Report of the High Level Group on Wine Planting Rights 1 FINAL

Report of the High Level Group on Wine Planting Rights 1 FINAL 1 This report reflects solely the discussions of the High Level Group and does not prejudice the views of any of the institutions of the European Union. 1

Table of Contents 1. INTRODUCTION... 3 1.1. Mandate... 3 1.2. Background... 3 2. THE CURRENT FUNCTIONING OF THE PLANTING RIGHTS REGIME... 5 2.1. Rules at EU level... 5 2.2. Implementation at MS and regional level... 6 2.3. Chairman Conclusions on the current functioning of the planting rights regime 11 3. THE EFFECTS OF THE END OF THE PLANTING RIGHTS REGIME... 12 3.1. Outlook for the world wine market... 12 Chairman Conclusions on the outlook for the word wine market... 13 3.2. Impact on wine production, prices and land values... 13 Chairman Conclusions on impacts on wine production, prices and land values... 15 3.3. Rural areas concerns: vineyards in less productive areas and family farming... 16 Chairman Conclusions on rural areas concerns... 17 3.4. Reputation of Protected Designations of Origin and respective value... 17 Chairman Conclusions on the reputation of PDO and respective value... 18 3.5. Standardisation and industrialisation of EU wine production... 18 Chairman Conclusions on the standardisation and industrialisation of EU wines... 19 3.6. Competitiveness and restructuring of the EU wine sector... 19 Chairman Conclusions on competitiveness and restructuring of the EU wine sector... 20 4. PRESENTATION OF POSSIBLE FUTURE APPROACHES... 21 4.1. Note of 11 Member States... 21 4.2. Elements of reflection... 21 5. CONCLUSIONS OF THE HIGH LEVEL GROUP... 23 ANNEX I... 25 ANNEX II... 26 ANNEX III... 28 ANNEX IV... 31 ANNEX V... 36 2

1. INTRODUCTION 1.1. Mandate On 19 January 2012 the Commissioner for Agriculture and Rural Development announced publicly the decision to establish a High Level Group (HLG) on wine planting rights. This decision followed concerns expressed by a large majority of wine-producing Member States (MS), several European Parliament (EP) MEPs and certain sectorial organisations, related to the non-extension of the transitional planting rights regime at EU level beyond 31 December 2015. The aim of the HLG is to organize a forum of discussion to assess different aspects of the functioning of the transitional planting rights regime in specific Member States and regions, as well as the effects of the end of the regime for the wine sector and wine market. The HLG, composed of representatives of all 27 MS as well as of key stakeholder organisations at European level (COPA, COGECA, ECVC (all three representing farmers), EFOW (wines with geographical indication), FoodDrinkEurope (industry), CELCAA (wine traders)), has been chaired by the Director General for Agriculture and Rural Development. Four meetings were held during 2012: on 19 April, 6 July, 21 September and 14 December. Three observers from the EP's secretariat, the Council's secretariat and Croatia were also present. The HLG received permanent contributions from the key stakeholder groups in the EU wine sector during the meetings. Furthermore, the HLG received valuable contributions from invited academic and professional experts, MS representatives and DG AGRI. The following issues were addressed by the HLG: (a) The current functioning of the planting rights regime at EU and MS levels; (b) The effects of the end of the planting rights regime for the wine sector and market; (c) The need for a future EU regulatory framework for vine plantings and its possible outline. All documents produced in the framework of the HLG can be found on: http://ec.europa.eu/agriculture/wine/high-level-group/index_en.htm. 1.2. Background The planting rights regime was introduced at EU level in 1976 in the framework of the wine Common Market Organisation (CMO). The context at that time was of an excessive and growing production (especially of low quality table wines) in relation to the available outlets. A ban on any new plantings was established, in order to limit the production of table wines and prevent structural surpluses. This ban was initially set for the period between 1 December 1976 and 30 November 1978, but the expiring date of the planting rights regime was prolonged ten times between 1976 and 2008 always on a transitional basis. The reasons invoked were most frequently the permanent risk of "structural surpluses affecting the sector", "the situation on the wine sector market" or "tendency in the next few years for production to exceed foreseeable needs". One of the main reasons for the transitional nature of the regime is the interpretation of production potential provisions in EU legislation provided by the European Court of Justice in the case-law 44/79 2 "Liselotte Hauer vs. Land Rheinland Pfalz". The Court stated that the 2 ECR 1979, p. 3727, 13/12/1979 3

restrictions of new planting of vines should correspond to objectives of general interest pursued by the Community and they should not constitute a disproportionate and intolerable interference with the rights of the landowner. The prohibition on new planting of vines, laid down for a limited period by the 1976 regulation, was justified by the objectives of general interest pursued by the Community at that moment but should be temporary. The rules in force in the present, as well as the decision to end the transitional prohibition on planting vines at EU level after 31 December 2015 (with the possibility to maintain such prohibition in Member States wishing to do so, in the whole territory or parts of the territory, until 31 December 2018) form part of the reform of the wine CMO agreed politically at the end of 2007. This reform was the result of a long and difficult political discussion at Council level and it eventually reflects a delicate balance of different MS positions and interests, the decision on planting rights having been only one of the aspects of this balance. The preambles 58 and 59 to Council Regulation (EC) N 479/2008 present the justification for the Council decision not to extend the regime beyond 2015: "While transitional prohibition on new plantings has had some effect on the balance between supply and demand in the wine market, it has at the same time created an obstacle for competitive producers who wish to respond flexibly to increased demand. As a market balance has not yet been found, and as accompanying measures such as the grubbing-up scheme need time to take effect, it is expedient to keep the prohibition on new plantings in place until 31 December 2015, at which juncture, however, it should be definitely lifted in order to permit competitive producers to respond freely to market conditions. ( )." The end of 2012 corresponds roughly to the end of the 1 st phase of implementation of the wine CMO reform, focused on achieving a balance in the EU wine market and improving competitiveness. In this period of four years the key aspects had to do with the implementation of the 3-year grubbing-up scheme (2009-2011), the beginning of implementation of national support programmes (NSP), and of new regulatory measures on geographical indications (GI) and traditional terms, as well as on oenological practices. In this same period of four years (2009-2012) the EU market situation improved significantly, the implementation of the wine CMO reform having contributed to this. The reduction in the EU's production potential and the boost in exports to third countries allowed for a return to a general stability and market balance, with the total stocks decreasing and the average wine prices in most categories (in particular wines without GI sold in bulk) going up significantly. The traditional structural surplus situation of the EU wine market appears to have been corrected, and the estimated total production for the 2012/13 campaign is historically low (~145 Mio hl) the latter is due to negative climatic conditions but the decrease of wine production in relation to pre-reform years is also due to the general regression in the wine-growing areas across the EU, and in particular in the largest wine producing MS. Despite the positive developments, the EU wine sector is still confronted with the challenge of improving its competitiveness in international markets. Main producing third countries are still conquering market shares in main consuming markets inside and outside the EU. The Commission presented at the end of 2012 a report to the Council and EP on the experience acquired with the implementation of the reform, covering the above-mentioned issues which were mostly kept outside the scope of discussions in the HLG. The remainder of this report will address only the content of the discussions held in the HLG, centred on the transitional planting rights regime. It will reflect faithfully the positions and concerns of the different members, and derive final recommendations on this basis. 4

2. THE CURRENT FUNCTIONING OF THE PLANTING RIGHTS REGIME 2.1. Rules at EU level The current legal framework on planting rights at EU level is established in the single CMO Regulation. The basic principle of the regime is the transitional prohibition of the planting of vines of wine grape varieties, as well as of grafting-on, until 31 December 2015 for all MS not covered by the de minimis rule 3. Both the planting and the grafting-on are only to be allowed if covered by planting rights. Three types of planting rights are defined in EU rules: 1) new planting rights, 2) replanting rights, and 3) planting rights granted from a reserve. MS may (or not) grant new planting rights and planting rights from the reserve to producers, but they shall grant replanting rights to producers who have grubbed-up an area planted with vines. The issuing of replanting rights is therefore the basic obligation MS have to comply with, together with the principle of prohibition of plantings; and the basic condition for the use of replanting rights by producers is that they shall be exercised on the holding in respect of which they were granted, either in the same parcel grubbed-up or in another parcel of the same holding. However, MS are given the possibility of being stricter than that, by stipulating that such replanting rights may be exercised only on the area where the grubbing-up was carried out (the strictest of all approaches, rights are linked only to specific land parcels); or they can allow for more flexibility, and may decide that replanting rights can be transferred to another holding in the same MS, but only in the case that part of the holding is transferred to that other holding, or the areas to be planted in that other holding are intended for the production of wines with a protected designation of origin (PDO) or a protected geographical indication (PGI), or to the cultivation of graft nurseries. In any of these cases, MS must ensure that any replanting does not lead to the increase of yields. Furthermore, MS may adopt "stricter national rules" in respect of the award of new planting rights or replanting rights. This provision leaves open room for MS to apply any additional stricter criteria than those specified in EU rules, in particular on replanting rights. In what concerns reserves of planting rights, EU rules foresee that they are created at national or regional level in order to improve the management of production potential. On the one hand, the reserves shall receive all three types of planting rights not used within the prescribed period of validity, and may receive replanting rights that producers decide to transfer including against the payment from national funds if that is considered necessary. On the other hand, MS may grant rights out of a reserve but shall ensure that: 1) the location, the varieties and the cultivation techniques used guarantee that the subsequent production is adapted to market demand, and 2) the yields concerned are typical of the region. The first condition is defined in such broad/vague manner, that it gives a large room for MS to define what it means 3 The de minimis rule stipulates that MS where the regime did not apply by 31 December 2007 shall continue not to apply it. This includes 11 out of 27 MS: Ireland, the United Kingdom, Denmark, Sweden, Finland, Netherlands, Belgium, Poland, Estonia, Latvia and Lithuania. 5

and may apply stricter or more flexible criteria. MS shall also define the criteria for setting the amounts of the payment to be done by producers applying for planting rights from the reserve, while young and qualified farmers establishing themselves for the first time can be granted those rights without payment. Lastly, planting rights granted from the reserve and not used by producers within two years are re-allocated back to the reserve; if not granted from the reserve within five years they are extinguished, and the respective MS loses production potential. Transfers of planting rights can take place between different reserves, regional or national, within the same MS. Overall, the basic rules of the regime at EU level are rather strict and induce the freeze of winegrowing areas at EU level, and in the same locations; in theory, they also allow to induce a freeze of the production potential. However, MS are given a large margin of manoeuvre to make it either even stricter or much more flexible via the use of reserves or the establishment of rules regarding replanting rights all depends on the concrete implementation decisions taken by public authorities at national and regional levels. Such decisions have a decisive importance in the economics of the sector, and on the conditions for investment in vineyards. 2.2. Implementation at MS and regional level 4 Under the framework defined at EU level, the development of planted vine areas in each of the 16 MS is limited by two main factors: 1) the total availability of planting rights; and 2) the rules public authorities may define for their use. In what concerns the total availability of planting rights, the situation at EU level is that there were ~300 000 ha of unused planting rights in 2011 representing over 8% of total production potential, and this number has tended to increase in the past decade leaving therefore a large margin for growth and not effectively limiting the sector's expansion. The situation differs a lot between MS: while some MS seem very restricted by this availability (e.g. Greece, with just ~1% of total production potential in the form of planting rights), other are not restricted at all (e.g. Austria, where planting rights represent ~23% of total production potential) and could have their planted area increase considerably under the current system. The three larger wineproducing Member States all have relatively comfortable room for expansion: ~97 000 ha of planting rights in Spain (9% of total production potential), ~67 000 ha in France (8% of the potential) and ~53 000 ha in Italy (7% of the potential) in total ~217 000 ha. One of the main reasons for the increased availability of planting rights at EU level has to do with the decrease of planted vine areas the grubbing-up of existing areas generates replanting rights, which if not used tend to accumulate in the hands of producers or in reserves. This 4 The information presented and discussed under this theme in the HLG was based on 2 papers presented by DG AGRI and 4 presentations done by MS on their national implementations' systems (Romania, Germany, France and Spain). The 2 papers prepared by DG AGRI ("The EU system of planting rights: main rules and effectiveness" and "The functioning of the planting rights regime in Member States") are based on information included in questionnaire replies to DG AGRI by the 16 MS implementing the regime, on the information received from MS via the official communications foreseen in EU legislation, and on official statistical sources. The content included the development of production potential in these MS during the past decade (2000-2010) in terms of wine-growing areas, number of planting rights and respective transfers, actual wine production and distillations; and an inventory of main restrictions based on EU and national laws. 6

decrease is a constant across the EU over the period 2001-2011, both in 8 older MS (reduction of ~380 000 ha or -12%, but reaching -14% in Spain and Italy) as well as in the 8 new MS acceding in 2004 and 2007 5. The marked reduction of planted vine areas can be explained in part by the subsidized grubbing-up in the framework of the wine CMO measures, in particular in the period 2009-2011. However, the 161 000 ha grubbed-up with financial support in the past few years represent only 59% of the total reduction of planted vine areas the remaining 41% can be explained by other factors, such as the abandonment of production due to unfavourable market or structural conditions of the sector. The use of the ~300 000 ha of planting rights (of which around 75% are replanting rights in the hands of producers, and only up to 25% are planting rights in reserves) is however subject to rules defined by national/regional public authorities in the framework of EU or national law. One of them is that planting rights cannot be transferred between MS. Furthermore, an abundance of planting rights in a MS or in a given region therein does not imply that applicants in that region or in that MS can make use of them. Limitations are usually justified by MS on the basis of certain policy objectives. Significant restrictions to the circulation of planting rights may be implemented within a MS territory. For example, in MS where the administration is regionalized, the "management of production potential" can be completely (or significantly) delegated to the regional level with a more or less loose coordination at central level - the transfers of rights between administrative regions can then be significantly limited 6, such as the cases of: Germany transfers of rights are in principle not allowed between federal regions (Länder) or between wine regions within the same federal region, except if public authorities authorize it; Spain transfers of rights are in principle allowed between Autonomous Regions, but subject to maximum limits defined in % of the production potential and where national authorities play a coordination role. Italy regions in many cases block the entry of planting rights from other regions, or block the exit of rights to other regions, or do both; there appears to be no coordination role played by public authorities at central level. This type of regulation is frequently justified on the basis of "keeping territorial balance", "avoiding delocalisation of production", "preserving the traditional landscape and environment", etc., rather than on more market-oriented criteria. In practice, producers located in more dynamic growing regions may find it difficult to access planting rights sourced from producers that are giving up production and grubbing-up in more regressive regions. In several MS it is also applied the concept of "wine regions", which in many cases do not cover the entirety of the territory and correspond to historical areas of wine-growing. In this case, planting rights cannot be used outside such defined areas, which may correspond to defined 5 Nevertheless, the analysis at the level of wine regions shows that in a limited number of them, usually associated to prestigious PDO's, a growth of planted vine areas has taken place (Veneto in Italy, Rioja in Spain, Champagne in France, Alentejo in Portugal, Baden-Württemberg in Germany, Macedonia in Greece or Dobrogea in Romania). 6 Either transfers of planting rights between regional reserves, or transfers of replanting rights between holdings located in different administrative regions both the control of reserves and transfers between private holders are elements of the mastering of plantings development. 7

PDO/PGI areas or not examples include Germany, where the 13 wine regions occupy a small part of territory and are mainly concentrated in some of the Länder; France, where 10 main wine regions occupy many areas in the territory, excluding most of the north; Luxembourg, where a single wine region is located in a small part of the southeast; or Slovakia, where 6 wine regions occupy mostly the south of the territory. Such limitations under national law are usually justified on the basis of territorial and/or land-use policy objectives. A related issue is the concept of "suitable plots or parcels" for wine-growing, which refers to the classification of individual land parcels or groups of land parcels as "suitable for wine growing" according to agronomic criteria and on the basis of national or sub-national laws. In this case, planting rights are not given to applicants wishing to plant vines in land parcels or plots not considered "suitable" for any type of wine 7 such type of rules is prevalent in Germany, as well as in Austria and in Hungary. In the latter case, the suitable land parcels are also classified under a system of points and transfers of replanting rights between holdings (the prevalent form of access to planting rights in this MS) are only authorised if the land parcel to be planted with vines is of equal or superior "suitability" to the land parcel grubbed-up. Such limitations are usually justified by MS on the basis of ensuring that grape-growing for wine production only takes place in agronomic conditions (soil, climate, relief) that can ensure the possibility of production of good quality wines. The objective of "keeping the vine landscape" for environmental or territorial reasons, is also at the origin of some limiting rules. In Germany, in order to preserve the vineyards in steep slopes (strong relation to tourism) a specific national rule applies: transfers of replanting rights are not allowed between locations with more than 30% slope to locations with less than 30% slope, in order to prevent abandonment of areas where vine cultivation is difficult. An important link also exists between rules for the use of planting rights and the EU PDO/PGI system. Most MS, under national implementing rules, grant planting rights from the reserve only for plantings aimed at the production of PDO/PGI wines (an exception is Greece) and in compliance with respective specifications - therefore, only for holdings located within PDO/PGI areas and according to the vine varieties, yields and cultivation methods prescribed. Furthermore an EU rule determines that, where MS authorise transfers of replanting rights between holdings (without partial acquisition) these must be used for vines aimed at PDO/PGI production. In both cases, such rules effectively prevent the use of rights for planting vines aimed at the production of wines without GI in areas not included in PDO/PGI specifications if these areas cover most of the territory of a MS, then there is little limitation (e.g. Portugal, Spain); if they cover a more limited part of the territory, or if they are defined at parcel/plot level, all land not included in PDO/PGI is excluded from vine planting and it may be a substantial part of the territory (e.g. Slovenia; PDO areas defined on the basis of land parcels in France). Nevertheless, the production of wines without GI (WWGI) is not prevented from vines located within PDO/PGI areas economic operators have the possibility in each case to determine how much of their production will be commercialized each year under which designation, following rules of classification and declassification. However, the planting of new vines within PDO/PGI areas (and in some cases also the replanting) is limited by the rules included in the respective specifications - if these allow for an ample margin of manoeuvre, there may not be any effective 7 This issue should be distinguished from the link between different types of location and different wine quality, which is established in PDO/PGI specifications. It refers here to an absolute prohibition of planting, while the definition of location in the context of PDO/PGI may prevent the possibility of planting vines to produce for that specific GI, but does not constitute an absolute prohibition of planting if another GI can cover the same area. 8

limitations; if they are more restrictive, important limitations may apply. The producer may therefore not be able to freely decide on the criteria for planting a vineyard. Another limiting situation for the use of planting rights is prevalent in areas in which a collective management of supply is put into practice by a professional organisation linked to a PDO or PGI 8. In this case, current or potential wine growers aiming at planting vines for the production of certain specific wines with PDO/PGI, and able to fulfil the conditions established in the respective specifications (including having land located within the PDO/PGI area), may not obtain or be able to use a planting right. This usually happens in the cases where the members of an established PDO/PGI organisation have the objective of controlling the total growth of planted areas for the production of this type of wines. This is usually justified by such organisations in order to "ensure that the development of a PDO/PGI wine is in line with market demand, both in quantitative and in qualitative terms, and thus has got a market outlet" and under the view that a collective name such as a GI needs to be managed collectively in order to generate added value. In some regions (e.g. mentioned in footnote 5) and PDO/PGI therein, although planting limitations are applied, an expansion of vine areas could be verified over the past decade. The mechanism of implementation may differ slightly between different cases, and the following can be given as example: Prosecco the respective consorzio di tutela decided on a limitation of growth in plantings for the production of PDO Prosecco on the basis of production planning, and proposed it to public authorities of Veneto and Friuli-Venezia-Giulia regions; these endorsed it in mid-2011, and in this case the registration of new plantings of Glera variety for this PDO in the vineyard register is limited to 20 000 ha until wine year 2013/2014; the use of planting rights for other PDO/PGI in the same area without such collective decisions is not prevented; Douro/Porto the Instituto de Vinhos do Douro e Porto (IVDP), in the context of a decision taken by the respective inter-professional body, decided for the wine region of Porto/Douro to be closed to the entry of replanting rights from other regions in spring 2012 (rights can go out of the region but not in); before that it allowed for the entry of those rights, except for plantings aimed at the production of one of the GI's - Porto PDO; only vines planted in certain land parcels may produce for Porto PDO, with a less restrictive approach for Douro PDO and Duriense PGI; Champagne the Syndicat Général des Vignerons de la Champagne, which represents only the Champagne grape growers, may ask each year for a limited quantity of authorisations to be granted for plantings within the region of Champagne-Ardenne 9, in order to control total growth of plantings and achieve the objective of "balancing supply with demand"; such demand, and the proposed criteria to allocate that quota among growers, is sent to the Institut National de l'origine et de la Qualité (INAO), a governmental body, that will finally decide how many hectares of new planting rights should be granted and the criteria according to which they should be allocated among growers - such decisions are finally published as a Ministerial order of the French Ministry of Agriculture; it is then up to the Comité Interprofessionnel du Vin de Champagne (CIVC) to manage the distribution of that quota of 8 This usually includes the regulation of plantings, but also other elements of regulation of wine supply. 9 No authorisations are given to land parcels in the region outside the ones defined in the PDO specifications. 9

authorisations, according to the criteria defined by INAO - the final administrative authorization would be granted individually to each grower which submitted a file 10. Rioja the Rioja PDO area (comprising part of the territory of the Autonomous Regions of La Rioja, Navarra and Pais Vasco, and not defined at the parcel level) is closed to the entry of replanting rights from outside this areas unless this is decided by the Consejo Regulador DOC Rioja; when such entry is authorised qualitative criteria may be associated to it (such as vine variety); the use of planting rights within the region gives automatically the right to produce for the PDO Rioja; Finally, several other rules related to the use of replanting rights 11 and planting rights from reserves necessarily also limit their use: The lifetime of replanting rights since these rights have a lifetime that may exceed 5 years after being issued (in the case of some regions in Germany, it reaches 13 years; in most other MS it usually reaches 8 years or until the end date of the current regime), the holder has an incentive not to use it (or transfer it to another holder) within a short time period and adopt a "wait to see" attitude this reduces the actual availability of those ~225 000 ha of replanting rights to potential users that are looking for them in each moment in time; The absence of transparent exchange markets of replanting rights in those MS where the transfers of replanting rights are the dominant form of access to rights, either because reserves are inexistent or relatively inactive, the price per hectare of rights can vary widely from less than 1 000 euros/ha to over 20 000 euros/ha (e.g. Italy, Portugal); this price depends on the relative scarcity of those rights, but also on the presence of middlemen that add their margin to an exchange between two producers; the higher the cost the less interesting it becomes to acquire a right and advance with an investment; The functioning of reserves MS may make planting rights available to all applicants via reserves in a relatively easy way, or apply relatively restrictive rules such as: not keeping the reserve open year-round, or not opening it every year despite having rights available; only granting planting rights to specific types of applicants (e.g. young farmers); imposing maximum size limits per beneficiary (e.g. 1 ha; in the case of France national rules prevent that a beneficiary can obtain more than 1 ha of authorisations per year for PDO and 3 ha for PGI); only granting rights to PDO/PGI wines; prioritising with very defined criteria (qualitative like the type of vine variety, the region of location of the applicants, the slope gradient, the level of mechanisation of the vineyard to plant, etc.) Overall, in MS where there is a relative abundance of planting rights in reserves that are granted either for free or in exchange for a symbolic fee (e.g. Austria, Slovakia, Slovenia, Czech Republic, Bulgaria, Romania, Malta), there is no active market for the exchange of replanting rights between holdings and all happens via the reserve(s). In MS where no reserve exists or where these have a relatively less important role compared to exchanges of replanting rights 10 This procedure, and in particular the fundamental role of the farmer's organisations (Syndicats, Organismes de Défénse et Gestion or ODG's) in submitting the initial proposal to public authorities on the acceptable quantity of hectares allowed to be planted and which criteria they should comply with, is common to almost all wine regions in France thereby providing by law a main role to one part of the supply chain (farmers) in the control of the regulation of plantings at national level. 11 Such rules have a particular impact in MS where use of these rights is the dominant way through which current or potential wine growers can plant vineyards (e.g. Germany, Italy, Portugal, Spain or Luxembourg). 10

between private holders (e.g. Luxembourg, Portugal, Italy, Spain, Germany) the access to replanting rights and the rules associated have significant importance. In France this difference is not relevant since the access to all types of planting rights is tied together through an "authorisations system", and the reserve plays an active role. 2.3. Chairman Conclusions on the current functioning of the planting rights regime The HLG chairman noted the following: Compared to supply restriction systems in other sectors, the planting rights regime cannot be considered as a very effective tool to control wine production, since it may allow some control on vine surfaces but not an effective control on yields it can only be considered as a tool that partially regulates wine production. After the introduction of the planting rights regime at EU level the market has never been balanced: since 1980/81 important volumes of excess production were distilled. The market has come to a balance in 2010/11 after reducing the distillation outlets and implementing the 3-year grubbing-up scheme, in conjunction with other factors such as the strong development of exports; The availability of ~300 000 ha of planting rights at EU level does not mean that farmers have easy access to these rights it is relatively easy to go out of the sector but not to entry; Both EU rules and "stricter rules" implemented at national and regional levels usually justified by MS on the basis of various policy objectives, create a wide heterogeneity of situations across the EU. Such heterogeneity does not allow creating a level playing field for investments in the wine sector among MS and regions therein; In some areas of the EU the system is almost frozen, while in other areas there are hardly any restrictions; There is a need for more harmonisation, as well as increased flexibility in the implementation of any EU-wide system of regulation of plantings, so that the sector can respond to future challenges. The HLG chair also noted that almost all the 16 MS implementing the planting rights regime, as well as the 4 stakeholder organisations representing farmers, consider the regime to have been positive for the respective wine sectors and allowing an organized development for the benefit of wine growers. They also highlighted that the regime allowed keeping the production fabric in a large diversity of regions, thereby preventing territorial unbalances and environmental degradation. The chair also distributed to all members the written position of the European Parliament, supporting the continuation of the regime 12. On the other hand, some of the 11 MS not implementing this regime (mostly wine-consuming countries) indicated a negative opinion on the current functioning of the system and oppose by principle any system of supply regulation, while other expressed to be relatively open to follow the discussions in the HLG before defining a position. The 2 stakeholder organisations representing industry and trade favoured the existence of a regulatory framework on plantings, but different from the current one. 12 Dess report on the CAP towards 2020, adopted in plenary in June 2012. 11

3. THE EFFECTS OF THE END OF THE PLANTING RIGHTS REGIME The reflection on this second theme of the HLG was based on a scenario of absence of any type of system to regulate vine plantings, and what would be the consequent effects on the wine sector and wine market. In the points below, before addressing the possible effects a description is given on the outlook for the world wine market in the coming years in order to provide a framework for discussions and any future policy choices. 3.1. Outlook for the world wine market The outlook for the world wine market up to 2020 13 foresees an increase in total wine consumption from 264 Mio hl in 2012 to 270 Mio hl in 2020 (+6 Mio hl), but with a reduction of EU consumption from 151 Mio hl to 141 Mio hl (-10 Mio hl) in the same period this decline is to take place mostly in main southern European wine-producing MS (France, Italy, Spain), since a slight increase is expected in northern European MS (UK, Germany, Sweden). The increase in consumption will necessarily take place in other parts of the world particularly in Asia (China, Japan), but also in Russia, USA, Canada and Brazil. Although the EU market will still continue to be the largest in the world, it will progressively lose importance both in absolute and relative terms 14. Wine production at world level will need to grow to meet the increase in demand but, based on past trends, it is expected that the necessary increase in production capacity will take place mostly in third countries (Chile, Australia or South Africa). A progressive decline will continue to take place in the EU (decrease from 157 to 151 Mio hl) based on a trend that has been forecasted under a scenario of continuation of the planting rights regime. The EU will still continue to be by far the largest producer in 2020, but losing ground to third countries. These trends will be reflected on the market shares in main consuming markets, where the EU wines are foreseen to lose ground to third countries' in a good number of them (such as USA, Canada, Japan and Brazil) despite the projected increase of net EU exports 15 - other competitors would have higher export increases to those markets than the EU. The perspectives are however positive in China and Russia, where market shares are foreseen to increase with the growth of demand, while these should remain relatively stable in main EU markets such as Germany and the UK. Given the structural changes projected to happen in the world market, the challenges are significant for the EU wine sector in traditional wine-producing MS. It will be essential for the sector to design the best strategies to improve competitiveness vis-à-vis third countries' wine 13 "Medium-term projections for the world wine market: 2012-2020", by DG AGRI. 14 The qualitative and value aspects of the development of consumption, which are a very important aspect to characterise the wine market, could not be modelled in this study due to lack of complete data - only the quantitative developments. 15 Due to the fact that EU consumption is projected to decrease at a quicker pace than production. 12

producers both in main EU consuming markets as well as in main third country markets, knowing these will represent the essential of future growth in demand 16. Understanding the evolution of consumer behaviour, preferences and trends in the different markets is a key to competitiveness: for instance, while in markets such as the UK or USA an important factor is the grape variety, with price/promotional offers being more important in UK than in USA, the region or country of origin is an important factor particularly in markets such as China, Japan, Brazil or Russia, but so is price; in Canada or Sweden the main factors are the brand and the variety. Chairman Conclusions on the outlook for the word wine market The HLG chairman noted the following: The most important growing markets for EU wines in the future have different characteristics from consuming markets in traditional wine producing MS; furthermore, those different markets also have very different characteristics between themselves, and one single strategy does not seem appropriate to target all of them and improve general competitiveness of EU wines; There is a general problem of identification of wines by many of consumers outside wineproducing MS: the EU model of GI wines has generated a high complexity of choices, while 75 to 80% of market shares in USA and the UK concern easy-to-consume product wine with an affordable price; varietal led wines, for many consumers and many markets, are used as a shortcut to choice, as they are often seen as much easier to identify as compared to a multitude of GI; On the other hand in emerging markets (e.g. China) there is also a growing interest in top quality EU wines with high price linked to region or country of origin, with this niche market tending to expand; The reflexion on any future EU-wide system of regulation of plantings should be based on the market prospects for the medium to long term for different types of wines, and that such system should not be an obstacle to the development of competitive production strategies that allow improving the market situation of EU wines across the world and meet future increase of demand(s). 3.2. Impact on wine production, prices and land values One of the main concerns expressed by MS and stakeholders defending the continuation of the current regime is that, without a control system such as the planting rights regime, there would be an excessively quick increase of new plantings. This expansion of vine planted areas would lead to an increase in wine production resulting necessarily in oversupply, general fall in prices and affect negatively producer's incomes. Such situation would also decrease the patrimonial value of wine growers, and in particular the value of land with vineyards, as well as other effects (discussed in other points of this report). 16 "EU wine sector competitiveness: global wine trends and outlook", by Wine Intelligence (consulting company). 13

A number of prospective studies were presented on this matter 17 and a working group composed by members of the HLG was held to discuss the topic. The study by UMR-MOISA-Montpellier speculates on what would happen in the EU without the planting rights regime, based in particular on a study of the situation in two countries in the southern hemisphere: Australia and Argentina. The former to illustrate the total absence of regulatory mechanisms and freedom for any new entrants to invest in the sector, resulting in uncontrolled increase of new plantings and eventually in overproduction crisis, bankruptcies, and grubbing-up or abandonment; the latter to illustrate that a regulatory system without effective control of illegal plantings or that covers only a part of a country's territory may also lead to crisis situations which are difficult to manage a posteriori. In what concerns the EU, it compares the implementation of the planting rights regime in Portugal, Spain and France, concluding that a more liberal implementation may also lead to overproduction crises, and implicitly presenting the French strict regulation model in some regions as the most defendable. It also contests the argument that the end of the planting rights regime would allow the most competitive producers to develop economies of scale by defending that these have relatively little importance in the wine sector and the key is to ensure high prices. Finally it describes the negative social, territorial and environmental effects of the end of the regime, although without providing much sound analytical evidence to back such descriptions. Overall it seems to defend the continuation of the current planting rights regime with a strict approach. In the discussion following the presentation, certain remarks were raised in relation to the case of Australia and its nonharvesting figures of 9 to 7% for the period 2008-2010, presented in the study as a surplus and an argument for regulation of plantings. There were no subsidies for non-harvesting in the case of Australia, while in the EU non-harvesting is possible with subsidies being provided for within the national support programmes. Given that within the EU regulated system of planting rights producers still distilled with subsidies ~14% of production per year on average (over the past 30 years), doubts were expressed as to what extent the EU system of planting rights has actually led to market equilibrium as compared to the Australian system. The study by INEA presents two prospective analyses. The first one (based on the Nerlove model) aims to establish a statistically significant relation between price variation and the development of vine planted areas, but while such relation could be established in the case of third countries (Chile, Australia) where increases in export prices have led to the growth of planted areas, it could not lead to significant results for the EU where the reduction of vine areas has been a constant with or without price increases (however part of this reduction can be explained by subsidized grubbing-up measures, and the lack of significant relation may also be due to the policy measures applied in the EU under the wine CMO). The second one (based on FADN data and a PQM model) aims at comparing the profitability of wine-growing farms with that of comparable crops in a number of wine regions in different MS, forecasting growth where wine-growing is considerably more profitable than any alternative crop; it comes to a result that in general the pressure for the expansion of vine plantings exists in many cases because of the higher level of profitability compared to other crops, also highlighting that results may be overestimated since it does not take into account investment risks and financial constraints (it takes a relatively high investment to establish a vineyard, and whoever thinks of doing it needs to take risks into consideration). It finally foresees two possibilities between the liberalisation of 17 "The liberalisation of planting rights in the EU wine sector" by INEA for the European Parliament; "Étude sur les impacts socio-économiques et territoriaux de la libéralisation de droits de plantations viticoles" by UMR-MOISA- Montpellier; "Regional effects of the end of the planting rights regime" by DG AGRI. 14

plantings and keeping the regime as it is: either to liberalise but give reinforced role of supply regulation to professional organisations linked to PDO, or to keep the planting rights regime but eliminate many of the strict rules and improve flexibility and management. These two possibilities are motivated by the general assessment that the complete liberalization of plantings could determine a pressure for structural changes in the EU wine industry, driven by a reduction of PDO wine producers and of smaller farms, and which could originate a weakening of environmental and socioeconomic stability in marginal areas. In the discussion following the presentation these two possibilities were debated, and most wine-producing Member States favoured a more flexible implementation of the current regime rather than liberalisation accompanied by counter-measures. It was highlighted the relation between planting rights and all other CMO measures with some emphasis on enrichment and NSP. The analysis presented by DG AGRI, based on a multi-criteria methodology (including FADNbased indicators, information on transfers of planting rights, evolution of wine growing areas in 2001-2011 and qualitative criteria based on the functioning of the planting rights regime at regional level), attempts at identifying the wine regions across the EU where an increase of planted vine areas would appear likely due to the end of the planting rights regime 18. The outcome of the analysis is that for the majority of wine regions the growth of total planted areas does not appear likely; for some wine regions that show a tendency to grow there are no significant restrictions imposed by the planting rights regime in the present to their growth, so no real effects of the end of the regime would be expected there; and for a limited number of wine regions the growth of planted vine areas appears likely due to the end of the regime (e.g. Veneto, Champagne, Rioja), because current restrictions effectively limit a growth that would otherwise take place due to market signals. Overall, at EU level no very significant increase of plantings is expected in the short to medium term following the end of the regime - and therefore no very significant risk of overproduction appears likely. However, in some regions where effective restrictions to the development of new plantings exist, a quick increase of plantings resulting in increase of wine supply and decrease of prices and incomes could take place and affect negatively the respective wine growers. In the working group discussion the opinion expressed by a large number of wine-producing Member States and stakeholders representing farmers was that abandoning the planting rights regime could give rise to overproduction, reduction of margins and even lead again to the need of distillation measures. However, the majority of non-producing Member States disagreed that there is a direct link between planting rights and market balance or the risk of overproduction. An important point made was the specific situation of small producers or those who are producing under more difficult circumstances on steep slopes and the importance of the vineyards for the environmental balance in certain areas; also that the current regime brings no cost to European taxpayers, contrary to a situation where subsidies would need to be granted to less favoured areas. Those arguments were opposed by other members who intervened to question to what extend that specific situation should determine the overall policy of the wine sector in terms of competitiveness and to what extent those specific problems could not be addressed in the 2nd Pillar of the CAP. 18 The wine regions analysed concern only the ones where statistical information on wine exists (either on vine areas or on specialized wine farms with accounting included in the FADN), not all the regions of every MS. 15

Chairman Conclusions on impacts on wine production, prices and land values The HLG chairman noted the following: The three studies presented offer differentiated views of possible effects of liberalisation; It is difficult to forecast with certainty whether the end of the planting rights regime would lead to an excessively quick expansion of vine plantings across the EU or not and whether this would lead to oversupply and other negative effects to the sector. It would seem to depend much on market signals and facility to develop new plantings; Nevertheless the risk exists, in particular in certain regions, and it is clear that many of the HLG members fear this scenario, and feel more secure with the existence of a regulatory framework for all vine plantings at EU level; Other members underlined the need to have a more market oriented wine regime, to better address the market trends; The discussion allowed a better understanding of what are the main risks and the key situations that any future EU-wide system of regulation of plantings should address while not allowing that too restrictive practices and lack of transparency remain. 3.3. Rural areas concerns: vineyards in less productive areas and family farming 19 Less productive vineyard areas were considered to be of two types: One of them refers to areas in slopes in certain regions of Europe, with high quality wine, high prices, but with high production costs; some of those areas are currently among the most profitable wine areas in the EU, with very high yields (e.g. Mösel, Alsace, etc.); The other type of areas are rather the contrary, areas with very low yields (20-30 hl/ha), in dry, remote regions, with poorer soils in organic matter, under significant risk of abandonment (e.g. certain areas in Spain). Nevertheless, those productions play an important role in the economy of those regions. Several replies in the working groups expressed that there is a risk that production would move from that kind of fragile areas even if they have very high yields and produce high quality wines to lower cost production areas in the plains where higher yields could be obtained. That would be mainly due to investments in plantings by big companies having the possibility to produce at large scale, using brands, which would make it more difficult for regions with higher production costs to compete. This territorial concentration of production would affect the family farmers, leading to depopulation of those more fragile areas. It is also claimed that in some of those areas there is no alternative to wine growing, which is the activity that keeps those afloat economically. The value of cultural landscape and the heritage identity are also associated to those more fragile areas. 19 The effects discussed in this point and the next ones of this report, while being somehow tackled in the studies mentioned in point 3.2, were mostly discussed in the context of specific working groups during the second and third meetings of the HLG on the basis of key questions (see Annex 1). 16