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COUNCIL OF

THE EUROPEAN UNION

Brussels, 26 June 2006

10851/06

ADD 1

AGRI 232

AGRIFIN 43 COVER NOTE

from: Secretary-General of the European Commission,

signed by Mr Jordi AYET PUIGARNAU, Director date of receipt: 23 June 2006 to: Mr Javier SOLANA, Secretary-General/High Representative Subject: Communication from the Commission to the Council and the European Parliament: Towards a sustainable European wine sector

- Summary of the Impact Assessment annexed to the Communication Delegations will find attached Commission document SEC(2006) 780.

_

Encl.: SEC(2006) 780

COMMISSION OF THE EUROPEAN COMMUNITIES Brussels, 22.06.2006

SEC(2006) 780

Annex

Summary

of the Impact Assessment

annexed to the

COMMUNICATION FROM THE COMMISSION

TO THE COUNCIL AND THE EUROPEAN PARLIAMENT

Towards a sustainable European wine sector

{COM(2006) 319}

NOTE:

Given the requirements in terms of number of pages, this summary is limited to the main findings of the impact assessment, which is available only in English.

Policy options

Four alternative options for the reform of the wine CMO have been identified in the impact assessment.

Option 1: Status quo, with possibly some limited adaptations

Option 2: Profound reform of the CMO

Option 3: Reform along CAP reform lines

Option 4: Deregulation of the wine market

The description of the policy options is summarised under table 1.

Table 1: Overview of the policy options

Potential Market measures Regulatory measures Options Ban of new plantings Permanent abandonment (grubbing-up) Restruct. of vineyards By-products distillation Dual purposes distillation Potable alcohol distillation Crisis distillation Private storage Aid to grape juice Aid to musts (enrichment) Export refunds Wine-making practices Quality policy, GI protection Labelling Option 1:

Improved status quo Prolongation Maintained Maintained, improved monitoring Maintained Maintained Maintained, possibly with reduction of price Maintained, possibly with links with grubbing-up Maintained Maintained Maintained (despite pressure from sugar price) Phasing out according WTO commitments no substantial change no substantial change no substantial change Option 2:

Profound reform of CMO Extension for a few years Important strengthening Maintained, link with grubbing-up. Possible reduction of envelope with shift to national envelope or 2nd pillar Abolition - budget replaced by national envelopes or shifted to 2nd pillar for wine regions Abolition and replacement through promotion and information measures Competence to the Commission, link to OIV practices, special practices for export, end of ban for imported musts Simplification, alignment on WTO-TRIPS and on PGI/PDO system, revision of wine classification system Competence to Commission, unique tools for all wines, more flexibility Option 3:

Reform along CAP reform lines Extension for a few years Abolition Conversion of budget into SPS entitlements Competence to the Commission, link to OIV practices, special practices for export, end of ban for imported musts Simplification, alignment on WTO-TRIPS and on PDO/PGI system, revision of wine classification system Competence to Commission, unique tools for all wines, more flexibility Option 4:



Deregul-ation of the wine market Abolition Abolition Abolition or shift to 2nd pillar Abolition or shift to 2nd pillar OIV rules as only regulatory framework Full integration in the PDO/PGI system Full integration in horizontal directive of labelling of foodstuff Analysis of impacts

Economic impact

Market balance

In the light of the mid-term outlook for the EU-27 (see annex 1), maintaining today"s wine regime (option 1), even if slightly adjusted, would lead to increasing surpluses, thus appearing unsustainable.

In all other policy options, the abolition of market measures would guarantee a better market orientation of wine production, and therefore the achievement of the equilibrium in the long term.

However, options 2-3-4 would produce different impacts on market balance in the short term.

In particular, option 2 would allow achieving the smoothest and most rapid absorption of wine surplus, by enhancing the reduction of production potential (grubbing-up programme) and supporting the structural adjustment in the sector. On the other hand, in options 3 and 4, the absence of structural measures would make the transition to the market equilibrium more difficult. This would produce an intense suffering for the sector, which has been relying for many decades on traditional instruments of market intervention and would now have the complete responsibility to adapt to the changed market situation.

Prices and incomes

Under the status quo, growing surpluses will generate increasing pressure on intervention measures and on the EU budget. Market tools will progressively encounter difficulties in clearing effectively wine stocks. Recurrent crises would entail a deterioration of prices, and thus of farm incomes.

All other options would lead, in the long term, to a satisfactory level of prices and incomes, which is a direct consequence of the achievement of market equilibrium.

However, irrespective of the policy option chosen, wine producers will have in general to face a price drop and income losses in the short term, as the stabilisation of the market situation will require an important effort of structural adjustment.

To assess the impacts of the four policy options, a two-steps simulation was carried out:

on the basis of the statistical relation determined between table wine prices and total wine stocks, wine prices were extrapolated.

with the information of the Farm Accountancy Data Network (FADN), and based on seven "model farms", representing the most significant typologies of table wine producers in five large wine-producing EU regions, the impact on incomes generated by the forecasted price drops was simulated.

The results of this exercise (see annexes 2 and 3) indicate that the status quo and the complete deregulation would produce the most severe impacts on prices and incomes.

Option 2 would generally have a less pronounced impact, although still quite significant, on incomes in the short term, and would ensure their rapid stabilisation over time.

Option 3 would be generally the most attractive option for wine producers in the very short term, since the decoupled payment would initially at least compensate the drop in wine price; however, the slow recovery in the market balance and the steep downward price evolution could evoke a degradation of income in the mid term.



Competitiveness

The EU wine industry has currently some handicaps compared to its competitors:

smaller production structures, with higher production costs and smaller volumes for the needs of large-scale retailers,

less dynamic marketing strategy,

higher regulatory constraints.

In this respect, option 1 would not improve the current problems.

Options 2-3-4 would all partly correctly address the problems through:

better market orientation,

more flexibility on wine-making practices and labelling rules,

less regulatory constraints.

In particular, lifting the ban of new plantings would be an asset for competitiveness, allowing to the most efficient producers to optimise the size of their holding and to operate at the most convenient production scale.

Finally, the proposed ban on the use of sucrose for enrichment could have a negative effect on the competitiveness of the concerned production, as production costs could increase by 15-25% .

Economic and social impact on rural areas

In option 1, the deterioration of the market situation in the wine sector would lead to increasing economic and social difficulties in rural areas of wine regions.

With option 2, the smooth stabilisation of the market balance, and hence the achievement of the economic sustainability of wine production, would also have a positive economic and social impact on rural areas as a whole. Funds allocated to the national envelope and to the strengthening of Rural Development policy would facilitate the structural adjustment of the sector and mitigate the effects of the downscaling of wine production.

In options 3 and 4, the lack of specific structural measures accompanying the cessation of market tools and helping the structural adjustment in the wine sector would entail significant risks for the cohesion of wine-producing regions. In particular, option 4 would produce the most radical impacts.

Impact on the environment

Wine production exerts a number of environmental pressures:

impacts on the soil (erosion, compaction, loss of organic matter),

intense use of plant protection products (in particular fungicides),

disposal of by-products of wine making,

increasing use of irrigation in certain regions,

excessive specialisation,

risks resulting from a disordered grubbing-up.

The status quo would result in the continuation of all pressures on the environment.

With option 2 there is no easy way to enforce the respect of the environmental baseline on the whole vine area, since wine farms would not necessarily receive direct payments, which could be subject to cuts in case of non-respect of cross-compliance. However, a solution could consist in making all support measures (including those eligible to the national envelope and to Rural Development) conditional to the respect of cross-compliance obligations. The strengthening of grubbing-up could have globally positive impacts on the environment, as it generally reduces monoculture. However, it could also lead to environmental risks if the land is abandoned or replaced by more intensive crops.

The main asset of option 3 consists in the fact that the environmental baseline would be automatically covered by cross compliance.

Under option 4, the implementation of an environmental baseline would be very difficult to achieve, since no support would be granted to vine growers in the framework of the wine CMO.

The removal of all distillation measures, as under options 2-3-4, may have positive impacts on the environment, provided that that the by-products of wine-making are dealt with in a sound manner.



Impact on trade and WTO conformity

For the wine sector, the main issues at stake in the context of the WTO are:

internal support: large part of the annual wine CMO expenditure is classified as amber box, that is the most trade distorting type of support.

quality policy/GIs: the existing quality regulatory framework does not allow an optimal international protection of our geographical indications under WTO-TRIPS Agreement.

labelling provisions: our rules are considered discriminatory from non-EU countries.

With option 1 almost all WTO problems of the existing wine regime would remain unsolved; therefore many provisions of the CMO could be under attack in future.

All other options would be completely WTO-friendly, although for the national envelope under option 2 the Green Box status should be verified on the basis of the concrete application of the eligible measures.

Impact on wine quality, health and consumer protection

Wine quality

Option 1 would not have impacts on wine quality.

Under the options 2-3-4, the better market orientation achieved through the abolition of market measures should tend to favour the segment of higher quality wines.

Health and consumer protection

In the existing wine CMO, potable alcohol distillation has a negative impact on public health, because it subsidises the transformation of wine into a beverage with higher alcohol content. By allowing the production of wine spirits at lower costs, it encourages their consumption, which is in conflict with health concerns.

In option 1, subsidies to potable alcohol distillation are maintained or only partly reduced, so that the inconsistency with public health policy would remain.

In options 2-3-4, the abolition of the subsidised potable alcohol distillation and, more in general, the aim of reducing surpluses through a better market orientation of the production, are likely to have a positive impact on public health. Option 2 would allow the most rapid absorption of the wine surplus.

Moreover, the simplifications proposed for the quality policy, geographical indication system and labelling rules, as well as education and information campaigns under option 2, could enhance transparency for the consumers.



Impact on management efficiency

Management efficiency can be increased through a simplification of the regulatory framework, which would facilitate the implementation of the system and controls, thus limiting the risks of frauds and misuse of public funding, and reduce administrative and statistical monitoring costs. A further contribution to efficiency is provided by a higher level of subsidiarity to respond, at MS level, to specific policy needs.

Option 1 would globally bring no improvements in management efficiency, while budgetary resources allocated to the wine sector would be subject to increasing pressure.

The other three options would have positive impacts, although to a different extent.

Options 2 would provide for important simplification due to the abolition, in some case after a transitional period, of some complex measures (planting rights, distillations, wine private storage and alcohol public storage). It would also increase the level of subsidiarity by introducing a national envelope, allowing Member States to choose between a set of alternative measures, and increasing the funds to Rural Development in wine regions.

Option 3 would provide for higher simplification, as the introduction of the Single Payment Scheme (SPS) and the end of crop specific measures would allow a reduction in the complexity of the regime. In terms of subsidiarity, certain flexibility would be granted through a specific implementation of the SPS system.

Option 4 would allow a radical legal simplification and a reduction of budget needs, although the socio-economic consequences of this option, in particular for acceding Member States, would entail budgetary risks in the long term.

Comparing the options

Table 2 summarises the various impacts of the different policy options.

Table 2: Overview on the impacts of the options

SUMMARY IMPACTS Option 1: Improved status quo Option 2: Profound reform of the CMO Option 3: Reform along CAP reform lines Option 4: Deregulation Market balance Increasing surplus Smoothest achievement of balance Increasing surplus in the short and mid term Increasing surplus in the short and mid term Market equilibrium in the long term Market equilibrium in the long term Prices Sharp decrease due to unsustainability of the system Decrease in the short term Sharp decrease in the short and mid term Very sharp decrease in the short and mid term Recovery after achievement of balance Recovery after achievement of balance Recovery after achievement of balance Agricultural incomes Progressive decrease due to unsustainability of the system Decrease in the short term Decrease in the mid term Very sharp decrease in the short and mid term Recovery after achievement of balance Recovery after achievement of balance

No safety net mechanism Recovery after achievement of balance

No safety net mechanism Competitiveness No improvement Rapid improvement through economic sustainability and improved regulatory measures allowing flexibility and innovation Improvement in the long run

through economic sustainability and

improved regulatory measures

allowing flexibility and innovation Strong improvement in the long run through economic sustainability, freedom to farm

and improved regulatory measures

allowing flexibility and innovation Economic and social impacts on rural areas Progressive deterioration due to unsustainability of the system Improvement due to smooth achievement

of economic sustainability Risks due to heavy

restructuring needs Important risks due to

heavy restructuring needs and

possible production shifts between regions Environment No improvement No easy solution to apply

cross-compliance on all vine area

Shifts to RD can be used to encourage

more environmentally-friendly measures Direct applicability of

general cross-compliance Very difficult to apply cross-compliance

No available funds to encourage more environmentally-friendly measures Trade WTO compatible Different measures

potentially under attack Most problems solved Most problems solved Most problems solved Wine quality Neutral Increase through better market orientation Increase through better market orientation Increase through better market orientation Health / consumer No improvement Stop to unacceptable support to

distillation into potable alcohol

Labelling rules more transparent

and consumer oriented Stop to unacceptable support to

distillation into potable alcohol

Labelling rules more transparent

and consumer oriented Stop to unacceptable support to

distillation into potable alcohol

Labelling rules more transparent

and consumer oriented Budget Increasing pressure Neutral Neutral Possibility of savings Subsidiarity No improvement Much more flexibility with national envelope



and increased RD funds Flexibility in the implementation of the SPS Possibly more flexibility via shift to RD Simplification, applicability, controllability No improvement Moderate simplification Strong simplification, but specific operational difficulties in implementing SPS in wine sector Most problem solved Annex 1:

Mid-term forecasts for the EU-27 wine sector for 2010-11

Annex 2:

Impact on prices

Regression analysis between average annual prices of table wine and wine stocks Option 1: Status quo

Option 2: Profound reform of the CMO

Option 3: Reform along CAP reform lines

Option 4: Complete deregulation

Annex 3:

Impacts on agricultural incomes

Summary results of a model-farm approach on table wine farms in some EU regions - Source: DG AGRI - FADN

Variation of Farm Net Value Added per Annual Working Unit (FNVA/AWU) in %

FNVA/AWU in the second year after the reform

Variation of FNVA/AWU in the year 2 of the reform

Source: the enrichment of wine in the European Community, Wageningen University, EUR report 13239, 1991.

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ban on the use

of sucrose

+

maintaining prohibition on overpressing

+

maintaining prohibition on overpressing

+

ban on the use

of sucrose

+

status quo

on the use of sucrose