Last week, the EU announced a number of proposals for CAP reform post-2013. What will be the impact on suppliers and retailers, asks Julia Glotz

Q: In a nutshell, what's going on? And what does everyone think of the ideas?
A: The new proposals aim to make CAP fairer and simpler, but the standout feature is to encourage farmers to do more for the environment.

To achieve this it wants individual countries to have more flexibility in how they distribute EU funds to farmers. New 'greening' criteria would require farmers to maintain grassland, undertake crop rotation and set aside 7% of non-grassland areas for ecological purposes. And a full 30% of direct payments made to farmers would be dependent on their meeting these environmental requirements.

This idea has proved controversial. Many in favour of environmental incentives say EU agriculture commissioner Dacian Ciolos's proposals are not ambitious enough, while others, such as the National Farmers' Union, warn they could have "unintended consequences" and limit farmers' ability to respond to market signals. Despite Ciolos's stated aim of simplifying the CAP, concerns have also been raised that the new proposals are still too complex and could increase the bureaucratic and administrative burden on farmers.

Q: Has anyone been supportive?
A: A rare positive take on the proposals has come from the Soil Association, which has welcomed the EC's support for organic farmers, who would be exempt from greening requirements and would also qualify for extra EU support.

Q: Are UK farmers going to get less money from the EU?
A: On paper at least, they could receive more. UK farmers currently receive less than the EU average on a per-hectare basis, and the EC is keen to close the gap between how much is paid across different member states.

The overall CAP budget itself has yet to be finalised, but current proposals suggest it will be kept stable at 2013 levels until 2020 nearly €400bn over the period. However, as Dairy UK policy director Peter Dawson points out, a stable CAP budget "of course means a reduction in real terms", and the NFU is concerned Defra might use the new flexibility afforded in the CAP proposals to transfer monies from farmers to the so-called 'second pillar' of the CAP rural development policy resulting in less direct support for British farmers.

In addition, all member states will be required to move to 'flat rate area payments', calculated on the basis of how much land is being farmed. Here, the potential impact differs across the UK while farmers in England will be unaffected by the change, those in Scotland, Wales and Northern Ireland whose payments are currently based on historic entitlements rather than land claim they could end up receiving substantially less.

Q: Why does all of this matter to retailers and suppliers?
A: Because without a sustainable farming sector, it's impossible to have a sustainable grocery supply chain. As Dawson puts it: "The proposals will have implications for the income and costs of production for every farmer in the UK. Each farmer's commercial viability could be affected, which could impact on the availability of products from specific regions."

Confidence is also an issue. NFU chief economist Phil Bicknell points out that many farm businesses are already uncertain about their future and rely on EU payments to remain viable: "Any changes to the system will create concern for farm businesses in the short term."

On the manufacturer side, companies are watching closely to see how the reforms will affect access to sustainably sourced and competitively priced raw materials. "The proposals could lead to reduced efficiency and less focus on the need to see EU agriculture as part of the wider global supply chain," warns FDF sustainability director Andrew Kuyk.

Q: So, are prices going to go up?
A: It's difficult to predict price movements at this early stage, but the EC's impact assessment suggests some commodity prices might go up. Since much of the focus is on 'greening', if more land has to be set aside for environmental reasons, and farmers have to farm their land not just to meet market demands but to meet policy objectives, less land could be available to grow in-demand crops. This could lead to higher raw material prices ultimately filtering through to suppliers and retailers.

Q: Will this lead to supply issues?
A: That depends on the crops and on precisely how the new greening criteria will be implemented. There will be a major battle between production and environmental interests, believes Dawson at Dairy UK, and the EC's own impact assessment shows that the effect on supply will be mixed. "Crop areas for durum wheat, barley and rice would fall, while it is expected to increase for sunflower, soya and sugar beet," he says.

Q: Will some sectors be more affected than others?
A: If the new proposals lead to higher grain prices, sectors such as pork and poultry which rely heavily on grain for feed might come under pressure from rising input costs. Bicknell at the NFU also fears new rules on the use of grassland could limit the scope for improvement in the livestock sector and, in effect, "fossilise" productivity of UK grassland. On the dairy side, an end to historic payments is likely to disadvantage intensive dairy farmers, adds Dawson at Dairy UK.

Q: What difference will the proposed changes make to consumers?
A: Rising raw material costs always have the potential to filter through to retail prices, so if predictions about higher commodity costs turn out to be correct consumers might have to pay more for some products. But prices aside, there is no 'consumer-facing' side to the CAP similar to the discards issue, which helped the Common Fisheries Policy gain a wider audience.

Q: What else is likely to be a game changer?
A: The EC is proposing to extend the Producer Organisation model, which already exists in the fresh produce sector, to the dairy industry, encouraging closer collaboration between dairy producers. Although only dairy is on the table at the moment, Dawson says the European Parliament is likely to push for an extension to all agricultural sectors. "That could have a significant impact on the balance of supply chain relationships," he says.

Q: What happens next?
A: The proposals will now be debated in the European Parliament and the Council, with a view to working out the different regulations by the end of 2013. The final CAP reform would then be in place as of 1 January 2014. Watch this space.

Key CAP proposals
- 30% of direct payments to be awarded for 'greener' farming methods and better use of natural resources
- All member states to move to calculate payments on a per-hectare basis rather than based on historic entitlements
- Direct payments to be capped at €300,000 per year direct payments to be available only to 'active' farmers, ie those carrying out a minimum of farming on their land and not in receipt of substantial non-agricultural income
- Special support for small farmers and those under 40
- Sugar quotas abolished by 2015
- Research budget for agricultural R&D to double