in 1998.

254. The former Soviet Union, the United States, Syria and the CFA area countries in Africa are the main suppliers. Intra-Community trade is rising but remains limited.

255. In the European Union, the scale of cotton production is limited, in terms of both surface area planted and the number of producers. However, it is concentrated in certain areas of Greece and Spain where it plays a very important socio-economic role. The Community area planted with cotton is again on the increase: 507 000 hectares in 1998 and 538 000 hectares in 1999 (427 000 ha in Greece and 111 000 ha in Spain), producing an estimated 1 622 000 tonnes of unginned cotton (1 231 000 tonnes in Greece and 390 000 tonnes in Spain), as against 1 512 000 in 1998. The European Union is about 40% self-sufficient in cotton fibres, its consumption from 1996 to 1998 having been around 1 179 000 tonnes.

256. The Community aid scheme provides for a guide price (EUR 106.30/100 kg) and aid, equivalent to the difference between that price and the world price, granted to ginners who pay a minimum price to the grower. If the production of unginned cotton exceeds a maximum guaranteed quantity (MGQ), the guide price and the amount of aid are reduced proportionally.

257. The reduction in aid in each Member State is proportional to overrun of the NGQ concerned, the latter being set at 782 000 tonnes for Greece and 249 000 tonnes for Spain. There is no limit on the reduction, but it is cut if the world price level allows expenditure on the aid scheme to be curbed. For 1999/2000 the provisional reduction is estimated at 40.5% of the guide price for Greece and 40.2% for Spain.

258. On 14 December 1999 the Commission, proposed a reform of the common organisation of the market in cotton, in order in particular to neutralise the effect of the scheme on the budget and introduce environmental criteria similar to those contained in the common rules for the direct support scheme under the common agricultural policy (COM(1999) 492 final). To prevent national authorities from obtaining the Community subsidy, the proposal also provides for granting the full amount of the aid direct to the beneficiaries.

259. Since this proposal does not change the fundamental principles of the scheme, it is expected to apply from the next marketing year, i.e. 1 September 2000.

Cotton (1998)

Area planted ('000 hectares) // 507.6

Production ('000 tonnes) // 1 512

Imports ('000 tonnes) // 857

Exports ('000 tonnes) // 130

Sources: Agriculture DG and Eurostat

Silkworms

260. Silkworm rearing is practised in Greece, Italy, and to a lesser extent, France. It accounts for only a tiny part of the EU's agricultural activity and of world silk production. In certain regions such as Thrace, Veneto and Marche, however, it represents an important activity and know-how worth preserving.

261. World production of raw silk fell markedly in 1997, totalling, according to the FAO, 83 000 tonnes, compared with an average from 1993 to 1995 of 110 000 tonnes. The industry is dominated by Asian producers (77 000 tonnes), with China (51 000 tonnes), India (16 000 tonnes), Korea (5 000 tonnes) and Japan (3 000 tonnes) accounting for more than 90% of world production.

262. Community silkworm rearing is finding it difficult to sustain its level of activity. The increase in production costs is not always offset by a growth in market prices. In 1998 a total of 2 821 boxes were produced successfully, compared with 2 267 in 1997. They yielded 61 200 kilograms of cocoons. The aid for 1999/2000 is again EUR 133.26 per box.

Olive oil

263. World production averages some 2 300 000 tonnes, of which 78% (around 1 850 000 tonnes) comes from the European Union . The other main producers are Tunisia (155 000 tonnes), Turkey (90 000 tonnes), Syria (75 000 tonnes) and Morocco (45 000 tonnes). Production varies considerably from one year to another, and the world market fluctuates as a direct result of the Community market situation.

264. Estimated Community production eligible for aid in 1998/99 was around 1 920 000 tonnes, as against 2 394 000 tonnes in 1997/98. According to information received from the Member States when the olive and olive oil yields were laid down for the 1998/99 marketing year, there are around 530 million productive olive trees in the European Union. Some 2 million farms are engaged in olive growing.

265. In 1997/98 Community consumption was around 1 900 000 tonnes (73% of world consumption). The most recent forecasts put consumption at a comparable level in 1998/99. Olive oil packaged in quantities of less than 5 kg accounts for the bulk of consumption (more than 90% of the total). At the beginning of the 1998/99 marketing year, intervention stocks totalled 113 343 tonnes, but were down to around 25 500 tonnes at the end.

266. Greece and Spain are normally the main suppliers, and Italy, although itself an exporting producer, remains the main purchaser. In 1997/98 imports totalled 46 000 tonnes. Exports for the same marketing year reached around 188 000 tonnes, but only 94 500 tonnes were exported with refunds. The limit imposed on exports with refunds for that period under the WTO agreements was 130 380 tonnes (including carryover).

267. Since the 1998/99 marketing year, substantial changes have been made to the market organisation for olive oil, and the maximum guaranteed quantity (MGQ) has been divided among the producer Member States into national guaranteed quantities (NGQs). When production exceeds the NGQ, plus, where applicable, the carryover from the previous year, production aid (paid to olive growers) is reduced proportionally.

268. The Commission has accordingly undertaken to step up inspections at mills, adopt an objective method for determining yields in homogenous areas and to draw up a strategy for olive oil quality. Lastly, the scheme provides for aid measures for the production of table olives for those producer Member States who so desire.

269. In addition, consumption aid has been abolished, the intervention system was replaced by private storage arrangements, the small producers scheme discontinued and new planting discouraged.

Olive oil (1997/1998)

Area planted ('000 hectares) // 4 448

Production ('000 tonnes) // 1 920

Imports ('000 tonnes) // 46

Exports ('000 tonnes) // 188

Sources: Agriculture DG and Eurostat

Fresh fruit and vegetables

1.1.1.19. World market

270. World production of fresh fruit and vegetables is increasing steadily. In 1997 it totalled nearly 915 million tonnes, 1.1% up on 1996 and 28.2% above the average for the period 1989 to 1991. [78] Vegetables (including melons) account for around 65% of this total. With production totalling 88 million tonnes, the Community was the world's second largest producer in 1997, after China (286 million tonnes).

[78] Source : FAO Production Yearbook Vol. 51 - 1997.

271. In the case of citrus fruits, the first estimates for the 1998/99 marketing year [79] point to world production totalling some 93.2 million tonnes, 5.5% less than in 1997/98 and 9.3% down on the figure for 1996/97. With production estimated at around 9.3 million tonnes, the Community was, in 1998/99, in third place behind Brazil (20.6 million tonnes) and the United States (12.6 million tonnes), but ahead of China (9.1 million tonnes) and Mexico (5.1 million tonnes).

[79] Source : FAO 1998 annual statistics on fresh and processed citrus fruit.

1.1.1.20. International trade

272. The volume of international trade in fresh fruit and vegetables varies from one product to another. In 1997/98, exports accounted for 10.4% of world citrus production. Recent figures are not available, but between 1993 and 1995, imports accounted for an average of 11% of world production for pears, 9.6% for onions, 9.4% for apples, 8.3% for peaches and 3.8% for tomatoes. For 1995, Community exports accounted for the following percentages of international trade: lemons 15%, oranges and small citrus fruits 11%, apples 8.8%, tomatoes 7.8% and pears 6.3%.

273. The European Union is a net importer of fresh fruit and vegetables: the volume of exports was only 54% of that of imports in 1995 and 1996 and 70% in 1997. In 1998 exports (3.35 million tonnes) represented 63% of total imports (5.3 million tonnes). In the case of fruit only, exports represented 38% of imports in 1998 (67% for citrus fruit). By contrast, while the Community was a net importer of vegetables in 1995 and 1996, it recorded a surplus in 1997, with a drop in imports (-39%) and an increase in exports (+38%). In 1998 exports were again down on 1997 (-9%) and imports were up (+30%). Tomatoes account for the bulk of these fluctuations.

1.1.1.21. Community market

274. At about 7.2 million tonnes in 1998/99, apple production in the Community was slightly down on the three previous marketing years. The quantities withdrawn from the market fell from 4.6% of EU production in 1996/97 to 4.1% in 1997/98 and 3.7% in 1998/99.

275. In 1998/99 the production of pears totalled around 1.96 million tonnes, i.e. 12% less than in 1997/98 and 27% less than the average for the marketing years 1991/92 to 1995/96. This decrease was accounted for mainly by Spain (down 21% on 1997/98) and Portugal (down 88%). The quantities withdrawn from the market amounted to 3.4% of production, compared with 4.1% for 1997/98 and 6.1% for 1996/1997.

276. The production of peaches picked up in 1998, totalling 2.6 million tonnes (+7% on 1997). This included substantial increases in Greece (+59%) and Italy (+23%). Nonetheless the production figure for 1998 was below that for 1996 (-19%) and the average for the marketing years 1991 to 1995 (-8%). Withdrawals were well down (0.7% of production compared with 3.7% in 1997 and 16.4% in 1996).

277. The market for nectarines in 1998 developed in much the same way as that for peaches, rising to 628 million tonnes, with increases being recorded mainly in Greece (+233%, from 30 000 to 70 000 tonnes) and Italy (+21%).

278. At 2.2 million tonnes, the production of table grapes for the 1998 marketing year, was much the same as in 1996 and 1997. Italy alone accounted for 66% of EU production. Withdrawals remained negligible.

279. The production of apricots fell again in 1998 (it was 16% down on 1997 and 31% down on 1996) and was below the low figure recorded in 1995. Withdrawals decreased from 3.8% of production in 1997 to 1% in 1998.

280. Citrus production, which totalled 9.3 million tonnes in 1998/99, was 12% down on 1997/98 but still exceeded the figures for 1996/97 and 1995/96. Spain remained Europe's largest producer, with 54% of the total in 1998/99. Community production of oranges fell to 5.29 million tonnes (12% down on 1997/98). At 1.7 million tonnes for 1997/98 and 1.5 million tonnes for 1998/99, lemon production returned to the average for the 1991/92 to 1995/96 marketing years. Production of mandarins, clementines, and satsumas was 17%, 14% and 12% lower respectively than in 1997/98. Withdrawals in 1998/99 were down on 1997/98, to 1.5% of Community production for oranges, 0.2% for mandarins, 2.6% for clementines and 1% for satsumas, while withdrawals of lemons rose to 2%.

281. Production of cauliflowers in 1998/99 was 2.16 million tonnes (3.5% down on 1997/98). Withdrawals in 1998/99 were down to 5.3% of production, compared with 7.8% for 1997/98 and 8.8% for 1996/97.

282. Tomato production in 1998/99 was up 10% on 1996/97 and 3% on 1995/96. Production rose significantly in Italy (+17%) to 6.5 million tonnes. Withdrawals remained negligible at 1.3% of production.

1.1.1.22. Main developments in legislation and policy

283. The new market organisation adopted by the Council in 1996 was, in 1999, being implemented for the third consecutive year. It makes producer organisations the key operators and provides for Community aid via operational funds so as to align production on demand, encourage the concentration of supply, cut production costs and promote care of the environment.

284. The conditions for the recognition and preliminary recognition of producer organisations were introduced in 1997 and 1998, as were the implementing rules concerning operational funds and intervention arrangements. The new legislation specifies, among other things, what type of action and expenditure is not eligible for financing under operational programmes.

285. Under the new market organisation, Community financing can be granted to recognised producer organisations that implement an operational programme. A total of 845 producer organisations, accounting for about 30% of fruit and vegetable production in the European Union, submitted operational programmes for 1998. In 1999, the number rose to 1 082. The amount of Community aid available for 1998 was EUR 238 million, compared with EUR 199 million in 1997. In 1999 the value of financing rose to 2.5% of the value of production marketed by producer organisations, compared with 2.0% in 1997 and 1998.

286. Under the specific measures introduced, for a three-year period, for area payments for asparagus, aid payments were made for a total of 3 736 hectares in 1997, and aid applications were submitted for a total of 3 900 hectares in 1998.

287. To avoid any risk of budget difficulties as a result of an excessive volume of withdrawals, the Commission set intervention thresholds for the 1999/2000 marketing year for the following products: tomatoes (360 000 tonnes), cauliflowers (112 300 tonnes), apples (486 900 tonnes), peaches (254 700 tonnes), nectarines (83 700 tonnes), table grapes (165 300 tonnes), lemons (73 100 tonnes), oranges (414 200 tonnes), satsumas (22 100 tonnes), mandarins (37 900 tonnes) and clementines (132 800 tonnes).

288. In June 1999 the Commission extended by one year the period of validity of the machinery for controlling imports of garlic originating in China.

289. The basic Regulation on the common organisation of the market in fresh fruit and vegetables provides for a report on the operation of the market organisation at the end of 2000.

Fruit (1998)

Area planted ('000 hectares) // 1 814*

Production ('000 tonnes) // 17 886

Imports ('000 tonnes) // 2 692

Exports ('000 tonnes) // 1 031

* excluding Germany, Ireland, Italy and Austria.

Vegetables (1997)

Area planted ('000 hectares) // 1 354*

Production ('000 tonnes) // 32 644

Imports ('000 tonnes) // 885

Exports ('000 tonnes) // 1 167

* excluding Ireland, Italy and Austria

Bananas

290. The market figures for 1999 confirm the trends that have observed since the establishment of the market organisation for bananas, [80] namely price convergence and a better mix of origins making up Community supplies.

[80] Regulation (EEC) No 404/93, 13.2.1993 (OJ L 47, 25.2.1993, p. 1).

291. Bananas are supplied by three main groups:

- the Community production regions (market share: 20.50%)

- ACP countries (17.12%)

- Central and South American countries (62.39%).

1.1.1.23. Reform of the market organisation for bananas

292. The new provisions of Title IV « Trade with third countries » of Regulation (EEC) No 404/93 have applied since 1 January 1999 following the reform adopted in July 1998. The summary table below shows the main features of market supply management.

293. However, the Dispute Settlement Body of the World Trade Organisation took the view that the content of this legislation was not yet compatible with the Community's obligations. The aspects complained of relate to the import licence arrangements, the distribution of tariff quotas and the quantity fixed for traditional imports of ACP bananas. The United States was authorised to apply sanctions to a value of USD 191.4 million.

294. The Commission began consultations with the main parties concerned to find an appropriate solution and informed the Council of its interlocutors' positions on the possible options, particularly those put forward by the Dispute Settlement Body itself. Finding a solution that is compatible with the rules of the WTO and satisfactory to the parties concerned is no mean task.

295. For Community bananas the producer groups receive aid to make up the difference between the flat-rate reference income, established on the basis of the 1991 figures for the four production areas adjusted upwards (+5% for 1998) and the average production income during the year in question. For bananas marketed in 1998 the amount of the compensatory aid [81] was EUR 24.42/100 kilograms with additional aid of EUR 3.19/100 kg for Portuguese bananas, and the volume marketed was 786 232 tonnes. Expenditure on the compensatory aid for 1998 totalled EUR 193 million, compared with EUR 201.9 million in 1997.

[81] Commission Regulation (EC) No 1063/1999 (OJ L 129, 22.5.1999, p. 25).

Bananas (1998)

Area planted (million hectares) // -

Production (million tonnes) // 786 232

Imports ('000 tonnes) // 3 050

Source: Agriculture DG

Market organisation for bananas: main mechanisms for managing market supply (arrangements in force since 1.1.1999)

>TABLE POSITION>

1 Customs duty exemption for non-traditional ACP quantities.

1.1.1.24. Community production

296. Community production in 1998 (786 232 tonnes) was in the end below the estimated +830 000 tonnes after hurricane George hit Guadeloupe. For 1999, the estimate is 786 000 tonnes, as a result of the impact of hurricane George on Guadeloupe's production and also the storms in the Canary Islands and Madeira at the beginning of the year.

1.1.1.25. ACP imports

297. Imports of ACP bananas in 1998 amounted to 656 000 tonnes, of which 595 000 tonnes were traditional ACP bananas. They are likely to increase in 1999.

>REFERENCE TO A GRAPHIC>

Processed fruit and vegetables

1.1.1.26. World and Community markets

298. Information on products processed from fruit and vegetables remains patchy. As far as the Community is concerned, it relates almost exclusively to products qualifying for processing aid.

299. World production of tomatoes for processing totalled around 24.3 million tonnes for the 1998/99 marketing year. The leading producer countries were the United States (8.5 million tonnes in 1998/99 as against 9 million tonnes in 1997/98), the EC (8 million tonnes as against 6.8 million tonnes) and Turkey (1.8 million tonnes as against 1.1 million tonnes).

300. The rise in Community production (1.2 million tonnes) concerned all products, i.e. concentrate (+0.7 million tonnes), peeled tomatoes (+0.2 million tonnes) and "other products" (+0.2 million tonnes). However, of the 6.9 million tonnes of tomatoes processed in the Community into products on which processing aid is payable, Community aid was actually paid on only 6.6 million tonnes, or 92% (6.3 million tonnes for 1997/98). Of those quantities, 66% was used in the manufacture of concentrate. Except in the 1997/98 marketing year, the quota of 6.9 million tonnes continues to be exceeded. During the 1999/2000 marketing year, production is expected to rise not only in the Community but also throughout the world.

301. Around 480 000 tonnes of peaches were tinned in syrup and/or natural juice in the Community in 1998/99, compared with around 426 000 tonnes in the previous marketing year. For the second year in succession, production was significantly below normal and the guarantee threshold (582 000 t) as a result of unfavourable weather conditions. This product continues to feature among the Community's exports (113 000 t in 1998).

302. EC production of Williams and Rocha pears in syrup and/or natural juice totalled over 162 000 tonnes for the 1998/99 marketing year, i.e. 58% above the guarantee threshold. Italy continues to be the main EC producer (49% of the total), followed by Spain (31%) and France (15%). The Community is a net importer of this product, its exports in 1998 totalling 5 000 tonnes of finished product, as against imports of 33 000 tonnes.

1.1.1.27. Main legislative and policy developments

303. In principle the market organisation governing this sector covers all products processed from fruit and vegetables. However, Community support is concentrated on a few products:

- Processing aid is, subject to compliance with a minimum producer price, paid on peaches, pears, tomatoes, prunes, dried figs and pineapples;

- Aid is paid for the buying-in and storage of dried grapes and dried figs at the end of the marketing year; dried grapes are also eligible for area aid;

- Quotas of mushrooms can be imported duty-free;

- A system of minimum import prices exists for dried grapes and certain products processed from cherries and for imports of soft fruit from certain central and eastern European countries, including the Baltic States;

- In response to the request from the Council in connection with the 1999/2000 prices review, the Commission drew up a draft measure to increase Portugal's tomato-concentrate quota for the 1999/2000 marketing year by 83 468 tonnes and, for the 2000/2001 marketing year, by a quantity to be calculated once production in 1999/2000 was known.

- Raspberries for processing and dried grapes qualify under specific measures to improve quality and marketing.

304. For the 1999/2000 marketing year, the Council amended Regulation (EC) No 2202/96 [82] so that the penalty for overrunning the threshold for the processing of citrus fruit is applied in the following, rather than the same, marketing year.

[82] OJ L 297, 21.11.1996, p. 49.

305. As compared with the preceding marketing year, for 1999/2000 the minimum producer price was reduced for tomatoes (-3%), peaches (-7.8%) and pears (-9.4%); it was increased for figs (+3.0%). The processing aid was cut by 11.4% for tomatoes and increased by 0.6% for peaches in syrup and/or natural juice, 5% for Williams and Rocha pears in syrup and/or natural juice and 2.8% for tinned pineapples. This development is connected with the price in euros of the raw material in third countries.

306. New rules of application for the granting of Community aid and storage arrangements for dried grapes and dried figs have been laid down and are to be applied from 1999/2000.

307. In the case of dried grapes, the basic aid per hectare was kept at EUR 2 785. This aid is paid only for specialised areas meeting certain yield criteria.

308. The minimum import price arrangements introduced in 1997 for certain soft fruit originating in Bulgaria, Hungary, Poland, Romania, Slovakia and the Czech Republic continued to apply. Under those arrangements, the minimum import prices apply permanently and no longer on the basis of an ad hoc Commission decision. They will shortly be extended to the Baltic States. Import prices were above the minimum prices fixed.

309. The basic Regulation on the common organisation of the markets in processed fruit and vegetables provides for the presentation, in the year 2000, of a report on the application of the market organisation.

Wine

310. The measures on the elimination of the by-products of winemaking, on storage aid and on support for the use of must to increase alcoholic strength and for the manufacture of grape juice were confirmed. Compulsory distillation was discontinued and will be replaced with crisis distillation measures. A new measure was introduced to preserve the major market outlet that is potable alcohol.

311. The provisions on the traceability of products, proper information for, and the safeguarding of the legitimate interests of, consumers and producers, such as those on accompanying documents, the description and presentation of products, oenological practices and the protection of designations of origin, were incorporated. The main innovation relating to product specifications involves the possibility for other specific particulars to be shown on the label, in addition to the compulsory or optional terms specifically defined in Regulation (EC) No 1493/1999, provided they do not mislead the consumer and are documented by the bottler.

312. Wine production in the Community (excluding must not processed into wine) in the 1998/99 wine year totalled 159 million hl. Community production is forecast to rise by 11% in the current wine year (1999/2000) (176 million hl) as compared with the previous wine year. The rise is expected to be very small in Spain (31 million hl) and Italy (57.6 million hl), large in Portugal, where the extra 4 million hl merely indicate a return to normal (7.2 million hl), quite appreciable in Austria (2.7 million hl) and, above all, in France (60.2 million hl) and Germany (13 million hl). The IWO's world production forecasts are for between 270 million hl and 285 million hl for 1999. Areas under wine grape varieties in the Community again fell slightly, amounting to 3.28 million ha in 1997/98, or 1.3% lower than in 1996/97. The Community accounted for around 62% of world wine production in the 1997/98 wine year. Going on the latest figures from the Instituto Européo de Coyuntura Vitivinicola, wine output in millions of hectolitres in 1999 in the countries of the southern hemisphere was as follows: Argentina 18.3, Australia 8.6, Brazil 3.2, Chile 4.3, New Zealand 0.7, South Africa 9.2, and Uruguay/Paraguay 1.1 together.

313. The European Community was the world's largest exporter with 12.8 million hl in 1998, up on the 12.2 million hl exported in 1997. For 1998 the chief traditional buyers of Community wine were the United States (close on 3 million hl), Japan (1.9 million hl), Switzerland (1.6 million hl) and Canada (1.1 million hl).

314. Imports from third countries also rose, amounting to 5.9 million hl in 1998, i.e. 7% more than in 1997.

315. Wine imports in 1998 came mainly from Australia (1 million hl), Bulgaria (609 501 hl), Chile (780 906 hl), South Africa (760 439 hl) and the United States (815 626 hl). US exports increased significantly compared with 1997 (+31%).

316. The Member States importing most wine in 1998 were the United Kingdom (44% of the Community total) and Germany (25% of the Community total).

317. Calculated on the basis of imports, intra-Community trade increased sharply between 1997 and 1998, rising from 30.8 million hl to 36.3 million hl (up 18%). It had increased by 4% between 1996 and 1997.

318. Wine consumption declined again during the 1997/98 wine year to 33.6 l/head (in 1996/97 it stood at 34.7 l/head). There were, however, possible signs of a recovery in 1998/99, and on the basis of provisional statistics supplied by the Member States, it looked set to reach 34.4 l/head.

319. At 118.7 million hl, the stocks at the end of 1998/99 were slightly down on 1997/98 (119.1 million hl).

320. In the 1998/99 wine year, preventive distillation was opened for a total of 9.45 million hl. For 1999/2000, the figure was 10 million hl.

Wine (1998)

Area planted ('000 ha) // 3 283

Production ('000 hl) // 159 000

Imports ('000 hl) // 5 900

Exports ('000 hl) // 12 800

Sources: Agriculture DG, Eurostat and IWO

Tobacco

1.1.1.28. Market developments

321. At 6.7 million tonnes, world tobacco production in 1998 was 17.4% down on 1997. In spite of having produced 27.2% less than in 1997, China was still the leading producer, with 37.8% of world production. The United States, India and Brazil took second, third and fourth places respectively. With 5.1% of world production, the European Union was fifth. In 1998 the European Union produced 342 000 tonnes of leaf tobacco, a small increase (2.1%) over 1997.

322. Tobacco prices fell slightly on the Malawian and Zimbabwean markets. Price trends on those markets give a good indication of world price trends, particularly for flue-cured and light air-cured varieties. Prices on European markets fell, in particular for oriental varieties. World demand for leaf tobacco decreased by 0.6% between 1997 and 1998.

323. The EC exported 178 674 tonnes of tobacco to the rest of the world in 1998, compared with 168 255 tonnes in 1997. Exports were mostly of oriental varieties, which are sought after for their aromatic characteristics. The large rise in Community exports can be explained largely by the increase in exports of flue-cured, light air-cured and sun-cured varieties and other tobacco and tobacco refuse in 1998. The EC imported 541 200 tonnes of tobacco in 1998.

324. Community production is stable, the 1992 reform of the common organisation of the market in tobacco having introduced a system of quotas by Member State and by group of varieties. There are now eight groups of varieties, while buying-in and export refunds have been abolished. For the 1998 harvest, the quota was 350 163 tonnes, with Community production 2.3% down.

325. A further reform of the tobacco market organisation, which seeks to encourage quality production and provides for accompanying measures for voluntary abandonment of tobacco growing, has applied from the 1999 harvest.

326. The new variable premium system will be introduced over a three-year period and will be fully in force from 2002. Its underlying principle is that a variable component of the premium available (from 30% to 45%) is allocated to producers in line with the market price, the designated indicator of quality. The variation is applicable by batch and by variety within each producer group.

327. With a view to encouraging producers to switch to other crops, a system was approved for buying back quotas from producers leaving the sector. Producers whose quotas were bought back during the 1999 harvest year are to qualify for amounts determined by group of varieties on payment of the premiums for the 2000, 2001 and 2002 harvests. Commission Regulation (EC) No 1823/1999 fixes the quantities of groups of high-quality varieties.

328. The Member States will have to set aside a national reserve of production quotas by group of varieties for each harvest. The aim is to ensure that the previously closed tobacco sector is opened up: the reserve will be apportioned with a view to strengthening existing production and helping young farmers to set up, in accordance with objective criteria laid down by the Member States.

Tobacco (1998)

Area planted (ha) // 139 100

Production ('000 tonnes) // 342

Imports ('000 tonnes) // 541.2

Exports ('000 tonnes) // 178.7

Sources: Agriculture DG and "World Tobacco Markets & Trade" (USDA publication)

Seeds

1.1.1.29. Market developments

329. In 1998 the total area given over to seed production and eligible for Community aid [83] was 439 512 ha. For the Member States taken together, this represents an increase of about 17% on the previous year.

[83] The market organisation for seeds provides for the granting of aid for the production of basic seed and certified seed belonging to some 40 different species of agricultural plants, including various species of fodder plants, rice and flax.

330. The area cultivated for the production of seeds of fodder grasses and legumes totalled 205 834 ha and 165 321 ha respectively, representing an overall increase on 1997 of 19% and around 20% respectively.

331. The total area used for rice seeds was 18 569 ha, representing an increase of around 5% on 1997. More specifically, compared with 1997, the areas used for the production of rice seeds of the indica type (4 451 ha) and japonica type (12 357 ha) were about 29% up and 8% down respectively.

332. The areas used for growing seeds for fibre flax and linseed production were 27 076 ha and 20 503 ha respectively. Compared with 1997 and for the EU as a whole, this meant an increase of around 2% in the case of fibre flax and of 8% in the case of linseed.

333. The area sown to produce hybrid maize seed was 56 687 ha. This represents a reduction of around 2% on 1997 for the EU as a whole.

334. In the case of seeds eligible for Community aid in the 1997/98 marketing year, total EC imports (75 980 t) again exceeded exports to third countries (23 179 t), thus confirming the trend observed over the last decade. Imports of hybrid maize seed totalled 65 317 t, of which 60 558 t (around 93%) were simple hybrids.

1.1.1.30. Changes in the market organisation for seeds

335. On 24 June 1999 the Council adopted a Regulation fixing the aid granted in the seeds sector for the 2000/2001 and 2001/2002 marketing years [84] and amending Regulation (EEC) No 2358/71 [85] as regards seeds of rice, hemp and perennial ryegrass.

[84] Council Regulation (EC) No 1405/1999, 24.6.1999, OJ L 164, 30.6.1999, p. 17.

[85] Council Regulation (EEC) No 2358/71, 26.10.1971, OJ L 246, 5.11.1971, p. 1.

336. In the case of rice seeds, the japonica/indica classification was replaced by one based on seed size, on the sames lines as the Regulation on the common organisation of the market in rice.

337. For hemp seeds, the aid for which has traditionally been paid only on the monoecious varieties, eligibility was extended to the new dioecious varieties with an alcaloid (THC) content of less than 0.3% for 2000 and 2001 and less than 0.2% for subsequent marketing years.

338. In the case of ryegrass, with prices on the external markets no longer justifying the distinction between three groups of varieties, a single rate of aid will apply from the 2002/2003 marketing year, after a transitional period during which the aid for the three groups is to be aligned gradually.

Hops

1.1.1.31. World market

339. The world area under hops stands at around 71 500 ha, of which almost 55 000 ha are located in member countries of the International Hop Growers' Convention (IHGC) and the producer Member States in the European Community. China, too, is a major producer, but its production can only be estimated, since no precise figures are available.

340. Areas under hops in the IHGC members and the EC were down 14.89% in 1998, the total reduction being around 9 600 ha, with falls of about 2 400 ha in the EC, particularly in Germany (about 1 700 ha), about 2 700 ha in the United States and about 1 750 ha in the Czech Republic.

341. At around 2 230 000 Ztr, the 1998 world harvest was 10.70% down on 1997. The quality of production was lower, with an alpha-acid content of 6.29% and alpha-acid production of 7 026 tonnes (9 300 t in 1997).

342. Although the yield was 2.5% down compared with the 1997 harvest, it was still 9% above the average for the last 20 years.

1.1.1.32. Community market

343. Hops are grown in eight Member States of the Community (Belgium, Germany, Spain, France, Ireland, Austria, Portugal and the United Kingdom), with Germany accounting for 80% of the 24 371 ha devoted to hop growing in the EU in 1998. Compared with the 1997 harvest, areas were down 2 414 ha, or 9%.

344. With production totalling 755 890 Ztr, the 1998 harvest was far smaller than in 1997 (-9.74%). The average yield per hectare, however, was identical to the previous harvest at 1.55 tonnes/ha or 31 Ztr/ha.

345. Production quality was good, with an average alpha-acid content of 7.5% across the Community for the three categories of varieties, the equivalent of 2 853 tonnes of alpha acid, or 117 kg/ha for beer production in 1999.

346. Overall, the average price of hops sold under contract came to EUR 197/Ztr, i.e. EUR 5/Ztr down on the 1997 harvest.

347. The average price on the free market rose sharply (from EUR 64/Ztr in 1997 to EUR 92/Ztr in 1998), approaching the price it fetched for the 1996 harvest.

348. Under the market organisation for hops, aid is granted to hop producers to enable them to attain a reasonable income level. The Council fixed the aid at EUR 480/ha for all varieties for a period of five years from the 1996 harvest. The same rate of aid is granted for areas set aside temporarily or grubbed up; in 1998 these totalled 1 679 ha, including 1 623 ha in Germany.

349. Estimates for the Community harvest in 1999 are lower than for the previous year.

Hops (1998)

Area planted ('000 ha) // 24.4

Production ('000 tonnes) // 37.8

Imports ('000 tonnes) // 2.5

Exports ('000 tonnes) // 12.3

Source: Agriculture DG

Flowers and live plants

350. This sector covers a wide range of products: bulbs, live plants (ornamentals and nursery products), cut flowers and foliage. The market organisation includes quality standards and customs duties, with no specific protective measures against imports apart from any safeguard measures that might prove necessary. In 1996 the Council adopted a three-year promotion programme (1997-99) eligible for Community financing of EUR 15 million a year, possibly rising to 60% of the actual cost of the measures implemented by groups representative of activities in this sector, the aim being to boost consumption of Community products in the EC. The programme also provides for a study to be carried out at the end of the three-year period, in order to assess the extent to which the objectives have been achieved and draw the consequences for any similar measures in the future.

351. In recent years, production and trade have grown on both the Community and third-country markets. In 1998 EC production was worth a total of EUR 13.4 billion, i.e. 6% of final agricultural production.

352. The total area devoted to ornamental horticulture is around 115 000 ha, including nearly 22 000 ha for bulb production, principally in the Netherlands.

353. In 1998 Community imports from third countries totalled 311 823 tonnes (EUR 984 million), a rise of around 84% on the figures for 1989. Fresh cut flowers accounted for about half of those exports, the EC being the biggest market in the world in this respect. Under agreements with third countries such as the Generalised System of Preferences in the case of Colombia and other central and south American countries, and the agreements concluded with the ACP States under the Lomé Convention, most of the flowers (approximately 80%) are exempt from customs duty.

354. All told, five Mediterranean countries (Cyprus, Israel, Jordan, Morocco, and the West Bank and the Gaza Strip) enjoy tariff exemptions for certain cut flowers (roses and carnations) within set quotas, provided that the import price is not below a certain percentage of the corresponding Community producer price.

355. Israel is still the EC's largest supplier of fresh cut flowers (40 700 t), followed by Kenya (29 600 t) and Colombia (19 000 t). Other countries that supply the Community with products from the sector as a whole include Poland and Zimbabwe, which now supply three times more than in 1990, and Ecuador, which exported 25 times more to the EC in 1998 than it did eight years ago.

356. In 1998 Community exports to third countries totalled around 328 000 tonnes (EUR 1 064 million), the principal exports in order of importance being live plants and nursery products, bulbs, fresh cut flowers and foliage.

357. The external trade balance for the entire sector for 1998 was positive, both financially (around EUR 80 million) and in terms of quantities (16 079 t), something which had not occurred since 1993. This was due to the fact that the export surpluses for two lines of production (bulbs and live plants) amounted to EUR 263 million and EUR 185 million respectively.

Market developments -- Animal products

Milk and milk products

1.1.1.33. World market

358. According to FAO estimates, world production of milk (including cow's milk, buffalo milk, sheep's milk and goat's milk) in 1999 was, at 559 million tonnes, likely to be 4 million tonnes (or just 0.7%) up on 1998. The production of cow's milk accounted for all of the increase, whereas in previous years it had, despite the increase in production in Australasia, remained more or less stable given the decline in production in Russia and the other countries of eastern Europe.

359. Asia: the increase in production in India, where more than half the milk produced is buffalo milk, slowed down in some regions. In 1999 India was expected to produce 78 million tonnes and become the world's second producer after the EC and ahead of the United States. This increase in production in India has been underpinned by growing domestic demand. Nevertheless, per capita annual consumption is only 65 kg, less than a quarter of what it is in western countries. Pakistan, the other major producer in the region and fifth in the world, was expected to produce slightly over 23 million tonnes in 1999, i.e. a year-on-year increase of 1 million tonnes since 1994.

360. In Latin America, production looked set to increase in most countries, from 58 million tonnes in 1998 to more than 59 million tonnes in 1999. Brazil is both the region's largest milk producer (sixth in the world) and the foremost importer among the Mercosur countries. While its production was expected to exceed 22 million tonnes in 1999, Brazil's domestic consumption was also set to absorb large quantities of milk products from Argentina and Uruguay.

361. At 84.9 million tonnes, milk production in eastern Europe in 1999 looked set to reach the same overall total as in 1998, with, however, some differences from country to country. In the former Soviet Union, the decline continued. However, production was on the increase, in particular in Poland, Romania and the Czech Republic and, to a lesser extent, in other countries. Supplies of feedingstuffs are still limited, with consequent further reductions in herds. The financial crisis in Russia the previous year also hit its neighbours, generating price increases which dampened consumption and allowed supply to outstrip demand. In addition, consumers are now moving towards cheaper substitute products such as vegetable oils. Similarly, consumers in the region are switching to products like long-life milk, soft cheeses, ice-cream and desserts, while consumption of traditional products is falling.

362. In the United States, production increased very slightly in 1998. Once again, those who saw the BST (bovine somatotrophin) programme as the answer to all the industry's problems and were forecasting a spectacular leap in production were disappointed. In Canada, maintaining processing quotas for milk will leave production practically unchanged.

363. In Australasia, weather conditions were a key factor, affecting both major players in the region. In Australia, the very favourable weather conditions in the last milk year helped to increase production to over 10 million tonnes (+8.4%). In this region of the world, milk production is affected by highly changeable weather conditions that bring large fluctuations from one year to the next. In 1996 the weather was very favourable, giving way in 1997 to a drought affecting much of Australia, and during the first half of 1998 the weather conditions were also unfavourable. There is a trend towards increased use of compound feeds in dairy farming in Australia. In New Zealand a drought put paid to any increase in milk production in the last milk year. The country had, however, shown strong growth -- amounting to a year-on-year increase of 8% -- between 1995 and 1998, on the strength of good weather conditions for grazing and favourable world price trends in 1995 and 1996. Falls in world prices have always been offset by devaluations of the New Zealand dollar, a policy sometimes followed by Australia with regard to its own currency.

1.1.1.34. Community market

364. The dairy herd was expected to be down 385 000 head to 21.1 million, a fall of 1.8% by the end of 1999, which should be partly offset by a 1.4% increase in yields. Production would thus be down 70 000 tonnes to 120.5 million tonnes, though the Member States forecast a slight increase in milk deliveries. The latter should amount to 113.8 million tonnes, up 310 000 tonnes, mainly in the United Kingdom and Spain.

365. Drinking milk output continued to fall (-0.9%), while production of cream for direct consumption looked set to rise substantially in 1999, increasing by 2.3%. Butter production was expected to rise 1.5% to 1.86 million tonnes in 1999, representing an increase of 27 000 tonnes, concentrated in Germany, Ireland, Belgium and France. Butter consumption has levelled off at 1.79 million tonnes, but in 1999 estimated per capita consumption was 4.78 kg, down 0.2%.

366. Cheese production was expected to fall by around 58 000 tonnes to 6.6 million tonnes (-0.9%) in 1999, which would be the first time cheese output had actually decreased, though growth had been slowing down since 1996. Consumption was also expected to fall by 0.3% or 19 000 tonnes in 1999.

367. Per capita consumption also fell in most Member States, in particular in those where traditionally it was most firmly established, e.g. Denmark, Spain, Ireland, Italy, Greece and the Netherlands. The United Kingdom, however, recorded a rise (+3.2%).

368. Milk powder production rose by some 39 000 tonnes to 2.13 million tonnes, an increase that can be put down to the 2.9% rise in skimmed-milk powder output to 1.1 million tonnes. Whole-milk and semi-skimmed milk powder reached the same level as in the previous year.

369. Casein production was down 7 000 tonnes in 1999, having recorded an increase of 14 000 tonnes in 1998.

370. At 1.28 million tonnes, condensed-milk production was down 2.3%, resuming its long-term decline of 1.6% a year.

371. Other figures worthy of note include: the sharp drop -- to 727 600 in 1999 -- in the number of dairy farms (the annual rate of change in 1995-99 (EUR-15) being 6.89%); the average number of cows per holding (which rose to 28.9); and the average quantity of milk delivered per holding (156.4 t).

372. Since 1995, overall consumption of dairy products in the EC has been around 112 million tonnes. It is estimated at 112.8 million tonnes for all uses made of the milk available in 1999.

373. In 1996 Community stocks were at an all-time low: in March of that year there was scarcely a single tonne of either butter or SMP (skimmed-milk powder) in public storage. Stocks of SMP subsequently began to rise in response to slack demand both inside the EC and elsewhere, although this appears to have changed in recent months. In previous years the quantities of butter bought in were very small, but they could well rise in 1999, though not much above 50 000 tonnes.

374. Internal prices for milk products in 1999 showed conflicting trends, particularly at the start of the year. The price for butter began the year at 99.4% of the intervention price, drifted down until early May (91.3%) and held steady at that level until July, whereupon it began to climb again. The price for SMP showed little or no change until February, when it began to move upwards, reaching the intervention price level around mid-June. This did not, however, mark the end of the rise.

375. Export refunds on milk powder and cheese were increased in February and in April respectively.

376. EC dairy exports fell 2.2% in 1998, i.e. by 340 000 tonnes milk equivalent, while imports were in excess of 3.6 million tonnes (including casein and fresh products). In 1999, forecasts point to a small fall in exports and a slight rise in imports.

377. On 10 December 1999 the Commission adopted a proposal [86] to amend Article 14 of Regulation (EC) No 1255/1999 [87] as regards the school milk programme. The proposal provides for the continuation of the existing scheme with 50% co-funding from the Member States or the milk industry to improve cost-effectiveness. As in the past, the quantity of milk subsidised will be 0.25 litres per pupil per day.

[86] COM(1999) 608 final.

[87] OJ L 160, 26.6.1999, p. 48.

Milk and milk products (1998)

Number of dairy cows

('000 head) // 21 506

Production ('000 tonnes) // 120 837 (cow's milk)

113 403 (cow's milk delivered to dairies)

38 793 (fresh milk and fresh milk products)

1 833 (butter)

6 341 (cheese)

1 081 (skimmed-milk powder)

1 015 (other milk powder)

1 242 (concentrated milk)

141 (casein)

Imports ('000 tonnes) // 71 (butter)

100 (cheese)

Exports ('000 tonnes) // 222 (butter)

453 (cheese)

Sources: Eurostat, Agriculture DG, WTO and FAO

Beef and veal

1.1.1.35. Market situation

378. According to FAO data, world beef and veal production, estimated at 53.8 million tonnes for 1998, was slightly down, by around 0.1%, on 1997, still accounting for just over a quarter of total meat production.

379. EC beef and veal production, totalling some 7.624 million tonnes in 1998, was 3.4% down on 1997. It now accounts for only about 14% of world production.

380. The supply of beef and veal increased in North America and certain producer countries in Asia, in particular China and India.

381. Beef production in Australia fell in 1996 as a result of the drought, and market conditions meant that exports from Australia and New Zealand were reduced to below their share of the tariff quota for exports to their traditional North American export market, but Australian production in 1997 and 1998 was up on 1996. As compared with 1996, production grew 4% in 1997 and 7.6% in 1998.

382. In Eastern Europe and especially in Russia, production continued to decrease with the fall in herd sizes and in productivity per head. In Russia, beef/veal production in 1998 was around 14% down on 1996.

383. On a world market experiencing dynamic economic growth and a strong trend towards meat consumption, beef/veal consumption was hampered by consumer fears about BSE (bovine spongiform encephalopathy).

384. This slowdown in world trade was encouraged by the fall in beef imports in South-East Asia, which now accounts for around a quarter of trade. Nevertheless, the situation in Asia was expected to settle down after the crisis that hit the region in 1998, which could only have a positive impact on beef trade for 1999.

385. Now officially recognised as free of foot-and-mouth disease, Argentina and Uruguay, the two exporting countries of Latin America, will probably increase their exports of fresh/chilled beef to the North American markets, where they can fetch higher prices.

386. More favourable access conditions on some import markets pointed to a trend reversal on the international markets in 1999 and thus firmer beef prices throughout the world. Nevertheless, the crisis in Russia in 1998 depressed the beef market in Ireland in particular. The fall-off in Russian imports (which account for 40% of Community exports) from September 1998 brought prices down by 10% on average, thus increasing supply in relation to possible outlets.

387. In 1998 cattle numbers declined in many countries, including the United States (where the decrease was put at some 2.0%), Australia (-0.1%) and New Zealand (-1.7%).

388. World production is therefore thought to have remained unchanged for 1998, whereas the medium-term trend is for an increase of around 1.4% a year through small rises in the developed countries.

389. In 1998 the Community market in beef and veal was up on 1997; there was a price rise of 2.2% for adult bovine animals (R3), while for heifers (R3) and cows (O3) the increases were 3.7% and 1.7% respectively.

390. Premiums for the early slaughter of calves up to November 1998, for slaughterings with a view to the eradication of BSE in the United Kingdom and for the processing of calves applicable to the end of 1999 in Ireland, France, the UK and Portugal doubtless helped to reduce net Community production in the short term.

391. Plans to eradicate BSE were implemented in several Member States, including the UK. Alongside veterinary health checks of identified herds and cattle feed, these plans seek to eliminate from the food chain the meat of animals likely to be affected by BSE. By August 1999 over 3.499 million cattle, in particular cull dairy cows, had been slaughtered.

392. Again with a view to restoring sound conditions on the market for veal in the wake of the BSE crisis, premiums for the early marketing of calves under a programme which expired in November 1998 and for the processing of such animals had, by the end of September 1999, been paid on 3.60 million and 2.716 million head respectively.

393. The market price for the reference quality (uncastrated adult males of class R3) remained higher than 80% of the intervention price, the threshold that triggers support measures, whereas, compared with 1997, prices for bovine carcases of classes R3 and R4 followed an upward and downward trend respectively, and the average Community price in 1998 was 78.0% for class R3 and 67.9% for class R4. In October 1999 the average price for R3 and R4 carcases was around 77% of the intervention price.

394. From April 1996 to the end of March 1999, 719 000 tonnes were bought in from the market (the last quantities bought in). By contrast, sales of intervention stocks from 1 January to 31 August 1999 totalled only about 308 000 tonnes. Physical stocks at 31 August 1999 were put at 247 000 tonnes.

395. Although slightly up, per capita consumption of beef and veal remained below the level considered normal before the outbreak of the BSE crisis in 1996.

396. Consumer confidence in the EC could be restored through programmes to promote quality beef and veal, to which the Community contributes up to 60% of the eligible expenditure. After the crisis referred to above, the budgetary authority substantially increased the funds available for promoting quality beef and veal. In the budget years from 1993 to 1999, the Community backed specific promotion programmes with actual funds of around EUR 76 million. Towards the end of 1999, the Commission contributed about EUR 8 million to such programmes, in addition to a total of EUR 7 million for information campaigns on the labelling of beef and veal.

397. At 387 000 tonnes in 1998, against 429 000 tonnes in 1997, beef/veal imports were in line with the normal level of Community imports observed in recent years.

398. Exports of beef/veal and live cattle to third countries, which totalled 769 000 tonnes in 1998, were 27% down on 1997 on account of the difficulties stemming from the BSE crisis and sales to Russia. In 1999, in view of the comparative recovery of the Russian economy, beef and veal exports are expected to be in line with those recorded in preceding years.

399. As a result of the measures taken in 1996 to deal with the BSE crisis and of improved sales to Russia, the Community price for beef carcases levelled off in September and October 1999 at around 75% of the intervention price, while the price for the reference quality of young bovine animals (R3) was above the threshold of 80% of the intervention price.

1.1.1.36. Labelling of beef/veal

400. In the wake of the BSE crisis, the Council adopted Regulation (EC) No 820/97 [88] with a view to restoring stability on the beef market, in particular by improving the conditions governing production and marketing. To that end, a Community labelling system based on objective marketing criteria was established in order to encourage consumer confidence in the quality of meat on offer.

[88] OJ L 117, 7.5.1997, p. 1.

401. The system should have become mandatory throughout the Community from 1 January 2000, but lack of progress in implementing the beef/veal labelling arrangements in the various Member States prevented this.

402. On 13 October 1999, in order to address the situation, the Commission presented two draft Regulations to Parliament and the Council, the first temporarily extending the current voluntary labelling provisions and the second again putting forward, for implementation in two stages, general rules on the compulsory system. The Commission's proposal was that, initially, the mandatory particulars on the labelling should focus on information that could be confirmed and was available at the time of slaughter (date and place of slaughter and type of animal).

403. On 16 December 1999 Parliament approved the proposal to extend the period of validity of the existing voluntary system for a maximum of eight months (i.e. to September 2000). Because of the tight schedule for adoption of the extension of the Regulation (31 December 1999), the Commission had to reserve the possibility of presenting to the Council an urgent proposal based on Article 19 of Regulation (EC) No 820/97, for adoption before the end of 1999. Such a proposal was necessary in order to avoid a legal vacuum as a result of the automatic lapsing of the voluntary system. In view of the divergence between the Parliament and Council positions on first reading, the Commission adopted the above-mentioned emergency proposal once Parliament's vote of 16 December 1999 was known, and took account of Parliament's wishes as far as possible, in particular by providing for a shorter extension of the period of validity. The extension adopted by the Council now runs until 31 August 2000 only.

Beef/veal (1998)

Number of animals ('000 head) // 82 850

Production ('000 tonnes) // 7 624

Imports ('000 tonnes) // 387

Exports (' 000 tonnes) // 769

Sources: Agriculture DG, Eurostat and FAO

Sheepmeat and goatmeat

404. The European Community is, after China and before Australia, New Zealand, the Commonwealth of Independent States (CIS) and the United States, the world's second largest producer of sheepmeat and goatmeat. [89]

[89] China produced about 2.6 million tonnes in 1997, according to the International Meat Secretariat.

405. New Zealand is the world's main exporter, followed by Australia. The European Community is also the world's second largest consumer after China. Imports are substantial in the EC, the United States, the Middle East and some countries in South-East Asia.

406. On the EC market, production decreased in recent years, reaching a low point in 1997 and recovering afterwards. Gross domestic production is expected to be 1 165 000 tonnes carcase weight equivalent in 1999. This rise comes mainly from the United Kingdom and Ireland, both countries having increased lately both their stock and their levels of production. Meanwhile, two other EC producers, Spain and France, have experienced declining trends.

407. France remains the largest recipient of internal trade, chiefly from the United Kingdom. New Zealand is the main supplier to the EC, largely through the United Kingdom.

408. Prices were at very good levels during most of 1996 and 1997. The graph showing prices for 1998 inversely reflects the price trends in previous years: prices were high around the middle of the year and very low in the first and last thirds of the year. In 1999 levels were at first very low, recovered towards Easter and remained firm during the spring. Nevertheless, prices collapsed in the United Kingdom and Ireland during the summer, owing to high levels of supply.

409. The private storage aid scheme was declared open in September 1999 (2 350 tonnes for the United Kingdom, 250 tonnes for Ireland and 100 tonnes for Finland). The very quick uptake of the quantities that were available under the scheme shows the scale of the crisis for the countries concerned. One of the aspects that stands out is the fact that while markets are depressed in some northern EC countries, those in southern EC countries look relatively healthy.

410. The reasons for concern are similar to those obtaining a year ago: (a) low demand, in particular in France, the main EC importer; (b) higher production in some Member States, in particular the United Kingdom and Ireland; (c) frequent poor quality of lambs in some northern EC countries and regions; (d) low prices for wool and skins; (e) greater competition from other meats for which prices are very low (poultry, pork and beef).

411. Imports into the Community are carried out principally under WTO tariff-free or reduced-tariff quotas together with additional quantities provided for in the Europe Agreements. For market management reasons, the quotas are managed on a calendar-year basis. Total imports for 1999 are expected to be lower than the previous year, but higher for New Zealand chilled meat.

412. New Zealand is by far the main supplier to the Community, exporting a quantity that is close to its tariff-free quota of 226 700 tonnes. Australia is the second largest exporter to the Community, with just under 19 000 tonnes. EC applicant countries from central and eastern Europe (in particular Hungary) and Uruguay export under 10 000 tonnes.

413. The premium per ewe for the marketing year 1998 was EUR 22.494, i.e. the difference between the basic price for sheepmeat (EUR 468.785/100 kg) and the market price (EUR 325.329/100 kg), multiplied by a technical coefficient (0.1568). Producers in less-favoured areas received a supplementary premium as part of the rural aid package.

Sheepmeat and goatmeat (1998)

Number of sheep and goats ('000 head) // 98 823/12 297

Production ('000 tonnes) // 1 142

Imports ('000 tonnes) // 267.8

Exports ('000 tonnes) // 4.1

Sources: Eurostat and Agriculture DG

Pigmeat

414. In 1998 world production of pigmeat continued to rise, increasing by 4.7% or 3.8 million tonnes to a total of 84.8 million tonnes (source: FAO). China remained the world's leading producer, with output totalling 36.9 million tonnes, up 3.5% on the previous year. The EC was again the second biggest producer, with an annual production of 17.6 million tonnes, an impressive 8.2% up on 1997. Actual pig production had already increased in 1997, although statistics tell of a slight decrease. More than 10 million pigs raised on farms in 1997 were withdrawn from the market because of classical swine fever. The favourable market price in 1996 and 1997 may have encouraged many farmers to expand production, which led to a massive increase in production in 1998. In 1999 production is expected to increase to about 17.9 million tonnes (up 1.6%), although production was already down in the second half of 1999. The world's third largest producer of pigmeat was the USA, with 8.6 million tonnes (+10%) in 1998. US production is forecast to increase by 0.7% in 1999 (source: USDA).

415. From the second half of 1998, EC pigmeat market prices decreased considerably as there was a clear oversupply situation. The average price for pig carcases was at its lowest (EUR 90/100 kg) in November 1998 and January 1999. It was only from the summer of 1999, when production levelled off, that the market situation improved significantly. In August 1998 exports to Russia were hit by a financial crisis in that country, but had reverted to earlier levels towards the end of 1998.

416. From May 1998 onwards, the European Commission took a number of measures -- mainly involving export refunds and aid for private storage -- to improve the market situation. Export refunds were made available for fresh and frozen products from May 1998 and were increased in August and October 1998. A special refund (EUR 70/100 kg) for carcases and certain cuts for export to Russia applied between November 1998 and July 1999. Special refunds were also introduced on certain processed products for Russia. In December 1998 the Commission reduced the refunds on carcases and cuts for eastern European countries to an especially low level in order to avoid serious problems on the pigmeat markets of these countries.

417. Private storage aid was introduced from 28 September 1998 to 17 September 1999. A total of 428 000 tonnes of pigmeat qualified under the scheme and was stored for a maximum of six months. Under a food supply programme for Russia, the Community sent 47 300 tonnes of pigmeat to Russia. There were plans (situation in October 1999) to distribute a total of 100 000 tonnes.

418. Per capita consumption of pigmeat increased by 6% in 1998 to 43.7 kg/year. The reason for this increase was the very low price of pigmeat. Consumption was expected to increase by a further 2.6% in 1999 as prices remained low.

419. In 1998 the quantity of pigmeat exported from the Community amounted to 1.2 million tonnes (carcase weight), an increase of 16% on 1997. Imports decreased to 50 000 tonnes in 1998 from 70 000 tonnes in 1997, which was no surprise considering the low prices in the EC. The most important country of destination for pigmeat exports in 1998 was Russia, with 335 000 tonnes. Japan came second with 175 000 tonnes, and Hong Kong, together with China, was third, with 145 000 tonnes. The share of subsidised exports increased in 1998, as the European Commission actively supported exports. In 1998 a total of 35% of exports qualified for refunds, compared with 18% in 1997. During the first half of 1999, exports to third countries increased further, again helped by low EC prices and relatively high refunds. However, the special refunds to Russia for carcases and cuts were abolished in September 1999 and exports then qualified for general refunds.

Pigmeat (1998)

Number of animals ('000 head) // 118 918

Production ('000 tonnes) // 17 569

Imports ('000 tonnes) // 50

Exports ('000 tonnes) // 1 200

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Sources: Eurostat and FAO

Graph 5

Poultrymeat

420. Since 1991 world production of poultrymeat has shown a steady increase: 7% a year from 1991 to 1995, slowing down to 3.4% a year from 1995 to 1999. In the case of the main producer regions, the rate of increase was even higher in China (6.4% a year from 1995 to 1999), but production fell in Russia (despite a small recovery expected in 1999) and Japan. In Eastern Europe it started to increase from 1994/95 onwards.

421. The world market continued to expand slightly in 1999, thanks in particular to growing demand in Russia, China and Japan. The United States remained the world's leading exporter in 1998 and 1999, owing in particular to its exports of cheap cuts and various promotion programmes. Russia is still the world's largest importer, but it is expected that its production will rise in 1999 and that its imports will fall appreciably. Community exports rose steeply from 1996 to 1998, but were expected to fall in 1999.

422. Total production of poultrymeat on the Community market looked set to rise by only 0.9% in 1999. The economic situation was affected by the dioxin crisis, which led to a sharp fall in demand and in prices. Although prices recovered fairly quickly, they were still lower than in previous years.

423. Poultrymeat does not qualify for support on the internal market. The measures governing trade with third countries have been adapted to comply with WTO rules: exports attracting refunds are being cut by some 30 000 tonnes a year (315 600 t for 1999/2000). This restriction has led to a targeting of refunds as regards countries of destination and products. Thus, in 1998, only 35% of Community exports qualified for refunds.

424. Import quotas at reduced customs duties continue to apply under the association agreements (with Poland, Hungary, Czech Republic, Slovakia, Romania, Bulgaria, the Baltic States and Slovenia). Furthermore, 15 500 tonnes of boned chicken and 2 500 tonnes of turkey meat can be imported free of customs duty each year, in addition to 9 344 tonnes for 1999/2000 (July/June) under the minimum access arrangements at reduced duty and 2 400 tonnes under other bilateral agreements (with Turkey and Israel).

Poultrymeat (1998)

Number of birds ('000 head) // 4 421 566

Production ('000 tonnes) // 8 730

Imports ('000 tonnes) // 248.9

Exports ('000 tonnes) // 1 034.8

Source: Eurostat

Eggs

425. World production increased by 4.4% (annual percentage change) from 1991 to 1995 and continued to rise, albeit more slowly, from 1995 to 1999 (3.6%). The increase in the United States was average, and production in the EC rose by only 0.4%. Growth in China was high, at 5.9% from 1995 to 1999.

426. After falling in 1995, world exports began recovering in 1996 and should continue to rise. The main importing countries are still Japan (egg products) and Hong Kong (eggs in shell). Community exports increased by 14.7% in 1998 and early figures for 1999 suggest a rise of 7%.

427. On the Community market, the number of laying hens should remain stable in 1999 and may decline slightly in 2000. The economic situation for producers was very poor in the first six months of 1999 compared with the corresponding period of the previous year, with prices fairly low, particularly during the dioxin crisis, even though they recovered in the third quarter of 1999.

428. The market organisation is similar to that for poultrymeat. In the case of trade, refunds are, under the WTO, payable on up to 104 200 tonnes eggs-in-shell equivalent in 1999/2000. Since the summer of 1996, exports have stayed below the limit agreed within the WTO.

429. The association agreements with Poland, Hungary, the Czech Republic, Slovakia and Bulgaria involve an 80% reduction in customs duties on certain egg products. Under the minimum access arrangements, import quotas at a reduced duty were opened in 1999/2000 for an annual volume of 132 826 tonnes, broken down into three groups of products, those for egg products and ovalbumin being the only ones used.

Eggs (1998)

Number of birds ('000 head) // 338 561

Production ('000 tonnes) // 5 332

Imports ('000 tonnes) // 35

Exports ('000 tonnes) // 228

Source: Eurostat

Honey

430. World production of honey was stable at around 1.15 million tonnes in 1998. Prices on the world market were lower than in the previous year (-4%).

431. The self-sufficiency rate in the EC was 49% in 1997/98, slightly down on the previous marketing year. This was due to the fall in production and the increase in imports. Per capita human consumption was stable at 0.7 kg a year.

432. Pursuant to Council Regulation (EC) No 1221/97 of 25 June 1997 laying down general rules for the application of measures to improve the production and marketing of honey, [90] the Commission adopted decisions approving the national programmes for the third year (2000 marketing year).

[90] OJ L 173, 1.7.1997, p.1.

Honey (1997/1998)

Number of honey farms ('000) // 450

Production ('000 tonnes) // 127

Imports ('000 tonnes) // 139

Exports ('000 tonnes) // 6

Sources: Eurostat and Agriculture DG

The Agricultural situation in the European Union - 1999 Report - VOLUME II - Report in conjunction with the General Report on the Activities of the European Union - 1999 BRUSSELS AND LUXEMBOURG, 2000

TABLE OF CONTENTS

1. Agrimonetary system

1.1. The agrimonetary system and the euro

1.1.1. The new agrimonetary system

1.1.1.1. Transition to the new scheme

1.2. Agrimonetary aids

2. Rural development in 1999

2.1. Agenda 2000 and rural development

2.1.1. Leader+ Community Initiative

2.2. Horizontal measures

2.2.1. Implementation of Objective 5(a)

2.2.1.1. Measures to improve and modernise farms

2.2.1.2. Young farmers

2.2.1.3. Less-favoured agricultural areas

2.2.1.4. Processing and marketing of agricultural and forestry products

2.3. Regional measures

2.3.1. Implementation of Objectives 1 and 6

2.3.2. Mid-term evaluations of Objective 5(b) programmes

2.3.2.1. Belgium

2.3.2.2. Denmark

2.3.2.3. Germany

2.3.2.4. Greece

2.3.2.5. Spain

2.3.2.6. France

2.3.2.7. Ireland

2.3.2.8. Italy

2.3.2.9. Luxembourg

2.3.2.10. Netherlands

2.3.2.11. Austria

2.3.2.12. Portugal

2.3.2.13. Finland (Objective 6)

2.3.2.14. Sweden (Objective 6)

2.3.2.15. United Kingdom

2.4. Accompanying measures

2.4.1. Agri-environmental measures

2.4.2. Early retirement measures

2.5. Forestry measures

2.5.1. A forestry strategy for the European Union

2.5.2. Forestry measures as part of rural development

2.5.2.1. European Forestry Information and Communication System (EFICS)

2.5.2.2. Protection of forests

2.6. Community Initiatives

2.6.1. Leader II

2.6.1.1. Belgium

2.6.1.2. Denmark

2.6.1.3. Germany

2.6.1.4. Greece

2.6.1.5. Spain

2.6.1.6. France

2.6.1.7. Ireland

2.6.1.8. Italy

2.6.1.9. Luxembourg

2.6.1.10. Netherlands

2.6.1.11. Austria

2.6.1.12. Portugal

2.6.1.13. Finland

2.6.1.14. Sweden

2.6.1.15. United Kingdom

3. Financing of the CAP in 1999

3.1. Berlin Summit Agreement

3.2. EAGGF Guarantee Section

3.2.1. Stages of the budgetary procedure

3.2.2. Budgetary discipline

3.2.2.1. The guideline

3.2.2.2. The monetary reserve

3.2.3. The EAGGF Guarantee Section in the context of the general budget

3.2.4. The EAGGF and its financial resources

3.2.5. EAGGF Guarantee Section expenditure

3.2.5.1. Expenditure, by sector

3.2.6. Clearance of accounts

3.2.7. Expenditure on agricultural markets in 1999

3.3. EAGGF Guidance Section

3.3.1. Funding carried out

3.3.2. Budget execution

3.4. Evaluation

3.4.1. Evaluation of market-related measures

3.4.2. Evaluation of structural and rural development measures

4. Preparing for enlargement

4.1. Accession strategy

4.2. Screening of the acquis communautaire

4.3. Accession Partnerships

4.3.1. Introduction

4.3.2. National programmes for the adoption of the acquis

4.3.3. Financing enlargement

4.4. Institution-building and twinning arrangements

4.5. SAPARD (Special Accession Programme for Agriculture and Rural Development)

5. International relations

5.1. International organisations and agreements

5.1.1. World Trade Organisation (WTO)

5.1.1.1. WTO consultations and dispute settlement

5.1.2. Organisation for Economic Cooperation and Development (OECD)

5.1.3. Generalised System of Preferences (GSP)

5.1.4. United Nations Food and Agriculture Organisation (FAO)

5.1.5. International Grains Agreement (IGA)

5.1.5.1. Grains Convention

5.1.5.2. Food Aid Convention

5.1.6. International Sugar Organisation

5.2. Bilateral and regional trade relations

5.2.1. United States

5.2.2. Canada

5.2.3. Mexico

5.2.4. Mercosur/Chile

5.2.5. Republic of South Africa

5.2.6. Japan and the Republic of Korea

5.2.7. New Zealand

Agrimonetary system

The agrimonetary system and the euro

1. On 1 January 1 the monetary world underwent a major change, with eleven national currencies and the ecu being replaced by a single currency: the euro.

2. Needless to say, the changeover to the euro had an impact on the CAP and brought about changes in the agrimonetary regime.

3. A distinction has to been made between the new agrimonetary system and the transition to that scheme.

The new agrimonetary system [1]

[1] Regulation (EC) No 2799/98 (JO L 349, 24.12.1998, p.1).

4. For the CAP the first consequence of the creation of the single currency is that prices and amounts are expressed in euros, one euro being equal in value to one ecu.

5. Conversion - if this term can still be used for the "ins" - into national monetary units is to take place at the exchange rate applicable from 1 January 1999. Given that this relationship vis-à-vis the euro is fixed and invariable, an agrimonetary system is no longer required for the "ins".

6. The new agrimonetary system accordingly applies only to the four "pre-in" currencies (the Danish krone, the Swedish krona, the pound sterling and the Greek drachma).

7. Agrimonetary agreements are still necessary, because of the need to specify how amounts and prices expressed in euros have to be converted into national currency. For prices and amounts covered by the CAP, it has been decided that conversion is to take place at the market exchange rate. Export taxes and amounts and prices linked to imports will be converted at the customs rate, which in principle varies monthly.

8. The new regime contains a compensation scheme for farmers in the event of an appreciable exchange rate rise. As was the case under the previous scheme, a distinction is made between, on the one hand, the monetary effects on prices and, on the other, the monetary effects on compensatory payments.

9. Agrimonetary compensation can be granted for reduction in prices if such reduction is the result of an appreciable revaluation (i.e. one which exceeds a neutral margin of 2.6%). The existence or otherwise of an appreciable revaluation will be established once a year. The average annual exchange rate will be compared to the lowest average annual exchange rate in the three preceding years and the value of the exchange rate on 1 January 1999. An appreciable revaluation is deemed to have taken place if the annual average is lower than the lowest of these four values.

10. Member States will then be able to decide to grant compensation co-financed by the Community. The detailed arrangements are the same as under the old system, except that the 50% co-financing by Member States has been made obligatory.

11. In the case of direct payments to producers, a reduction in the conversion rate can be compensated. Compensation - 50% of it financed by the EU - can be granted if a conversion rate applicable to these payments is lower than the one applied during the 24 preceding months. The Member State concerned pays the other 50%.

12. It also has been decided to limit the possibility to grant compensations to revaluations occurring before 1 January 2002, the date on which the euro will be definitely introduced.

1.1.1.1. Transition to the new scheme [2]

[2] JO L 349, 24.12.1998, p.8.

13. As a consequence of the introduction of the euro and the new arrangements, the Council decided to dismantle all the monetary gaps existing on 1 January 1999 between the different agricultural conversion rates applicable until 31 December 1998 and the exchange rates for the "pre-ins" which were to be used from 1 January 1999. The same rules applied to all currencies and the compensation, if any, is guaranteed in the same way.

14. Although a reduction in prices expressed in national currency resulting from the introduction of the euro could be compensated if the replacement of these rates by the fixed conversion rate for the "ins" - or the exchange rate for the "pre-ins" - constituted an appreciable revaluation of more than 2.6%, the agrimonetary situation on 1 January 1999 was not such as to give rise to compensation.

15. For conversion rates applicable to direct payments, full compensation financed by the EU is granted in the first year if the new conversion rate is lower than the lowest value of the rate applicable in the last 24 months. For the second and third year, the new agrimonetary system rules apply. This means a double reduction of the compensation by one third and 50% financing by the EU.

16. Two tables are attached. The first one indicates the monetary gaps resulting from the introduction of the euro and the resulting compensation (in %). The second table gives an overview of the agrimonetary compensation granted in the first year.

Agrimonetary aids

17. In the case of agrimonetary aids, 1999 has been marked by the transition to the euro and the dismantling of the frozen green rates. Only one case concerned the revaluation of the Swedish krona for arable crops, that took place on 1 July 1998. The overall aid granted to this sector was EUR 2 215 million at a rate of EUR 1.4/hectare, taking account of the Swedish base rate area described above. In this connection, it should be noted that the rules on the granting of transitional agrimonetary aid diverge from past rules. Indeed, the granting of the Community part of transitional agrimonetary aid is not just a possibility for the Member State as in the past, but it is an obligation. Member States retain, however, the possibility of deciding whether they wish to grant the national funding required for the second and third tranches. For the CAP measures having an operative event on 1 or 3 January or 1 July 1999, the Member States concerned are: Belgium, Denmark, France, Ireland, Italy, Luxembourg, Finland, Sweden (only for 1 July 1999) and the United Kingdom. All Member States submitted their proposals in good time. For most of the direct aids under the CAP, transitional agrimonetary aids were granted by topping up the relative market premiums. However, some practical difficulties arose in the case of the structural measures (Regulation (EC) No 950/97 [3]) and the measures accompanying the reform of the CAP (Regulation (EEC) No 2078/92 [4] - agro-environmental measures; Regulation (EEC) No 2079/92 [5] - early retirement from farming; and Regulation (EEC) No 2080/92 [6] - forestry measures). The difficulties were attributable mainly to the fact that these measures are implemented through multiannual programmes approved by the Commission; these programmes contain a significant number of measures whose implementing conditions differ appreciably. Thus far the Commission has approved four schemes in the United Kingdom (sheep premiums, beef premiums, agri-environmental and arable areas/hops premiums), two schemes in Denmark (one relating to measures whose operating event is on 1 and 3 January and one relating to measures whose operative event is on 1 July), one scheme for France and Luxembourg covering all the sectors concerned, one scheme in Belgium covering only animal products, with an operative event on 1 or 3 January 1999, one scheme for Finland and one scheme for Ireland covering only the measures with an operative event on 1 or 3 January 1999. In the case of Italy, scrutiny of the notified plan is still pending, the Commission having requested additional detailed information on how the funds available would be used.

[3] Regulation (EC)No 950/97 (JO L 142, 2.6.1997, p.1).

[4] Regulation (EEC) No 2078/92 (JO L 215, 30.7.1992, p.85).

[5] Regulation (EEC) No 2079/92 (JO L 215, 30.7.1992, p.91).

[6] Regulation (EEC) No 2080/92 (JO L 215, 30.7.1992, p.96).

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Rural development in 1999

Agenda 2000 and rural development

18. In keeping with the principles of Agenda 2000, rural development policy has been both strengthened and simplified in order to complement the Community's policy on agricultural markets and make it the second pillar of the common agricultural policy.

19. Rural development policy has been amended in two main respects, compared with the current period: it can now be implemented throughout the Community, and it can be funded not only from the Structural Funds of the EAGGF Guidance Section but also from the agricultural appropriations in the budget, those of the EAGGF Guarantee Section.

20. This new approach focuses in particular on environmental aspects: promoting the careful management of natural resources, the conservation of the natural and cultural heritage and more environmentally friendly farming.

21. These measures to protect the countryside (rural areas make up around 80% of the Community territory) are in keeping with the ground swell of support for such ideas in society at large. No longer regarded solely as producers of commodities, farmers are taking on a variety of other roles which demonstrate the multidimensional nature of agriculture and give them an opportunity to diversify their sources of income. This diversification takes on even greater significance in the light of the ongoing decline in the number of holdings and hence in agricultural employment.

22. Rural development features in two of the three new Structural Funds objectives. Firstly, Objective 1 aims to promote development and structural adjustment in the areas whose development is lagging behind: those with a GDP of less than 75% of the Community average, the outermost regions and the areas previously eligible under Objective 6. All told, about 70% of the appropriations (some EUR 136 billion) is allocated to this Objective, whose programmes cover every sector of economic activity, including those located in rural areas. On 1 July 1999 the Commission adopted two decisions, one fixing an indicative allocation of the commitment appropriations for each Member State, [7] and the other drawing up the list of regions covered by Objective 1. [8] The proportion of the ERDF, ESF, FIFG and EAGGF Guidance Section appropriations earmarked for rural development will not be known until the Community support frameworks and operational programmes are adopted. The exceptions to this are the three supporting measures accompanying the 1992 CAP reform and the compensatory allowances paid in less-favoured areas from the Guarantee Section.

[7] OJ L 194, 27.7.1999, p.49.

[8] OJ L 194, 27.7.1999, p. 53.

23. Objective 2 funding is intended to support economic and social conversion of areas facing structural difficulties. It covers areas undergoing economic and social change in the industrial and service sectors, declining rural areas, urban areas in difficulty and depressed areas dependent on fisheries. This Objective applies to 18% of the Community population - including about 5% in rural areas - and accounts for 11.5% of the appropriations (a total of EUR 22.5 billion). On 1 July 1999 the Commission adopted two decisions, one setting the indicative allocation, by Member State, of the commitment appropriations, and the other establishing a population ceiling for each Member State. [9]

[9] OJ L 194, 27.7.1999, pp. 58 and 60.

24. The Member States then submitted their national lists of eligible areas, based on the criteria laid down in the legislation and taking account of the population ceilings attributed to each one. On the basis of these proposals, and after considering the opinions delivered by the Structural Funds committees or consulting them directly, the Commission adopted a definitive list of eligible areas for four Member States. Funding can be granted from the ERDF and the ESF, but, in the case of the EAGGF, the appropriations will come from the Guarantee Section (budget heading 1).

25. The implementation of rural development policy will be greatly simplified thanks to the adoption of Council Regulation (EC) No 1257/1999. [10] This is a consolidated legal framework, which replaces nine previous Regulations, making the criteria more flexible and easing the eligibility requirements.

[10] OJ L 160, 26.6.1999, p. 80.

26. It incorporates the measures from the former Objective 5(a):

- investment in agricultural holdings to boost farm incomes and improve living, working and production conditions in this sector;

- start-up assistance for young farmers;

- training to improve knowledge and skills among managers and owners in the farming and forestry sectors and, more generally, among people engaged in rural activities;

- compensatory allowances in disadvantaged areas and areas facing environmental constraints, to compensate for permanent natural handicaps in order to ensure the continued use of the land, protect the countryside, safeguard methods of farming and ensure compliance with environmental requirements;

- improving the processing and marketing of agricultural products, to encourage rationalisation and boost competitiveness and value added.

27. It also incorporates the three supporting measures accompanying the 1992 CAP reform:

- agri-environmental measures to protect the environment and preserve the countryside;

- early retirement schemes to help older farmers give up farming by providing them with a guaranteed income;

- support for forestry measures within farming.

28. Lastly, the new framework incorporates the remaining structural measures in the agriculture sector and those covering related activities, to ensure that non-agricultural activities and services are also involved in the process of fostering development in rural areas (craft-based industries, tourism, essential services for local rural economies and people, the restoration and development of villages, infrastructure in rural areas, diversified agricultural and related activities, etc.).

29. The new policy for rural development encompasses all rural regions within the Community and, at the Berlin European Council on 24-25 March 1999, it was decided that, in addition to the Structural Funds money available under Objectives 1 and 2, a portion of the funds from budget heading 1 (Agriculture) should be allocated to rural development and supporting measures. A total of EUR 30 370 million is to be made available for the seven-year period, i.e. an average of EUR 4 339 million per year. At a meeting on 8 September 1999 the Commission adopted a Decision on the allocation of the appropriations to the Member States. [11]

[11] OJ L 259, 6.10.1999, p. 27.

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30. On 23 July 1999 the Commission also adopted Commission Regulation (EC) No 1750/1999, which lays down detailed rules for the application of Council Regulation (EC) No 1257/1999. [12] In deference to the requirements of subsidiarity, the rules were specifically limited in scope, merely setting the eligibility criteria for each rural development measure. The Regulation also clarifies the administrative and financial aspects (programming, financial provisions, monitoring and evaluation and controls). The rural development plans are described in detail in the Annex to the Regulation.

[12] OJ L 214, 13.8.1999, p. 31.

31. In the interests of a smooth transition from the current programming period to the new period of rural development programmes in 2000-06, the Commission proposed a set of transitional rules on the funding of rural development. To ensure that all future measures are fully integrated into the new programming, Commission measures - or amendments to measures under existing schemes - will no longer be approved with some exceptions. These rules lay down in particular a number of requirements aimed at underpinning the continuity of the agri-environmental measures. They also regulate certain aspects of financial transition, in particular for measures featuring multiannual funding. These transitional arrangements will also be for compensatory allowances in less-favoured areas, with a one-year extension of the system of payments on a headage basis. Lastly, the date on which expenditure under the new rural development programmes becomes eligible is defined.

Leader+ Community Initiative [13]

[13] Liaisons Entre Actions de Développement de l'Économie Rurale (Developing the rural economy through integrated projects).

32. In the final analysis, four Community Initiatives (Interreg, Equal, Leader+ and Urban) will be implemented in the coming period, funded by 5.35% of the appropriations available under the Structural Funds, of which around 20% will be allocated to Leader+ projects (EUR 2 020 million).

33. The following are two major new features:

- Leader+ can now be implemented throughout the Community, instead of, as was previously the case, just in the areas covered by the regional Objectives (1, 5(b) and 6);

- assistance will be granted from a single fund, in order to simplify financial management. All eligible schemes will be funded exclusively from the EAGGF Guidance Section. Previously, some schemes were funded from the ERDF and the ESF.

34. On 13 October 1999 the Commission approved the draft guidelines for each Community Initiative. They were then sent to the STAR Committee and Parliament for their opinions. The strong points of Leader were retained, namely:

- the involvement of local partners in exploiting the potential of their areas and devising a development strategy;

- the bottom-up territorial approach;

- the opportunity to include small-scale projects, as part of an integrated approach;

- the networking aspect, which allows experience to be shared among the different projects.

35. The Leader+ Initiative will consist of three main planks:

- funding for pilot strategies that are territorial and integrated in nature and set out in the form of a development plan;

- funding to promote cooperation between rural areas, either in the same Member State (interregional cooperation) or in several different Member States (transnational cooperation). The aim is to set up viable joint projects, rather than simply to share experience;

- networking between projects.

36. All projects funded by Leader+ will be required to participate actively in networking activities, with Member States called upon to provide the necessary structures. The Commission, for its part, will operate an Observatory for rural areas.

Horizontal measures

Implementation of Objective 5(a)

37. A major development in connection with Objective 5(a) in 1999 was the launch of evaluations covering two of the basic Regulations concerned. In the case of Council Regulation (EC) No 950/97 on improving the efficiency of agricultural structures, [14] Community guidelines for the evaluation of the application of the three main measures in 1994-98 (investment aid, aid to young farmers and compensatory allowances for less-favoured areas) were submitted to Member States, while, for Council Regulation (EC) No 951/97 on improving the processing and marketing of agricultural products, [15] ex post evaluations covering 1991-1993 and 1994-1998 have been launched. In October 1999 the Commission decided that EUR 4 million earmarked for technical assistance should be allocated to these evaluations.

[14] OJ L 142, 2.6.1997, p. 1.

[15] OJ L 142, 2.6.1997, p.22.

1.1.1.2. Measures to improve and modernise farms

38. Every year some 40 000 holdings receive investment aid. Such aid is conditional on the drawing up of individual investment plans, which must include strategies to improve competitiveness, modernise production conditions and diversify activities. Other areas that must be addressed include preserving the environment, improving livestock health, and animal welfare. Investment aid must fulfil certain requirements aimed at ensuring consistency with the market situation and a contribution to the longer-term goal of sustainable development.

1.1.1.3. Young farmers

39. Aid for young farmers (Articles 10 and 11 of Regulation (EC) No 950/97) is aimed at encouraging young people to become heads of holdings. It does so by helping them meet their start-up costs, more specifically, via a start-up allowance and additional investment aid.

1.1.1.4. Less-favoured agricultural areas

40. Aid for farmers in less-favoured areas accounts for most of the expenditure financed by the Guidance Section of the EAGGF under Objective 5(a) measures. These areas, which include mountain and other less-favoured farming areas, cover 78 million hectares, or around 56% of the EU's total agricultural area. These compensatory allowances, which aim to maintain farming and contribute to the slowing down of rural depopulation, help offset generally higher production costs. Compensatory allowances are granted to some 1.1 million holdings. The annual Community budget for these compensatory allowances averages EUR 614 million.

1.1.1.5. Processing and marketing of agricultural and forestry products

41. Implementation of measures to improve conditions for the processing and marketing of agricultural and forestry products, as provided for in Regulations (EC) Nos 951/97 [16] and 867/90, [17] continued as part of Structural Funds programming for the period 1994-99. In Objective 1 and Objective 6 regions, this programming was integrated under Objective 5(a) in the relevant programming documents, along with the rest of the measures.

[16] OJ L 142, 2.6.1997, p. 22

[17] OJ L 91, 6.4.1990, p. 7.

42. By the end of 1996, the Commission had approved 49 programming documents under Regulations (EC) Nos 951/97 and 867/90. These are listed below:

- nine national single programming documents for France, Spain, the United Kingdom, the Netherlands, Denmark, Luxembourg, Austria, Finland and Sweden (not including regions eligible under Objectives 1 and 6);

- thirteen regional single programming documents for Germany (at Länder level) and Belgium (at regional level);

- one Community support framework for Italy, in the form of 15 operational programmes aimed at improving the conditions under which agricultural products are processed and marketed, together with (for Italian regions not covered by Objective 1) a multi-regional operational programme and 12 operational programmes designed to improve the conditions under which forestry products are processed and marketed.

43. In July 1998 the Commission decided on the distribution of unallocated commitment appropriations available under the agricultural strand of Objective 5(a), in areas not covered by Objectives 1 and 6. This funding was used mainly in 1999. A total of EUR 190 million was earmarked for the various measures eligible under Objective 5(a), including an additional amount of EUR 171 million for programmes under Regulation (EC) No 951/97 in Spain, Germany, France and Belgium. Other adjustments were made to programmes in the Netherlands, Germany, Finland, Sweden, Italy and Belgium. The changes consisted above all in the inclusion of new sectors, adjustments to financial plans and transfers of funds within Objective 5(a) and were based on, inter alia, the results of the mid-term reviews.

Regional measures

Implementation of Objectives 1 and 6

44. By the end of 1999 a total of 57 operational programmes and 14 single programming documents (including two in respect of Objective 6) had been adopted by the Commission. This brought the total number of implementation instruments to 71.

45. The table below gives a breakdown of the programmes with, in each case, the total volume of funding and the Community contribution, by Member State and Fund.

Objectives 1 and 6: 1994-99 SPDs and OPs

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*Since 1.1.1995

(6) Objective 6

46. The funding for the two single programming documents implementing Objective 6 was committed in full by the end of 1999.

Mid-term evaluations of Objective 5(b) programmes

47. The approach of the closing date for the 5(b) programmes generated intense activity among the national and regional authorities and in the monitoring committees during 1998 and 1999.

48. All the programmes set 31 December 1999 as their deadline for the commitment of funds. This meant that all the investment decisions for the individual projects had to be taken by the final beneficiaries before this date. The national and regional authorities had to make a considerable effort to match the Community financing for each project and complete the administrative procedures necessary for signing the contracts with the project contractors (or, in the case of State aid schemes, with the final beneficiaries).

49. In addition, national and regional administrations undertook an analysis of their programmes to ensure that the proportion of funds allocated to each of the various measures was consistent with the results of the mid-term evaluations carried out in 1998. The evaluation exercise examined programme execution over the period 1994-96 and took account of the modifications to programmes that had been made over the period. Following their analysis of the work of the evaluators, monitoring committees modified certain aspects of programmes to help ensure that programme goals were reached as effectively as possible and to commit funds to final beneficiaries before the end of 1999. This exercise also involved a certain redistribution of funding between the ERDF, the EAGGF, and the ESF. Programmes are set to be finalised by the planned deadlines.

1.1.1.6. Belgium

50. The programme continued in 1999, with the accent on the need to commit all the appropriations before 31 December 1999. A process of reprogramming and rescheduling took place in order to help achieve this but, as late as October 1999, some of the appropriations remained to be committed.

51. A central feature of the two Flemish programmes under way in the 1994-99 period (Meetjesland and Westhoek) is their integrated approach to rural development. One of the top priorities is increasing employment opportunities and safeguarding existing jobs. While tourism is regarded as a major vehicle for the development of these regions, the focus is also on making them more attractive to business. A number of environmental schemes and projects to promote small businesses have also been set up under the two Flemish SPDs. The two monitoring committees both met twice in 1999. They noted that very little concrete progress had thus far been made with those diversification projects that were not of a strictly agricultural nature. The slow pace of these programmes was to a large degree due to problems in raising counterpart funds. A total of three decisions adjusting the Westhoek programme were adopted in August, October and November 1999. In particular they enabled the project authorities to allocate the monies accruing from the 1999 indexation, reschedule the annual instalments, and ensure that the appropriations were fully committed by the 31 December 1999 deadline. The rate of payment of Community appropriations as at 31 December 1999 was of the order of 47% (56% in the case of the EAGGF, 44% in the case of the ERDF and 40% in the case of the ESF).

52. The pace of progress of the Objective 5(b) SPD projects in Wallonia picked up considerably in 1999. The projects that had been behind schedule due to extensive preparatory work made up the lost ground. The implementation of the projects under all three funds has been standardised, with the ESF increasingly being called to back up the funding provided by its sister funds. A decision to adjust the programme was taken by the Commission in June 1999, enabling the appropriations to be fully committed by 31 December 1999. This is a clear indication of the progress made by all the measures under the SPD, and will enable all the projects in the programme to be completed as planned. In December 1999 the average rate of Community appropriations was 41% (42% in the case of the EAGGF, 40% in the case of the ERDF and 44% in the case of the ESF).

1.1.1.7. Denmark

53. In Denmark, Objective 5(b) areas cover 19.6% of the territory and 7% of the population. One programme covers all Danish Objective 5(b) areas. The main objectives are to create and safeguard jobs and improve incomes in those areas, while ensuring that environmental impact is also taken into consideration.

54. Progress was somewhat slow in the first part of the programming period, but picked up thereafter. By the end of 1999, the entire Community contribution had been committed, and 78% had been paid to the final beneficiaries.

55. Adjustments in the budget allocated to different measures were decided on the basis of the recommendations contained in the interim evaluation report. By virtue of these adjustments greater emphasis was placed on the agricultural conversion programme (particularly on the shift towards organic farming) and on improved animal welfare. Other areas of special emphasis included investment aid for SMEs, vocational training and retraining (with the focus on SME development) and tourism infrastructure.

1.1.1.8. Germany

56. Overall, the programmes made highly satisfactory progress. In 1995-99, although the preliminary forecasts pointed to an ongoing downward trend in the processing and marketing of primary products, there was an increase in the utilisation of appropriations for rural development purposes.

57. This policy has created new jobs in the agriculture sector and secured existing ones, in particular by providing support for a whole range of village development projects, the net effect of which has been to improve the quality of life for local residents.

58. Generally speaking, the commitment appropriations were fully utilised, and the payment appropriations are at an advanced stage.

59. In Mecklenburg-Western Pomerania, appropriations originally earmarked for the construction of a fish processing plant could not be utilised in good time. As a result, appropriations totalling EUR 30.9 million were transferred from the FIFG to the EAGGF Guidance Section, to support the rural development programme, to the benefit of the five new Länder (excluding Berlin).

60. The main task of the eight monitoring committees responsible for the Objective 5(b) programmes was to prepare the programmes for the final phase of implementation. The Committees decided on the allocation of the additional funds accruing from indexation and on transfers of funding between measures and between the different annual instalments.

61. Generally speaking, the extra Community funding was allocated on a pro rata basis to each of the three Structural Funds, a major exception to this approach, however, being Baden-Württemberg, where the committee decided to transfer EUR 4.5 million from the EAGGF to the ERDF, in addition to allocating the indexation funds to the ERDF and the ESF. Financial implementation in some regions differed from the specifications in the indicative financial plans. These plans had to be adjusted accordingly in order to commit the Community funds in the full by the end of 1999.

62. All the monitoring committees decided to effect minor transfers between measures, to reflect the take-up rate of the funding.

63. According to the annual reports, about 92% of the public funds had been committed and 69 % paid to the final beneficiaries by the end of 1998. The remainder was committed by the Länder in 1999. As a result, all funds had been committed in full by year-end 1999, with certain regions then exercising their right to "overbook" in an attempt to ensure the total utilisation of the Community funds.

1.1.1.9. Greece

64. National EAGGF measures: the "Agriculture" operational programme twice received EUR 125 million in extra funding in 1999, as a result of indexation and the redeployment of Community support framework appropriations. Despite these additional resources, the operational programme had used up its entire budget before the end of the first half of 1999. An estimated shortfall of EUR 270 million of EAGGF appropriations will have to be booked at the end of the programming period, due to the low initial budget allocation for this operational programme.

65. Multifund regional operational programmes: these made slower progress than the national programmes. However, even the multifund programmes that are the most behind schedule in implementing their rural development measures were able to commit all the appropriations available to them (which, barring any unforeseen problems, should be paid out in full by the planned deadline). Two multifund operational programmes (Thessaly and West Macedonia) each received extra funding to the tune of EUR 0.5 million from the EAGGF to help them to implement their territorial employment pacts.

1.1.1.10. Spain

66. All the 1994-99 Objective 1 appropriations from the EAGGF Guidance Section for Spanish regions under the Community Support Framework (a total of EUR 3 457.575 million) was programmed and committed from the Community budget.

67. Slight adjustments were made to the regional operational programmes (EAGGF Guidance Section) in order to include appropriations accruing from the 1999 indexation.

68. The EAGGF Guidance Section contribution (EUR 30.86 million) to the ERDF/EAGGF Guidance/ICO [18] global grant has been withdrawn and reallocated to the "Food-processing industry and structural measures in agriculture" operational programme.

[18] Instituto de Crédito Oficial.

69. The various measures under the Community Support Framework were implemented as planned, and overall implementation in 1999 was satisfactory. Some programmes were completed in 1999 (the regional programmes for Valencia, Murcia and Asturias), whereas payments for others (the "Food-processing industry and structural measures in agriculture" and "Development and diversification of rural economies" operational programmes) will continue into 2000 and even into 2001.

70. The rural development programmes approved by the Commission at the end of 1994 were implemented with a view to being completed before the end of 1999.

71. In 1999 the seven programmes were adjusted in line with the current situation and the recommendations made in the 1997 interim evaluation reports covering the period 1994-1996.

72. Funding was transferred between measures and Funds in order to make the best use of Community resources in line with the principle of subsidiarity.

1.1.1.11. France

73. In 1999 the emphasis was on the urgent need to commit the appropriations in full before 31 December. A rescheduling of the programmes (in particular those covering the three Atlantic overseas departments) had been drawn up at the end of 1998 and approved at the first meeting of the monitoring committee with a view to adoption in 1999. By the end of October the Community appropriations had all been committed except those for Corsica. A major effort will have to be made in 2000 and 2001 (in parallel to the opening of the new 2000-2006 programming period) to complete the programmes without the loss of any appropriations.

74. The efforts observed in 1998 continued throughout 1999, enabling the authorities to commit in full the Community appropriations for the 18 regional rural development programmes. There is, however, scope for tightening the rules governing the payment of the appropriations to the final beneficiaries since 29% of the Community appropriations has in effect been allocated by the French Government to the project contractors. The Commission is monitoring the situation to ensure that it does not prevent the actual expenditure from being carried out in full before 31 January 2001.

75. The problems with the two cross-regional upland area programmes having proved insurmountable, the two monitoring committees responsible for these measures concluded that the Community appropriations concerned could not be used in full. The latter were therefore transferred in part to rural development programmes covering those areas.

76. In the light of the recommendations made in the interim evaluations, and to ensure that the Funds are used effectively, the monitoring committees put forward a set of adjustments for every programme. The Commission adopted 40 amending decisions on the programmes, ranging from improving project content and transferring appropriations between measures, to larger-scale redeployments involving transfers of funding between priorities and/or the Structural Funds themselves.

77. Finally, two regional programmes (Auvergne and Midi-Pyrénées) were allocated additional Community appropriations from the industrial conversion programmes (Objective 2) for the regions concerned.

1.1.1.12. Ireland

78. The funding for the operational programme for Agriculture, Rural Development and Forestry has been committed in full and, for most of the measures, has been effected or is close to being effected. All of the commitments had been made for the Food Sub-programme (part of the "Industry" operational programme), but because of decommitments by some projects, some of the funding had to be transferred away from the Measure for capital investment funded by the ERDF.

1.1.1.13. Italy

79. Since the last tranche of funding under the revised financial plans was very substantial, the bulk of each programme was implemented in 1999.

80. The Objective 5(b) programmes for Italy made satisfactory progress in 1999. For almost all the programmes the appropriations were committed in full and the level of payments was satisfactory with, in several regions, the projects selected exceeding the funding available. The monitoring and evaluation systems introduced enabled the monitoring committees to assess the progress made in concrete terms and obtain initial feedback on impact. The implementation of the programmes was also checked against Community policies in terms of environmental impact, equal opportunities and the rules on competition. Project implementation also improved because the regional authorities simplified their administrative procedures in certain respects.

81. The Objective 5(b) programmes in the Marche and Umbria regions constitute a special case. Their funding had increased sharply in 1998 (almost EUR 500 million was transferred from other programmes part-financed by the Structural Funds in Italy, and from Objective 5(a) programmes) to meet the new needs imposed on rural areas in the two regions due to the damage caused by the 1997 earthquake. A number of factors held up the new reconstruction programmes and the projects aimed at improving living conditions and production structures:

- the stringent quality standards governing the reconstruction of rural villages deemed to have a high tourism potential and very characteristic architectural/town planning features;

- the remoteness of most such villages (situated in mountain areas);

- administrative bottlenecks caused by the large number of funding requests sent to regional authorities that do not have adequate resources to process them. This situation is exacerbated by the authorities' efforts to comply fully with the transparency and objectivity criteria in selecting the projects for funding;

- problems in identifying rapidly which firms can be called upon to carry out the reconstruction work.

82. The regional authorities have nevertheless given assurances that they have taken all the necessary steps to enable the available resources to be committed in full before 31 December 1999.

Multiregional programmes

83. Several more research and innovation projects were selected for funding under the multiregional programme for agricultural extension. All told, of the 179 projects submitted since the launch of the programme, 79 have been selected for investment totalling EUR 60 million. The funding for all the projects under this programme has been committed at both Commission and national level.

84. The "Territorial employment pacts" programme was not approved until the end of 1998. However, local groups, as the final beneficiaries of this multifund programme, made great efforts to implement the first part of the programme in 1999 and commit all the necessary funds before the year-end.

Regional programmes

85. All the regions made an effort to make up ground after the late start caused by the delayed approval of their programmes. Most of them had, by the end of 1998, succeeded in meeting the level of funding commitment and payment (55%) set by the national monitoring committee. The one exception was Apulia, whose funding allocation for 1999 was consequently reduced by EUR 10 million. In contrast, the most successful EAGGF programmes were allocated extra funding in 1999, in particular the operational programme for Basilicata, which saw its Structural Funds budget rise by EUR 20.56 million. This was to help it cope with the thousands of applications for improvement grants made by agricultural holdings which had been processed by the authorities but for which no funds had previously been available.

1.1.1.14. Luxembourg

86. The strategy for the Luxembourg programme has three funding priorities: revitalising agriculture and forestry along environmentally friendly lines; creating and safeguarding sustainable jobs, and investment geared towards developing tourism and generally enhancing the quality of rural life.

87. The two monitoring committees meetings held in 1999 concluded that the programme had made entirely satisfactory progress. A decision to adjust the programme was approved by the Commission at the end of September 1999. This entailed reallocating EAGGF funding within the same financing priority, transferring funding from the ESF to the EAGGF, applying the 1999 deflator to the three Funds, and rescheduling the annual instalments to match the level of expenditure of the three Funds.

88. This last adjustment enabled the programmes to commit the available funding in full by the 31 December 1999 deadline. This is a clear indication of the progress made by all the measures under the SPD, and will enable every project in the programme to be completed.

89. At 45%, the disbursal rate for the committed funding was relatively high (EAGGF 40%, ERDF 76%, ESF 68%).

1.1.1.15. Netherlands

90. The EAGGF Guidance Section measures made very patchy progress. To improve the take-up rate for the funding, a proposal was made to transfer funding between measures for the benefit of environmental projects.

91. Generally speaking, the Objective 5(b) programmes in the Netherlands made wholly satisfactory progress. The 1994-99 Objective 5(b) appropriations were committed in full in all regions.

92. In the provinces of Friesland, Groningen/Drenthe, Overijssel and Limburg, the accent was generally on business start-ups, tourism and schemes to promote the best use of the countryside. The province of Zeeland, however, focused on diversification in the agriculture sector. Schemes to assist small businesses are an essential part of the Objective 5(b) strategy. The province of Friesland, for example, devotes a substantial share of the appropriations to this sector: 60% of all investment under the programme is used to assist small firms viz. the large Drachten/Heerenveen industrial park project (an industrial site combined with water sports facilities).

93. Environmental issues are relatively well catered for in the Dutch programmes. In practice, the lion's share of environmental appropriations has been taken up by the province of Friesland, with its nature conservancy projects and schemes to promote environmentally friendly farming. Groningen/Drenthe spends 12% of its Structural Funds budget on projects to protect the environment, forestland and the countryside as part of schemes to improve water quality, develop a national park and relocate a number of agricultural holdings.

94. The twice-yearly meetings of the five monitoring committees passed off satisfactorily.

95. A series of decisions to adjust the programmes in all the Netherlands Objective 5(b) regions were adopted in 1999. These entailed transferring financing between priorities and individual projects, carrying over non-utilised funding, and allocating the additional resources resulting from the 1999 indexation. As well as constituting a clear indication of the progress made by all the projects under the programmes, these adjustments enabled all the appropriations to be committed by 31 December 1999 and allowed every project to be completed.

1.1.1.16. Austria

96. Economic conditions in the Burgenland region highlight the need for targeted structural development in rural areas. Previously behind schedule, especially as regards diversification, the Burgenland programme made very satisfactory progress, resulting in the commitment of all the appropriations available.

97. The status of the seven Objective 5(b) programmes in Austria at the end of September 1999 was as follows (EAGGF Guidance Section):

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98. The Austrian authorities are confident that they can commit all the appropriations before the end of the year. The 5(b) programmes are regarded as a success, in the light not only of the results they achieved, but also of the wider resonance they have had, particularly among farmers and local authorities. Launching and later managing these programmes was a major undertaking in terms of coordination, backed up by numerous events designed to raise awareness of the policy.

1.1.1.17. Portugal

99. Adjustments were made to the five multifund programmes receiving financial support from the EAGGF Guidance Section.

100. In addition, the EAGGF Guidance Section element of the Community Support Framework was boosted by the transfer of an extra EUR 20 million from the Objective 5(a) performance reserve to the "Agriculture" subprogramme (EUR 16 million) and the multifund operational programme for the Azores (EUR 4 million), in order to help repair the damage caused by the autumn 1997 storms.

101. The "Agriculture" subprogramme, which was at a very advanced stage, was also allocated an additional EUR 22 million, partly from the application of the deflator and the adjustment of funding allocations between programmes financed by the EAGGF Guidance Section, and partly from the transfer of EUR 4 million from the FIFG to the EAGGF Guidance Section.

102. EAGGF Guidance Section decommitments of EUR 10 million and EUR 4 million, from the Pediza (integrated development in the Alqueva area) and PPDR (promoting regional development potential) programmes respectively, were assigned to the "Agriculture" subprogramme.

103. The EAGGF Guidance Section budget for the Azores multifund operational programmes was allocated an extra EUR 16.38 million from the application of the 1998 deflator - to help repair the damage caused by the July 1998 earthquake - and a further EUR 2 million from the application of the 1999 deflator.

104. An additional EUR 4.023 million generated by the 1999 deflator was allocated to the EAGGF Guidance Section funding for the Madeira multifund operational programme.

1.1.1.18. Finland (Objective 6)

105. On the whole, EAGGF assistance made satisfactory progress. More specifically, the ground lost earlier with regard to improving the efficiency of agriculture and other rural development was made up.

106. Objective 5(b) areas have a population of 1.1 million, or a fifth of the total, and cover a quarter of the country's surface area. These regions are sparsely populated (averaging 11.5 inhabitants/km ) and highly dependent on agriculture. Objective 5(b) assistance is channelled through two operational programmes, one for Continental Finland and the other for the Åland Islands.

107. The programme for Continental Finland concentrates on diversification for small businesses, the establishment of rural services and improving the attractiveness of rural areas. Another major aim is to adapt rural areas to the CAP. The programme for the Åland Islands focuses mainly on tourism, small businesses and sustainable development projects.

108. Environmental protection is taken into account horizontally in all Finnish regions by involving environmental authorities in the decision-making process at regional level.

109. During the indexation exercise, the Monitoring Committee encouraged the Finnish regions to create high-profile, cross-regional projects, based on a bottom-up approach.

1.1.1.19. Sweden (Objective 6)

110. EAGGF assistance made satisfactory progress, with commitments rising considerably. While payment levels are still lagging, they are on an upward trend. In 1999 EU funding was transferred from start-up aid and the food processing industry towards compensatory allowances and rural development measures. The funds for these two measures were also increased by indexation in the course of the year. Demand for investment aid is very high and EAGGF funding for the programming period is expected to be fully utilised. This is due to a combination of adjustments in programme content and changes in the way programmes are administered.

111. Objective 5(b) areas account for 12.8% of Sweden's land and 8.6% of its population. A total of five programmes were approved on 10 May 1996, all focusing on the development of businesses and, in particular, firms operating in the agriculture and forestry sectors. Priority is also given to developing tourism, human resources and the cultural heritage of rural areas. The total Community contribution to these programmes is EUR 137 million (at 1996 prices).

112. In 1999 the resources generated by indexation were distributed and several adjustments were introduced to ensure the completion of the entire programme. Due to a lower rate of take-up than expected, some of the funds earmarked for financing business start-up loans for young people were transferred to other measures.

1.1.1.20. United Kingdom

113. In Northern Ireland, the commitment of the funding for the sub-programme covering agriculture and rural development under the Single Programming Document was completed and expenditure will, for most measures, reach completion in 2000.

114. A total of eleven areas in the United Kingdom receive Objective 5(b) assistance. These vary considerably in size and population. The largest is Northern Uplands, covering 14 000 km , as against the 1 000 km of the Midlands Uplands. Population density in these areas also differs widely, from 10 inhabitants/km in some areas to 105 in others, the average concerned being 47 inhabitants/km .

115. Altogether, these programmes account for EUR 840 million of Community funding, about 18% of which comes from the EAGGF. The implementation rate of the programmes picked up in 1998, a development which continued in 1999, enabling them to commit their EAGGF funding in full.

116. All the programmes were adjusted in the light of the results of the interim evaluations aimed at improving effectiveness. In this respect the biggest gains were made in the area of management structures, to which was added a simplification and standardisation of procedures and close monitoring of the implementation of the projects, in both financial and material terms.

Accompanying measures

Agri-environmental measures

117. Regulation (EEC) No 2078/92 [19] provides for programmes to encourage farmers to mange their land in an environmentally-friendly manner by compensating them for the costs of such activities. The agri-environment Regulation accompanied the 1992 CAP reform. Examples of the type of land management measures covered by the Regulation include:

[19] OJ L 215, 30.7.1992, p. 85.

- returning intensively used land, such as arable land or grassland used for silage production, to biologically diverse, but unprofitable, extensive grassland;

- reducing the amount of nutrients used (resulting in lower yields);

- reducing or eliminating altogether pesticide usage (e.g. organic farming);

- taking land out of production to create national parks;

- preserving traditional environmental land management practices in areas susceptible to neglect;

- maintaining landscape features that are no longer agriculturally viable.

118. Programmes are, subject to Commission approval, which is to be given in each case, managed by regional or national authorities on a decentralised basis. Part of the costs are financed by the EU budget -- 75% in Objective 1 areas and 50% elsewhere. The EAGGF Guarantee expenditure concerned totalled EUR 1.3 billion in 1998, and the estimate for 1999 is EUR 1.8 billion, i.e. around 4% of the EAGGF Guarantee total.

119. On average, the programmes cover one in seven farms, accounting for 20% of European farmland. This figure is to some extent attributable to the high levels obtaining in the new Member States -- 78% of the farms in Austria, 77% in Finland and 64% in Sweden. The proportion of participating farms higher than the EU average is two other Member States, namely Luxembourg (60%) and Portugal (30%). It is less than 7% in Belgium, Greece, Spain and Italy.

120. In the first two years after the launch of the measure, the pace of implementation for some of the programmes was slow and not all the funds available were utilised. In 1996, for the first time ever, nearly all the Member States' agri-environmental programmes were operational. In 1998 and 1999, several programmes approved in 1994 and 1995 reached the end of their first five-year cycle. By 1999, the Commission had approved a total of nearly 140 agri-environmental programmes or groups of programmes.

121. The Commission attaches great importance to monitoring and evaluating agri-environmental measures. The detailed rules for implementing Regulation (EEC) No 746/96 [20] specify how this is to be carried out, and the Commission has, together with the Member States, begun to scrutinise the plans, methods and early findings of the monitoring and assessment work notified by the Member States under the terms of the implementing Regulation.

[20] OJ L 102, 25.4.1996, p. 19.

122. In December 1997 [21], the Commission presented a report to Parliament and the Council on the implementation of the Regulation, and followed it up with a series of working papers on support for organic farming, on genetic resources and on evaluation and monitoring, together with reports on implementation in the Member States. In December 1998, the Commission presented a working paper on the evaluation of Regulation (EEC) No 2078/92 both to the Committee on Agricultural Structures and Rural Development and to the competent Parliamentary committees.

[21] COM(97) 620 final.

123. By 1999, the Member States had produced some 160 monitoring and evaluation reports, highlighting a number of environmental benefits arising from the agri-environmental initiative. The evidence from the programmes points to substantial environmental benefits, including reductions in the use of nitrogen fertiliser, better application techniques, positive nature conservancy measures, and the conservation of landscape features.

124. Under Agenda 2000, agri-environmental measures are the only obligatory feature of the rural development programmes that Member States must submit for 2000-2006. For more information on the rural development measures in the Agenda 2000 package, see the beginning of this chapter.

Early retirement measures

125. A Community framework for assistance to facilitate early retirement from farming activity has been in place since 1992. The scheme, which is covered by Council Regulation (EC) No 1257/99, is intended to contribute to the following objectives:

- to provide an income for elderly farmers who decide to stop farming;

- to encourage the replacement of such elderly farmers by farmers able to improve, where necessary, the economic viability of the holdings;

- to reassign agricultural land to non-agricultural uses where it cannot be farmed under satisfactory conditions of economic viability.

126. Community funding is available for farmers taking early retirement, for the farmers who take over their land, and to farm workers.

127. The programmes under way aim to help 205 000 farmers and 7 500 farm workers to retire early, thereby releasing some four million hectares of farmland. A small part of this area would be put to uses other than farming, like forestry or setting up national parks. The rest would be made available to other farmers, especially to young people seeking to enlarge their holding or to take up farming as their main occupation.

128. While the scheme had a relatively slow uptake when it was introduced in 1993, this improved in 1998 and 1999. By 1998, annual Community expenditure on early retirement had reached EUR 208.9 million, a fourfold increase on the 1993 figure of EUR 48.6 million.

Forestry measures

A forestry strategy for the European Union

129. On 18 November 1998, the Commission adopted a Communication on a forestry strategy for the European Union [22], and on 15 December 1998 the Council adopted Resolution No 1999/C 56/01 on the same subject [23]. The starting point of the forestry strategy are the commitments entered into by the EU and the Member States in international processes related to forests [24]. The strategy underlines the importance of the multifunctional role of forests and sustainable forest management that is based on the social, economic, environmental, ecological and cultural roles played by the forestry sector in the development of society and rural areas.

[22] COM(1998) 649 final.

[23] Council Resolution of 15 December 1998 on a forestry strategy for the European Union (OJ C56 of 26.2.1999, p. 1).

[24] In particular UNCED, UNGASS, the Convention on Biological Diversity, the Convention on Climate Change, the Convention to Combat Desertification and the Ministerial Conferences on the Protection of Forests in Europe.

Forestry measures as part of rural development

130. In line with the strategy, Council Regulation (EC) No 1257/1999 considers forestry an integral part of rural development policy. Chapter VIII of the Regulation brings together existing measures provided for in Regulations 2080/92 [25], 1610/89 [26] and 867/90 [27], along with a new measure to maintain and improve the ecological stability of forests in certain areas. Restructuring the different forest measures under the new chapter in this way will allow a more efficient and coherent approach to forestry measures at Community level.

[25] OJ L 215, 30. 7.1992, p. 96.

[26] OJ L 165, 15.6.1989, p. 3.

[27] OJ L 91, 6.4.1990, p. 7.

1.1.1.21. European Forestry Information and Communication System (EFICS) [28]

[28] Council Regulation (EEC) No 1615/89 ( OJ L 165, 15.6.1989, p. 12).

131. In order to collect comparable and objective information on the structure and operation of the forestry sector in the Community, and thus facilitate the implementation and monitoring of the Community forestry provisions in force, a European Forestry Information and Communication System (EFICS) was set up in 1989. This system is designed to collect, coordinate, standardise and process data on the forestry sector and its development.

132. In June 1999, the Commission adopted a work programme to set up this system in the period 1999-2002. This concentrates on compiling existing information in a computerised system and on improving and standardising data on forests, forestry products and trade.

1.1.1.22. Protection of forests

133. In 1999, a total of EUR 16 million was granted for projects submitted by the Member States under the Community schemes for the protection of forests against atmospheric pollution and fire.

134. On 22 July 1999, the Commission adopted two proposals for European Parliament and Council Regulations amending Regulation (EEC) No 3528/86 on the protection of the Community's forests against atmospheric pollution [29] and Regulation (EEC) No 2158/92 on the protection of the Community's forests against fire [30]. The proposed regulations have the same purpose as Council Regulations No 307/97 [31] and 308/97 [32], which were repealed by the judgement given by the Court of Justice of 25 February 1999, which stipulated that Article 130s of the Treaty (now Article 175) should have been used as the only legal basis. The legal basis of the new regulations is Article 175 of the Treaty.

[29] Council Regulation (EEC) No 3528/86 (OJ L 326, 21.11.1986, p. 2).

[30] Council Regulation (EEC) No 2158/92 (OJ L 217, 31.7.1992, p. 3).

[31] OJ L 51, 21.2.1997, p. 9.

[32] OJ L 51, 21.2.1997, p. 11.

135. On 28 July 1999 the Commission adopted Regulation (EC) No 1727/1999 laying down certain detailed rules for the application of Council Regulation (EEC) No 2158/92 on protection of the Community's forests against fire. [33]

[33] OJ L 203, 3.8.1999, p. 41.

136. On 21 October 1999 the Commission adopted Regulation (EC) No 2278/1999 laying down certain detailed rules for the application of Council Regulation (EEC) No 3528/86 on the protection of the Community's forests against atmospheric pollution [34].

[34] OJ L 279, 29.10.1999, p. 3.

137. These two Regulations concern the procedures for submitting applications for Community financial assistance and for payment.

Community Initiatives

Leader II

138. The Leader II Community Initiative supports rural development projects, designed and run by local partners in rural areas, which stress innovation, demonstration of practicability and transferability.

139. Following on from Leader I, this Initiative is based on three priorities:

- support for transferable innovative projects that demonstrate new approaches to rural development;

- support for exchanges of experiences and the transfer of know-how; and

- support for transnational cooperation projects.

140. The appropriations available amount to some EUR 1.7 billion. Approval has been granted for 102 programmes and over 1 000 local action groups (LAGs) and other partnership bodies have been set up.

141. The other Community Initiatives covering the 1994-99 period are Interreg, REGIS and PEACE.

1.1.1.23. Belgium

Leader II

142. The programme for Hainaut adopted on 8 July 1997 was costed at EUR 9.26 million, of which EUR 4.09 million will be provided by the Community (with EUR 1.875 million from the EAGGF Guidance Section). In June 1998 the Monitoring Committee adopted three of the five rural innovation programmes provided for in the framework programme, enabling the authorities to proceed with their implementation. The reprogramming was adopted in October 1999, in the wake of the June meeting of the Monitoring Committee, creating the ideal conditions for the five approved local action groups to implement their rural innovation programmes.

143. The Leader II programmes for Meetjesland and Westhoek adopted on 12 December 1997 did not come into operation until 1998. The Commission adopted an amending decision in respect of each of these programmes, thus allowing the allocation of the amounts accruing from the 1999 deflator and the transfer of appropriations from the ESF and ERDF to the EAGGF.

144. The adoption of the programme for Wallonia was delayed, 1998 and 1999 having been taken up with the selection of all the local action groups after a call for projects had been issued. A total groups of 16 groups were selected and began to put their rural innovation programmes into action.

145. The Monitoring Committee, which met twice in 1999, drew up an amending decision (adopted by the Commission at the end of September) allowing the amounts accruing from the 1999 deflator to be allocated to specific projects under Measure B, "Rural innovation programmes".

Interreg

146. The two programmes covering Hainaut have a small budget under the EAGGF, and did not give rise to any major problems in terms of implementation.

1.1.1.24. Denmark

Leader II

147. The Danish Leader II programme was approved on 13 June 1996. The long-term objective is to maintain and redevelop the areas as active and viable local communities. The total Community contribution to the programme is ECU 8.1 million (at 1994 prices), rising to ECU 10.1 million after the inclusion of additional resources from the 1999 indexation of the Structural Funds allocations.

148. After a relatively slow start, projects are now being submitted in increasing numbers. According to the mid-term evaluation report, which was presented in June 1998, the expectation was that all or almost all of the programme resources will be utilised. When the programme was last amended, in December 1999, it was estimated that the amount of funding used would be EUR 8.7 million, because there was insufficient national part-financing for the total allocation of EUR 10.1 million.

1.1.1.25. Germany

Leader II

149. After a fairly slow start, Leader II was successfully implemented in the new Länder. The local action groups made a highly satisfactory contribution to stimulating development in the areas covered by the programme. Not only did Leader II help to create jobs, it also strengthened the cultural identity of the rural areas in question. All the appropriations available were committed.

150. In Objective 5(b) areas generally, implementation was fairly slow in the first part of the programming period, but improved considerably thereafter. This is because Germany's 123 Leader II local action groups and 46 other collective bodies became fully operational and the administrative authorities were able to build on the experience they had gained.

151. This allowed all the available funds, including the 1995-1999 reserve and indexation, to be committed to the final beneficiaries.

152. The monitoring committees responsible for overseeing the Leader II programmes in Baden-Württemberg and Hessen decided on minor transfers between the Structural Funds. The measures and the annual instalments corresponding to each programme had to be adjusted in line with the take-up rate of the funds.

Interreg II

153. Interreg II covers three of the new Länder: Mecklenburg-Western Pomerania, Brandenburg and Saxony. These regions boast a dense network of contacts with border regions in the Czech Republic and in Poland.

154. The appropriations available were used mainly to develop infrastructure, support forestry and agriculture, improve the quality of the environment and assist disadvantaged rural areas.

1.1.1.26. Greece

Leader II

155. In 1999 an amendment was adopted which allocated the resources accruing from the deflator for that year and the Monitoring Committee carried out a final reallocation of funding between the different beneficiaries. The Structural Funds appropriations were committed in full and the programme was implemented at a fast pace. Some problems remained, however, with the implementation of the training programmes (under the ESF).

Interreg II - External borders

156. Final adjustments were made to the programme in order to fine-tune the various measures and their budgets, in particular for the EAGGF projects.

Interreg II - Water shortages

157. The "Water shortages" programme was approved in 1999. It included EUR 3 million in EAGGF funding, targeted mainly on the islands.

1.1.1.27. Spain

Leader II

158. The implementation of the regional Leader II programmes in Objective 1 regions picked up markedly in 1999. The Structural Funds appropriations were all allocated to the various programmes and committed in full from the Community budget.

159. All told, six Objective 5(b) regions implemented Leader II programmes by means of a global grant administered by an intermediary body with a composite structure on which the region and the Ministry of Agriculture were represented. The said body helped the local action groups by providing eligibility assessments of project applications and other useful information.

160. Although some regions experienced delays in selecting their local action groups, the latter are all on course to commit their budget in full before the end of 1999.

161. Due to its special status as an autonomous region within Spain, the Basque Country implemented Leader II in the form of an operational programme. This programme has also made satisfactory progress.

Regis II

162. This programme concerns the Canary Islands, one of the Community's outermost regions. The programme has made satisfactory progress and is expected to be completed in 2000.

Interreg II

163. The Spain-Portugal Interreg II programme is progressing as expected. All the Community appropriations were committed before the end of 1999, with disbursal set to continue until 2001.

1.1.1.28. France

Leader II

164. The Leader II programme for Corsica has experienced some implementation problems due to lax administrative procedures on the part of the project sponsors. The leaders of the local action groups and the authorities agree that it will not be possible to either commit or disburse all the funds available for the programme. However, every effort is being made to safeguard this worthwhile venture.

165. Throughout the period, the regional Leader II programmes suffered from administrative problems which impeded the commitment and payment, to operators on the ground, of all the commitments available. In 1999, to rectify the situation, the Commission adopted 20 decisions to adjust the programmes in line with recommendations made by the monitoring committees. The aim of the adjustments was, in particular, to provide extra funding for the rural innovation programmes run by the local action groups.

Interreg II

166. The EAGGF-funded programmes are making stuttering progress, but there have been no payment requests from the French or Belgian Hainaut regions.

Regis II

167. The programmes for the four overseas regions continued to be adjusted in order to commit all the available funds before the 31 December 1999 deadline (this now seems likely). As with the SPDs, the difficulty will reside in the parallel tasks of implementing the adjusted programmes and completing them in the current period.

1.1.1.29. Ireland

168. The Leader II programme made great strides in terms of completing commitments and accelerating expenditure, the latter being set to be completed in 2000. The Leader II groups in Ireland have accomplished sterling work.

1.1.1.30. Italy

Leader II

169. After a slow start, due to the innovative nature of the Initiative and the complex nature of the procedures involved, the rate of funds commitment for most of the Leader II programmes for the Italian regions picked up considerably in 1999. The programmes whose local action groups were not selected until 1998 are still experiencing implementation problems

170. In terms of concrete achievements, however, progress has been less impressive, although most of the projects have been selected and the implementation rate is expected to pick up in 2000.

171. As corroborated by the reports conducted by the independent assessors, the Leader II Initiative often had the important effect of stimulating and strengthening the partnership networks between local operators, giving them the means to continue driving forward local development, even beyond the bounds of the Initiative itself.

1.1.1.31. Luxembourg

Leader II

172. Leader II, which was approved in 1995, is a programme whose strategy is based entirely on innovation and transferable measures. It has succeeded in bringing together all the local operators in a regional partnership representing almost every socio-economic group.

173. Certain administrative and institutional problems notwithstanding, the Leader II programme has made satisfactory progress. Local operators are grouped into two local action groups (Clervaux-Vianden and Redange-Wiltz).

174. The operational programme, costed at EUR 4 888 300, will be financed with a single tranche of funding, of which some 20% (EUR 1 million) will be provided by the Community.

175. The two monitoring committees, which met in 1999, approved the need to adjust two measures - "Innovative investment in the small business sector" and "Promoting distance working in rural areas" - in order to reinforce their role as pilot measures in the context of the region and its economy, allocate the 1999 deflator and reserve in equal shares between the EAGGF and the ERDF (50%), and transfer other funds within measure B, "Rural innovation programmes" in line with the assessor's recommendations.

1.1.1.32. Netherlands

Leader II

176. The Flevoland programme is progressing according to plan. Following the mid-term evaluation, the administration and monitoring of the programme were improved, together with the procedures employed by the local action group to select projects.

177. The progress of the three Leader II programmes in Objective 5(b) areas (Northwest Friesland, Northwest Groningen and Northeast Friesland and Drenthe) is overseen by the Objective 5(b) monitoring committees. These programmes, intended mainly to stimulate sustainable economic and agricultural activity and promote tourism, are making satisfactory progress. The Community contribution to the three Leader II programmes (except Objective 1 areas) amounts to EUR 6.34 million, nearly 80% of which (for all three Funds combined) had been disbursed by 31 December 1999. All the programmes were adjusted by means of an amending decision at the end of September 1999.

178. A single local action group, representing local organisations and authorities is, for each programme, responsible for administering the project. In the light of the recommendations made in the mid-term evaluation report, each programme's financing plan was adjusted, in particular by allocating the extra resources from the deflator and the reserve. The Commission adopted the corresponding amending decisions in the second half of 1998. Most of the additional resources were allocated to innovative projects based on cultural/rural tourism, small businesses and agricultural diversification.

179. The national Leader II network in the Netherlands, which was officially approved by the Commission on 2 April 1997, is under the supervision of the province of Friesland. It is intended to provide the necessary infrastructure for sharing experience, cooperation between projects and organising visits and studies on relevant subjects.

1.1.1.33. Austria

180. The Leader II programme has delivered satisfactory results. In the Burgenland region, this Initiative is encountering problems of structural change in the local economy. In the Objective 5(b) areas, the programme has stimulated a lively response, generating a raft of development projects. The project managers and sponsors expect the programme to continue.

1.1.1.34. Portugal

181. The Leader II integrated Community programme was, by way of an amending decision, reprogrammed to include the amounts accruing from the 1998 and 1999 indexation (EUR 2.28 million) and effect the final transfers between Funds and between projects, all this with a view to ensuring that the appropriations are committed in full.

1.1.1.35. Finland

Leader II

182. A total of 12 local action groups are operating in Objective 5(b) areas in Finland. By the end of 1999, approximately 1 500 projects had been approved for funding. An estimated 1 500 new jobs will be created, more than half of them for women.

183. There are 10 local action groups operating in Objective 6 areas. By the end of 1999, some 900 projects had been approved for funding. An estimated 900 new jobs will be created with, again, more than half of them for women. The Monitoring Committee allocated funds accruing from indexation to EAGGF activities under measure (b).

184. Due to the small average size of the Leader projects in Finland, some of the new posts are part-time jobs. Almost 150 new businesses will have been created by the end of 1999. In addition, Leader II has played a major role as primer, stimulating the participation of the local population in rural development projects. It has also increased cooperation among rural inhabitants and created new networks, both nationally and internationally. Consequently, it will be years before the full extent of its impact becomes apparent.

Interreg II

185. Finland participates in seven Interreg II A operational programmes. Although six of them receive financial assistance from the EAGGF, rural development does not play a central role in the programmes generally. The emphasis is on cross-border cooperation with areas in the former Soviet Union. Although this cooperation has run into some difficulties as a result of the economic problems in Russia, this has not prevented the eligible projects fulfilling the financial framework of the programmes. In 1999, a total of 39 new EAGGF-financed projects were approved under the programmes. Preparations are under way for the next period, and, the above-mentioned problems notwithstanding, special attention will be paid to cooperation with Russia and Estonia, the latter country being a candidate for EU membership.

1.1.1.36. Sweden

Leader II

186. The expectations are that the entire budget for measures (b) "local action groups" and (c) "transnational cooperation" will be committed in 1999. Over 160 projects are being implemented. The Swedish Leader network has continued to raise awareness of the achievements of Leader II and facilitate the sharing of experience. The monitoring committee allocated the funds accruing from indexation to ESF projects under measure (b).

Interreg II

187. There are three Objective 6 programmes: "Nordic Green Belt" (in conjunction with Norway), which is eligible for an EAGGF contribution of EUR 1 million; "Kvarken/Mittskandia" (implemented jointly with Norway and Finland, and only partly an Objective 6 area), for which there was an EAGGF contribution of EUR 0.908 million, and "North Calotte Region" (jointly with Russia, Norway and Finland), with an EAGGF contribution of EUR 1.6 million. "Nordic Green Belt" comprises 20 projects attracting a total of SEK 4 606 000 in part-financing from the EAGGF. In the "North Calotte Region" the EAGGF co-financing of 1.6 million euro is distributed between the masures as follows: measure 1.4 (rural development) 0.3 million euro, measure 2.2 (environment) 0.3 million euro and measure 4.1 (Sami livelihoods) 1.0 million euro. Part-financing for the 11 projects selected under the "Kvarken/Mittskandia" programme totals SEK 7 835 000.

1.1.1.37. United Kingdom

188. The three Leader programmes for Objective 5(b) areas in the United Kingdom (England, Wales and Scotland) continued to progress at a satisfactory pace. They were adjusted to take account of the recommendations made in the mid-term review and to allocate the monies accruing from indexation for the period concerned. All the appropriations were committed.

Financing of the CAP in 1999

Berlin Summit Agreement

189. The Berlin Summit of 24 and 25 March 1999 produced an agreement on the Agenda 2000 proposals. From a financial perspective its conclusions differ appreciably from the Commission's initial proposals of EAGGF Guarantee funding for market support and rural development measures, including accompanying measures, under a single heading. The total expenditure is of course expected to remain below the agricultural guideline, but the expected trend of the guideline suggests that there will be a substantial margin over and above the anticipated expenditure, a margin which could well be needed after 2002 for the expected new members.

190. The conclusions of the Berlin Summit include the Commission's proposed guideline (and within it rural development measures, veterinary measures, the SAPARD pre-accession agricultural instrument and the amount available for agriculture in connection with accessions), but introduce sub-guideline ceilings on expenditure in the shape of two annual subceilings for 2000-2006: one for traditional market expenditure (Title 1(a)) and one for expenditure on rural development (Title 1(b)). Moreover the subceilings are "airtight" - there is no provision for transferring amounts between them or from one year to another - and have been set at a level corresponding to the estimated expenditure resulting from the adoption of Agenda 2000, i.e. at the level of the expected expenditure, with no allowance made for unforeseeable events, even though events of that type often do occur. The ceilings have been set as follows:

Expenditure in 2000-2006 (in EUR million at 1999 prices) [35]

[35] A 2% deflator will be used for calculating amounts at current prices.

>TABLE POSITION>

191. The conclusions of the Berlin Summit were followed by the adoption, by Parliament and the Council, of a new interinstitutional agreement - on budgetary discipline, financial perspectives (the ceilings) and the budgetary procedure - which lists those conclusions and formally allows the Commission to put forward in the autumn a letter amending the Preliminary Draft Budget for the following year, thereby enabling the budgetary forecasts to reflect the most recent developments. The agreement also includes provisions on flexibility and on revision of the financial perspectives (ceilings), but responsibility for invoking those provisions rests with the budgetary authority.

192. Given that the new ceilings are much tighter than the guideline, the Commission has proposed a revision of the Decision on budgetary discipline (doc. COM(1999) 364 final of 14 July 1999) which would provide the Community with instruments and procedures that can effectively comply with those ceilings.

EAGGF Guarantee Section

193. The EAGGF Guarantee appropriations adopted for 1999 total EUR 40 440 million (including EUR 205 million for the agricultural budgetary reserve - Chapter B0-40), i.e. EUR 4 748 million less than the agricultural guideline [36] of EUR 45 188 million.

[36] An instrument of budgetary discipline setting a maximum growth threshold for agricultural spending.

Stages of the budgetary procedure

194. The 1999 budgetary procedure began with the presentation, on 30 April 1998, of the Preliminary Draft Budget (PDB), in which the estimated appropriations required were put at EUR 40 440 million. On 28 October 1998 the Commission adopted an amending letter (Amending Letter No 1) which took into account on the one hand the cyclical downturn in agriculture and, on the other, recent agricultural legislation, which provided for slightly increased expenditure.

195. The cyclical downturn in agriculture resulted in an overall increase of EUR 436 million in anticipated expenditure compared with the Preliminary Draft Budget. In essence the additional expenditure concerned two sectors: cereals (+ EUR 1 007 million) and sugar (+ EUR 236 million), in both cases because lower world prices had added to the requirements in terms of refunds and public storage.

196. Additional expenditure arising from the recent adoption of certain legislative proposals totalled EUR 77 million, including EUR 49 million in respect of the Council decision on the prices package.

197. Requirements as set out in the Amending Letter thus totalled EUR 40 953 million, EUR 513 million more than in the Preliminary Draft Budget. A sum of EUR 105 million had been entered in Chapter B0-40 "Provisional appropriations".

198. On 24 November, with a view to complying with the limit, concertation took place between the Council and Parliament on the basis of proposals drawn up by the Commission. The outcome was as follows:

- The Amending Letter was adopted, but the proposed increase of EUR 513 million was offset by an equivalent amount in targeted reductions in the cereals sector. These reductions stem from savings resulting from a significant increase in world cereal prices recorded after the Amending Letter had been drawn up.

- The overall appropriation for agri-environmental measures was increased by EUR 20 million (entered in the B0-40 reserve) by deducting that amount from the item "Depreciation of cereal stocks".

- A total of EUR 80 million was transferred from the fruit and vegetables and milk products sectors to Chapter B0-40.

199. The total requirement for 1999 was accordingly EUR 40 440 million, with appropriations matching this amount. Altogether, EUR 205 million was entered in Chapter B0-40.

200. At the concertation meeting held on 24 November 1998 Parliament and the Council decided, in agreement with the Commission, to finance a food-aid measure for Russia using 1998 EAGGF Guarantee appropriations. Supplementary and Amending Budget No 1/98 provides for EUR 400 million (the net cost of the measure) to be entered under a new heading: B1-315. As agreed by the three institutions, the Commission presented to the Budgetary Authority a proposal to carry over EUR 400 million in appropriations from 1998.

201. It should be emphasised that estimating future expenditure on agriculture is particularly difficult. Up to twenty months can elapse between the forecast and the execution of certain expenditure, and many unforeseeable factors, both internal and external - including the value of the euro in relation to the dollar - can have a major effect on expenditure.

202. Moreover the Commission's budgetary forecasts are heavily dependent on the expenditure forecasts and on some production forecasts which Member States must produce and transmit to it in accordance with the rules applicable. The Commission has accordingly looked into possible improvements in financial management and has implemented an action programme in this respect. It has asked Member States to contribute to this effort by improving the quality and the speed of transmission of the information concerned, in line with the current rules.

Budgetary discipline

1.1.1.38. The guideline

203. Like previous budget years, 1999 is subject to the requirements of budget discipline and, in particular, compliance with the guideline adopted pursuant to the agreement reached at the Brussels European Council in February 1988 and extended to 1999 at the Edinburgh European Council in December 1992. In order to curb spending on the CAP the guideline limits the annual rate of increase of the expenditure concerned.

204. The overall pattern of EAGGF Guarantee Section expenditure since 1992 can be summarised as follows:

EAGGF Guarantee Section

(EUR million)

>TABLE POSITION>

1 All types of expenditure have been financed within the guideline from 1993 onwards.

205. The graph shows the development of the guideline and expenditure from 1988 to 1999.

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Figure 6

1.1.1.39. The monetary reserve

206. The operating mechanisms for the monetary reserve are set out on page 139 of the 1995 Report on the Agricultural Situation.

207. In accordance with the Council Decision on budgetary discipline, the euro/dollar parity used for the 1999 financial year is equal to the average dollar parity for January, February and March 1998, i.e. USD = EUR 0.92.

208. The average rate for the dollar from 1 August 1998 to 31 July 1999 was EUR 0.90, giving rise to additional budget expenditure of EUR 219 million.

209. Expenditure was also incurred as a result of changes in the dual rate coefficient. The impact of the dual rate was estimated, in terms of the appropriation requirements on which the budget was based, at EUR 511 million. As currently calculated, the impact is estimated at about EUR 630 million, i.e. an increase of EUR 119 million.

The EAGGF Guarantee Section in the context of the general budget

210. In a general budget of the European Union for the 1999 financial year, totalling EUR 83 978 million (in payment appropriations entered in the 1999 budget), EUR 40 440 million in payment appropriations (including the monetary reserve and the appropriations entered in Chapter B0-40 "provisions"), i.e. 48%, was allocated to the Guarantee Section. In 1998 EAGGF Guarantee Section expenditure accounted for 49% of general budget expenditure.

211. The share of the general budget accounted for by the Guarantee Section since 1988 is shown in Figure 7. It has followed a downward trend, on the whole, as a result of the growth of other common policies and a determination to curb agricultural spending.

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Figure 7

* Appropriations entered in the budget (including the monetary reserve of ECU 500 million)

The EAGGF and its financial resources

212. The EAGGF forms an integral part of the European Union's budget. Its appropriations are therefore determined in accordance with budget procedures, in the same way as other Community expenditure.

213. The CAP also generates revenue in the form of sums collected under the common market organisations. This revenue, which forms part of the Union's own resources, [37] consists of:

[37] The Union's other own resources are: the levy on VAT, customs duties collected under the Common Customs Tariff and Member States' contributions.

- levies, which are variable charges on imports from non-member countries of agricultural products covered by the common market organisations; such charges are intended to compensate for the difference between prices on the world market and prices agreed within the Union. Under the Agreement on Agriculture following the Uruguay Round of multilateral trade negotiations, levies have been replaced by fixed import duties since 1995;

- levies collected under the common organisation of the market in sugar; these are divided into production levies on sugar and isoglucose, sugar storage levies and additional elimination levies which ensure that farmers and sugar manufacturers finance the cost of disposing of sugar which is surplus to Community internal consumption.

Revenue

Charges accruing to the Union's own resources under the CAP

(EUR million)

>TABLE POSITION>

*As at 31 October.

214. It should be noted that there are other sources of agricultural revenue. Under the common organisation of the market in milk and milk products, producers pay an additional levy if milk quotas are exceeded. This revenue does not, however, form part of the Union's own resources but is considered to be part of the measures to stabilise agricultural markets. It covers the additional expenditure brought about by the production overrun on the quotas and is thus deducted from this same expenditure.

EAGGF Guarantee Section expenditure

215. Essentially, the EAGGF Guarantee Section finances expenditure on the common organisations of agricultural markets, comprising:

- market support (ECU 10 563 million in 1998);

- aid to producers (ECU 28 217 million in 1998).

216. Market support covers export refunds (ECU 4 826 million in 1998), storage (ECU 2 008 million in 1998), guidance premiums (ECU 172 million in 1998), processing and marketing aids (ECU 1 207 million in 1998), consumption aids (ECU 1 483 million in 1998), withdrawals and the like (ECU 462 million in 1998) and miscellaneous other expenditure (ECU 404 million in 1998).

217. Aid to producers is thus currently by far the largest type of assistance. It consists in particular of production aid, but also includes guidance premiums and processing aid where the payments are made direct to producers.

218. Furthermore, as a result of the reorientation and later the reform of the CAP, the EAGGF Guarantee Section has been used to finance, in whole or in part, various specific measures for the management of agricultural markets such as the distribution of agricultural products to the needy in the Community, measures to combat fraud, measures to promote quality and measures designed to compensate for the geographical isolation of the French overseas departments (Poseidom), Madeira and the Azores (Poseima), the Canary Islands (Poseican) and the Aegean islands. In connection with the CAP reform, mention should also be made of the accompanying measures to assist farmers with projects to protect the environment, maintain the landscape, develop the use of forest resources or transfer their holdings with a view to early retirement.

219. Figure 8 shows the impact of the reform on the main types of financing in 1998, as compared with the pre-reform levels. Of note are the fall in expenditure on storage following the measures to normalise markets, the lower expenditure on refunds and the increased share devoted to the new aids introduced or reinforced by the reform.

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Figure 8

1.1.1.40. Expenditure, by sector

220. Chart 9 shows the breakdown of expenditure in 1999.

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Figure 9

221. It should be noted that Chapter 10 "Arable crops" covers the appropriations for 1999 for cereals, oilseeds and protein plants. Per hectare aid (including set-aside) accounts for a major share of this expenditure (EUR 14 624 million).

222. Past movements in EAGGF expenditure by sector and Member State and a detailed breakdown of EAGGF Guarantee Section expenditure and appropriations under the 1998 budget, by sector and economic type, are shown in Tables [3.4.1], [3.4.2], [3.4.3] and [3.4.4] (see statistical part of this Report).

Public storage

223. As shown in Table [3.4.5] (statistical part of this Report), between 1 October 1997 and 30 September 1998, when the public storage accounts were closed, the book value of the products in storage was significantly up on 1997: from ECU 749.2 million to ECU 1 398.0 million, an increase of 54%.

224. This resulted from:

- a marked increase in stocks of cereals and rice (from 2 380 700 tonnes in September 1997 to 13 603 000 tonnes on 30 September 1998);

- a slight reduction in beef stocks (from 622 600 to 544 000 tonnes);

- a sharp increase in milk products, from 170 400 to 208 400 tonnes).

225. The following developments took place in 1999:

226. The book value of the products in storage again rose significantly, from ECU 1 398.0 million in 1998 to EUR 1 630.7 million in 1999. It is above all cereals which contributed to the increase (EUR 1 155 million). Butter, too, is up (from EUR 3 million to EUR 44 million), but the increase is of relative importance, given that the product accounts for only a small part of the total value of products in public storage.

227. There were, however, major reductions as regards meat (from EUR 273 million in 1998 to EUR 85 million in 1999) and olive oil (from EUR 119 million in 1998 to EUR 62 million in 1999). In the case of beef this is simply the continuation of an underlying trend, doubtless attributable to the end of the BSE crisis.

228. These developments are shown in Figure 10.

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Book value of products in public storage with the intervention agencies

Figure 10

Clearance of accounts

229. In 1999 the Commission adopted six Decisions on the clearance of the accounts presented by the Member States in respect of EAGGF Guarantee Section expenditure:

- the Decision of 3 February 1999, in respect of 1995; [38]

[38] Decision 1999/187/EC, OJ L61, 10.3.1999, p. 37.

- the Decision of 28 July 1999, in respect of 1995, supplement; [39]

[39] Decision 1999/596/EC, OJ L 226, 27.8.1999, p. 26.

- the Decision of 3 February 1999 pursuant to Article 5(2)(c) of Regulation (EEC) No 729/70 - first ad hoc Decision, applicable from 1996; [40]

[40] Decision 1999/186/EC, OJ L61, 10.3.1999, p. 34.

- the Decision of 30 April 1999, in respect of 1998 - clearance of accounts; [41]

[41] Decision 1999/327/EC, OJ L124, 18.5.1999, p. 28.

- the Decision of 4 May 1999 pursuant to Article 5(2)(c) of Regulation (EEC) No 729/70 - second ad hoc Decision, applicable from 1996; [42]

[42] Decision 1999/350/EC, OJ L133, 28.5.1999, p. 60.

- the Decision of 28 July 1999 pursuant to Article 5(2)(c) of Regulation (EEC) No 729/70 - third ad hoc Decision, applicable from 1996. [43]

[43] Decision 1999/603/EC, OJ L 234, 4.9.1999, p. 6.

230. The expenditure recovered from Member States in respect of these six Decisions comes to EUR 725.1 million.

231. In the case of the agricultural guarantee sector, where Member States are responsible for executing virtually all payments and for collecting all levies and recoveries, the Commission has taken firm steps to encourage Member States to reduce the rates of irregularity. Firstly, it has worked with the Member States to ensure that, throughout the Union, the paying agencies see to it that there are very strict controls on all claims before they are paid, and that the paying agencies' accounts and procedures are audited each year to internationally accepted standards. Secondly, it has actively assisted all Member States in putting into place an integrated control system which uses the most advanced techniques - viz. checking of fields by aerial and satellite photography - and in cross-checking claims in computer data bases.

232. The Commission also took part in the following in connection with the clearance of accounts:

- discussions with the Member States on the findings of the inspection missions in respect of 1997 and 1998 and drawing up of a new decision on the clearance of accounts;

- the work of the European Parliament's Budgetary Control Committee in the context of the discharge of the 1996 and 1997 budgets;

- Opinion of the Court of Auditors on the clearance of the 1994 accounts and on the 1998 Statement of Assurance;

- raising awareness in applicant countries in the context of SAPARD and the pre-accession screening;

- work of the conciliation body;

- commenting on the recommendations made in the second Report of the Committee of Independent Experts.

Expenditure on agricultural markets in 1999

233. The uptake of EAGGF Guarantee Section appropriations for the 1999 financial year (expenditure by the Member States from 16 October 1998 to 15 October 1999) amounted to EUR 39 541 million, i.e. 97.7 % of the appropriations entered under Subsection B1 of the budget. After the transfer of appropriations to the monetary reserve, the initial appropriations of EUR 40 440 million exceeded expenditure by EUR 899 million.

234. The level of expenditure described above takes into account the Commission decisions to reduce advances to Member States. The reductions concern in particular:

- the failure by Italy and others to collect the additional levy on milk for 1997/98 and 1998/99 (advances reduced by EUR 337 million);

- weaknesses in the application of the integrated system and in the carrying out of checks by Greece. The final reduction totals EUR 108 million;

- weaknesses in the application of the integrated system by Portugal (reduction of EUR 5 million);

- failure by several Member states to comply with time limits for payments laid down in the Regulations (reduction of EUR 12 million).

235. The following factors, too, could not be foreseen when the budget was drawn up, and had a major impact on its execution in 1999:

- deductions from EAGGF Guarantee expenditure following the larger financial corrections of the clearance of accounts (EUR 96 million);

- the non-payment by Italy of the first tranche of agrimonetary aid for the execution of programmes adopted by the Commission in the spring of 1998 (EUR 130 million).

236. The differences between appropriations entered under budget Subsection B1 and expenditure in respect of the principal chapters of the budget are set out below.

237. The principal sectors where there was underutilisation were:

- beef/veal (- EUR 337.4 million), generally as a result of an increase in beef/veal consumption in the European Union;

- fruit and vegetables (- EUR 206.9 million), as a result of reduced expenditure on fresh fruit and vegetables. This stems mainly from a lower level of withdrawal operations in 1998/99 and a reduction in expenditure on compensatory aid for bananas;

- other measures (- EUR 165.8 million), underutilisation here resulting mainly from the non-payment of agrimonetary aid by Italy;

- olive oil (- EUR 159.2 million), the underutilisation of appropriations being in this case attributable to lower than expected expenditure in respect of production aid, in particular in Spain, and to a reduction in monthly advances paid to Greece. High olive oil prices resulted in some profits on sales from public storage which had not been anticipated in the initial budget.

238. On the other hand, expenditure under the following chapters appreciably exceeded budget appropriations:

- sugar (+ EUR 175.8 million), the overshoot being attributable to substantial payments in respect of export refunds. This was the result partly of low world market prices and partly of an upturn in exports at the beginning of the marketing year, and led to a higher than expected percentage of payments in 1999 in respect of 1998/99;

- sheepmeat and goatmeat (+ EUR 139.3 million), an overshoot which stemmed from higher ewe and goat premiums. Owing to a lower market price the level of expenditure on the balance for 1998 and the initial advance for 1999 was higher than had been forecast when the budget was drawn up.

EAGGF Guidance Section

239. Implementation of the reform of the Structural Funds since 1 January 1989 has gradually changed the nature of the aid granted by the EAGGF Guidance Section. An ever-increasing share of Community contributions is taken up by the part-financing of operational programmes (99.8% of the total in 1998, as compared with 52% in 1993 and 40% in 1991). The second reform of the Structural Funds, which came into force on 1 January 1994, put the finishing touches to the system of annual reimbursement of national expenditure that had not been programmed. Virtually all financing under the EAGGF Guidance Section is now provided through measures programmed on a multiannual basis in accordance with the principles of partnership and subsidiarity between the Commission and the Member States.

240. The current programming period, which covers 1994 to 1999, is marked by consolidation of the principles governing the first programming period following the reform of the Funds. It also includes some simplification of procedures, for example under Regulation (EC) No 951/97 on improving the processing and marketing conditions for agricultural products. [44] Furthermore, Regulation (EC) No 950/97 on improving the efficiency of agricultural structures [45] has been amended so that financing is based on multiannual programmes, in a manner similar to that for the other Objectives, thus harmonising the funding mechanisms. In this way the Community schemes implemented by Member States, which account for a significant share of financing by the Guidance Section (farm improvement plans, compensatory allowances, etc.), give rise to reimbursements up to the limits laid down in the corresponding multiannual programmes.

[44] OJ L 142, 2.6.1997, p. 22.

[45] OJ L 142, 2.6.1997, p. 1.

241. The measures undertaken on the initiative of the Member States under the Community support frameworks are supplemented by those launched by the Commission, i.e. programmes under the Leader, Interreg, Regis II and Peace Community Initiatives, and measures financed under Article 8 of Regulation (EC) No 4256/88 [46] and transitional measures.

[46] OJ L 374, 31.12.1988, p. 25.

Funding carried out

242. EAGGF Guidance Section expenditure by Member State during the period 1991 to 1998 is shown in the table below.

243. It is also worth noting the breakdown of expenditure by Objective. The EAGGF Guidance Section contributes to the following four Objectives:

- Objective 1 (regions whose development is lagging behind);

- Objective 5(a) (agricultural structures in all regions);

- Objective 5(b) (rural development in designated areas);

- Objective 6 (Nordic regions), following the accession of the new Member States.

244. The following table also shows expenditure from 1994 onwards under the Community Initiatives and under Article 8 of Regulation (EEC) No 4256/88 (finance for technical assistance, general studies, pilot and demonstration projects) and transitional measures (old measures which cannot be assigned to an Objective under the new rules).

EAGGF Guidance expenditure (commitment appropriations)

>TABLE POSITION>

ECU million)

Expenditure by objective

>TABLE POSITION>

ECU million)

245. Expenditure under Objective 1, which had increased from 1991 onwards, steadied towards the end of the first programming period, only to rise again from 1994 on.

246. Expenditure under Objective 5(a) was fairly stable during the period under review, but peaked strongly in 1994 as a result of the change in the system of financing the "indirect" measures (former Regulation (EEC) No 2328/91 [47]), which meant that reimbursements for 1993 and new financing for 1994 and 1995 were charged to that year. Expenditure under Objective 5(b) grew substantially from 1991 to 1993, reflecting the emphasis on rural development policy, but fell sharply in 1994 following delays in launching the new programming period. The delays were made up from 1996 onwards.

[47] OJ L 218, 6.8.1991 p. 1.

247. Since the transitional measures are being wound up, expenditure on them has fallen almost every year since 1991.

248. While the amounts under Objectives 1 and 5(b) for 1991 to 1993 include measures under the Community support frameworks, under the Community Initiatives and under Article 8 of Regulation (EEC) 4256/88, [48] from 1994 onwards the amounts corresponding to the last two are shown separately.

[48] OJ L 374, 31.12.1988, p. 25.

Budget execution

249. In terms of the appropriations available in 1998, including those originally entered in the budget together with transfers and carryovers (ECU 4 417 million in commitment appropriations and ECU 3 706 million in payment appropriations), execution of the 1998 budget for the whole of the EAGGF Guidance Section was 98.9% for commitment appropriations and 99.5% for payment appropriations.

250. The appropriations in the 1999 budget amounted to EUR 5 545 million for commitments and EUR 4 002 million for payments. These figures include the appropriations for Community Initiatives. As in 1998, the above figures also include that part of the payment appropriations allocated under Regulation (EC) No 3575/90 [49] to the new German Länder and sums for the implementation of the programmes in the outermost regions included in the "Structural Funds" chapter. The commitment appropriations total does not include appropriations for measures in the fisheries sector, since this is separate from agriculture.

[49] OJ L 353, 17.12.1990, p. 19.

Evaluation

251. The evaluation of agricultural measures is divided into two major parts: one dealing with market-related measures and one concerned with structural and rural development measures.

Evaluation of market-related measures

252. In 1999 external experts were asked to carry out a total of ten evaluations. One evaluation (dealing with promotion) had to be called off when the contractor defaulted. A total of three evaluations, concerning school milk, the internal food programmes and Poseican, were completed and contributed to proposals for amendments to the legislation concerned. Another three evaluations, on durum wheat, the Aegean islands and Poseidom, were completed at the end of 1999. A further three evaluations, on the sugar sector, the sheepmeat and goatmeat sector and Poseima, were launched in the second half of the year with a view to making the results available before the summer of 2000.

253. Concomitantly with the negotiations on the Agenda 2000 package, the Directorate-General for Agriculture has begun to carry out methodological work which will pave the way for evaluations in the arable crops, beef/veal and milk products sectors.

Evaluation of structural and rural development measures

254. Appropriate conclusions have been drawn by the Directorate-General for Agriculture in the light of the 1998 scrutiny and summary of the national and regional reports on the intermediary evaluations.

255. Accordingly, in order better to prepare for the next series of evaluation reports carried out in the Member States, a number of guidelines have been drawn up for the evaluations in connection with Objective 5(a) (Regulations Nos 950/97 and 951/97), ex post evaluations in connection with Objective 5(b) and Leader II, and the cycle of evaluations to be undertaken in the context of the next programming period (2000-2006).

Preparing for enlargement

Accession strategy

256. The Commission injected new momentum into the enlargement process when, on 13 October 1999, it adopted an expanded accession strategy. The Commission's recommendation was that the Helsinki European Council in December 1999 should decide to open negotiations in 2000 with every candidate country that had met the political criteria for accession and had shown that it was prepared to adopt the necessary measures to meet the economic criteria. The opening of negotiations should, however, be conditional on a decision on the closure of a specified nuclear power station in the case of Bulgaria, and on confirmation of effective action regarding child-care centres in the case of Romania. The Commission also takes the view that negotiations should take place on the basis of the principle of differentiation, i.e. in accordance with each candidate's progress in preparing for membership.

Screening of the acquis communautaire

257. The application of the screening process to agriculture, which began on 21 September 1998, was the preliminary phase of the negotiations. Its purpose is to explain the acquis and identify possible technical adaptations with a view to its implementation. In addition, it aims to identify acquis acceptance problems and the capacity for implementation (i.e. the availability of administrative and control structures). In the case of the candidate countries with which negotiations had opened in March 1998 (Poland, Hungary, Estonia, Czech Republic, Slovenia and Cyprus), the screening was completed in September 1999, with the scrutiny of the new legislation introduced as part of Agenda 2000. The applicants then presented their formal negotiating positions in November/December 1999, specifying in particular their requests for transitional periods and technical adaptation of the acquis in agriculture.

258. In the case of the candidate countries with which negotiations had not yet begun (Bulgaria, Romania, Latvia, Lithuania et Slovakia), the screening exercise covering the acquis communautaire in agriculture - but not veterinary or phytosanitary legislation - started in October 1999 and was completed in December.

Accession Partnerships

Introduction

259. As part of the Agenda 2000 initiative, the Commission proposed bringing together into a single framework all the different forms of pre-accession support provided by the EU. The Luxembourg European Council of 12-13 December 1997 endorsed this by creating Accession Partnerships with each of the candidate countries. [50] These partnerships are to be the key instruments in the reformed pre-accession strategy. They are designed to help prepare the candidate countries to meet the criteria for membership established in 1993.

[50] See OJ C 202 of 29.6.1998 for full details of the Accession Partnerships.

260. Each Accession Partnership sets out priorities and intermediate objectives. Short-term priorities were selected on the basis of whether it was reasonable to expect an advanced stage of progress, or even completion, by the end of 1999. Those listed as medium-term priorities were expected to need more than a year to complete, although work could and indeed did indeed begin on them in 1999.

261. Whilst the Accession Partnerships identify particular priorities they also make it clear that the candidate countries must address all the issues identified in the Commission Opinions on the application for membership.

262. Each Accession Partnership is individually tailored to the needs and specific situation of the country concerned. Some of the common objectives for the agricultural sector cover:

- alignment with the veterinary and phytosanitary acquis, in particular external border controls;

- development of the capacity to implement and enforce the CAP. This concerns in particular the fundamental management mechanisms and administrative structures for monitoring agricultural markets and implementing structural and rural development measures. The restructuring of the agri-food sector is also included.

National programmes for the adoption of the acquis

263. Complementary to the Accession Partnership is each candidate country's National Programme for the Adoption of the Acquis (NPAA). This sets out, together with an implementation timetable, the legislative, administrative, and operational adjustments that need to be completed prior to accession. Where possible it also indicates the staff and financial resources required for implementation.

Financing enlargement

264. The Accession Partnerships also indicate the main Community instruments for technical and financial assistance. The main source of financial assistance remains the PHARE programme, which provided ECU 6.7 billion to the central and eastern European countries in 1995-99. The Commission will work with the candidate countries, the European Investment Bank (EIB) and other international financing institutions, in particular the World Bank and the European Bank for Reconstruction and Development, in facilitating the co-financing of projects relating to pre-accession issues.

265. As well as making available EUR 1 560 million in aid under PHARE, the Council decided to reinforce pre-accession assistance to agriculture and rural development. This will be undertaken through a specific instrument called the Special Accession Programme for Agriculture and Rural Development (SAPARD) and will be implemented in 2000-06 with a budget of EUR 520 million per year.

266. ISPA, the pre-accession instrument for structural policies, will contribute EUR 1 040 million per year in 2000-2006. This fund, operationally similar to the Cohesion Fund, will focus on funding in the areas of transport and the environment.

267. Under the Accession Partnership, Community assistance will be conditional on respecting commitments made under the Europe Agreement, as well as on taking further steps towards satisfying the Copenhagen criteria and making progress in the implementation of the Accession Partnership priorities.

268. Monitoring of the implementation of the Accession Partnerships will take place through the Europe Agreement institutions. This process has begun and the first conclusions were included in the progress report submitted to the Council in November 1998. A second report was submitted in October 1999. Both review the progress made by the candidate countries.

269. As agreed by the Luxembourg European Council in 1997, the Commission's progress reports will serve as a basis for the decisions that may need to be taken by the Council on the conduct of the accession negotiations or on extending the negotiations to other applicants.

Institution-building and twinning arrangements

270. Another important aspect of accession is the strengthening of the institutional and administrative capacity of the candidate countries. The latter must establish modern and efficient administrations if they are to apply the acquis communautaire to the same standards as the current Member States.

271. To help candidate countries adopt the acquis, the European Commission has proposed re-focusing PHARE support on two priorities: institution-building and investment. While support for investment will help candidate countries bring their economic and social structures into line with Community standards, institution-building will help them to reinforce their institutional and administrative capacity so that they can take on the obligations of membership. Institution-building can take many forms, such as technical assistance, training programmes and exchanges of experts.

272. In the EU the acquis is implemented, applied and enforced by national administrations (at central, regional and local level), by agencies and by the private sector. This vast body of administrative and technical expertise will be made available to the candidate countries through the process of twinning. Twinning will focus on four key areas of the acquis in each of the candidate countries, namely agriculture, environment, finance, and justice and home affairs.

273. Twinning aims to deliver specific and guaranteed results in the process of implementing the priority areas of the "acquis" set out in the Accession Partnerships.

SAPARD (Special Accession Programme for Agriculture and Rural Development)

274. As part of the pre-accession strategy the Council decided to grant pre-accession aid in the agricultural and rural development sectors from the year 2000. An instrument known as SAPARD (Special Accession Programme for Agriculture and Rural Development) will contribute to the implementation of the acquis communautaire under the CAP and policies related thereto. It will also help to meet challenges such as the need to find solutions to the long-term problem of adaptation of the agricultural sector and the rural areas in the candidate countries.

275. The budget of EUR 520 million/year is distributed among the central and eastern European countries on the basis of objective criteria. An indicative breakdown was adopted in July 1999. Priority will be given to the countries whose needs are greatest. The indicative breakdown (at 1999 prices) is as follows:

- Bulgaria EUR 52.1 million

- Czech Republic EUR 22.1 million

- Estonia EUR 12.1 million

- Hungary EUR 38.1 million

- Lithuania EUR 29.8 million

- Latvia EUR 21.8 million

- Poland EUR 168.7 million

- Romania EUR 150.6 million

- Slovenia EUR 6.3 million

- Slovak Republic EUR 18.3 million

276. After accession the candidate countries will no longer benefit from this aid, and the resources thus released will be distributed among the remaining candidate countries on the basis of the same criteria and taking into account their capacity for absorption.

277. SAPARD will take the form of multiannual programmes developed and implemented by the candidate countries. The SAPARD Regulation provides for a broad range of measures for the improvement of agricultural structures. This covers in particular: investments in agricultural holdings; improvements in the processing and marketing of agricultural and fishery products; improvements in structures designed to enhance quality, veterinary and plant-health controls and foodstuffs quality and consumer protection; agricultural production methods aimed at protecting the environment and preserving the countryside; the development and diversification of economic activities; provision for multiple activities and alternative income; the setting-up of farm relief and management services and producer groups; the renovation and development of villages and the protection and conservation of the rural heritage; land improvement and reparcelling; the establishment and updating of land registers; improvements in vocational training; the development and improvement of rural amenities; water-resource management in agriculture; forestry, including the afforestation of agricultural areas, investment in privately owned forests and the processing and marketing of forestry products; and technical assistance in connection with the measures covered by the Regulation, including studies to assist in the preparation and monitoring of the programme, and information and publicity campaigns.

278. From the measures available candidate countries will be able to select those which address their specific needs and objectives.

279. The procedures for helping the administrative authorities in the CEECs prepare for the implementation of SAPARD are in their final stage. Preparation itself is underpinned by the SPP (Special Preparatory Programme) component of the PHARE programme and a series of seminars organised by the Directorate-General for Agriculture and TAIEX. [51]

[51] Technical Assistance Information Exchange Office, a "one-stop" information and advice point set up by the Commission to help candidate countries in their preparations for integration into the single market.

International relations

International organisations and agreements

World Trade Organisation (WTO)

280. In 1999 the WTO Committee on Agriculture held regular meetings and several informal consultations at which progress in the implementation of commitments negotiated under the Uruguay Round was reviewed.

281. The process of analysis and exchange of information, which was launched at the Singapore Ministerial meeting in 1996 and took place in parallel with the work of the Committee on Agriculture, was aimed at preparing the new round of multilateral trade negotiations in agriculture and was completed in September 1999. It provided a very useful forum for detailed discussions on trade issues and, in the case of the multifunctional role of agriculture, non-trade issues. The European Communities contributed actively to that process.

282. In spite of the intense discussions which took place in Geneva in October and November 1999 in order to prepare the ministerial meeting, ambassadors failed to agree on a draft declaration for adoption in Seattle. The Seattle ministerial meeting held from 30 November to 3 December 1999 then failed to adopt the ministerial declaration launching the new round of WTO negotiations. Nevertheless, negotiations on agriculture were set to begin in 2000, in accordance with Article 20 of the WTO Agreement on Agriculture.

1.1.1.41. WTO consultations and dispute settlement

283. A panel was established on 16 October 1997, at the request of the EU and the United States, to examine the Republic of Korea's taxes on alcoholic beverages. According to the Panel and Appellate Body reports, Korea had applied dissimilar taxation in such a way as to afford protection to domestic production. The adoption of the reports, on 17 February 1999, was followed by arbitration between the parties to determine how Korea was to adapt its tax structure.

284. On 23 July 1998 a panel was established, at the EU's request, to examine Korea's definitive safeguard measure on imports of certain dairy products (an import quota for skimmed-milk powder preparations). The Panel Report states that Korea's actions are not consistent with the provisions of the Agreement on Safeguards, and recommends that the Dispute Settlement Body request Korea to bring its measures into conformity with its obligations under the WTO agreement. Korea then lodged an appeal, which was heard by the Appellate Body on 3 November.

285. In the matter of the EC banana import regime, Ecuador had on 18 December 1998 requested that, under Article 21.5 of the WTO Dispute Settlement Understanding (DSU), a panel examine whether the measures taken by the EC to implement the recommendations of the WTO Dispute Settlement Body (DSB) were WTO-consistent. On 12 April 1999 the panel found that aspects of the EC's new import regime for bananas were not consistent with the EC's obligations under Articles I:1 and XIII:1 and 2 of GATT 1994 and Articles II and XVII of GATS.

286. On 14 January 1999 the US requested authorisation to suspend concessions for a value of USD 520 million. The matter was referred to the original panel for arbitration. On 12 April 1999 the arbitrator determined the level of nullification and impairment of benefits of the United States at USD 191.4 million.

287. On 3 June 1999, in the matter of the EC's implementation of the WTO ruling on the EC measures affecting meat and meat products (hormones), the US and Canada requested authorisation to suspend concessions for a value of USD 202 million and CAD 75 million respectively. The matter was referred to the original panel for arbitration and on 12 July 1999 the arbitrator determined the level of nullification and impairment of benefits of the United States at USD 116.8 million and of Canada at CAD 11.3 million.

288. On 3 June 1999 the EC requested the establishment of a panel concerning the imposition of definitive safeguard measures by the United States on the import of wheat gluten from the EC. A panel was established on 26 July 1999.

289. On 8 October 1999 a WTO panel found that Section 921-927 of the US Internal Revenue Code and related measures was in violation of a number of WTO obligations, including Articles 3 and 8 of the WTO Agreement on Agriculture concerning export subsidies. The United States appealed against the findings of the panel before the WTO Appellate Body.

Organisation for Economic Cooperation and Development (OECD)

290. The EU participates actively in the activities of the OECD (Organisation for Economic Cooperation and Development). The areas of activity of the OECD Committee on Agriculture currently concern in particular a working programme aimed at providing background analytical material for the next WTO round of negotiations on agriculture. This programme covers, inter alia, the three pillars of the Uruguay Round (market access, export competition and support to farming activities) and non-trade concerns, such as multifunctionality, food security and food safety, in addition to core activities relating to commodity markets (outlook) and agricultural policies (annual monitoring report). There are also on-going activities in the field of agri-environment, rural development and international trade standards (for seeds, forestry reproductive material, fruit and vegetables). At the meeting of the G8 in June 1999 the OECD was given an important mandate in the field of biotechnology and food safety, with a report expected in 2000. Negotiations on export credits to agriculture have taken place within the OECD in the wake of the Uruguay Round, but there has been little progress thus far because of resistance from the USA.

Generalised System of Preferences (GSP)

291. The provisions of the Council Regulation applying the new multiannual generalised system of preferences (GSP) for agricultural products entered into force on 1 January 1997. The aim of the GSP is to foster the integration of developing countries into the world economy and the multilateral trading system. The new scheme grants preferential access to Community markets to a wide range of agricultural products from the developing countries, except where those products are the subject of a market organisation. Products are classified in one of four categories - each corresponding to a separate preferential margin - according to their sensitivity. Inclusion in a category is based on the evaluations which had led to the tariff offer presented by the European Union in the context of the Uruguay Round.

292. The four categories are:

- highly sensitive products, which have a preferential margin of 15%;

- sensitive products, which have a preferential margin of 30%;

- semi-sensitive products, which have a preferential margin of 65%;

- non-sensitive products, which have a preferential margin of 100 % and are entirely free of customs duty.

293. GSP focuses on the needs of the poorest beneficiary countries by transferring preferences gradually from the developed to the developing countries.

294. There is also provision for special arrangements for countries undertaking to abide by social and environmental standards. The GSP coverage of agricultural products was substantially widened by Council Regulation (EC) No 1256/96 of 20 June 1996, [52] with the addition of 527 products and the removal of 64 others. The basic principle is that the GSP should cover all products except those which are the subject of a market organisation. Additional preferences are also granted to Latin American countries which commit themselves to combating the production of drugs.

[52] OJ L160, 29.6.1996, p. 1.

United Nations Food and Agriculture Organisation (FAO)

295. As a member of the United Nations Food and Agriculture Organisation, the EU took part in the work of the various bodies belonging to the organisation, in particular the meetings of the Committee on Agriculture, the Committee on World Food Security, the Committee on Commodity Problems and the Committee on Forestry, presenting its agricultural policy and approach to food security. It also participated in the technical consultations on the revision of the International Plant Protection Convention (IPPC), which is aimed, inter alia, at bringing the Convention into line with the Agreement on the Application of Sanitary and Phytosanitary Measures of the Final Act of the Uruguay Round. The Community also played an active part in the meetings on food security and, in particular, the implementation of the code of conduct for the granting of food aid.

296. The Commission took part in the drawing up of the FAO's new strategic framework, which will lay down the policy guidelines for 2000 onwards.

297. The Commission also played an active role in the FAO's technical contribution to developing countries in preparation for the talks in the context of the new negotiations within the WTO.

298. The Commission also contributed to the FAO's discussions on trade-related but non-commercial issues, such as the multifunctional aspects of agriculture and its links in less advanced countries.

International Grains Agreement (IGA)

299. This Agreement, concluded in 1995, consists of two separate legal instruments: the 1995 Grains Trade Convention and the 1995 Food Aid Convention. They were due to expire on 30 June 1998, but were initially renewed for one year (until June 1999) to enable the Food Aid Convention to be renegotiated.

1.1.1.42. Grains Convention

300. The period of validity of the Grains Trade Convention was again extended, from 1 July 1999 to 30 June 2001.

1.1.1.43. Food Aid Convention

301. The European Union and its Member States are signatories to the Food Aid Convention, the aim of which is to contribute to world food security and improve the international community's ability to respond to food emergencies and other food needs of developing countries.

302. Renegotiation of the 1995 Food Aid Convention began in 1998 in the context of the Marrakesh and Singapore Ministerial Decisions.

303. The text of the Food Aid Convention was adopted on 24 March 1999, at a meeting of the Convention Council working group concerned. Pending the EU Council's adoption of the text, the Community made a declaration of provisional application. The new Convention, however, entered into force on 1 July 1999.

International Sugar Organisation

304. In 1999 the EU continued to play a full role in the affairs of the International Sugar Organisation, the body responsible for administering the 1992 International Sugar Agreement (ISA). In particular, it chaired the ISA Council and the Administrative Committee and hosted the 15th session of the ISA Council in Brussels on 25-27 May. In accordance with the Agreement, the Council decided that the period of validity of an unchanged ISA should be extended for a further two years, up to 31 December 2001.

Bilateral and regional trade relations

United States

305. The cumulative recovery system for rice, introduced on a trial basis in July 1997, was replaced from January 1999 by a flat-rate duty, calculated every two weeks, in the light of price movements.

306. A two-yearly tariff rate quota for a particular quality of malting barley used in brewing was established for 1999 and 2000.

307. Negotiations began on a comprehensive EU/US wine agreement, in connection with which three meetings were held. The aim was to facilitate trade in wines while improving protection for European and American names used in winemaking and the recognition of oenological practices used by the respective parties.

308. Discussions took place on US organic food standards.

309. Annual bilateral discussions took place on the EU support measures for tinned fruit.

310. The US imposed 100% ad valorem tariffs on USD 116.8 million of EU exports pursuant to the WTO arbitrator's ruling on the level of impairment. The retaliation list, covering a wide variety of products, focused on pigmeat, fruit juice, cheese, and fruit and vegetables. Further attempts were made to agree on an equivalent level of compensation and bring an end to the retaliation.

311. In July 1999 the Commission signed the bilateral veterinary equivalence agreement on sanitary measures affecting trade in live animals and animal products.

312. In November 1999 the Commission filed its first written submission in the WTO panel case opposing the safeguard action taken by the US in the form of a quantitative limit on imports of wheat gluten. In May 1999 what was already a restrictive quota had been reduced even further by the US following an overshoot of the first year's quota, apparently as a result of quota-management problems in the US.

313. The Corn Gluten Feed Monitoring Group continued to meet regularly.

314. Regular exchanges of views between the US and the Commission were held on the implications for trade in agricultural products of concerns about the use of genetically modified products.

Canada

315. Talks were held with Canada on the level of export refunds for barley and oats.

316. Discussions on trade in wine and spirits took place with a view to consideration of an EU/Canada agreement. They focused on protection for names used, on the use of oenological practices, on certification requirements and on the operation of alcohol monopolies.

317. Canada imposed 100% ad valorem tariffs on CAD 11.3 million of EU exports pursuant to the WTO arbitrator's ruling on the level of impairment, focusing on pigmeat and fruit and vegetables. Further attempts were made to agree on an equivalent level of compensation and bring an end to the retaliation.

318. Agreement was reached on a three-year system of phytosanitary authorisation, coupled with appropriate safeguards, for imports of Canadian seed potatoes into Italy.

319. Canada and the Commission agreed on a trial system for facilitating exports of cheese to Canada without export refunds and for preventing the fraudulent use of refunds. The procedure was to be reviewed towards the beginning of 2000.

Mexico

320. A total of eight negotiating rounds have been held to date on the basis of the negotiating directives approved by the Council in June 1998 with a view to the establishment of a Free Trade Area between the European Union and Mexico. Substantial progress has been made in the case of agriculture and there were high hopes that a deal could be finalised before the end of the year, paving the way for possible implementation in July 2000. The market access package consists of each side's lists of products to be liberalised in stages or put on a "waiting list", in much the same way as the South Africa formula outlined previously. Both parties' offers are subject to a review clause which comes into effect in 2003.

321. Built into the draft Agreement are measures for the protection of numerous Protected Designations of Origin (PDOs) and Protected Geographical Indications (PGIs).

322. Much of the market access package is dependent on a solution being found to the question of the rules of origin, i.e. when is a given product genuinely entitled to originating status, thus qualifying for tariff dismantling. A satisfactory result appears to have been achieved.

Mercosur/Chile

323. In July 1998 the Commission adopted draft proposals for Directives for the negotiation of an association agreement between the EU and Mercosur and Chile. The Council approved the draft on 13 September 1999.

324. In the case of trade it is proposed that the parties give confirmation of their common objective of gradual mutual liberalisation of trade in goods and services as a whole with a view to the introduction of free trade and taking into account the sensitiveness of certain products and sectors in accordance with WTO rules.

325. It was also proposed that, in the second half of 1999, the parties begin concertation on the round of multilateral negotiations in the context of the WTO and on the preparation of the forthcoming negotiations. The concertation could well cover a number of issues and include regular talks on agriculture, trade and services.

326. The parties will immediately begin negotiations on non-tariff matters.

327. The proposal is that the process of negotiation on tariff reductions and on services should begin on 1 July 2001. The negotiations will be conducted and concluded in the light of the results of the WTO round and the anticipated timetable for the Free Trade Area of the Americas. They are expected to be concluded after the WTO round.

Republic of South Africa

328. The South Africa Free Trade Agreement (FTA) was approved by the Heads of State and Government on 11 March 1999. It is the culmination of 3½ years' work and 24 negotiating rounds. A number of details still remain to be settled on the parallel Wine Agreement (see separate section on wines and spirits), however. This and parts of the general Agreement offer protection for EU intellectual property rights.

329. The final FTA package features a detailed trade offer for tariff dismantling, including a set of products to be liberalised wholly, partially or not at all. The offer is in the form of a series of lists of agricultural products, the least sensitive of which are put forward for immediate liberalisation. Some extremely sensitive Community items, most notably bananas, sugar, beef, rice, maize, sweet corn, starches and numerous fruits and vegetables are not being put forward for tariff liberalisation for the time being. Equally, South Africa also excluded many similar products, such as fresh meats, some cereals and sugar products. The EU has allowed partial liberalisation for some of the Community's other sensitive products, viz. certain citrus fruits, tinned fruit, juices, cut flowers and wines, some of which were on the original Council Mandate exclusion list. This was in the form of tariff quotas, generally limited to levels of recent imports from South Africa. In return, South Africa offered the EU some reciprocal tariff quotas in the cheese sector. Both parties' offers are to be reviewed within five years of entry into force of the Agreement.

330. As South Africa was considered a developing country from the point of view of trade, the agreement as a whole (including industry and fisheries) has a built-in asymmetry intended to aid the country's economic development. The South African offer did, however, cover a greater percentage of trade than the EU's did in the agriculture sector. Again in keeping with the spirit of asymmetry, South Africa is allowed up to 12 years for tariff dismantling.

Japan and the Republic of Korea

331. Relations with Japan and the Republic of Korea continued to be centred on market access and deregulation issues, particularly in relation to the continuing removal of trade barriers in the areas of plant and animal health.

New Zealand

332. New Zealand has, for more than two decades, enjoyed preferential conditions for the import of butter into the United Kingdom. These concessions became part of the European Community competence under the United Kingdom accession treaty. In the 1994 Uruguay Round negotiations New Zealand's current access rights were established on the basis of the reference years 1986 to 1988, and the previous specific quota conditions were maintained. In 1990, without first consulting the Commission, the New Zealand Dairy Board decided to export a non-traditional type of butter ("spreadable" butter), the characteristics of which were not regarded as falling within the specific quota conditions.

333. On 22 October 1999 the Council of Ministers decided on a regulation putting an end to three years of diverging interpretations of the meaning of the EU WTO commitment - as laid down in its CXL schedule - regarding the eligibility of butter from New Zealand under the reduced tariff import arrangement.

334. The decision had been preceded by court decisions on a test case in the United Kingdom and an amicable settlement under the auspices of the WTO.

335. In the matter of dairy imports under reduced tariff arrangements, further clarification of the technical parameters and control mechanisms (in particular for New Zealand butter exports requested by New Zealand) will soon allow stricter verification of compliance with the respective quota conditions. The corresponding implementing legislation is in the final stages of approval.