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10 COMPULSORY MODULATION

10.1 In Scotland, almost 20,000 businesses receive Single Farm Payments, yet over a third of these fall below the €5,000 threshold which exempts them from compulsory modulation though they remain subject to voluntary modulation deductions. Two new changes have been proposed with Article 7 of the draft new regulations, changes which are intended to increase European funding in relation to Pillar 2 Rural Development schemes. These changes would increase the level of compulsory modulation and introduce a progressive element of increasing deductions proportionately as the size of payment increases.

10.2 Respondents were asked "What are your views on proposals for increasing compulsory modulation with progressively higher rates for certain businesses?"

Compulsory modulation

10.3 Twenty-two out of the 40 respondents answering this question specifically said that they support compulsory modulation, with seven of these respondents specifying that there must be a corresponding decrease in voluntary modulation and only one, from the wider interest group, saying there should not be a corresponding decrease in voluntary modulation.

10.4 One farming and one agribusiness organisation did not support compulsory modulation although the farming respondent acknowledged that the proposals would have little impact due to the reduction in voluntary modulation.

10.5 Two local authorities commented on the importance on ensuring that there is no overall increase in deductions.

10.6 Two farming stakeholders, while agreeing with proposals, stated they are against the general concept of modulation; one said that as long as it does exist it should be the same across the EU. These respondents did agree that the proposals would harmonise rates across EU and ultimately lead to the removal of voluntary modulation. A wider interest group voiced their opposition to any increases in modulation but also said they favoured compulsory over voluntary modulation.

10.7 A stakeholder from the environment group felt UK farmers have been at a disadvantage and that these proposals will level the playing field. One local authority agreed proposals would harmonise rates across Europe while another stressed that rates must be harmonised throughout the EU.

10.8 However, the environment stakeholder felt the proposals for farmers in receipt of less than €5,000 of SFP will mean these smaller farms will continue to be disadvantaged compared to similar sized businesses in Europe. They proposed that the €5,000 threshold be removed, with funds transferred to Member States' Pillar 2 Rural Development budgets -" if € 5,000 rule removed it would increase modulation amounts by around 4 million Euros per annum from Scotland alone".

10.9 A supply chain/ livestock stakeholder commented that voluntary modulation discriminates against Scottish dairy farmers.

10.10 A farming organisation felt that there should be a threshold below which there is no modulation penalty. This respondent wanted to ensure that crofters are not disadvantaged by any changes and commented that a loss of support to smaller producers could impact heavily on the crofting system and on biodiversity.

10.11 An environment stakeholder, while supporting increased compulsory modulation, believed that a higher rate of transfer from Pillar 1 to Pillar 2 will be needed. They expressed concern that simple point for point reduction in voluntary modulation may lead to shortfall in the UKRDP and suggested that voluntary modulation be retained for a short period.

10.12 Two environment stakeholders voiced support for an increase in compulsory modulation to 13% across the EU as, they commented, this will result in increased Rural Development funding in other Member States.

10.13 One supply chain/ livestock stakeholder wanted to ensure that there is no flexibility in proposed legislation that might allow voluntary modulation to be re-adopted in future.

Progressive modulation

10.14 Progressive modulation, described by one farming stakeholder as having been developed to help address tax-payers criticism of SFPs, itself came in for criticism from the majority of respondents replying to this question. The stakeholder felt that forcing Member States to provide greater transparency in relation to who receives SFP, and how much they receive, may be a better way to address criticism from tax-payers.

10.15 Twenty-two respondents made negative comments about progressive modulation. Two environment stakeholders said they were not convinced about it and only five respondents (an individual, and one each from agribusiness, environment, special interest and local authority) specifically said that they support the proposals for progressive modulation. The others either did not mention progressive modulation or gave more general answers.

"We also oppose proposals to have increasing modulation for large farmers, on the assumption that we have greater efficiencies. We do have efficiencies of scale but on the whole these are more than offset by the standards we set as an exemplary employer."

(Agribusiness)

10.16 Respondents voiced concerns that the proposals could lead to the break up of larger units; 10 respondents felt that larger units may be forced to restructure. A local authority and a farming organisation said that it would be detrimental to penalise businesses based on scale while a wider interest stakeholder commented that there is no justification for penalising larger businesses. They felt progressive modulation could cause problems for any structural reform of the industry that might be needed to adapt to market conditions and may lead to the artificial break-up of farm businesses.

10.17 One environment stakeholder also pointed out that farmers may restructure their businesses and that this is not a good use of resources.

10.18 One farming stakeholder described progressive modulation as unfair, complex to administer and something which, they felt, would result in land being split into smaller, less effective, units and also result in job losses.

10.19 Another farming stakeholder felt progressive modulation would penalise businesses at a time when "economic efficiency is vital". Progressive modulation was also seen as a "a penalty on efficiency" by two wider interest respondents and two local authorities.

10.20 A farming organisation and a local authority felt that the administrative and bureaucratic implications would outweigh any benefits.

10.21 Sixteen respondents made comments similar to a wider interest organisation who felt progressive modulation discriminates against larger businesses and may be seen as a tax on larger units. Some also commented that Scottish farmers would be disproportionately disadvantaged due to the larger than average size of Scottish farms.

10.22 Two supply chain/ livestock stakeholders also commented:

• progressive modulation is arbitrary "there are no proven economies of scale in meeting cross-compliance obligations" and the move stigmatises larger farms;
• progressive modulation could be damaging, it would badly hit large herd owners and disadvantage them.

10.23 An individual respondent commented that if progressive modulation must be implemented then incremental increases of 2%, 4% and 6% would be suitable.

Environmental benefit and the SRDP

10.24 An environment stakeholder said they were not convinced that progressive modulation is likely to benefit the environment; they felt there is no evidence to show that larger businesses are more sympathetic to the environment than small ones.

10.25 One stakeholder, from the environment group, voiced support for progressive modulation for larger businesses as they felt this would generate additional funding for rural development. Another, again from the environment group, said they had no view on progressive modulation and that it is the way the farm is managed, not the scale, which is important.

10.26 It was the view of one individual respondent that progressively higher rates may be necessary to increase Rural Development options and therefore further advances in performance and quality.

10.27 All four stakeholders in the environment group expressed concern over a possible reduction in SRDP funding which, two commented, is one of the worst funded in the EU. These respondents said any reduction would be unacceptable and that that it was vital that the SRDP was not compromised as a result of changes to funding arrangements.

10.28 Two special interest organisations said it was vital that the SRDP which, they also commented, was one of the worst funded in Europe, is not compromised as a result of changes to funding arrangements. This view was echoed by a wider interest organisation and a local authority also stressed the need to ensure that the SRDP has adequate funding.

10.29 Acknowledging the need to ensure Rural Development funding is increased, one local authority commented that there is a fine balance between this and increasing modulation. Another local authority would only support progressive modulation provided the sums recycled through Pillar 2 returned to the regions in which they were generated.

10.30 An agribusiness organisation stressed the need to ensure that 100% of any money modulated is made available through relevant schemes.

10.31 A farming organisation commented on the disadvantage to the rural economy if receipts from progressive modulation are lost while an environment stakeholder, again voicing concern over the possible loss of Scottish Rural Development funding commented "there will not be additional money to fund measures relating to the 'new challenges (Climate Change, Renewable Energy, Water Management, Biodiversity)' as envisaged by Europe".

10.32 An environment organisation wanted to see any additional funding go toward addressing the 'New Challenges'; they wanted to see a 20% rate and added that changes should not impinge on any option to voluntarily modulate at a higher rate to fund agri-environment measures.

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