Small, rural farms given boost as EU cuts subsidies for large landowners

Brussels took steps yesterday to adjust its much-criticised £32bn-a-year farming policy to a threatening new world of food shortages and soaring food prices. The proposals – too radical for some European governments; too timid for others – are likely to generate heated argument in the second half of this year.

Wealthy, large landowners, including the Queen, would have part of their EU subsidies removed and invested in environmentally friendly rural developments and traditional, small farms. Compulsory "set-aside" payments to farmers to leave one-tenth of their land fallow would be scrapped, boosting the European harvest of cereals, whose world price has almost trebled in the past year. Limits on milk production (quotas) which have been in place for 25 years would be relaxed and then abolished, reducing – eventually – the upward pressure on dairy prices.

The proposals are, in theory, just a "health check" on the much-contested Common Agricultural Policy (CAP), which is not scheduled for a root and branch reform until 2013. However, the European Union's cautious, initial schedule has been swamped by events. Soaring global prices for basic foodstuffs threaten widespread famine and have already caused riots in the developing world. In the EU, rising shop prices for food are putting pressure on household budgets and the popularity of governments.

A European farm policy, pushed into bizarre and fantastic shapes over the years by the need to reduce mountains of surplus cereals and butter, must now adjust to a strange new world of booming demand and food shortages.

The proposals put forward yesterday by the Agriculture Commissioner, Mariann Fischer Boel, try to reconcile the need to accelerate food production with the drive to make agriculture less environmentally damaging and, at the same time, support "traditional" farms and encourage "high-quality" foods.

Any farm receiving up to €99,999 (about £80,000) in annual subsidies would lose 7 per cent from next year. Farms receiving more than €300,000 in tax-payers' money would lose 16 per cent – with the threat of steeper cuts to come.

The money would be shifted to rural development programmes, including attempts to encourage biodiversity and protect rivers and streams from pollution. Some could also go to new direct subsidies to smaller, traditional farms, producing high-quality foods.

Set-aside payments would be abolished and dairy quotas eased and then abolished by 2015.

If approved by the 27 EU governments, the plans would sharply cut the huge payments received by some high-profile landowners in Britain, including the Queen, the Duke of Westminster and the Duke of Marlborough. The Queen is believed to earn £500,000 a year from the CAP. Under yesterday's proposals, she would lose £80,000.

It remains to be seen whether the British Government will accept the idea of "capping" payments to large landowners. The Treasury has fiercely resisted such changes in the past, saying they unfairly penalise Britain, which has more large farms than other EU countries.

The plans are supposed to be a limited adjustment before radical reform in 2013. All governments know, however, that the debate on Ms Fischer Boel's plans could set the pattern for a new CAP.

The Franco-British animosity on farm policy is likely to be revived – but on new ground. Even the French government, which has traditionally resisted all change in the CAP, is now pushing for a radical re-appraisal of EU farm policy.

In a significant shift in French thinking, Paris supports the idea of cutting payments to large cereal farmers and shifting the subsidies to smaller, more traditional producers of beef, fruit or vegetables. President Nicolas Sarkozy, who assumes the EU council presidency in July, has promised to push through agriculture reforms. He is likely, however, to run into conflict with Britain.

The Chancellor, Alistair Darling, sent a letter to his EU colleagues last week suggesting that the worldwide boom in food prices offered an opportunity for the virtual scrapping of the CAP. He accused EU farm policy of helping to cause the global food price inflation (something which mystified his colleagues, who point to the increasing demand for food from China, India and elsewhere).

Mr Darling called for the scrapping of all restrictions and taxes on EU food imports from the rest of the world. President Sarkozy is pushing in precisely the opposite direction: he wants the EU to return to a stricter policy of "community preference", in other words tougher barriers on food imports.

Proposed changes to the Common Agricultural Policy

* There will be no change in the CAP budget of £32bn – 42 per cent of EU spending – until 2013 (as negotiated by France in 2004).

* Farms receiving up to €99,999 (£80,000) in annual subsidies would lose 7 per cent from next year. Farms receiving more than €300,000 would lose 16 per cent.

*Compulsory "set-aside" payments, which force cereal growers to leave 10 per cent of their land fallow, would be abolished. This will affect some of Britain's richest landowners.

* The money saved would fund programmes to support smaller, traditional farms and "green" projects to, among other things, boost wildlife and clean up rivers and streams.

* Milk quotas, imposed from 1983 to reduce dairy surpluses, would be eased to reduce a growing shortage of milk. The quotas would vanish in 2015.

* The plans must be approved by all 27 members of the EU.