52003DC0554

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT accomplishing a sustainable agricultural model for Europe through the reformed CAP - the tobacco, olive oil, cotton and sugar sectors {SEC(2003) 1022} {SEC(2003) 1023}

EXPLANATORY MEMORANDUM

Since 1992, the common agricultural policy (CAP) has been immersed in a fundamental reform process, aimed at moving away from a policy of price and production support to a more comprehensive policy of farmer income support. The last step in this process was the decision reached at the Luxembourg Council on 26 June 2003 regarding the 2003 CAP reform, with the introduction of the single farm payment scheme.

The Luxembourg Council also invited the Commission to submit in autumn 2003 a communication on the reform of the common market organisations for olive oil, tobacco and cotton that would be based on the principles of the June CAP reform. This Communication meets the commitment made by the Commission in Luxembourg, while legal texts of the reform proposal for the three sectors involved will follow in November.

With the Luxembourg decision, decoupling of direct producer support becomes the core element of CAP direct payments, although the possibility of coupling part of support is kept mainly as a response to member states concerns related to the risk of production abandonment in more marginal areas.

The present Communication follows the same basic approach as the June reform of the CAP. The largest part of support for the three sectors is decoupled, based on historical references for the 2000-2002 period, and is integrated into the legal framework of the single farm payment.

Thus the fundamental objectives of CAP reform are met by:

* establishing a long-term policy perspective for these sectors, in line with their present budgetary envelope, the ceiling of Heading 1 of the current financial perspectives and the new framework for agricultural expenditure agreed at the Brussels European Council in October 2002;

* promoting the objectives and the approach of the June 2003 CAP reform, namely enhanced competitiveness, stronger market-orientation, improved environmental respect, stabilised incomes and a higher regard for the situation of producers in LFA;

* giving priority to producer income and not product support through the transfer of a significant part of the current production-linked direct payments to the single farm payment scheme, as from 1 January 2005;

* subjecting these payments, as is the case with all CAP direct payments, to the respect of the statutory EU environmental and food safety standards, through cross-compliance, and rules of good agricultural and environmental condition, as well as to the modulation and financial discipline mechanisms.

In addition, the Communication reflects the Commission's conclusions, based on the Commission's Extended Impact Assessment of the EU tobacco sector, regarding a sustainable policy-approach for the sector, in the context of the EU strategy for sustainable development, agreed at the Göteborg European Council in June 2001.

The common main aim as regards tobacco, olive and cotton growing is to support sustainable development in the sector, achieved by reorienting the support to reward healthy, high-quality products and practices, and developing alternative sources of income and economic activity.

However, in developing its proposals, the Commission had to take account of the fact that the tobacco, olive oil and cotton sectors are characterised by a concentration of their production in regions notably lagging behind in their economic development. In addition, with all three sectors showing differences in the present market regimes and in the problems and long-term priorities they face, different solutions are also envisaged in the proposed coupled part of their support.

For tobacco, the overall aim is to allow producers to adjust to a situation where product support would be phased-out. Thus the move towards full decoupling, and the shift of part of the present support into measures that assist producers to adjust. For olive oil, where potential risks are mainly associated to the abandonment of olive-groves in marginal areas with consequent negative environmental impact, the coupled part of support is aimed to guarantee that the cost of maintenance of olive trees is covered, while the production decision is left to producers. Finally in cotton, overall orientation is towards a mix of non trade-distorting (green box) and less trade-distorting (blue box) forms of support that minimise the already marginal impact of EU cotton on world markets.

Finally, taking account of the potential impact of decoupling on these sectors, in particular the risk of production abandonment and the competitiveness of rural areas, the proposals either earmark part of the sector expenditure as an area payment and/or transfer part of it to a restructuring envelope.

The Communication also fulfils the Commission commitment to report to the Council in 2003 on the EU sugar regime and its prospects, as laid down in Article 50(2) of Council Regulation (EC) No 1260/2001. The complexity of the sector and the various challenges it faces, both domestically and internationally, as well as the potential impact of various options, are documented in the accompanying Extended Impact Assessment of the sugar sector.

The sugar sector is characterised, among others, by the fact that it has never until now been fundamentally reformed. As a result, the Council and Parliament have not been given the opportunity to conduct a political debate on the possible policy approaches available for this sector.

This Communication seeks, in a similar way to that followed in the lead up to the latest reform to the milk sector, to open a first discussion on three reform policy options identified for the EU sugar regime, before proceeding to a formal proposal, and invites the Council, the Parliament and the stakeholders to actively participate in this debate.

Notwithstanding the different implications of the various options that could be envisaged, it is nonetheless evident that any reform of the sector would have to follow the fundamental principles of the CAP reform initiated in other sectors, i.e. bridging the gap between domestic and world market prices and shifting support from product to producer. In addition such a reform would need to closely examine its effect in the international context, especially with respect to the impact it may have on developing countries in general and ACP countries benefiting from the Sugar Protocol in particular.

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT accomplishing a sustainable agricultural model for Europe through the reformed CAP - the tobacco, olive oil, cotton and sugar sectors

1. Introduction

Ever since 1992, the common agricultural policy (CAP) has been immersed in a fundamental reform process, aimed at moving away from a policy of price and production support to a more comprehensive policy of farmer income support. The last step in this process was the decision reached at the Luxembourg Council on 26 June 2003 regarding the 2003 CAP reform.

The central feature of the CAP of the future will be the single farm payment, applicable from 2005, which cuts the link between eligibility for direct payments and the production decision. This key shift in policy, which will increase the transfer efficiency of the direct payment as an income support mechanism significantly, should lead to an improvement in the income situation of farmers. In this way, the June 2003 CAP reform effectively rounds off for the major agricultural sectors the move away from product support towards producer support, begun in 1992.

In the lead up to the adoption of the June 2003 CAP reform, attention was focussed, not only in Council but also in the European Parliament, the Economic and Social Committee and the Committee of the Regions, on the risk in specific areas of production disruption and abandonment from decoupling. This perceived threat to the agricultural sector was the principal motive for allowing Member States some degree of production-linked payment to be kept.

On the other hand, the widespread support for the reform to be accompanied by an increase in the financial resources for the CAP's second pillar through compulsory modulation and an extension in the scope of its measures, reflected a broad consensus in the EU on the need to improve the sustainability and competitiveness of rural economies.

It was with these two broad caveats that the Council reached a political agreement on the June 2003 CAP reform, accompanied by the following declaration:

"The Council notes that the Commission will submit next autumn a communication on the reform of the common market organisations for olive oil, tobacco and cotton, and will follow it by legal proposals.

As in its July 2002 communication, the Commission will provide a long-term policy perspective for these sectors in line with their present budgetary envelope and the new framework for agricultural expenditure agreed at the Brussels European Council in October 2002. The reform of these sectors will be based on the objectives and the approach of the current 2003 CAP reform."

Indeed, such a declaration confirmed the Commission's view, indicated in both July 2002 and January 2003, that the more sectors included in the single farm payment, the greater the economic and administrative benefits, in terms of simplification, will be. However, independently of the engagements made at the time of the agreement of the June 2003 CAP reform, specific circumstances prevail concerning the tobacco cotton and olive oil regimes.

Regarding the tobacco sector in particular, the future of the common market organisation was last touched upon at the Göteborg European Council in June 2001, in the context of the EU strategy for sustainable development.

Though the Council withheld from adopting any specific conclusions on tobacco, it was evident from the discussions, and the context in which they took place, that certain reservations existed about the sustainability of the EU tobacco sector.

Doubts were voiced about the social justification for production-related payments for tobacco growers, the apparent contradiction between those aids and public health concerns about tobacco consumption. The current support to tobacco growing is not consistent with public health policies, which are among the priorities of the EU sustainable development strategy. Under these conditions, the long-term viability of tobacco-growing as an economic activity was put into question. However, there was also awareness that, in order to avoid social breakdown in those rural areas with a great dependency on tobacco growing, alternative sources of income for tobacco producers and tobacco-growing regions would be necessary, in the event of any major reform.

The Commission's response at the time was to strengthen its commitment to finding a sustainable policy-approach for the tobacco regime, based on an assessment of the economic, social and environmental aspects of the sector. Thus, in May 2002, in its Legislative and Work Programme for 2003, the Commission decided to subject its policy reflections on the tobacco sector to an Extended Impact Assessment [1], in accordance with its 'Sustainable and inclusive economy priority'.

[1] SEC(2003) 1023 presenting the Extended Impact Assessment of the Tobacco Sector.

As far as the olive oil sector is concerned, a clear deadline has already been set for the expiry of the current aid scheme through Article 5 of Council Regulation No 136/66/EEC. In this context, the Commission considers the present communication to meet the obligation, laid down in Article 3(2) of Council Regulation (EC) No 1638/98, to carry out the following:

"On a proposal from the Commission to be presented in 2003, the Council shall decide on the common organisation of the market in oils and fats which is to replace, as from 1 November 2004, the one established by Regulation No 136/66/EEC."

The EU cotton regime, which dates from Greek accession in 1981, was last modified in 2001, with the aim of strengthening the price reduction mechanism, in order to tighten budget discipline and limit the total area dedicated to intensive cotton production, associated with environmental problems. Member States also agreed to undertake appropriate environmental measures in relation to agricultural land dedicated to cotton production. In the meantime, the Commission has noted that, despite the adoption of these new measures, the necessary reduction in surface area has not taken place and there are signs that such a reduction will be difficult to achieve. For that reason, the Commission believes that the Council, in its concluding remarks to the CAP reform decision in Luxembourg in June this year, has provided a valuable opportunity for a re-appraisal of the current arrangements in the cotton sector, with a view to introducing a more effective and sustainable policy orientation for cotton in the EU.

The sugar sector is singular in having so far stayed out of the 1992 reform process, which has essentially consisted of increasing competitiveness by compensating institutional price cuts with direct income payments. Instead, the current sugar common market organisation has been founded on the basis of a repartition of the production capacity across the entire Community, through the maintenance of national production quotas and high internal prices. With the last step towards competitiveness now completed by the June 2003 CAP reform, the Commission believes that the role of the repartition principle in the current EU sugar regime must be carefully reconsidered, in order to follow the CAP objectives of more market orientation and economically, environmentally and socially sustainable agricultural production.

In 2001, after extending the duration of the current regime for sugar by five years until 30 June 2006, the Council also placed the following obligations on the Commission, as found in Article 50(2) of Council Regulation (EC) No 1260/2001, which reads:

"On the basis of Commission studies on the market situation, all aspects of the quota system, prices, relations within the trade and an analysis of the increase in competition resulting from the European Union's international commitments, the Commission shall submit a report at the beginning of 2003, together with any appropriate proposals."

With sugar, the Commission's method, in a similar way to tobacco, has been to subject the regime to an in-depth assessment of the economic, social and environmental factors at stake. For that reason, the Commission also undertook to carry out an Extended Impact Assessment [2] on the sugar sector in its Legislative and Work Programme for 2003, published in May 2002. Together with that impact assessment, the Commission considers that the present communication fulfils the engagement to report on the EU sugar regime and its prospects.

[2] SEC(2003) 1022 presenting the Extended Impact Assessment of the Sugar Sector.

In the light of these various commitments, the remainder of this communication gives, in the first instance, a description of the overall outlook for each of the four sectors concerned, including the conclusions to be drawn from the Extended Impact Assessments carried out for the tobacco and sugar sectors, as well as from working documents made available for these sectors [3]. This is followed by a presentation of the Commission's proposal for reform of the tobacco, olive oil and cotton sectors, in line with the orientation given by the Council, and a closing chapter on budgetary aspects of the proposals.

[3] http://europa.eu.int/comm/agriculture/ capreform/com554/index_en.htm.

For sugar, however, being aware of the fact that the Council and Parliament have not been given the opportunity to conduct a political debate on the subject, the Commission has adopted a two-phase approach. Based on the information provided in the sugar Extended Impact Assessment, which describes the available reform policy options, the Commission wishes first to open discussion on the future of the EU sugar regime, in a similar way to that followed in the lead up to the latest reform to the milk sector, before proceeding to a formal proposal.

2. Overall outlook for the sectors concerned

2.1. Tobacco

Tobacco production represents only 0,4 % of the EU agricultural output. In the last decade, there has been a decreasing trend in the volumes of world and EU tobacco production. With 348 013 tonnes, corresponding to 5,4 % of world production, the EU is the fifth world producer, behind China (38 %), Brazil (9 %), India (8 %), and USA (7 %). Greece and Italy cover more than 75 % of EU raw tobacco production.

Production of tobacco in the EU shows a remarkably high geographical concentration. Seven regions concentrate about 70 % of total holdings, 63 % of the areas under tobacco and 57 % of total gross income. In some districts, tobacco production accounts for more than 50 % of regional agricultural production.

The area under tobacco in the EU has been decreasing at a rate of 2,6 % per year, while the EU average yield has risen from 2 to 2,7 tonnes per hectare in the 1990s. The total number of farms with tobacco in the EU was 79 510 in 2000, following a ten year decline of 3,6 % per year. The average area per holding has increased from 1,4 ha in 1990 to 1,6 ha in 2000.

The tobacco sector employs an important quantity of labour force, that is 126 070 annual working units (AWU), or 212 960 persons, corresponding to 2,4 % of total AWU employed in the EU agricultural sector. Labour demand for raw tobacco production is highly seasonal and the share of part-time employment is remarkably high. Family labour force is about 80 % of total labour force employed in the sector.

A key feature of tobacco holdings is that they are extremely heterogeneous across regions and farms. In particular, a noteworthy dichotomy persists between few large farms, which are more capital-intensive and concentrate production on the best varieties, and many small farms, which are typically of small size, labour-intensive and less integrated with markets.

Problems of restructuring are still particularly acute in some areas where tobacco production plays a very important economic and social role. There, pulling out workers from the sector too rapidly could perhaps cause major social imbalances and rural depopulation if adequate measures to create off-farm employment were not put in place.

Over the last decade, there has been a reorientation towards the production of high-quality varieties, an increasing specialisation per variety at farm and regional level, and prices of EU-produced raw tobacco at international and domestic level have increased. On the other side, the market price of raw tobacco is too low to cover the production costs and positive margins are currently allowed only by CAP direct payments. Yet, these account for more than 75 % of total receipts farmers obtain from this crop. Overall, tobacco activity in the EU, while exhibiting a high dependency on public support, is characterised by a structural low level of income per labour unit employed, which, however, on a per hectare basis, is very much higher compared to other agricultural sectors.

The EU has a top position in world trade of raw and processed tobacco, both on the export and import side. In particular, the EU is an importer of raw tobacco and a major exporter of cigarettes and other processed products.

The 1992 reform of tobacco common market organisation (CMO) abolished intervention and export refunds, introduced production quotas as well as stricter controls. Following later refinements of the 1992 legislation, support to producers is currently provided through a premium system, linked to quantity of production, modulated on the basis of quality criteria and subject to individual production quotas for each group of tobacco varieties. The tobacco CMO also relies on measures to convert production, through a quota buy-back programme and a Community Tobacco Fund. CAP expenditure for tobacco was EUR 973 million in 2001, that is, an average of about EUR 7 700 per tobacco AWU or EUR 7 800 per ha, which took a 2,3 % share of the 2001 EAGGF Guarantee budget.

2.2. Olive oil

The olive sector is a key element of the EU model of agriculture. In 1998/99, the area under olive groves in the EU was approximately 5,4 million hectares, that is, about 4 % of the utilisable agricultural area, of which 44,5 % were in Spain, 26,3 % in Italy, 18,8 % in Greece, 9,7 % in Portugal and 0,7 % in France. The sector involves about 2,5 million producers, roughly one third of all EU farmers, and is an important source of employment and economic activity in the main producer areas, most of which, with the notable exception of Tuscany in Italy and Catalonia in Spain, are located in Objective 1 regions of the EU-15. Furthermore, olive production offers the advantage of providing seasonal employment in winter, complementary with other agricultural activities, and provides significant off-farm employment in the associated milling and processing industry.

The size of specialised olive holdings in the EU is relatively small but diverse, ranging from an average of 13,5 ha in Spain to 3,2 ha in Greece. Olive oil processing structures tend to reflect the mix of traditional olive groves and more intensively managed, modern plantations, found across the producing Member States. Consequently, the association that olive production has enjoyed with positive landscape features and environmental impacts in the areas where it is practised has started to be questioned. Traditional olive groves are valued for their role in combating desertification and promoting biodiversity. Abandonment of production in such holdings brings increased risks of fire and erosion. On the other hand, criticism is more frequently directed towards the negative impacts of intensive plantations, through the increased dependence on phytosanitary products, monoculture techniques and water resources for irrigation.

The EU dominates world production, with harvests that have steadily grown in the nineties, especially in Spain, to a record of 2,46 million tonnes of virgin olive oil in 2001/02. Olive production, however, is noted for its fluctuations, determined by the biological production cycle and susceptibility to weather variations. Tunisia, Turkey, Syria and Morocco are the other main olive oil producers. They account for about 20 % of total world production. While production in other regions of the world is currently negligible in comparison to that in the Mediterranean basin, some countries without an olive oil tradition appear to be willing to invest in this sector.

Historically, olive oil consumption tended to be high only in traditional producer countries. While olive oil still only represents about 3 % of total world oil consumption, since 1995/96 demand has risen at a rate of about 6 % per year, in the light of olive oil's positive image in terms of healthfulness and quality. Apart from the EU, main markets for olive oil are the United States of America, Japan, Canada, Australia and Brazil.

Thus, trade has become an important feature of the olive oil market in the EU, which has doubled its exports, in the last ten years to almost 324 000 tonnes in 2001/02, mostly in bottled form. Imports, on the other hand, mainly destined to Italy, remained relatively stable, with the exception of the poor production years in Tunisia, the main importer to the EU.

In turn, the growing production of olive oil on the EU market has given rise to a decrease in producer prices during the nineties. Several projections of production and consumption point to a fragile balance for the world olive oil market, which will face appreciable surpluses if world production increases faster than demand.

The current common market organisation for olive oil, originally created in 1966, relies on production aid, as the principal measure of support to the sector. The former intervention system was replaced by a private storage mechanism, as an instrument for crisis management, and consumption aids were abolished in 1998. Production aid, at a rate of EUR 1 322,5 per tonne, is granted to all producers on the basis of the quantity of olive oil actually produced and the table olive equivalent, subject to the National Guaranteed Quantity (NGQ), currently totalling 1,78 million tonnes. Mechanisms regulating the amount of aid granted to producers, in the case where Member States over- or undershoot their NGQs have been put in place.

Intervention buying-in has been replaced by a private storage aid scheme. Export refunds have been set at a zero level since 1998 without negative impact. A production refund is granted for olive oil in vegetable and fish preserves. In 2001, further emphasis was given to control and quality aspects, most notably through the 'EU Quality Strategy for Olive Oil', which established product and marketing standards for the sector.

2.3. Cotton

The cotton sector, despite being of limited significance to the EU as a whole, contributing only 0,5 % to the final agricultural output, has strong regional importance. Greece, with 79,4 % of the total EU production of 1,55 million tonnes of unginned (raw) cotton, receives 9,0 % of its final agricultural output from cotton while in Spain, the other main EU producer, cotton contributes 1,5 %. Production in other Member States (only in Portugal) is less than 1 500 tonnes.

Within the main producer Member States, there are even stronger distribution effects. After reaching a maximum land area under cotton of 440 000 ha in 1995, the vast majority of today's 380 000 ha of land devoted to cotton production in Greece is located in three regions: Thessaly, Macedonia-Thrace and Sterea Ellada. In Spain, production is concentrated in Andalusia, mainly in the provinces of Seville and Cordoba. The total area under cotton cultivation in Spain, after reaching a maximum of 135 000 ha in 1988, has decreased at around 90 000 ha.

Cotton holdings in these regions are characterised by their large number (71 600 in Greece and 7 600 in Spain) and small size (Greece, 4,9 ha and Spain 12,0 ha). On the other hand, Greek cotton holdings are noted for their higher degree of specialisation, the Thessaly region having evolved towards almost exclusive dedication to cotton cropping. Indeed, despite its vital role in many local rural economies, the tendency towards monoculture in cotton production has been one of the strongest sources of criticism in recent years. Combined with the heavy dependence of cotton on irrigation and fertiliser inputs, cotton production is widely associated with low biodiversity and soil impoverishment. Intensive use of phytosanitary products, especially insecticides, and leaf defoliants to assist with harvest, are techniques, which are pointed to as examples of the most negative environmental impacts of agriculture. For that reason, specific commitments to reduce the negative environmental impacts of cotton production have been made by Member States in 2001.

Most cotton producers in the two main producing Member States belong to producer organisations, which have a management and co-ordination role. At the processing level, a mixture of private enterprises and co-operatives assure the conversion of raw to usable cotton through the ginning process, by which the cotton fibres are separated from the cotton seed. Spain, with almost half of its 22 plants run by co-operatives, shows a certain over-capacity for ginning compared to its production level, while the ginning capacity in Greece is more in balance with production and a lower proportion of plants are running by co-operatives (20 out of a total of 75).

Trade in the sector is generally referred to in terms of ginned cotton. As a producer, the EU is a minor player on the international scene, contributing only about 2,5 % to total world production. The latter, now at 19,9 million tonnes, practically doubled in the last forty years, mostly due to yield improvements. The chief producing countries, having retained their relative importance for the last two decades, remain China (22,6 %), the USA (20,1 %), India (13,1 %) and Pakistan (9,0 %).

The EU, with 708 000 tonnes of imports and 227 000 tonnes of exported ginned cotton, is the major net importer on the world scene. China alternates between net import and export, depending on the state of its own harvest. Brazil and South-east Asia are also significant importers of cotton for their manufacturing industries, having little or no production themselves, though Brazil has appeared recently as a new producer country, of about 800 000 tonnes of cotton over the last few years.

World cotton exports are undoubtedly dominated by the USA, which currently takes about 1,8 million tonnes, that is, 30 % of world trade of 6,0 million tonnes. Uzbekistan, Africa (CFA area countries) and Australia, each with around 800 000 tonnes traded, are the only other major exporters on the world scene.

The largest consumers of cotton in the world are those with established manufacturing industries. China consumes 25,4 % of the world's cotton, followed by India, the USA and Pakistan, the latter consuming about 9,0 %. The EU's consumption of around 1,0 million tonnes of ginned cotton (5,4 % of the world level) is mostly centred in Italy, Portugal and Germany.

The fact that the EU is a marginal producer of cotton [4] implies that the impact of EU production on the evolution of world market prices has been negligible. This is further strengthened by the fact that the EU, for this sector, does not use export subsidies and provide for duty free access. Though policies of both other developed and developing countries have had a significant effect on cotton prices, the main factor contributing to the price decline is more a result of increased competition with synthetics in the fibre market.

[4] Press release on cotton: 15.09.2003, IP/03/1244.

The cotton common market organisation dates from the time of the accession of Greece into the European Community in 1981. The current regime is centred based on a direct aid per tonne of unginned cotton, subject to a National Guaranteed Quantity (NGQ) for each Member State. The level of the aid, granted to processors, who pay a minimal price to producers, is fixed periodically on the basis of the difference in a "guide price" and the world price. Since 1995/96, the "guide price" has been fixed at EUR 1 063 per tonne, with a minimal price of EUR 1 009,9 per tonne. The NGQ is fixed at 782 000 tonnes for Greece, 249 000 tonnes for Spain and 1 500 tonnes for other Member States. Adjustments can be made to the amount of aid paid out if production over- or undershoots the guaranteed quantities.

2.4. Sugar

Sugar beet covers 1,8 million hectares throughout the EU-15, accounting for 1,4 % of the Utilised Agricultural Area, and provides 1,6 to 1,8 % of the EU's agricultural output. It is grown on more than 230 000 farms along with other arable crops, such as cereals. Generally, holdings with sugar beet are larger than average, in terms of both area and economic indicators. The overall agricultural area for holdings with sugar beet (70 hectares, of which 8 are dedicated to sugar beet) is greater than the average for all farms (20 hectares). Holdings with sugar beet also achieve a better income. It is estimated that the net value added per Annual Working Unit (AWU) is 1,7 times higher for holdings with sugar beet than for all farms [5].

[5] Based on figures from the Farm Accountancy Data Network comparing income indicators for farms with sugar beet and average for all holdings (except those with horticulture) from 1998 to 2000.

The EU-15 sugar production oscillates between 15 and 18 million tonnes, in refined equivalents. With the ten new Member States, areas under sugar beet are likely to increase by 30 % and sugar production by 15 %. In the EU-15, there are 135 sugar processing plants and 6 refineries.

Sugar is produced in all Member States of the EU-15 with the exception of Luxembourg. However, the productivity of sugar production varies significantly across Member States. Germany and France account for more than half of the EU-15 sugar production, followed by the United Kingdom and Italy (8 % each). Among the ten new Member States, six are manufacturing sugar for a total of about 3 million tonnes, with Poland accounting for two thirds.

The EU-15 both imports and exports sugar, but in net terms it is an exporter. On average for the marketing years 1999/2000 to 2001/02, exports amounted to 5,3 million tonnes versus 1,8 million tonnes for imports. Net exports represent on average 20 % of sugar production and 2 to 3,5 % of the EU-15 exports of agri-food products, according to the Uruguay Round definition.

The EU is a key player on world sugar markets. The share of the EU-15 in world total amounts to 13 % for production, 12 % for consumption, 15 % for exports and 5 % for imports. Its share in world production, consumption and exports has declined, whereas Southern Hemisphere countries have steadily gained importance. While the EU has been the leading world producer for several decades, Brazil and India have disputed the first rank from 1996 onwards, both accounting for 15 % of world supply. India has also outpaced the EU-15 in terms of consumption.

Although leading sugar producing countries are also main users, sugar is a widely traded commodity. On average international trade, close to 40 million tonnes, represents about 30 % of world production, which totals 120 million tonnes, in refined equivalent. Brazil now dominates exports, with a share as high as one fourth of world exports.

International prices for sugar are of significant importance and are extremely volatile, following an erratic path. After the historical peaks of 1974 and 1981, over the nineties monthly world prices for raw sugar have fluctuated between EUR 280 per tonne in March 1990 and EUR 110 per tonne in April 1999. Since 1995, prices have been on a decreasing trend. This is mainly explained by an overall excess of production over consumption, as measured by the rise in the stocks to use rate. From their low point in 1999/2000, as a result of a shortfall in production in several leading suppliers, prices improved over the marketing year 2000/01, reaching an average EUR 240 per tonne. By the following year they had declined again to EUR 180 per tonne. The average for the first quarter 2003 is even lower, down to EUR 170 per tonne.

There are several reasons explaining price volatility. Exchange rate fluctuations can increase or decrease the price volatility of sugar for a certain currency. The steady growth in consumption is a fundamental driving force in the sugar market, but this has not necessarily translated into sustained import demand. The increase in consumption is much sharper in developing countries than in others and sugar imports are dependent on macro-economic factors. Production is not particularly responsive to changes in world market prices due to the protected internal prices in many countries, the perennial nature of sugar cane, which represents 75 % of the total areas under sugar production, and the long time horizon for investments in sugar manufacture. By contrast, supply is particularly sensitive to weather and revisions in production estimates often cause significant adjustments in international prices. Moreover, sugar exports are concentrated in a limited number of countries that are also leading producers. Brazil, the EU-15, Australia, Thailand and Cuba achieve 70 % of world exports. Finally, both supply and demand are influenced by the various policy instruments used by governments.

Within the EU-15, the sugar sector benefits from a system that combines border protection, supply control and support prices. The intervention price for sugar is currently set at EUR 631,9 per tonne for refined sugar or EUR 523,7 per tonne for raw sugar. Compared to international reference prices for recent years the EU market price has been two to three times higher.

Volatility makes it difficult to provide a solid forecast on world sugar prices. Several analysts estimate that prices will remain on a decreasing trend over the short (2003/04 marketing year) and medium term. In its 2003 agricultural outlook, the OECD forecasts a price of EUR 170 per tonne for 2008/09 for raw sugar. Compared to the average for the reference period (1997/98 to 2001/02), this represents a 13 % drop. According to the OECD, this projected low level is mainly due to "increasing sugar supplies and exports form low cost producers as well as continuing high support and protection in many OECD countries". In global terms, consumption is projected to increase at a slightly quicker rate than supply, most of the growth taking place in non-OECD countries. However, the burden of stocks is expected to keep prices low over the medium term.

3. Proposed reforms and their likely impacts

3.1. General considerations

In its assessment of the needs for reform in the tobacco, olive oil and cotton sectors, the Commission had recourse to the following elements of consideration:

- the clear request from Council for a reform of the sectors concerned "based on the objectives and the approach of the 2003 CAP reform";

- similarities between the sectors, in terms of certain structural and production characteristics, and their policies, which make them suitable for the June 2003 CAP reform approach;

- specific features of each sector, in particular, the risk of production disruption and abandonment of olive groves and the need to improve the sustainability and competitiveness of rural economies.

The Commission believes that a reform based on the June 2003 CAP reform objectives of enhanced competitiveness, stronger market-orientation, improved environmental respect, stabilised incomes and a higher regard for the situation of producers in LFA, should aim to achieve the following objectives:

* establishing a long-term policy perspective for these sectors, in line with their present budgetary envelope, the ceiling of Heading 1 of the current financial perspectives and the new framework for agricultural expenditure agreed at the Brussels European Council in October 2002;

* promoting the objectives and the approach of the June 2003 CAP reform, namely enhanced competitiveness, stronger market-orientation, improved environmental respect, stabilised incomes and a higher regard for the situation of producers in LFA;

* giving priority to producer income and not product support through the transfer of a significant part of the current production-linked direct payments to the single farm payment scheme, as from 1 January 2005;

* subjecting these payments, as is the case with all CAP direct payments, to the respect of the statutory EU environmental and food safety standards, through cross-compliance, and rules of good agricultural and environmental condition, as well as to the modulation and financial discipline mechanisms.

Producers in the tobacco and olive oil sectors already receive a payment linked to the level of production, subject to Maximum Guaranteed Quantities. In the cotton sector, the payment per tonne of unginned cotton, also subject to a Maximum Guaranteed Quantity, is calculated on the basis of the difference in the EU "guide price" and the world price and granted to the ginner, who pays a minimum price to the producer.

Bearing in mind that no price cuts are deemed necessary and that direct payments already exist in the three sectors in question, the Commission considers that translation of those payments into the single farm payment scheme would not present major difficulties.

However, all three sectors have tended to concentrate their production in regions, which are notably lagging behind in their economic development and all are input-intensive, in terms of labour or capital inputs, generating significant off-farm employment through the importance of their associated processing industries.

It is this fact, which has prompted the Commission, within the context of the June 2003 CAP reform approach, to pay attention to the potential impact of decoupling on these regionally important sectors, in particular the risk of production abandonment and the competitiveness of rural areas, in which their production is traditionally located. In accordance with the CAP reform of June 2003, Outermost regions and the Aegean Islands should benefit from a special treatment as regards production support. The direct payments in those regions will not be integrated in the single farm payment.

3.2. Tobacco

The Commission's principal conclusion, from the Extended Impact Assessment for the tobacco sector, was that a step-wise decoupling of the existing tobacco premium, accompanied by a phasing out of the Tobacco Fund and the setting up, within the second pillar of the CAP, of a financial envelope for restructuring tobacco producing areas, would provide the most sustainable policy for the tobacco sector in the future. Under this schema, tobacco quotas would need to be kept as a means of fixing the envelope of that part of the tobacco premium not yet decoupled. Consequently, during the transitional period, any production taking place outside of quota would not receive the corresponding coupled premium remaining to be paid. At the end of this process, the current tobacco common market organisation would no longer be of application.

This option was found to balance adequately the need to break the link between supporting individual producer incomes and the growing of tobacco, while providing funding for a re-orientation of the sector towards alternative sources of income. Furthermore, since at present about one third of the current tobacco premium is needed to cover variable production costs, the progressive implementation of the reform was preferred, in order to avoid a disruptive effect on production and local economies and to allow the market price to adjust to the new conditions. That implementation will last three years.

The proposed reform would begin with the transfer of all or part of the current tobacco premium into entitlements for the single farm payment. While, as shown in Table 1, this transfer would be complete for a producer's first 3,5 tonnes of production, for the following tranche between 3,5 tonnes up to 10 tonnes, only 80 % of the current tobacco premium would be incorporated into the single farm payment. The remaining 20 % would feed the proposed restructuring envelope.

Table 1 - Summary of the Tobacco Reform Proposal

>TABLE POSITION>

When implementing the reform for larger tobacco farms, the current tobacco premium, corresponding to the tranche above 10 tonnes, would be decreased by one third at each one-year step. In order to avoid any major changes in income at agricultural holding level, one third of this tranche's tobacco premium would be converted into single farm payment entitlements, the remainder being transferred to the restructuring envelope.

Equity and efficiency considerations have guided the fixing of the rates of transfer to the restructuring envelope, which would be used to speed-up the re-conversion process in tobacco-producing regions. The restructuring envelope will switch funding to the rural development measures, foreseen in the rural development regulation ((Council Regulation (EC) No 1257/1999). This could include more beneficiaries, more measures, or even an increased aid intensity of existing rural development measures.

With full implementation, this reform process would re-distribute more than 70 % of the current tobacco premium to the single farm payment and at least 20 % to the restructuring envelope. This re-distribution would correspond to an allocation, on average, of EUR 6 900 per family Annual Working Unit (AWU), through the single farm payment.

With a step-wise implementation, the reform would be expected to bring better market orientation and income growth for producers, in addition to the positive impact on producer income development from the increased transfer efficiency of decoupled payments, especially for small holdings, who will receive earlier a larger part of their income as a single farm payment.

During the three year phasing-out period of the current tobacco regime, the Tobacco Fund will continue to be used to support anti-smoking information campaigns. The Commission is committed to continue support for anti-smoking activities despite the diminishing subsidy during this period.

In the short-term, the cultivation of less-profitable tobacco varieties in the EU would be expected to cease. Furthermore, the transfer of the current tobacco premium into the single farm payment would undoubtedly encourage producers, who are not currently covering their variable production costs or who could shift production to crops generating higher income per hectare, to reconvert to another land use in the short-term.

It is projected that the resulting slack in EU tobacco production would be taken up by larger and more professionalised demand- and/or quality-driven tobacco holdings, at an EU price, which would align with world levels prices, according to the varieties produced.

Acting together with the gradual introduction of the single farm payment amongst tobacco growers, the restructuring envelope would promote further the shift in production to more rationally structured holdings, improving the rate of income transfer to holdings producing tobacco during the reference period and encouraging a re-conversion within the local labour market in tobacco-growing areas.

3.3. Olive oil

The Commission considers that the long-term needs of the EU olive oil sector would be best served by a reform, based on the orientation given by the Council at the time of the agreement over the June 2003 CAP Reform.

It is proposed that the existing production-linked payments in the olive oil sector be converted into direct income support, through the creation of new entitlements to the single farm payment for farmers, in addition to those arising from the June 2003 CAP Reform. There are three major benefits to be obtained from including the olive oil sector in the single farm payment.

Firstly, under the single farm payment scheme, the olive oil sector may be expected to achieve better market orientation and enhanced competitiveness. While the olive oil sector already enjoys a positive trade dynamic and has made conscious efforts to keep in touch with consumer trends through its Quality Strategy, the challenges for the future, should world production levels outstrip consumption, can only be met by a sector, which is responsive to the trends in world market demands.

Secondly, adhesion to the single farm payment results in more stable income for farmers, due to the higher transfer efficiency of support, and enables low input olive oil producing regions to maintain their overall level of income support.

Lastly, the positive association already enjoyed by the olive oil sector, in terms of transparency, consumer confidence and the provision of environmental and landscape benefits to society, would be enhanced by its inclusion in an EU agriculture sector moving in the same direction. Any tendencies within the olive oil sector, which are arguably leading to an erosion of its positive image, particularly in environmental issues, would be given greater exposure under the proposed reform arrangements.

However, the Commission considers that a complete conversion of current production-linked payments in the olive sector to the single farm payment could bring problems to certain traditional producer regions of the EU and to low-output olive groves. There exists a significant risk of widespread disruption to olive tree maintenance in these cases, which could in turn lead to degradation of land cover and landscape or negative social impacts. This problem is heightened where such areas manifest a high dependency on the olive sector in their local economies.

For these reasons, the Commission concluded that a reform proposal, which completely broke the link between support payment and olive trees, in terms of the permanence of existing olive groves in sensitive areas, could fail to respect the concerns expressed by the Council and the Parliament, concerning the risk of production abandonment and the need to provide sustainability of rural economies.

Consequently, the Commission proposes that 60 % of the production-linked payments in the olive oil sector, for the reference period, should be converted into entitlements to the single farm payment for holdings larger than 0,3 ha. For reasons of simplification in the implementation of the policy, smaller holdings would have their payments completely decoupled.

Member States would retain 40 % of the payments in the olive oil sector, for the reference period, as national envelopes, for the granting to producers of an additional olive grove payment, calculated on a per hectare or per tree basis. This payment is not linked to production but is intended for maintaining the olive trees, preserving the soil and the environment while taking into consideration the local traditions and culture. The purpose of this additional payment would be to ensure the permanence of olive trees in marginal areas or low-output olive groves by contributing significantly to the maintenance cost of olive groves in those areas. Member States will identify those zones according to objective sustainable development criteria, within a common EU framework. This should include landscape preservation, environmental, social and cultural concerns.

The calculation of the reference hectares for the single farm payment, as well as the area or number of trees for olive grove payments, would be based on IACS-compatible, geographical information system (GIS) data. Areas of olive trees planted after 1 May 1998, except those included in approved new planting schemes, will be excluded from the single farm and olive grove payment schemes.

Concerning olive oil market policy, the Commission proposes that the current private storage measures should be kept intact, as a safety net mechanism, but the refunds relating both to export and to manufacture of certain preserved food, which no longer serve a purpose, should be repealed.

Finally, in relation to the Olive Oil Quality Strategy, the Commission proposes that, to support the sector during the adaptation to the evolving market conditions, existing quality and traceability measures should be reinforced. Activities eligible for support should be broadened to include monitoring of olive oil quality in pluri-annual programmes and reinforcing activities at national, EU and international level. The extra necessary funding would come from the Member State national envelopes for the olive grove payment.

Regarding control aspects, it is proposed that the financing of the present olive oil control agencies will be suppressed beyond 1 November 2005. Control of the new area payment will be made through IACS, supported by GIS. For simplification, the olive grove payment will not be allocated below EUR 50 per aid claim. As far as quality measures are concerned, control over the activity programmes will be strengthened through, among others, new evaluation and control obligations.

It is proposed that, in order to enforce the single farm payment as from 1 January 2005, the reform of the olive oil sector would apply as from 1 November 2004.

3.4. Cotton

The Commission has reached the conclusion that, on balance, the economic, social and environmental benefits of a reform to the EU cotton sector, based on the June 2003 Reform approach, would far outweigh the disadvantages.

For that reason, the Commission proposes to transfer the part of the EAGGF expenditure for cotton, which was destined to producer support during the reference period, into the funding of two producer income support measures, namely, the single farm payment scheme and a new production aid, granted as an area payment. With regard to the latter, the Commission considers that such a production-linked aid would also respond to the objective of the Cotton Protocols in the Acts of Accession of Greece and of Spain and Portugal to support the production of cotton in the regions concerned.

It is proposed that 60 % of that producer-support expenditure, per Member State, would be transferred to the single farm payment scheme, in the form of new entitlements. In doing so, improvements may be expected in terms of the responsiveness of the cotton producers to future market evolutions and requirements. The inclusion of the cotton sector in the single farm payment would also bring to cotton producers the benefits of more stable producer incomes.

In the context of the conflicting association between the cotton sector and environmental degradation, it is important to note that the June 2003 CAP reform approach brings coherence and transparency, with regard to the application of EU legislation covering production standards. Given the newly agreed cross-compliance arrangements for all CAP expenditure, entry into the single farm payment scheme would allow cotton producers to benefit from the same rights as other farmers, in terms of freedom to make more extensive, switch or diversify their production.

Finally, the Commission believes that, in addition to the significant decrease in trade distorting subsidies already proposed by the EU in the Doha Development Agenda, such a reform could help alleviate the rather complex problem of the level of the world market price for cotton by shifting support away from the current "deficiency payment" mechanism, towards a mix of blue and green box measures.

Nevertheless, in view of the appreciable risk of production disruption, the Commission proposes that Member States will retain 40 % of the producer-support expenditure, during the reference period, as national envelopes, for the granting to producers of the new area payment per hectare of cotton, in zones suitable for that crop.

The level of the new area payment has been fixed in order to allow cotton production to continue, on a reduced area than at present, with a gross margin similar to that of competing crops. The combined effect of subjecting both the single farm and area payment to cross-compliance criteria, will lead to more environmentally-friendly cotton production in an income-neutral manner.

The new area payment will be subject to a maximum area of 425 360 ha (340 000 ha in Greece, 85 000 ha in Spain and 360 ha in Portugal). The maximum areas are designed according to the rates of past developments in cotton areas and correspond to 11 % less than the areas in the reference period for Greece and 5 % for Spain. The level of the area payment will be proportionately reduced in the event of payment claims exceeding the maximum area of a Member State.

The area payment would be granted on the basis of specific criteria, relating to the participation of producers in an inter-branch organisation. Each inter-branch organisation would be approved by Member States, covering an area of, where practicable, at least 20 000 ha, and be subject to controls, which could lead to the application of financial penalties or to the withdrawal of approval for all or part of the area allocated.

Half of the area payment envelope could be differentiated according to inter-branch scales, rewarding production deliveries in quality and quantity terms. The activities of each inter-branch organisation would be financed by its members and by a Community grant of EUR 10 per hectare. Total support should be around EUR 4,5 million, which will be included in Member State national envelopes.

The balance between the total market expenditure for cotton and the two producer income support measures, of around EUR 100 million, would be included in restructuring envelope for cotton areas. This amount would be shared between Member States according to the average area eligible for aid over the reference period. This envelope would become an additional financial instrument within the second pillar of the CAP and will fund rural development measures, foreseen in the rural development regulation (Council Regulation (EC) No 1257/1999). This could include more beneficiaries, more measures, or even an increased aid intensity of existing rural development measures.

3.5. Sugar

Following the introduction of production quotas in Member States, the common market organisation for sugar has developed along essentially different lines from those other sectors that have been involved in the CAP reform process. The decision to impose sugar quotas was a political choice, made to ensure a spread of production over the entire Community, rather than to encourage economic specialisation in the most competitive regions of the EU.

This high price support in the current sugar regime permits producers located in the less competitive regions of the EU, which do not have a comparative advantage in sugar beet production, to cover at least their production costs. Internal market prices were maintained through high intervention prices, accompanied by the necessary border protection.

This policy has offered a number of advantages over the years. Firstly, a secure, stable and high quality supply of sugar has been assured on the internal market, even though that result may have been reached with other types of less distorting mechanisms and an higher transfer efficiency. From the point of view of EU producers, the regime offers stability at relatively high prices, which in turn maintains producer incomes. Furthermore, the main countries benefiting from preferential market access and currently exporting sugar into the EU, tend to express, on balance, their satisfaction with a regime that offers their own operators favourable prices for stable quantities traded. However, for a number of reasons, this policy approach has come under growing pressure and its inherent disadvantages have become increasingly apparent.

The principal criticism of the sugar regime is the assertion that it encourages the production of a substantial quantity of sugar in the EU at non-competitive prices. Subsequently, taking account of the EU's sugar import commitments, EU sugar surplus to domestic requirements must be disposed of on the international market, at the prevailing world price. Using such arguments, the external impact of the EU sugar regime has been criticised for creating distortion to free trade and hinders the growth of primary industry in some developing countries.

Within the EU, the high price has been guaranteed to EU producers at the expense of consumers and processors. Not only is the EU intervention price at a level much higher than the world market price, but the EU market price has remained above the intervention price. Further, since it is based on quotas allocated per Member State, the CMO inherently leads to low market integration and favours market partitioning. The price incentive to producers to cultivate sugar beet by means of pushing up yields, is criticised by environmental groups, which also express concerns about the lack of coherence between the sugar policy and sustainable development objectives.

A number of drivers of change to the EU sugar policy, in various stages of development, can be identified.

Firstly, there is the question of the coherence between the current sugar policy and the new orientations for EU agriculture, taken by the June 2003 reform to the CAP, which itself has been based on the objectives of the EU Sustainable Development Strategy. In this context, the importance of the repartition of the production capacity, currently built into the sugar quota regime, must be weighed up against the need to move towards a more competitive and sustainable sugar sector.

Secondly, with the EU's unilateral import concessions awarded to the Least Developed Countries through the Everything But Arms initiative (EBA), and to the Balkan countries, the EU's sugar market could face substantial imbalance, as early as 2007. This market imbalance would bring severe disruption and decline to the industry in many parts of the EU.

Lastly, on the international scene, the legal action against the EU sugar regime must be seen against the backdrop of the ongoing Doha Development Round. Even though the final outcomes of those multi-lateral negotiations are not yet known, the basic features of the new environment of the EU sugar economy are already in place and sufficiently clear for their impact to be assessed. Furthermore, independently of the option to be considered, the EU export regime will have to be brought in line with the outcome of the agreement under the ongoing DDA round in the WTO.

Taken together, these evolutions alter the conditions that prevailed when the balance between the various interests and concerns was originally struck years ago. The Commission believes that the current sugar regime must now be carefully reconsidered, in order to renew an agreement on a sustainable and long term EU sugar policy. Considering the heavy and long-term investment required in the sugar industry, the Commission also believes that any further delay in this decision would be harmful to the sector, whether in the EU or in the developing countries.

Any option leading to a reduction in the internal market price will have a significant impact on the countries benefiting from the Sugar Protocol under the EU-ACP Cotonou Convention. The Commission will evaluate the impact of the reform for the ACP countries benefiting from the Sugar Protocol and will draw therefrom the appropriate conclusions, taking into account the difficulties that may be encountered by the countries concerned.

The Commission proposed three possible policy orientations for the EU sugar regime, which have been analysed in the Extended Impact Assessment, taking into account the effects of the internal and external constraints placed on the sector and the ongoing dispute currently before the WTO. Furthermore, these policy options will have to be considered in the light of the recently approved Community policy on bio-fuels and of the impact for ACP and other third countries.

As a reference scenario for the alternative options, the Commission has first looked at the consequences of an extension of the present regime beyond 2006. This would consist of keeping intact the current common market organisation, based on flexible quotas and price intervention. The EU market would be open to import quantities, according to the various international commitments already agreed or agreed in the future. Custom duties, internal prices and production quotas would be reduced. To put the effects of this scenario in context, though there is little difference in the final outcome, the Extended Impact Assessment also addressed the hypothetical impact of any request by the EBA countries to implement that agreement through an orderly, agreed system on deliveries.

The second scenario evaluated was that of a reduction in the EU internal price. Once the levels of imports and production have stabilised, production quotas would be phased out. In this scenario, the internal market price is allowed to adjust itself to the price of those imports. However, in view of the fact that lowering the level of the EU internal price, which was found to come to an equilibrium value of around EUR 450 per tonne, makes the EU market less attractive for the least competitive sugar producing countries, the impact of this policy option on the world trade patterns was given particular attention. To smoothen for the effects of the reduction in the EU sugar prices, this scenario also looked at the possibility of introducing the single farm payment into the sugar sector, in line with the June 2003 CAP reform. Finally, the impact of this scenario on the revenue from sugar for countries currently exporting sugar to the EU has been assessed.

The third option for reform represents a complete liberalisation from the current regime. This means that the domestic EU price support system would be abolished and production quotas would be abandoned. Consequently, under this option, the impact on the EU sugar market, of the complete removal of import tariffs and quantitative restrictions to imports, has been assessed. As with the price reduction scenario, the possible introduction of income support for EU producers, as well as the impacts of liberalisation on world trade and the implications for the revenue from sugar of countries currently exporting sugar to the EU, have been assessed.

Table 2 - Summary of the Impacts of the Policy Options for the Sugar Sector

>TABLE POSITION>

4. Budget Aspects

Consistent with the objectives and approach of the June 2003 CAP Reform, the overall expenditures resulting from the proposals for tobacco, olive oil and cotton will be in line with recent historic expenditures on the premia and aids under the existing regimes for these sectors.

The reform will also respect the new framework for agricultural expenditure, agreed at the Brussels European Council in October 2002. In addition, the transfer foreseen to strengthen rural development measures will take place within the overall Agriculture Heading 1 ceiling.

The proposals are therefore budgetary neutral compared to past expenditure because the reforms are based on historical reference (average 2000-2002) and avoid a redistribution of funds between Member States. The annual costs remain within the status quo expenditure scenarios for these sectors established by the Commission when, at the time of the CAP Reform proposals of January 2003, it presented expenditure forecasts for the CAP for the period to 2013.

With regard to the sugar sector, projected budgetary costs of the different options are given in the accompanying Extended Impact Assessment. While extending the current regime represents some savings, the overall costs of the other two options depends on the level of compensation granted.

COMMISSION STAFF WORKING DOCUMENT - Tobacco regime - Extended Impact Assessment {COM(2003)554 final}

TABLE OF CONTENTS

1. Introduction

2. Economy of the sector and current CMO

2.1. Economy of the sector

2.1.1. Tobacco production and output

2.1.1.1. Overall production and output

2.1.1.2. Production by group of variety

2.1.1.3. European acceding countries and candidate countries

2.1.2. Structures

2.1.2.1. EU-15 structures

2.1.2.2. Regional analysis

2.1.3. The downstream sector

2.1.4. Prices

2.1.4.1. Prices of raw tobacco

2.1.4.2. EU competitiveness

2.1.4.3. Prices by variety groups

2.1.5. Trade

2.1.5.1. EU-15 trade

2.1.5.2. Tobacco trade: acceding and candidate countries

2.1.6. Utilisation

2.1.6.1. EU-15 utilisation

2.1.6.2. Utilisation in acceding countries

2.1.7. Tobacco production costs, margins and farm incomes

2.1.7.1. Tobacco production margins

2.1.7.2. Income of tobacco farms

2.1.7.3. Conclusions

2.2. The common market organisation for tobacco

2.2.1. Premium system

2.2.2. Measures to orient and limit production: guarantee threshold and quota system

2.2.3. The Community Tobacco Fund

2.2.4. Trading regime with third countries

3. Specific problems of the current CMO in a reshaped CAP

3.1. Internal constraints

3.2. Reshaped objectives of the CAP and improved coherence with other EU policies

3.3. Coherence with sustainable development objectives

4. Reform options

4.1. Option 1: Prolongation of the current CMO

4.2. Option 2: decoupling along CAP reform lines

4.3. Option 3: gradual phasing out within a sectoral approach

5. Impact analysis

5.1. Market and income impact

5.1.1. Impact on production and prices

5.1.2. Impact on income

5.1.2.1. Options 1 and 3

5.1.2.2. Option 2

5.2. Impact on producing areas: social issues within EU-15 and developing countries, trade, environment

5.2.1. Social impact on EU-15 production areas

5.2.2. Impact on trade and on developing countries

5.2.3. Impact on the environment

5.2.3.1. Tobacco farming and environment

5.2.3.2. Key environmental questions and criteria

5.2.4. Impact on public health and consumer interests

5.2.4.1. Effects on health of tobacco smoking

5.2.4.2. Impact of tobacco growing/farming on public health

5.3. Impact on sound and efficient management (budget, monitoring, simplification and controls)

5.3.1. Impact on budget

5.3.2. Impact on monitoring

6. Conclusion

ANNEXES

5. Introduction

In 1998, when the Council agreed substantial modifications to the existing framework of support for Community tobacco production, it instructed the Commission to submit a report [6] in 2002 on the operation of the regime accompanied.

[6] Council Regulation (EC) No 1636/98 of 20 July 1998, Article 26.

The question of the tobacco regime's future was also touched upon during the Göteborg European Council in May 2001, in the context of the EU's strategy for sustainable development.

Although the Council held back from adopting any specific conclusions on tobacco it was evident from the discussions, and the context in which they took place, that reservations exist about the sustainability of the EU tobacco sector.

Doubts were voiced over the social justification for product-related subsidies to tobacco growers, and in particular the apparent contradiction between those aids and society's concerns about smoking. The long-term viability of tobacco production as an economic activity was itself called into question. There was also an awareness, however, that in the event of any major reform alternative sources of income for tobacco producers would be necessary, in order to avoid economic and social breakdown in rural areas that are very dependent on tobacco growing.

The Commission's response was to strengthen its commitment to finding a sustainable policy approach for the tobacco regime, based on an assessment of the economic, social and environmental aspects of the sector. Thus, in May 2002, in its Legislative and Work Programme for 2003, the Commission decided to subject its policy reflections on the tobacco sector to an Extended Impact Assessment2, in accordance with its "Sustainable and inclusive economy priority".

In addition, an evaluation of the common market organisation (CMO) for tobacco was launched in 2002 and completed in 2003.

As the reform of the tobacco regime has implications for other EU policies, the Commission decided to entrust this analysis to an Interservice Steering Group (ISG), inviting representatives from twelve directorates-general and services to take part4. The analysis of the economic, social and environmental aspects of the tobacco regime and the impact different reform options could have on stakeholders in the Union and in third countries, benefited from the Group's diversity of knowledge and background.

Over a six-month period the work of the ISG followed the steps set out for the conduct of impact analyses. The different parts of this report correspond to each of these steps. An introductory section (chapter 2) sets out the main characteristics of the tobacco economy and the tobacco CMO.

Chapter 3 deals with the changes and tensions now facing the CMO, at which certain criticisms have been levelled, while others have underlined the serious constraints any reform must take into account. The aims of the CMO are reconsidered in the light of new engagements by the Union, the European strategy for sustainable development and the general direction of the reformed Common Agricultural Policy.

In chapter 4, three types of option are outlined which reflect different approaches to the reform of the tobacco regime. The "Prolongation" option keeps the high level of production subsidy and uses fixed production quotas to regulate the market. The "Decoupling" and "Phasing out" options seek to achieve a balance between prices and costs. Their likely impact on production levels and location, on prices, farm incomes, industry, employment, the environment and trade flows from third countries where tobacco is produced, has been either qualitatively or quantitatively assessed with the help of various simulations modelled on the FADN sample.

The final part of the report (chapter 6) provides a summary of the advantages and drawbacks to the different options, which are rated according to how they respond to the challenges identified, to what extent they meet the different objectives and according to the effect they would have on stakeholders.

In March 2003 the options agreed by the ISG and a draft of the impact assessment were presented to the "Standing Tobacco Group" of the Consultative Committee on Specialised Crops. They were also presented in June to a Consultative Forum comprising representatives from the world of health, consumer groups, downstream industries, environmental and development associations as well as local authority representatives from the main EU producing countries. The different parties were invited to present their positions and comments, which would inform the choice to be made by the political authorities.

The organisations consulted and the contributions received are presented in Annexes 3 and 4. The substance of the positions expressed in these contributions, on various aspects of the CMO and on the reform options are taken into account in the corresponding parts of the report. Further annexes set out the mandate and composition of the ISG (Annexes 1 and 2), as well as certain working notes.

Main features of tobacco production

>TABLE POSITION>

* varies from 0,8 ha in Anatoloki Makedonia and Puglia to 12,1 ha in Umbria.

6. Economy of the sector and current CMO

- Tobacco is grown in eight Member States, in two of which, Greece and Italy, 75% of EU production is concentrated.

- In the Member States producing tobacco, there is a high geographic concentration: 12 regions contain more than 72% of the tobacco area.

- The number of holdings is small (1,3% of all EU agricultural holdings) and their size is very small, on average 1,6 ha of tobacco and 9,4 ha of Utilised Agricultural Area (UAA).

- Tobacco-growing is highly labour intensive and even if based mainly on family labour (100 000 Annual Work Units, 80% of the total) is also of crucial importance to the economy of tobacco areas, where more than 25 000 AWU of non-family labour is employed.

- Trade is important: of the 350 000 t of raw tobacco produced in the EU, 55% is exported. The EU imports more than 500 000 t, the equivalent of 160% of its production.

- Unlike most European agricultural products, domestic prices are generally between one third and half of world prices (except for Greek oriental tobaccos).

- On average, and particularly due to the very small size of the farms, tobacco producers' incomes compare badly with other producers'; they are highly dependant on production premiums, which represent on average 76% of their income from tobacco-growing.

- In 2002 overall EAGGF expenditure on the tobacco CMO was EUR 963 mio, or around EUR 7 600 per Annual Work Unit in the tobacco sector.

6.1. Economy of the sector

6.1.1. Tobacco production and output

6.1.1.1. Overall production and output

World production of raw tobacco was 6,4 million t per year in the period 2000-2002. With 348 013 t, corresponding to 5,4% of world production, the EU is the world's fifth producer, behind China 38%, Brazil 9%, India 8%, and the US 7%. The last decade has seen a downward trend in volumes produced in the EU and all the other major producing countries except Brazil. In 2000-2002 EU production was down 20% on 1990-1992.

Raw tobacco is produced in eight Member States: Belgium, Germany, Greece, Spain, France, Italy, Austria and Portugal. By far the most important of these are Greece and Italy with, respectively, 132 261 t and 130 274 t in 2000-2002, together representing 75% of EU production. Although remaining at a relatively high level, 37,4% in 2000-2002, Italy's share of EU tobacco production has fallen over the last decade, while Greece's share, at 38% of the total, has remained more stable or slightly increased.

The share of raw tobacco in EU agricultural output is very small and has remained stable over the last decade. It currently represents only 0,4% of the EU's agricultural output at basic prices [7], although in Greece it is more important, accounting for almost 4,5% of national agricultural output at basic prices. In the other producing Member States it fails to reach the 1% threshold.

[7] Basic prices are the sum of producer prices and net subsidies on production.

Geographically, tobacco production is highly concentrated and is especially important to some regions (NUTS 3) of Greece and Italy, where it accounts for more than 50% of regional agricultural production.

In 2000, 0,1% (125 420 ha) of the EU's Utilised Agricultural Area (96 455 390 ha) was cultivated with tobacco. In 2001 the area under tobacco was only 73,2% of the 1993 level. The reduction, of nearly 45 000 ha, was concentrated primarily on the main producing Member States (Greece -17 740 ha, Italy -20 199 ha and Spain -4 935 ha).

From 1993 to 2000 tobacco yields improved in all Member States, especially Italy (from 2,2 t/ha to 3,3 t/ha) and Portugal (from 1 t/ha to 2,8 t/ha). The average EU yield rose from 2 to 2,7 t per ha over the same period.

6.1.1.2. Production by group of variety

EU tobacco production is characterised by a number of different varieties which attract different prices and are destined to different uses. Four broad groups of varieties can be distinguished:

- High quality group of varieties (e.g. "Flue Cured", "Light Air Cured") are mainly used for "American blend" cigarettes, which are currently the most popular type of cigarette on the market. These high-quality varieties together made up more than half the EU's tobacco production in 2001, with a remarkable upward trend recorded particularly for "Flue Cured" (40% share of EU tobacco production).

- Low quality and declining group of varieties, including the "Dark Air Cured" and, to a greater extent, the "Sun Cured" groups, have traditionally been used for cigarettes sold on local markets and the production of dark cigarettes. These varieties have become less and less important in the EU, with a 10% share for "Dark Air Cured" and a 4,1% share for "Sun Cured" in the 2001 tobacco production figures.

- Oriental group of varieties, produced only in Greece and used mainly to enrich the aroma and taste of "American blend" cigarettes. Their share of EU production has remained quite stable over the years, though some variations can be observed within the group. "Basmas" varieties have increased their weight, with a 8,1% share of EU production in 2001, "Katerini" has a settled 7,1% share, while "Kaba Kulak" varieties have seen a slight decrease to a 4,0% share.

- Fire Cured group of varieties, used mainly for the production of cigars and Toscani. Its share in EU tobacco production was only 1,9% in 2001.

Following recent market developments and policy changes (in particular, the introduction in 1998 of the modulation of premiums to producer organisations on the basis of quality standards), there has been a marked reorientation towards the production of high-quality varieties and, to a lesser extent, some of the oriental varieties. This shift particularly shaped Italian production, with the most sought after varieties (Virginia and Bright, belonging to "Flue Cured", and Burley falling in the "Light Air Cured" group) now representing about 77% of national production. Over the last few years Greece has started to produce similar varieties, but still specialises strongly in oriental tobaccos.

The restructuring process has also resulted in increasing varietal specialisation at farm and regional level, with high quality varieties becoming more and more concentrated on a growing number of producers in a few regions. But big differences can still be seen between farms and regions in Greece and Italy: a dichotomy persists between a few "industrial" farms, which are more capital-intensive and concentrate on producing the best varieties, and a large number of small farms, which are typically labour-intensive and less integrated with the market.

6.1.1.3. European acceding countries and candidate countries

Of the 10 acceding countries only four produce tobacco: Poland, Hungary, Slovakia and Cyprus. Their annual production (2000-2002 average) is: Poland 24 617 t, Hungary 9 805 t, Slovakia 1 959 t and Cyprus 362 t [8]. Over the same period Bulgaria and Romania produced respectively 43 915 t and 10 662 t. In all the candidate and acceding countries except Cyprus raw tobacco production is declining.

[8] All acceding countries have obtained the possibility from the EU to pay tobacco support in a simplified manner (aid per ha) as from accession but only Poland and Cyprus have decided to opt for this system of payment.

Poland specialises in the production of Fire Cured varieties, while in Bulgaria and Romania oriental tobaccos are more widely grown.

6.1.2. Structures

6.1.2.1. EU-15 structures

In 2000 there was a total of 79 510 farms with tobacco in the EU, representing only 1,3% of all EU farms. These holdings were mainly concentrated in Greece (64% of all EU tobacco holdings), followed by Italy with a share of 21% [9].

[9] See map in Annex 9.

Over the 1990s the rate of decline in tobacco holdings, at 3,6% per year, was higher than the average rate of decrease of agricultural holdings in the EU (2% per year). On the other hand, over the same period, tobacco hectares declined by 2,6% per year against a fall of 3,2% in the EU's UAA. This means that there was a poor increase in tobacco hectares per holding from 1,4 ha in 1990 to 1,6 ha in 2000.

A moderate restructuring process set off the decline in tobacco holdings and areas and a partial shift from tobacco to other crops, particularly in Italy where favourable climatic conditions have made this possible.

Tobacco holdings are typically small. Almost 60% of holdings growing tobacco, in fact, are under 5 hectares, while more than 18% range from 5 to 10 ha. This inevitably limits the possibility for farmers to diversify. Even though the average size has increased slightly since 1990, there is still a myriad of tobacco holdings characterised by their very small size across the European Union, particularly in Greece, Spain, Portugal and Italy.

The tobacco sector employs a large amount of labour, 126 070 AWU (212 960 people), corresponding to a 2,4% share of the total AWU employed in the EU agricultural sector. However, most raw tobacco labour is seasonal and the share of part-time employment is remarkably high. Greece is the biggest employer, with 79 230 units (AWU), followed by Italy with 23 120 units. Together these two Member States represent 81% of the total labour force employed in tobacco production.

Family labour strongly prevails with about 80% of the total labour force employed in the sector. The equivalent figure for EU holdings not producing tobacco is 73%.

Tobacco production is typically a highly labour-intensity activity. Technical reasons limit the extent to which tobacco growing can be mechanised. On average, the AWUs per farm and hectare of tobacco holdings are higher than the equivalent indicators for "all holdings".

53% of tobacco farmers are over 55 years old. In Greece, Portugal, Italy and Spain more than 90% of managers have only practical experience, while the highest percentage of holders with full agricultural training is recorded for France. On average, only 25% of holders are women.

6.1.2.2. Regional analysis

Concerning the distribution of farms across the EU regions (NUTS 2 level), the tobacco sector is characterised by a strong territorial concentration. Seven regions, ranked on the basis of the number of holdings, concentrate around 70% of the total number of holdings, 63% of the area under tobacco and 57% of gross income [10]. Kentriki and Anatoliki Makedonia are the most important regions, representing altogether 60% of tobacco holdings, 25% of tobacco area and 21% of total gross income. In these two regions 50% of all specialised tobacco farms are concentrated.

[10] Gross income is defined as the value of output from one hectare minus the cost of variable inputs required to produce that output.

A key features of tobacco holdings is that they are extremely heterogeneous across regions. The large farm size, both in terms of area and economic activity, of Umbria, Aquitaine and Veneto contrasts with the small dimension of holdings in Greece and in some other Italian regions (Campania and Puglia).

Problems of restructuring are still particularly acute in some areas where tobacco production plays a very important economic and social role. There, pulling out workers from the sector too rapidly would cause major social imbalances and rural depopulation if an adequate safety net is not put in place.

In Greece, tobacco has the highest relative importance, particularly in Anatoliki Makedonia, where it accounts for 20% of all holdings and 34% of all employment. In Italy, holdings growing tobacco represent just a small proportion of the total holdings, though the proportion is higher in Campania and Umbria, where tobacco accounts for, respectively, about 11% and 9% of all agricultural employment and about 10% and 19% of total gross income. Another region where tobacco production is relatively important for employment is Extremadura in Spain.

6.1.3. The downstream sector

According to the CEDT, the European Confederation of Tobacco Retailers, in 1999 the EU tobacco sector employed over 1 million people and 440 000 people as full-time equivalent.

Most of the first processing industry's input is raw tobacco produced in the Union. However, the tobacco used in the EU to be manufactured into cigarettes is mainly imported, the processed products then being either exported or consumed in the Union.

The first processing industry is mainly located in those Member States where the production of raw tobacco is concentrated. Italy, with 52%, and Greece, with 28%, have the bulk of the EU's first processing production.

Turning to manufacturing, the most important producers of cigarettes are Germany, the UK and the Netherlands. Production in these three countries represented 63% of EU manufactured cigarettes in 1999. The Netherlands and Germany are the main EU producers of cigars, with a 67% share of EU production, and pipe tobacco, 67% of the total. Sectoral employment is relatively important in Germany and the UK with 12 000 and 8 000 people respectively, out of 50 697 full time units for the whole EU tobacco manufacturing industry. Women's employment in this sector is very important (i.e. 53% in Spain compared to 23% for the whole economy).

As far as the retail sector is concerned, sales of tobacco products have surprisingly increased in recent years in terms of both volume and value. In 1999, total sales amounted to about EUR 93 billion.

Tax revenues generated by sales of manufactured tobacco are high in all Member States. The total added value generated in 1999 was EUR 12 billion. The "Manufacturers" contributed with 54% of the total, followed by "Retail sales" with 28%. Globally, the contribution of excise duties and VAT to Member State taxes was EUR 60 billion in 1999.

6.1.4. Prices

6.1.4.1. Prices of raw tobacco

Prices of raw tobacco differ significantly between the varieties, depending on the distinct values of the processed goods for which the variety is used and on the concentration in the supply of final product (various kinds of cigarettes and cigars). In practice, a few multinational traders and manufacturing corporations act as price makers, taking decisions on the demand for raw tobacco on the basis of a complex quality grid, as well as supply and the volume of stocks.

Developments over the last decade show that the strong concentration of manufacturing suppliers has not had a negative effect on prices. Rather, it helped the process of structural adjustment along the tobacco chain and, together with appropriate policies, contributed to increasing the value of the goods produced by the primary sector.

Prices of EU-produced raw tobaccos at international and domestic level are increasing as a consequence of the modernisation undertaken over the last decade.

Low prices are mainly incurred for the products marketed by small farms, as they are relatively more specialised in low quality varieties

6.1.4.2. EU competitiveness

The unit value of tobacco exports has been used to measure the relative competitiveness and value of the EU tobacco industry in an international framework.

At world level, the positive combination of market demand and quality makes the USA and, to a lesser extent, Turkey, the countries with the highest levels of unit values of tobacco exports. The USA mainly exports the varieties used for "American blend" cigarettes while Turkish exports are concentrated on oriental tobaccos.

Unit values of EU exports follow a slight upward pattern against a negative trend observed for the world unit export values. The EU unit export values remained below the world averages from 1989 to 1999, but with a clear trend to close that gap. Indeed, in 2000 EU unit export values were already higher than the corresponding world ones.

6.1.4.3. Prices by variety groups

Between 1993 and 2001, prices for all varieties increased, except for "low qualities and declining varieties", despite the steady fall in production and cultivated area for these latter groups. The price decrease of these varieties is therefore the result of falling demand.

6.1.5. Trade

6.1.5.1. EU-15 Trade

EU tobacco trade is affected by two main factors:

(1) EU production of raw tobacco is insufficient to cover, both in quantity and quality terms, domestic demand from the processing industry;

(2) European multinationals, based mainly in the Netherlands, Germany and the UK, together with some US companies, control a significant share of the world trade in cigarettes and cigars.

The EU occupies a top position in the world tobacco trade. In 2000-2002, the EU imported, in value, 34,7% of the unmanufactured tobacco traded in the world, but only 5,4% of the manufactured tobacco. At the same time, the EU exports accounted for almost 20% of transformed and 7,6% of unmanufactured tobacco. The tobacco industry's trade balance is negative, but improving strongly thanks to increasing exports of processed tobacco.

Trade in manufactured tobacco products is relatively more important for the EU, the US and other developed countries, while the tobacco trade of developing countries is generally based on unmanufactured tobacco.

It is important to note that the production of manufactured tobacco in the EU is not located near to where raw tobacco is cultivated. Italy is a net importer of cigarettes, while Greek net exports of cigarettes are positive in some years and negative in others.

Tobacco intra-trade flows (average 2000-2002) are worth about EUR 5 000 mio. Italy, Greece and Spain are the main suppliers, while Germany followed by Belgium and the United Kingdom are the main buyers. The most traded varieties, both at extra-EU and intra-EU level, are "Flue Cured", "Light Air Cured", and "oriental varieties".

6.1.5.2. Tobacco trade: acceding and candidate countries

From 1998-2000, the acceding countries exported an annual average of 9 470 t and imported 92 060 t of raw tobacco. Exports are mainly towards the EU and imports from the EU, Brazil, USA and Zimbabwe.

Over the same period Bulgaria and Romania exported 22 275 t and 773 t, and imported 10 747 t and 20 809 t. Within the group of acceding and candidate countries Bulgaria is the only net exporter. Turkey is also a major net exporter (77 173t).

6.1.6. Utilisation

6.1.6.1. EU-15 utilisation

Raw tobacco is used ("consumed") by the processing industry, while final consumption refers to the number and value of cigarettes and processed tobacco products sold to consumers.

In the EU, patterns of raw tobacco and processed product use vary, as the European manufactured tobacco industry may acquire the raw product from EU producers, mainly based in Greece and Italy, and from non-EU sources. Similarly, internal raw tobacco production may be directed outside, rather than within, the EU. The EU's overall degree of self-sufficiency in raw tobacco is 53%, with a slight tendency to further reductions. On the other hand, internal production of cigarettes is rather stable, against a slight fall in cigarette consumption. The EU's self-sufficiency in cigarettes is therefore positive and expected to improve.

The EU accounts for a 10% share of the world's total raw tobacco consumption, behind only China (36%), and ahead of India (8%) and the USA (6%). In 2001, EU raw tobacco use amounted to almost 587 000 t, while EU consumption of cigarettes reached 628 000 t in 1999.

Recent data indicate that the number of smokers in the EU is falling faster than the total EU consumption of cigarettes, which means that fewer smokers are smoking more.

Figures for cigarettes per smoker are generally higher for Denmark, Greece, Germany and Spain, with the lowest levels recorded in Sweden, Portugal, Finland and Italy. The percentage of male smokers is higher than the percentage of female everywhere in Europe but Sweden.

Importantly, the evaluation report on tobacco produced by COGEA in 2002, pointed out that consumption of cigarettes in the EU is not linked directly to the tobacco CMO. In this case, changes to the CMO and consequently to EU production of tobacco would have no relevance to cigarette consumption across the EU.

6.1.6.2. Utilisation in acceding countries

On average, from 1998-2000 the biggest users of raw tobacco among the ten acceding countries were Poland (69 109 t) and Hungary (23 266 t). Over the same period consumption levels in Romania and Bulgaria were 38 085 t and 19 772 t respectively.

6.1.7. Tobacco production costs, margins and farm incomes

6.1.7.1. Tobacco production margins

The analysis of profitability of tobacco production is based on FADN [11] data 1999 and 2000 on the basis of a sample of specialised farms. Due to the limited number of specialised tobacco farms, the analysis can be only carried out for Greece, Italy and Spain at the regional level, in the framework of relatively homogeneous production conditions. The five regions for which costs and margins of tobacco production were estimated are Extremadura (Spain), Umbria (Italy), Makedonia-Thraki, Thessalia and Sterea Ellas-Nissi Egaeou-Kriti (Greece).

[11] Farm Accountancy Data Network.

Indicators of profitability include Market margin (tobacco output without premia) and Total margin (tobacco output with premia), both of them calculated over variable costs, over total input, and over total economic costs.

Market margins

Market margins over variable costs and over total input are in general negative in all the regions considered, except in Makedonia-Thraki. This result is determined by the fact that the producer price of tobacco is much too low to cover the costs of the labour-intensive production activity, and it clearly proves that the profitability of tobacco production is highly dependent on subsidies. However, the production of tobacco in Makedonia-Thraki has positive margins, which is in part explained by the fact that in this region the share of high price-varieties is important. On the other hand, it is interesting to notice that in Makedonia-Thraki the main part of labour input comes from the farming family, and is not included in costs.

Total margins

The situation completely changes when considering the total margins, which also include the premium. The total margins over variable costs, but also over total input (variable + fixed costs), are largely positive in every region (and in particular in Greece, where the external factors are mainly unpaid), making tobacco production a very attractive agricultural activity.

Graph 1 - Average costs of production and margins per ha of tobacco specialised farms in some European regions (average 1999-2000)

>REFERENCE TO A GRAPHIC>

Source: DG AGRI, FADN Total receipts = market receipts + premium Implicit costs = family labour and land ownership costs

6.1.7.2. Income of tobacco farms

To analyse the income situation of tobacco producers, it is interesting to compare the revenue of tobacco holdings with that of other types of farm.

In this context, the most common income indicator for the agricultural activity is the Farm Net Value Added per Annual Work Unit (FNVA [12]/AWU).

[12] Farm net value added = total farm output + balance current subsidies and taxes - intermediate consumption - depreciation.

Two main elements playing a role in determining the profitability of the holdings are:

(a) the level of margins per hectare expressed by the indicator FNVA/UAA,

(b) the availability of agricultural area per Annual Work Unit.

Finally, it should not be forgotten that the total farm income is not only determined by the crop or animal production in which the holding is specialised, but also by other possible "secondary" activities.

Graph 2 - Income development (FNVA/AWU) in the EU (for the three main producer Member States) by type of farm - 1990-2000 (current prices)

>REFERENCE TO A GRAPHIC>

Source: DG AGRI, FADN

The evolution of the indicator between 1990 and 2000 shows that tobacco producers in the EU suffer from a structural low level of income compared to other agricultural sectors (see graph above). In most cases, the revenue of tobacco holdings was the lowest among all farm types, with the exception of the specialised beef producers in the beginning of the period and of the mixed beef-milk in the last year. Not even the development of income over the 10-years-period has been particularly favourable to tobacco farms (+45% at current prices or 10% at constant prices and constant currency rates) compared to the average of all sectors (+75% in nominal terms or 47% in real terms).

However, the income situation varies considerably in the different Member States.

While in Italy and Spain, the income of tobacco producers is respectively equal and higher than the average of agricultural holdings in those countries, and anyway higher than the average for all three countries, the profitability of tobacco farms in Greece is the lowest among all the sectors and all the countries.

The low income of tobacco farms in the EU is therefore mainly determined by the situation in Greece, which is the most important tobacco-producing country.

Even if tobacco producers in Greece attain the best margins per hectare, their total income is the lowest. This can be explained by the very small size of tobacco farms in Greece, where the availability of UAA per working unit, and in particular of tobacco area, is very low, and the use of labour input per hectare is probably not very efficient.

Finally, another interesting conclusion can be drawn from the ratio between the balance of current subsidies and taxes and the net value added: for year 2000, this indicator, which measures the dependence of the agricultural revenues on the public support, is equal to 98% for tobacco producers of the three considered countries, by far the highest value compared to other agricultural sectors.

Graph 3 - Ratio Balance current subsidies and taxes / Farm Net Value Added in EU (for the three main producer Member States) by type of farm - 2000

>REFERENCE TO A GRAPHIC>

Source: DG AGRI, FADN

6.1.7.3. Conclusions

The picture emerging from the analysis based on FADN data strengthens the results of the structural analysis. As a fact, tobacco production uses labour very intensively, in particular in Greece, where the oriental varieties are produced. In the actual situation with low market prices, the producer's income is mainly guaranteed by the high level of support, which allows positive margins per ha. Without support, only the oriental varieties in Greece could be profitable. In this respect, the raw tobacco sector appears very fragile.

If on the one hand, the income situation of Greek producers appears particularly unfavourable, on the other hand the higher margins offered by the oriental varieties guarantee a better strength to the sector. Even taking into account that oriental varieties are more intensive in terms of labour, the extremely small size of the Greek holdings determines an apparent inefficient use of family labour force.

6.2. The common market organisation for tobacco

The common market organisation for raw tobacco is set out in Council Regulation (EEC) No 2075/92 [13]. Commission Regulation (EC) No 2848/98 [14] lays down implementing rules. The CMO currently comprises:

[13] OJ L 215, 30.7.1992, p. 70.

[14] OJ L 358, 31.12.1998, p. 17.

(1) a premium system,

(2) a system of production limitation (national threshold and quota system) and of production orientation,

(3) measures to convert production through the Community Tobacco Fund,

(4) trading arrangements.

6.2.1. Premium system

The 34 tobacco varieties are classified into 8 groups.

One single premium is fixed for each variety group. The premium ranges from EUR 2,15 to 4,13/kg. A supplementary amount in the range of EUR 0,41 to 0,88/kg is fixed for some tobacco varieties in some Member States in order to compensate part of the premium lost as a result of the 1992 reform.

On average, the premium is EUR 2 900/t corresponding to EUR 7 800/ha.

Since 1999, the premium paid to producers is made up of a fixed part and a variable part (30% to 45% of the premium, granted as a function of the quality delivered).

The amount of the premium is reduced by a deduction for the Tobacco Fund and, since 1999, by a deduction for the specific aid to producer groups.

The Tobacco Fund has been financed by a deduction of, successively, 0,5% of the premium (1993 harvest), 1% (1994-1998 harvests), 2% (1999-2002 harvest) and 3% (2003 harvest).

The specific aid granted to producer groups for financing their activities to improve quality, environmental protection and regulation management amounts to 2% of the premium.

Upon accession, the new Member States will have the possibility either to apply the "acquis communautaire" or to pay tobacco support, along with support for all other agricultural commodities, in a simplified manner (flat rate aid per ha). Poland and Cyprus have already opted for this simplified system of payment.

6.2.2. Measures to orient and limit production: guarantee threshold and quota system

The Council has set an overall guarantee threshold per harvest for the EC and, within that quantity, individual guarantee thresholds for each group of varieties and for each producing Member State. The guarantee thresholds have been slightly reduced from 348 508 t of raw leaf in 1999 to 334 064 t in 2004.

The acceding countries have been granted a total of 52 353 t of guarantee thresholds, broken down as follows: Poland 37 933 t, Hungary 12 355 t, Slovakia 1 715 t and Cyprus 350 t.

Within each Member State quantities of thresholds may be transferred from one variety group to another, in a budget neutral way. This measure has permitted a shift of production towards varieties with a higher market demand and that fetch better prices.

In order to ensure respect of the guarantee thresholds the Council has imposed a regime of production quotas. Member States distribute the quotas by variety among producer groups and individual producers proportionately to the average quantity of tobacco they delivered to the first processing industry in the three years preceding the most recent harvest. To allow for some flexibility, producers can buy and sell quotas within Member State boundaries.

A national reserve of production quota, which may be set up with between 0,5% and 2% of the total national guarantee threshold, is an option for Member States.

The auction procedure envisaged for cultivation contracts has not been applied, because a lack of first processors does not allow for real competition in most producing Member States. In those Member States with sufficient first processors and where competition could take place, small processors were opposed to the scheme because they feared they would be unable to compete with the major processors. The industry has expressed interest in an auction system for raw leaf tobacco, rather than for contracts.

Producers who decide to leave the sector on a voluntary basis may sell their quota to the EU via the quota buy-back programme. National guarantee thresholds are reduced accordingly. Between 1999 and 2001 the quantity of quota withdrawn from the market in this way has been marginal. In 2002, however, as buy-back prices were increased, results have improved significantly.

6.2.3. The Community Tobacco Fund

The CMO allows for the creation of a Community Tobacco Fund [15]. Prior to 2002, this Fund was used to finance agricultural research into tobacco varieties and production methods, and information actions to improve public understanding of the harmful effects of tobacco consumption. As from 2003, the agricultural research aspect was transferred to the 6th framework research programme. Instead, the Fund may now finance actions that enable tobacco producers who have sold their quota in the buy back scheme to convert their production to other crops or economic activities that generate employment; and also studies into the possibilities for producers to switch to other crops or activities.

[15] See "Commission Report on the use of the appropriations from the Community Tobacco Fund" COM(2003) ... [currently under adoption procedure by the Commission].

Funding of campaigns against tobacco consumption

In the past the Tobacco Fund was not fully used. From 1993 to 2001, EUR 31,4 million were spent on 19 information projects managed by DG SANCO. In 2001, DG SANCO launched a three-year prevention campaign against tobacco consumption among teenagers (12-18 years old) with an annual budget of EUR 6 million. In parallel, DG SANCO is developing new initiatives in order to improve knowledge in the field of tobacco prevention and also to support its political and legislative initiatives. Media experts consider this budget too low to have a critical impact.

Measures to reconvert production

Since 2003, Member States may set up national programmes for the conversion of tobacco growers to other crops and activities. Individual producers who have abandoned the tobacco sector and sold their quota in the buy back programme can present individual projects for conversion (switching to other crops, training for diversification, establishing infrastructure for marketing quality products).

Public authorities in the production areas and public research bodies in agronomy and/or rural economy can present projects of a general interest (studies, guidance and advisory services, innovative demonstration projects). EU financing may cover up to 75% of the total amount for individual actions or 100% for collective actions of a general interest.

In 2003, 680 individual projects and 14 projects of a general interest were presented in the Member States. Individual conversion is mostly oriented towards (in decreasing order) horticulture, olive production, rural tourist facilities, processed horticulture products, fruit production and cereals.

6.2.4. Trading regime with third countries

The trading regime includes:

- a common duty with a rate depending on type and variety, from 11,2% of the imported value (with a minimum of EUR 22 and a maximum of EUR 56/net kg) to 18,4% (with a minimum of EUR 22 and a maximum of EUR 24/100 net kg).

- concerning bilateral or unilateral tariff preferences, the EU has granted zero duty imports to ACP countries, and least developed countries in the SPG system with the exception of Myanmar and the Andean/Central America group. A reduced duty has been granted to Mexico, South Africa and to the other SPG countries. Finally, Moldova, Hungary, Bulgaria and Romania benefit from a reduced customs duty within a preferential import quota.

There are neither preferential import quotas at WTO level, nor export subsidies, which were abolished under EEC legislation in 1993.

7. Specific problems of the current CMO in a reshaped CAP

The objective in reforming the tobacco regime is not only to increase global coherence between the main policies of the Union, in this case mainly between the CAP and the public health policy, but also to include this sectoral policy in the new reform process agreed in the Council compromise of 26 June 2003.

7.1. Internal constraints

With the reshaping of the CAP, some of the objectives formerly assigned to the tobacco CMO are no longer pertinent. Some instruments are not suited to the new context; others have under-performed and so failed to achieve their goals, even if these remain valid.

- A heavy dependency on the premium for tobacco cultivation is a major drawback of the present CMO. When considering the ratio of the premium to the total market and premium receipts, it represents on average 76%.

- Import prices still remain much higher than internal prices even if the latter have improved since the last CMO modification in 1998. In fact, the ratio market price/net premium remains rather low.

- The present CMO has ensured a high level of employment, in particular of the family labour force. However, the cost to the EU budget (EUR 963 mio in 2002) is too high compared to other sectors. The ratio between the weight of Gross Saleable Production/EU cost of support is highest (1 to 6) for the tobacco CMO. The sector with the second highest support ratio is sugar, at 1 to 2,70, followed by cereals, with a ratio of 1 to 2,27.

- The balance between market supply and demand has improved but some groups of varieties, especially those oriented to traditional dark cigarettes, are in difficulties.

- The buy-back mechanism implemented to facilitate abandonment of the sector by less competitive producers appears to be largely underused and hence inefficient in achieving its goal although some improvements were made in recent years.

In addition to these problems, the current CMO, based on coupled "Amber box" (i.e. distortive) support, faces growing constraints in two areas:

- environmental deterioration due to the effects, already observable, of coupled support,

- the Community's proposal to the WTO and in particular the engagement to reduce Amber box support by 45%.

7.2. Reshaped objectives of the CAP and improved coherence with other EU Policies

Like the other CMOs, the common market organisation for tobacco has to redefine its objectives in line with the new economic context and the expectations of consumers and taxpayers. The main aspects of the reshaped CAP that are relevant to this CMO are the following:

(1) promoting a more market oriented and sustainable tobacco production. This can be achieved by including the current coupled direct payment into the decoupled Single Farm Payment, based on historical references and subject to compliance requirements;

(2) an agriculture sector which can achieve a fair and stable standard of living for agricultural producers without receiving unacceptable subsidies;

(3) the need to provide a better balance of support and strengthen rural development by transferring funds from the first to the second pillar of the CAP and expanding the scope of instruments currently available for rural development;

(4) contributing to a simpler agricultural policy;

(5) strict respect of the budgetary constraints decided at the October 2002 Brussels Council in an enlarged Union.

7.3. Coherence with sustainable development objectives

At the Göteborg European Council, the Commission presented a communication on the EU's strategy for sustainable development [16] (May 2001) which specifically referred to the tobacco sector.

[16] Communication from the Commission: A Sustainable Europe for a Better World: A European Union Strategy for Sustainable Development (COM(2001) 264 final of 15.5.2001).

"Following on from the 2002 evaluation of the tobacco regime, adapt the regime so as to allow for a phasing out of tobacco subsidies while putting in place measures to develop alternative sources of income and economic activity for tobacco workers and growers and decide an early date accordingly".

As fully recognised by the European Council and clearly stated during the stakeholders' consultation, tobacco is an agricultural product with particular features, linked as it is with public health and rural employment.

In addition the sustainable development objective has to be achieved not only inside the Union, but also in the framework of policies promoted in the developing countries.

All these internal and external objectives make it necessary to determine whether tobacco production subsidies are compatible with policies of maintaining economic and social structures and reducing tobacco consumption in the European Union, and to examine different policy options.

8. REFORM OPTIONS

To resolve the problems inherent in the current CMO and attain the new objectives of the CAP, the common market organisation for tobacco could be reformed by modifying some measures and adopting a number of new ones. Three main options have been drawn up.

8.1. Option 1: Prolongation of the current CMO

If it is decided to prolong the current CMO, it will anyway be necessary to adjust some of the mechanisms currently used for market management.

* The commercial status of EU raw tobacco is idiosyncratic, as producer prices are much lower than import prices. However, the good quality of EU raw tobacco should ensure an increase in prices if premium levels are reduced.

* The guarantee threshold for varieties with no obvious market outlets should be completely eliminated or reduced during the first year of application of the new CMO. Supplementary support for some varieties should also be abolished.

* The abandonment of activity by marginal and older producers should be facilitated through a buy-back programme with the same conditions as at present.

* Compulsory implementation of the auction scheme for quantities produced should further improve quality and market efficiency. This would also mean that the very complicated application of the variable part of the premium could be abandoned.

* The savings obtained by reducing premiums and eliminating or reducing thresholds could be used to finance a restructured Tobacco Fund.

8.2. Option 2: decoupling along CAP reform lines

* Using a step-wise approach, an increasing part of the current coupled tobacco premium would be decoupled and included in the Single Farm Payment: subsidies become non crop specific and producers free to continue tobacco production or to reconvert to a different use of their land. Decoupling may be introduced gradually but will be full at the end of the phasing-in period.

A step-wise implementation of decoupling would be necessary to avoid disrupting production and local economies and to allow market prices to adjust to the new conditions. In order to avoid any major changes in farm incomes at each step a fixed part of the current coupled tobacco premium would be decoupled and included in the Single Farm Payment.

* The Tobacco Fund, as such, would be phased out and replaced by a new tool, a financial envelope for restructuring tobacco producing areas, including measures for workers external to the producer's family in the production regions. It is important that rural development resources work together with the envelope for restructuring to maintain and reinforce the competitiveness of the rural tobacco zones. In order to keep the mechanism as simple as possible, it should cohere with existing Rural Development policy tools and create synergies. The possibility of specific measures being added to the framework of rural development plans should not be excluded.

* This option does not address the issue of financing the tobacco control campaigns, which will be dealt with in the relevant context.

Main features of the step-wise approach:

* During the phasing-in of decoupling, tobacco quotas would be kept as a means of fixing the coupled tobacco premium envelope. Production would be permitted outside of quota but without the payment of any coupled premium.

* In order to avoid threshold effects when phasing-out the coupled payments, a distinction would be made, in terms of the volume of production per holding, between the tranche of production from 0 to 3,5 t, the tranche from 3,5 to 10 t and the tranche of more than 10 t.

* At each step and for each tranche of production, part of the current coupled tobacco premium would be transformed into a decoupled producer payment and part would be transferred to the financial envelope for restructuring.

* During the first step, for all producers, the coupled payment corresponding to the tranche of production from 0 to 3,5 t would be fully decoupled and added to each producer's Single Farm Payment. Above the first 3,5 t only part of the coupled payment would be decoupled, and part would be transferred to the envelope for restructuring.

* In the next two steps, the remainder of the coupled payment would be phased-out by gradually increasing:

- the part to be decoupled and added to each producer's Single Farm Payment;

- the part transferred to the financial envelope for restructuring.

* Once fully implemented the decoupling process would have re-distributed the current coupled tobacco premiums to the Single Farm Payment, and an Envelope for Restructuring totalling about EUR 150 mio would be available. In addition, Structural Funds could be used to promote alternative activities.

8.3. Option 3: gradual phasing out within a sectoral approach

This approach keeps the current framework but gradually reduces the unit amounts, e.g. in ten cumulative steps of 10%.

* Support would be phased out progressively over a 10-year period, by 10% per year. During this time the current CMO would continue to be applied without modification, except that the auction scheme for the allocation of quotas would be made compulsory.

* The Tobacco Fund would also be phased out and progressive savings shifted entirely towards the financial envelope for restructuring to take into account the new needs for restructuring across the whole tobacco sector. As under option 2, Structural Funds could be used to complement rural development measures implemented in the regions affected.

* This option does not address the issue of financing the tobacco control campaigns, which remains to be dealt with in the relevant context.

Summary table of the three options

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* during the phasing out period

Any change in Community support to tobacco producers will first have to take into account the anticipated impact on areas and actors directly and indirectly involved, i.e. not only at production level, but also on marketing, processing, trade, rural development, public heath, environment and monitoring.

9. IMPACT ANALYSIS

9.1. Market and income impact

9.1.1. Impact on production and prices

The impact of the different options on markets and prices must take fully into account certain relevant features particular to tobacco production, namely:

- the low average level of income due to the small size of farms and high costs,

- the consequent high dependency for income on the coupled premiums currently granted,

- the depressive effect of the premiums on domestic price levels, which are very low if compared to world trade prices

Option 1

As changes would be limited to an adaptation of the current CMO, including a reduction of premiums, the impact on production would also be limited. Indeed, as support would remain coupled, current production levels would still be necessary in order to maximise the premiums. Inefficient producers would therefore continue to produce tobacco. A small fall in production could only come from varieties for which the threshold would be abolished or reduced and this only if the producer could not convert to other varieties.

The consequence of this slight fall in production, combined with a cut in the premiums, would be to increase prices, in line with the current trend, as the current high level of premiums is known to have a depressive effect on domestic prices. The precise impact would very much depend on the level of cuts decided.

Compulsory implementation of the auction scheme for allocating quotas should have the effect of further improving quality and market efficiency.

Option 2

With decoupling, as the premium is no longer linked to the quantity produced but to a historical basis, producers will respond much more to markets signals and produce according to demand. This would imply the following changes:

- extensification for many producers and research of better quality varieties.

- farmers now producing at a loss in order to get the coupled premium would cease production.

- only quality varieties finding profitable outlets in the market would continue to be grown.

The result would be a sharp drop in production. The only regions where tobacco would continue to be grown on a significant scale would be in Greece, where varieties for which the market price covers the variable costs would predominate.

This qualitative and quantitative evolution of production should lead to an increase in domestic prices from their present relatively low levels.

Option 3

Under this option the phasing out of the premium, even over a long period (10 years), would result in a very sharp decline in production, even of better exportable qualities and taking into account the likely subsequent increase in domestic prices.

As for option 1, compulsory implementation of the auction scheme for allocating quotas should further improve quality and market efficiency.

9.1.2. Impact on income

The impact of the tobacco reform options was assessed by static simulations using FADN data. These simulations show the effects of a possible reduction in tobacco premiums, accompanied by a probable increase in tobacco prices.

The starting point for all simulations is the database of production costs, market receipts and premiums per hectare of tobacco, calculated for specialised holdings in five European regions. This database has already been used in the descriptive analysis. Based on this data, as well as on other information (for instance the average tobacco area and labour input) income from tobacco production is calculated for the current period, which is considered to be the baseline.

The income indicators [17] used in the analyses are Farm Family Income (FFI) and Farm Family income per Family Work Unit (FFI/FWU). FFI is defined as total market receipts plus premiums minus total inputs. The choice of this indicator is justified by the fact that, unlike Farm Net Value Added (which represents the remuneration of the farms whole labour force), it only refers to the earnings of the agricultural entrepreneur and his family, who are finally responsible for the production decisions on the holding.

[17] Details in Annex 8.

Assuming that the cost structure remains unchanged over time, FFI and FFI/FWU for the reform options are calculated by applying the reduction in premiums envisaged by the option in question, as well as a likely price increase, to the baseline. The price increase is considered likely following the probable abandonment of some tobacco production after the cut in subsidies.

The impact of the different policy options on income from tobacco production is evaluated by comparing the income indicators of the simulations with the corresponding indicators in the baseline.

For all the analyses presented below it is assumed that if the coupled tobacco premium is at least one third lower than in the baseline, tobacco prices would increase by 100% in Italy and Spain and 25% in Greece. The huge gap between domestic producer prices for tobacco and prices paid by first processors for tobacco imported from outside the EU, also taking into account the different stages of processing, transport and insurance costs and differences in quality, shows that there is room for price increases of this magnitude.

9.1.2.1. Options 1 and 3

The impact of a reduction in the tobacco premium on the income of an average farm was simulated.

The results show that already after a 50% reduction in the premium the average FFI/FWU from tobacco production, in all regions and particularly outside Greece, would be dramatically lower than at present, and lower than incomes from the production of cereals.

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* Option 1: with a 33% reduction of the premium, generating corresponding financial resources to be transferred to a Tobacco Fund, the impact on incomes would be more variable. In the regions where the fall in income would be biggest (Umbria -39% and Sterea -33%) the profitability of tobacco nevertheless remains higher than for cereals. In particular in Umbria, where tobacco holdings are currently characterised by an extremely high level of revenue per work unit, incomes from tobacco production would be comparable to those for cereals specialists in Champagne-Ardennes and the East of England.

* Option 3: a total abolition of premia would have an even bigger impact on tobacco incomes, which would be negative in all regions except Makedonia-Thraki.

9.1.2.2. Option 2

Option 2 entails the gradual transformation of the current tobacco premium into a decoupled payment that would be integrated in the Single Farm Payment.

As the new payment is not crop-specific, the farmer is not obliged to continue producing tobacco, but can switch to another agricultural activity, or even completely cease production. If he converts to another crop or, more certainly, if he ceases production altogether, the farmer would have much lower production costs, especially as tobacco is a very input-intensive (and especially labour-intensive) crop.

Under this option a differentiated treatment for tobacco farms is proposed, according to their size. When the system is fully implemented, the premium for the first 3,5 t of tobacco will be maintained at the existing level, but in a decoupled form. For production between 3,5 and 10 t, 80% of the premium will be integrated in the Single Farm Payment, while the remaining 20% will be transferred to the Restructuring Envelope. On production exceeding 10 t, only 33% of the tobacco premium will be integrated in the Single Farm Payment to the producer, and 66% shifted to the Restructuring Envelope.

The impact of this policy option on the income of the average farm was simulated by comparing the average FFI under the current regime with the simulated FFI:

- if tobacco production is continued,

- if all agricultural activity ceases,

- if switching to an alternative crop, such as durum wheat. The FFI from durum wheat production was calculated for each region on the basis of average production costs, market receipts and premiums per hectare of durum wheat and on the area formerly used for tobacco.

The costs of conversion are not taken into account. If production is completely abandoned, only some minor cost items (land rental and interest repayments) and the decoupled premium are taken into account. Finally, production decisions are taken on the basis of the profitability of each alternative.

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The results of the analysis show that, except for Greece, and in particular Makedonia-Thraki, FFI from tobacco production would drop, making the continued production of tobacco the least attractive choice for the farmer. Tobacco therefore would be largely abandoned as a crop.

Looking at projected incomes for the most profitable production decision, it is clear that this reform option would guarantee farmers at least the same level of income as in the baseline. This is not suprising, as the aim of decoupling is to increase income transfer efficiency. The tobacco sector provides a good illustration of the positive effects of decoupling on agricultural incomes.

- In Umbria (Italy), a switch from tobacco to durum wheat would allow farmers to increase their income by 8%;

- in Greece, the income improvement generated by the best production option would vary between 15% and 28% but, given the low FFI of Greek tobacco farms, the difference would be just a few hundred EUR;

- only in Extremadura (Spain) would this option lead to a more substantial income improvement for producers switching to durum wheat.

This reform option therefore appears to be well balanced and, in particular, the fine-tuning of the three production bands and of the percentages to be shifted to the Envelope for Restructuring should ensure that any major increase in overall support is avoided.

Other simulations were carried out to study any possible differentiated impact on farm incomes depending on farm size (e.g. the available tobacco area). The results for Umbria and Makedonia-Thraki are presented in the graphs below, while similar graphs for the other three regions can be found in Annex 7.

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A common characteristic of the development of FFI by tobacco area is that, compared to the baseline, the decoupling option allows small farmers to systematically improve their income. This is because, as the level of premium for the first 3,5 t of tobacco production is unchanged, the producer can either benefit from a higher tobacco price, or from lower production costs, if he prefers to cease production or switch to another crop.

As the farm size increases, and particularly when the tobacco area is more than that needed to produce 10 t, the 66% cut in the coupled premium leads to a sharp slowdown of income growth, so that from a certain threshold onwards, FFI in the reformed system is lower than the baseline, regardless of the production choice taken by the farmer.

In Umbria, continuing with tobacco appears to be the least profitable option and incomes fall, compared to the current situation, as soon as production exceeds 10 t. FFI even becomes negative for a tobacco area over 20 ha. Conversion to durum wheat seems to be the best option for producers, who could improve their income despite the reduction of payments, except if they have more than 40 ha of tobacco.

In Makedonia-Thraki the situation is completely different from Umbria. The farmer's best option is to continue producing tobacco, which allows a slight improvement of income, as long as the decoupled premium is paid fully or at 80%. As large farms are almost non-existent in this region, most farmers would benefit from the reform. Switching to durum wheat or ceasing production would not seem attractive alternatives for any size class of farm.

9.2. Impact on producing areas: social issues within EU-15 and developing countries, trade, environment

9.2.1. Social impact on EU-15 production areas

As shown by employment data directly or indirectly linked with tobacco cultivation, and clearly reiterated by local authorities during the Forum, any change in the common market organisation will have to face up to the potential risks producing areas will be exposed to.

Tobacco production is typically highly labour intensive. It provides many jobs, not only for producers' families and employees, but also for workers in the processing industry.

In some regions, particularly in Greece, natural and structural constraints make tobacco cultivation and first processing the only options. This is why the majority of farms specialise in tobacco.

In Greece two regions, Kentriki and Anatoliki Makedonia, with a 60% share of the EU's tobacco holdings, represent 50% of all specialised tobacco farms but, due to the very small size of the farms, no more than 21% of the EU's tobacco area.

Besides tobacco cultivation, tobacco processing activities are also concentrated in these regions. Data provided by Prof. Mattas, of the University of Thessaloniki, show that about 85% of Greece's first processing industry for tobacco is located in this area. Jobs are provided for more than one third of the agricultural sector (which itself represents a high 35% of the total employment). In addition, these regions are among the poorest in the EU: for example, per capita GDP in Anatoliki Makedonia, a mountainous region, is about 57% of the EU average.

This situation is mirrored, but to a lesser extent, by farms in the Italian regions of Campania and Puglia.

Due to the very small size of many farms, even where an alternative crop might be possible, up to now none would provide as many jobs as tobacco production in all the regions concerned. A few limited possibilities exist to maintain the same levels of employment on the farm, for example, specific types of horticulture.

Under these circumstances, the impact of each option would be:

* Option 1 - limited.

* Option 2 - the decoupled payments would maintain the family labour but a large part of the non-family labour would not be retained.

Concerning employment in the first processing industry, some jobs could be lost temporarily while waiting for the positive effects of the Restructuring Envelope.

The combined effects of increased family income (see point 5.1.2) and successful implementation of the Restructuring Envelope would, in the medium term, improve cohesion.

* Option 3 - would have the most radical impact on family, non-family and first processing employment

9.2.2. Impact on trade and on developing countries

At global level, the tobacco sector is characterised by an increasingly high level of production and consumption in developing countries. In 2000-2002, 81% of the world's production and 71% of the world's consumption of raw tobacco were concentrated in developing countries. The bulk of unmanufactured tobacco produced in developing countries remains within national boundaries to feed the growing consumption. Developed countries have a much higher share of trade, with four in particular - Germany, the US, UK and the Netherlands - exporting half of all the cigarettes traded at world level.

As a significant net importer of raw tobacco and a major net exporter of cigarettes and other processed products, the EU plays an important role in world trade. While a good percentage of raw tobacco imports originate in developing countries, the European multinationals in the processed tobacco sector depend mainly on the United States for imports of high quality varieties (21% of all EU imports). Next in importance come Brazil (19,5%), Zimbabwe (15%), Malawi (8%), Turkey (5,5%), then a number of other countries with a roughly equal, small share of imports. Patterns in tobacco trade could be affected by changes in commitments, following China's entry into the WTO. China is the world's biggest producer of tobacco.

The current CMO for raw tobacco has been shaped by the abolition of price support measures, such as intervention and export refunds, while border protection has been maintained at a very low level, through the application of the common customs tariff. Current support mechanisms are based on production-linked premiums, together with quotas allocated by variety. In the notification of domestic support at the WTO, the current premium system is classified in the Amber box (that is, as a trade distortive measure) where it does not fall into the price support category but into the group of Non-exempted direct payments (see Annex 6).

Overall, the CMO has not had the effect of depressing world prices, as EU production has declined over the last decade faster than the fall recorded for world production. Equally, enlargement should not produce major imbalances, as tobacco production in Eastern Europe is declining faster than in the EU.

Leaving aside the status quo option, the trade effects of options 2 and 3 are questionable. In particular, it is uncertain to which extent decoupling will cause internal production to fall and so provoke an increase in raw tobacco imports to feed the needs of the EU processing industry. Some agents of the EU tobacco industry argue that abolishing premiums could induce a further and more decisive modernisation of EU production, strengthen integration in the tobacco chain, increase production of the best quality varieties, and, as a consequence, restrain the scope for further imports of these varieties.

According to International Labour Organisation (ILO) figures, of the estimated 100 million people employed worldwide in all segments of the tobacco sector, 90% are in developing countries. 1,2 million work in manufacturing, some 40 million in growing and leaf processing, 20 million in typical local industries (such as hand rolling in India and Indonesia) and the rest in tobacco-related processes and industries ranging from distribution, sales and promotion for tobacco use to those against tobacco consumption.

According to the ILO, while workers in tobacco manufacturing are among the best paid industrial employees in the world, tobacco farmers in developing and some transition countries are generally disorganised and unable to profit from the total value added generated by the industry. If the sector should be subject to a worldwide process of production limitation, counter-measures should be adopted to avoid disruptive effects on employment and income capabilities. Particularly vulnerable would be countries such as Malawi and Zimbabwe, where raw tobacco is a key product, with exports representing more than 70% of agricultural exports and a large share of total exports (66% and 45% respectively).

The consumption of tobacco has a serious impact on health in developing countries. It is estimated that 2,4 million people die each year in developing countries from tobacco-related diseases. Whereas tobacco consumption is slowly falling in many industrialised countries, smoking is increasing in many developing countries - especially among women and young people. Based on current trends, estimates have been made that the mortality figure in developing countries will have almost trebled by 2020.

The control of tobacco is gradually becoming an important health policy component in developing countries and is currently being promoted through an international commitment to agree on a Framework Convention on Tobacco Control (FCTC) under the auspices of the World Health Organization (WHO), already signed by the EU.

In this context, the European Commission has played an active role in showing how existing instruments of development cooperation can be used to address the control of tobacco in developing countries.

The main overall challenge is to resolve the internal contradiction between production-linked support for raw tobacco and the emphasis on tobacco control. This is also important vis-à-vis those developing countries where adaptation and diversification programmes for tobacco growers have already been implemented.

The EU stands to gain much in terms of credibility and coherence, and a further stimulus to cooperation and mutual trust with developing countries. From this point of view, the reform proposals under option 2 would have a very positive impact. Decoupling associated with renewed efforts to reconvert tobacco farms to alternative uses, and to enhance public health, would give the EU a solid standpoint in international talks and bilateral relations with developing countries.

9.2.3. Impact on the environment

The future revised tobacco CMO needs to fit into the current discussion of the CAP as well as into the general context of environmental policies, the Sustainable Development Strategy, the bio-diversity action plan, the 6th Community Environment Action Programme and the thematic strategies on soil and pesticides.

9.2.3.1. Tobacco farming and environment

The risks of environmental impact resulting from many agricultural products as tobacco production concern the leaching of nitrogen from fertilisers into ground- and surface water, strains on groundwater resources from irrigation. Particular risks are caused by unwanted side effects resulting from the usually high level of pesticide application. Tobacco cultivation requires such high pesticide levels in order to ensure a good leaf quality. The fact that tobacco is grown in monoculture also contributes to a high consumption of pesticides.

The leaching risk depends, among other factors, on the types of variety:

- "Virginia"-type tobacco is not very demanding on nitrogen. Nitrate problems in water are unlikely to occur;

- oriental tobacco varieties, largely cultivated in Greece, are produced with a more intensive use of nitrogen than Virginia.

Another factor influencing the presence and severity of environmental risk is the agri-climatic conditions of a certain area.

In addition to the risks resulting from the presence of tobacco, there are also risks due ceasing traditional tobacco cultivation, which is of particularly relevance in the mountain areas. In these environmentally fragile areas, land abandonment can contribute to the degradation of landscapes and soil erosion soils.

Finally, secondary effects may occur with respect to processing and transport specifically related to the cultivation of tobacco.

9.2.3.2. Key environmental questions and criteria

The impact of modifications of the tobacco regime on the environment will result from changes in the farmer's decision concerning tobacco production or land use in general. These decisions will affect the intensity of input use and the choice of alternative crops, which both can have positive or negative environmental consequences.

Therefore, the crucial environmental questions are:

- Which are the specific impacts on tobacco growing, processing, and transport resulting from the current system as compared to those resulting from a gradual phasing out or decoupling scenario? In this context, also the scope for re-conversion and the specific environmental effects of alternative crops matter.

- Are there different possibilities, in the different scenarios, that ensure the respect of environmental requirements through cross compliance?

In view of possible policy changes and related producer decisions concerning the cultivation of tobacco or alternative crops, the specific production intensity, as well as land abandonment, the following criteria would have to be considered:

- soil erosion (water and wind), soil organic matter, and soil compaction,

- ground and surface water quality (pollution with pesticide and nitrates),

- water resources,

- biodiversity and landscapes.

When discussing the effect of the different policy options, changes of the overall context, notably the 2003 CAP reform, have also to be taken into account. In this respect, cross-compliance implies, first, a better respect of existing environmental standards and, second, the requirement to keep land in "good agricultural and environmental condition".

Given the limited availability of studies specifically related to tobacco, only qualitative assessments can be developed. In this respect the context the following can be stated.

* Option 1, adaptation of the present regime while keeping its main elements, would change the current situation of environmental impact only to a very limited degree. Some effects might arise from reducing the relative profitability and from increasing the amounts spent on re-conversion. In order to identify whether such changes bring positive or negative net effects, it would be necessary, however, to know what alternatives are developed and whether land abandonment becomes an issue. In any case, one can assume that cross-compliance will mitigate the potential for negative effects resulting from the presence of high production incentives. However, where land abandonment is an issue and where it involves whole farms, cross-compliance would not be applicable, given the lack of direct payments.

* Option 2, full or stepwise decoupling of tobacco support and increasing efforts to reconvert production, has the potential of yielding positive environmental effects. Whereas the special intensity of input use might remain unaffected on the more competitive farms, decoupling could encourage conversion to other types of land use. Then again, the question of positive or negative net effects depends on the alternatives eventually taken up. Negative effects due to land abandonment should normally not be an issue under this option, since with the continued granting of decoupled payments, the cross-compliance obligation of keeping land in "good agricultural and environmental condition" would apply, even where land is not used at all. The function of cross-compliance to better enforce existing statutory standards would apply here as with option 1. As regards secondary effects (transport and processing), the potential is reduced, alongside the reduction of production levels. Finally, the amounts available under the envelope for restructuring can be targeted towards agri-environmental measures, which is of particular relevance also for tobacco production since a number of problems (such as erosion, irrigation and pollution) can be resolved by using appropriate management techniques (e.g. integrated management practices).

* Option 3, the phasing out of the tobacco regime accompanied by reinforced conversion efforts, would bring tobacco production to the same level as would result eventually under option 2. In this respect the same reasoning applies as developed in the context of option 2. This concerns the policy implications for the special intensity, the switching alternative crops, and secondary effects. As under option 2, the restructuring envelope can be used for agri-environmental measures. However, other than under option 2, cross-compliance would apply only where areas formerly used for tobacco production are farmed by farmers who own payment entitlements established under the single payment scheme. Similarly to option 1, particular problems arise with respect to land abandonment since, without direct payments, the application of cross-compliance, and specifically the rule to keep land in "good agricultural and environmental conditions", is not applicable.

Drawing conclusions from this brief qualitative assessment, it can be stated that option 2 would have the best score with respect to environmental objectives. This confirms what was spelled out already in the Explanatory Memorandum of the CAP Reform legal proposals, namely the beneficial environmental effects emerging from the decoupled single payment scheme in conjunction with the application of cross-compliance.

9.2.4. Impact on public health and consumer interests

As already stressed concerning the problem of coherence with development policy, the current tobacco policy is not consistent with the consumer and public health policies, which are among the priorities of the EU sustainable development strategy.

At the European Summit in Göteborg in June 2001 the Commission presented a communication on sustainable development, in which it proposed to "reorient support from the common agricultural policy to reward healthy, high-quality products and practices rather than quantity, adapt the tobacco regime at the end of its review in 2002 so as to allow for the phasing out of tobacco subsidies while putting in place measures to develop alternative sources of income and economic activity for tobacco workers and growers and decide on an early date accordingly."

9.2.4.1. Effects on health of tobacco smoking

According to the World Health Organization tobacco kills 500 000 Europeans each year, which means that it is the single most important cause of death. Smoking causes a substantially increased risk of mortality from lung cancer, upper airway and other cancers, heart disease, stroke, chronic respiratory disease and a range of other medical conditions. There are also health risks from passive smoking, and smoking during pregnancy adversely affects foetal development.

As a major public health risk, tobacco use must be treated very seriously, and every possibility engaged to reduce tobacco-related deaths. Even a 5% reduction would mean 25 000 fewer deaths annually. By way of comparison halving the number of people killed on the roads would save annually 20 000 deaths [18].

[18] European Commission: Press release IP/03/797, Brussels, 4 June 2003.

In the EU tobacco smoking is the leading risk factor behind 12,3% of diseases for men and 5,7% for women. Corresponding figures for the whole European region are 17,1% for men and 6,2% for women [19]. However, now that women are smoking as much as men in many countries, health damage among women is on the increase.

[19] WHO. World Health Report 2002 Reducing Risks, Promoting Healthy Life. Geneva, Switzerland: World Health Organization, 2002.

Smoking is a significant cause of inequalities in health [20] and is responsible for more than half the difference between adult male mortality in the highest and the lowest socio-economic groups. A reduction in the use of tobacco would therefore be an effective way of reducing health inequalities.

[20] Platt S, Amos A, Gnich W, Parry O. Smoking policies. In: Bakker M, editor. Reducing inequalities in health: A European Perspective. London, Great Britain: Routledge; 2002. p. 125-143.

9.2.4.2. Impact of tobacco growing/farming on public health

The health impact of tobacco subsidies is mediated through a complex sequence of intermediate steps. While there is strong evidence for each individual step, few studies have addressed the impact chain. The long delay between cause and effect in the implementation of tobacco control measures, the reduction of tobacco use and the improvement in health status further complicates studies.

Flow chart - Model used to analyse public health impact

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Subsidies for growing tobacco contribute to promoting the use of tobacco and obstruct tobacco control measures. Policy makers become linked to tobacco related interests and a positive image of tobacco is endorsed.

In tobacco-producing countries, especially where it is an important crop, political and economic implications impact on the possibility of introducing effective tobacco control policies and measures.

The existence of tobacco subsidies undermines the credibility of tobacco control measures and hampers health efforts. Reference is frequently made in the media, European institutions and by non-governmental organisations to the incoherence of EU tobacco policies, which on the one hand support tobacco growing and on the other fight the use of tobacco.

Even if no quantified link has been established between cigarette consumption and the level of support for domestic tobacco production:

* the public health community and scientists widely consider that the abolition of tobacco subsidies is one of the means to combat smoking. A 5% decline in tobacco use would in the long run have a greater impact than most other public health measures;

* option 1 clearly goes against the public health and consumer protection objectives of the EU;

* options 2 and 3 could lead to a reduction in tobacco growing in the EU and would have some positive impact on tobacco control and public health.

9.3. Impact on sound and efficient management (budget, monitoring, simplification and controls)

9.3.1. Impact on budget

With EUR 973,4 mio spent in the 2001 budget year, EAGGF expenditure on raw tobacco represented 2,6% of total EAGGF expenditure under subheading 1a) and 2,3% of the EU's total agricultural budget expenditure. Raw tobacco production represents, in value, only 0,4% of the EU's final agricultural production.

In 2001, Greece was the producing Member State to benefit most from the tobacco CMO, with 38,6% of total expenditure, followed by Italy with 34,8%, Spain with 11,8%, France with 7,9% and the others (P, D, B, A) together totalling 5,8%. The expenditure position of Greece and Italy is inverted compared to production levels because the premium for the oriental varieties cultivated by Greece is higher than for the other groups cultivated in Italy.

At European Union budget level, all three options are based on the principle of budget neutrality.

The main difference between options 2 and 3 is in the rate and duration of the Tobacco Fund increase and the consequent shift between the two budget sub-headings.

The financial procedures necessary would be in line with those to be set up for the modulation scheme adopted under CAP reform.

9.3.2. Impact on monitoring

* Option 1 adaptations could result in a certain degree of simplification, however limited.

Cross compliance will in any case be enforced (as a result of the horizontal application to all direct payments agreed in the CAP reform).

In the long term, some problems could occur in implementing the system in the new Member States, when application of the simplified system comes to an end. All acceding countries obtained the possibility from the EU to pay tobacco support in a simplified manner (aid per ha) as from accession. Poland and Cyprus have already decided to opt for this system of payment.

* The decoupled payment in option 2 could achieve a dramatic simplification of the regime, as it is intended to be incorporated into the Single Farm Payment. It will then be granted under conditions of cross compliance, as agreed in the CAP reform for other decoupled payments. The CMO regulation could be repealed and the remaining elements, mainly concerning trade rules, put in a specific horizontal regulation.

The restructuring envelope under option 2 should be seen as a financial tool, and the amounts available to be used within the tobacco regions under existing rules in the framework of the Rural Development Plans. In other words, the principle of subsidiarity will be fully applied and there Is no need to create additional procedures.

In addition, the decoupled payment would be, by far, the easiest system to implement in the new Member States when their simplified system comes to an end.

* The phasing out envisaged by option 3 allows for no simplification prior to complete phasing out. The monitoring of the current complex system will then be necessary during the full phasing out period.

10. CONCLUSION

This assessment has considered the economic, social and environmental impact, whether positive or negative, the three reform options would be likely to have on the many different areas affected by tobacco production, as well as their consistency with stated Community policy objectives. The following conclusions can be drawn.

Options 1 and 3 would neither enable the CAP's new objectives to be met, nor solve the problems inherent in the current CMO.

Option 1 offers only modifications to the current CMO, which will not substantially improve the market situation or make the tobacco regime more consistent with other Community policies. In addition, many of the complexities of the existing regime would remain and be very difficult to apply in the acceding Member States after the transition period.

Option 3, by phasing out the current regime, risks seriously disrupting producers' incomes, employment and the rural fabric of the producing regions. Many of these are already fragile, with large sections of the population and the economy directly dependent on tobacco production. The restructuring envelope would help alleviate the negative impact of this option, but would be unlikely to prevent extensive problems remaining at the end of the phasing-out period.

Option 2, by decoupling support, should lead to an improvement in the market situation and would, when fully implemented, represent a simpler and more efficient method of supporting farm incomes, while avoiding the distortive external effects of the current coupled regime. The new Envelope for Restructuring would give impetus to conversion away from tobacco production and strengthen cohesion. The approach represented by this option is entirely consistent with the reformed CAP and its objectives. By offering decoupled, but focussed, support the new regime would help bring the CAP much more in line with other Union policies aimed at promoting public health, the environment and sustainable development.

Impact synthesis summary table

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ANNEXES

Annex 1: Interservice group mandate

Annex 2: Commission DGs involved in the Inter-service steering group

Annex 3: Stakeholders consulted

Annex 4: Stakeholders' opinion and contributions

Annex 5: Tobacco premium and threshold

Annex 6: Economic nature of tobacco current support

Annex 7: Graphs - Income impact in Greek and Spanish regions

Annex 8: Income indicators

Annex 9: Map

Annex 1 Mandate of the inter-departmental steering group for tobacco

1. Commission Decision establishing the inter-departmental steering group for tobacco

When it adopted its work programme for 2003 [21], the Commission set the deadline of June 2003 for a proposal to review the tobacco regime and decided that a thorough impact assessment of that proposal should be carried out under the responsibility of DG AGRI by an inter-departmental steering group.

[21] COM(2002) 590 final, 30.10.2002.

That decision refers to the communication on impact assessment of June 2002 [22], in particular the following passage, which set out the mandate of the steering group.

[22] COM(2002) 276 final, 5.6.2002.

In some cases, the Commission may decide that, for the proposals with the most significant crosscutting impact and the highest political importance, the DG responsible for the Impact Assessment is assisted by, and normally chairs, an inter-departmental group including the most concerned DGs and the SG. The Commission will ensure that the design of these proposals takes into account the horizontal multi-sectoral aspects, in particular economic, social and environmental impacts as early as possible in the process. The task of the inter-departmental group is to define the scope, monitor the progress of the extended assessment, and supervise the completion of the impact assessment reports for crosscutting proposals.

2. Background to discussions on tobacco

The substantial impact across sectors and political importance of tobacco had already been stressed in the Commission's communication on a European Union strategy for sustainable development [23]. It included the following action in the paragraph entitled "Address threats to public health":

[23] COM(2001) 264 final, 15.5.2001.

"following on from the 2002 evaluation of the tobacco regime, [to] adapt the regime so as to allow for a phasing out of tobacco subsidies while putting in place measures to develop alternative sources of income and economic activity for tobacco workers and growers and decide an early date accordingly."

The evaluation of the tobacco regime is now being finalised. It was carried out by an external consultant, under the responsibility of DG AGRI and with the assistance of a steering group including DGs BUDG, COMP, ECFIN and SANCO.

3. Stages in the work of the tobacco steering group

The stages in the work of the tobacco steering group should follow the pattern set out in the communication on impact assessment:

3.1 Analysis of the problems

The first question in the process of impact assessment concerns the identification and analysis of the problem or problems in one or more domains. These are described in economic, social and environmental terms.

In the case of tobacco, two documents will help provide basic information for the Commission to analyse the problems:

- the evaluation report;

- the report to the European Parliament and the Council on the operation of the common organisation of the market in raw tobacco [24].

[24] SEC(2002) 1183, 6.11.2002.

3.2 Identifying the objectives

On the basis of the analysis of the problems, the objectives of the action will be expressed in terms of the results expected by a given date.

In the case of tobacco, the communication on the strategy for sustainable development mentioned above already goes a long way in fixing objectives for the revision of the market organisation. It will also have to take account of the objectives set for the CAP.

3.3 Identifying policy options and alternative instruments

Alternative means or instruments for achieving the objectives should always be considered from the initial stages of formulating proposals. The principles of subsidiarity and proportionality must also be taken into account and considered all through the impact analysis process. The analysis must always include the "no policy change" scenario as a point of reference for comparison with other options.

The policy options for tobacco will be prepared with regard to the communication on the strategy for sustainable development and the general approach adopted for the mid-term review of the CAP.

3.4 Impact analysis

All the positive and negative implications of the action option chosen and, if possible, of the alternatives selected, should be considered and included in the impact assessment, with attention paid to their environmental, economic and social aspects. This is a two-stage process: first the implications are identified ('screening'), then they are assessed in qualitative, quantitative and/or monetary terms ('scoping').

The Directorates-General participating in the steering group are requested to look at the implications of the various options for tobacco in their areas of responsibility.

3.5 Implementation, monitoring and ex-post evaluation

The impact assessment must identify all possible difficulties in implementing the action options which are evaluated and describe how account will be taken of them, for example in selecting the periods for implementation or the gradual application of the measure. Subsequent continuous or ex-post evaluations will respect the arrangements laid down in the communication on evaluation, i.e. a general ex-post or interim evaluation at intervals of not more than six years, depending on the nature of each activity.

4. Deadlines and reports

Problems raised and identification of options end January 2003

Identification of impacts end February 2003

Evaluation of impacts mid-April 2003

Final report end May 2003.

Annex 2 Commission DGs involved in the Interservice Steering Group

SG

DG AGRI

DG ECFIN

DG TRADE

DG ENV

DG DEV

DG COMP

DG SANCO

DG ELARG

DG BUDG

DG ENTR

DG EMPL

DG REGIO

OLAF

Annex 3 List of participants' in the Tobacco Standing Committee and in the Tobacco Forum (04/06/2003)

Tobacco Standing Committee

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Tobacco Forum (04/06/2003)

Public health:

1. Dr. Erkki Vartiainen National Public Health Institute Department of Epidemiology - Finland

2. Mrs. Trudy Prins STIVORO - Netherlands

3. Prof. Manuel Pais Clemente Conselho Prevenção do Tabagismo - Portugal

4. Clive Needle ENHPA netw - UK

Manufacturing:

5. ALTADIS Mr Georges Podeur

6. EUROPEAN SMOKING TOBACCO ASSOCIATION - ESTA Mr van den Driest

Consumers:

7. Luk Joossens BUREAU EUROPEEN DES UNIONS DE CONSOMMATEURS - BEUC

Mr Thomas Gerard - France

Environment:

8. Birdlife international Birdlife European Regional Office - Netherlands

9. Chatziparadeisis Christos Teacher of Mechanology in high school - Greece President of the committee for the protection of the environment of the region of Langada

10. Mauro Albrizio European Affairs Director Legambiente - European Policy Office

Local authorities:

11. Mr. Tsoutsos Ioannis Mayor of Potamia Larissas - Greece

12. Sr. José Moreno Gomez Alcalde de TALAYUELA - Spain

13. Fernanda Cecchini SINDACO DI CITTA' DI CASTELLO - Italy

Development:

14. SOLAGRAL Mrs. Hermelin

Producers:

15. UNITAB - France François Vedel and Rémy Losser

Annex 4 Stakeholders opinion

The services of the DG AGRI have met the stakeholders of civil society to take into account the largest possible opinion of European citizens. The contribution to analyse the impact of different options of the reform has been very rich and interesting.

1. Tobacco Standing group - 13 March 2003

The members have received a document giving the basic options for the future.

On that base, the representatives of the tobacco producers and tobacco co-operatives condemned the erroneous strategy followed by the Commission in its negotiations with the WTO. They categorically rejected the third option of gradually phasing out the subsidies. This option which had already been officially discarded both by the Council of Agriculture Ministers and the European Parliament. They considered that the second option (support decoupling from production) would have disastrous effects and would engender severe social problems in the tobacco growing regions. They asked the maintenance of the current system in the long term, possibly with the necessary settlements, to ensure that the tobacco producers could remain on the land and continue to work without anxiety in a stable framework while continuing their endeavours to improve quality. The existing regime had worked satisfactorily and had presented the fewest problems by comparison with the regimes that has been applied to other crops. Nobody had presented the viable alternatives to tobacco production which were acceptable to the tobacco producers. The other options are only artifices oriented to the radical cutback or even the abolition of tobacco subsidies. If the Commission formally accepted them there would be reactions and social upheavals.

The representative of the tobacco trade said that the options which involved eliminating of the Community regime are not in line with the agreements which had been made with the acceding countries. He asked for maintenance of the current system so that the tobacco industries could continue to operate.

The consumers' representative has not expressed a favourable opinion for a specific option but he has criticised the too high level of the Community support for the tobacco sector. Furthermore, he has pointed out that production quotas of the groups of varieties III and V should be transferred towards the other groups of varieties much more demanded by the market.

2. Tobacco Forum held on 4 June 2003 (list in Annex 3)

The participant stakeholders have received a document giving the basic options for the future, a document concerning a presentation of the farm structure of the sector and another document on the tobacco CMO functioning.

Mayors - On that base the three mayor representing the main areas of tobacco production in Italy, Greece and Spain have stressed that the first option would guarantee the maintenance of the current employment and the conservation of the landscape and avoid land desertification. The second option would lead to the abandonment of the production without profitable alternatives and consequently create big problems of unemployment. The Spanish mayor of Talayuela has said too that the few remaining production would be of very low quality with a great danger for consumer health. The third option would have disrupting consequences on the employment and the EU tobacco would be replaced by imported production. The Italian mayor, has added that the level of income would decrease in the whole local area of production. A negative impact there will be too on the small mechanics industry linked to the tobacco sector. The Greek mayor of Potamia Larissas has confirmed the great risk of unemployment for the whole local community if the second or the third options were adopted.

The health experts explained the negative impacts of tobacco consumption on the citizen health. According to them tobacco is responsible of 500 000 deaths each year in Europe and of 10% of all diseases. They presented several health-related arguments, including that smoking is a get-away to drugs. They also underlined the incoherence of support to tobacco sector while the European policy on tobacco discourages use of tobacco and the advertising. The three experts agreed on the necessity to abolish tobacco support to production, and emphasised the need to look into the future of and enhancing competitiveness of the tobacco producing areas, the impact of the enlargement. One expert expressed his preference for the third option.

The consumer representative has observed that current support will not be sustainable at the moment of Bulgaria's and Turkey's accession in the EU. Alternative solutions will have to be found to help the economies of the production regions. The problem is political and DG AGRI will not be able to solve it alone.

The environment representative has observed the excess of support to the tobacco sector of which indirectly the tobacco multinationals are the beneficiaries. In fact this is the only case in the agricultural sector where the production prices are lower than the import prices. Economic alternative solutions must be found together with producers and the local communities throughout the reconversion way. He has stressed the problems caused by tobacco production in the water pollution. Furthermore, he has remembered to the participants the necessity to allow the exports of tobacco towards the EU by the less developed countries because, which, in several cases, is their only economic resource. Under these conditions the only viable option is the second. Another representative has remembered the high risk of desertification in the case of abandonment of tobacco production in the marginal areas. He thought that the option 1 is the better way to conserve an equilibrated environmental condition.

The tobacco manufacture industry representative explained that European tobacco production activity until now has supplied a product with low residues of pesticides and a very strict control on their use in the opposite of the tobacco imported. She has informed the participants that the USA, Japan and Switzerland give subventions to their tobacco production and European production would not exist without support because India and China are very competitive and already produce a comparable quality of tobacco.

The workers representative has observed that there exists a high risk of impact on the first processing industry and the employment with the second option. It is clear that tobacco is a legal product, better controlled in Europe than in the third countries and consequently the European production must not be criminalised. An equity solution is needed for everyone, producers, processors, workers and citizens.

The development representative has underlined the essential importance of tobacco export, produced by the less developed countries. In some cases it is the only goods that these countries are able to export because other productions are directly consumed inside for survival.

The producers representatives for UNITAB, have remembered the importance of the tobacco CMO either in terms of economy and of employment for European producers. Tobacco is a production with the highest level of labour force employed in agriculture. They have remembered, like the Spanish Mayor, the unacceptable moral critics concerning tobacco when all Member States draw EUR 63 billions from taxes applied on tobacco consumption. However, they are well aware of the public health problems. In any case, also without European tobacco production there will be tobacco consumption based on imports. They have stressed that it is very easy to say the tobacco producers must be creative but in reality the profitable alternatives to tobacco production do not exist. The tobacco producers are traumatised by the current situation. For the future there will be a need to ensure stability of income and to allow to producers to stay on the land. They asked before in order to take any decision of tobacco reform, it will be indispensable to have very serious studies of impact. Finally they informed the public that tobacco is a production less pollutant than others. In fact the fertiliser by nitrogen is of 200 kg per ha for maize production while for tobacco is only of 50 kg per ha. They think it would be better to stimulate production of food crops in the third countries than tobacco.

3. Tobacco bilateral meetings and written contributions

In addition, and on their request, DG AGRI services met stakeholders' representatives of producers and industry.

Written contributions were sent by several other stakeholders, including consumers' representatives, and were fully taken into account.

Annex 5 Premium amounts and guaranteed thresholds

1-

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2-

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3- (t)

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4- Breakdown of EU tobacco production and labour force

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Annex 6 Economic nature of the tobacco current support

Deficiency payments and price support are two different policy tools with different economic impact.

The effects are analysed for the case of an agricultural products in a large net-importing country, that is for a situation which is similar to the one realised for tobacco on the EU market.

The premium paid for tobacco is classified, in the notification of domestic support at the WTO, within the Amber box (that is, as a trade distortive measure) where is does not fall into the price support category, but in the group of the Non-exempted direct payments.

The reason of this is simple. The support for tobacco is not implemented through a mechanism of guaranteed market prices, but with a system of guaranteed prices (up to a given quantity of production) paid to producers' organisations by the EU budget. In other words, the support policy applied to tobacco belongs to the family of the "deficiency payments".

The different characteristics of both instruments are shown in the following graph. Both diagrams show supply and demand in a simple price/quantity framework. The initial point of departure is the price p, which gives the supply qs and the demand qd. The distance between the two is the level of imports needed.

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* Let us first consider the price support solution. The government sets the institutional price p' and that increases production to q's and decreases demand to q'd. Another effect is a decrease in imports to the amount q'sq'd. In order to control this internal price independently of influence from the equilibrium price (world price), a system of trade barriers must also be implemented.

* In the case of deficiency payments, on the other hand, the government sets a target price p' at the level they want the farmer to receive for his products. This target price increases production to q's. The equilibrium price p, is still the market price, and consumers still buy qd. In this case there is a decrease in imports to the amount q'sqd.

The following table summarises the welfare economic effects of the two instruments:

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In both cases the producers gain the same amount, the area A. In the situation with price support this gain is financed by the consumers, since they pay a higher price than the equilibrium price. The consumer loss is the area A+B+C+E. Because of the import levy, the government gains C. The net loss, or the welfare economic loss, of implementing a price support policy is B+E.

In the deficiency payments case the producers' gain is paid by the taxpayers, because the difference between the target price and the equilibrium price is transferred directly to the farmers from the fiscal budget. The taxpayers' loss is A+B. The welfare economic effect of implementing deficiency payments is B.

The graph does not show the effects of the internal policy on the world market, but because of the size of our country, the increase in production pushes the world market price down. In the first case this means that consumers have to pay a larger amount in price support; in the case of deficiency payments it actually means that consumers benefit from lower prices, but it also means that the amount directly transferred from the state to the farmer increases.

In synthesis both instruments transfer money to agriculture and increase production. The main differences, which also reflect on the welfare effects of the two instruments, are the control of the market price in the price support regime and the type of financing.

Annex 7 Impact on income

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Annex 8 Income indicators

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Annex 9

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