EUROPEAN COMMISSION. SA (2017/N) Saxony: Aid for the closing of milk production capacity

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1 EUROPEAN COMMISSION Brussels, C(2017) 1397 final Subject: State aid Germany SA (2017/N) Saxony: Aid for the closing of milk production capacity Sir, The European Commission ("the Commission") wishes to inform Germany that, having examined the information supplied by your authorities on the State aid scheme referred to above, it has decided not to raise any objections to the relevant scheme as it is compatible with the internal market pursuant to Article 107(3)(c) of the Treaty on the Functioning of the European Union ("TFEU")). The Commission has based its decision on the following considerations: 1. PROCEDURE (1) By letter of 4 January 2017, registered by the Commission on the same day, Germany notified, according to Article 108(3) TFEU, the above mentioned aid scheme. 2. DESCRIPTION 2.1. Title (2) Saxony: Aid for the closing of milk production capacity. Seiner Exzellenz Herrn Sigmar GABRIEL Bundesminister des Auswärtigen Werderscher Markt 1D Berlin Commission européenne/europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË

2 2.2. Objective (3) With the present notification the authorities of Germany wish to support farmers to close their milk production capacity in the light of the current crisis. Substantial further financial losses should be avoided and the loss of agricultural assets should be slowed down. In addition, milk quantities should be permanently withdrawn from the market leading to a relief from over-supply and to contribute to an increase of milk prices Legal basis (4) Richtlinie des Sächsischen Staatsministeriums für Umwelt und Landwirtschaft zur Gewährung von Zuwendungen bei Stilllegung der Milchproduktion RL SMP/2017 (Directive of Ministry of Environment and Agriculture of Saxony on the granting of aid for the closing of milk production capacity) Duration (5) From the date of the approval by the European Commission until 31 December Budget (6) The overall budget is EUR 3.5 million (EUR 1.75 million per year) Beneficiaries (7) Beneficiaries are micro, small and medium-sized enterprises as defined in Annex I to Commission Regulation (EU) No 702/2014 of 25 June 2014 declaring certain categories of aid in the agricultural and forestry sectors and in rural areas compatible with the internal market in application of Article 107 and 108 of the Treaty on the Functioning of the European Union 1, active in primary agricultural production. (8) The scheme will support milk farmers in their efforts to close their milk production capacity. Aid will be granted to farms in Saxony which have 20 or more dairy cows. The German authorities explained that the notified aid scheme will be accessible to all eligible undertakings in Saxony. (9) The aid will not be granted to: (a) (b) undertakings in difficulty within the meaning of point (35)(15) of the European Union Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to (hereinafter "the Guidelines"); undertakings subject to an outstanding recovery order following a previous Commission decision declaring an aid illegal and incompatible with the internal market. 1 OJ L 193 of , p OJ C 204 of , p. 1. Amended by the Notice published in OJ C 390, , p. 4 and by the Corrigendum published in OJ C 265, , p. 5. 2

3 2.7. Description of the aid scheme Context (10) As the German authorities recalled, the milk sector is currently confronted with a market disturbance, there is a global imbalance between supply and demand, bearing in mind, inter alia, the extension of the Russian ban on the import of agricultural products and foodstuffs originating in the EU by the end of 2017 and the expiry of the milk quota system in March (11) Global demand for milk and milk products has in 2015 and 2016 slightly increased but at a much slower pace than production. While the global offer of milk and milk products throughout 2015 increased, and the production in the EU, the United States and New Zealand as a whole increased by about 4,5 million tonnes, the EU s total exports and those of third countries decreased by around 200,000 tonnes in milk equivalent. In the first quarter of 2016 milk production of the EU, the United States and New Zealand increased, amounting to around 3,6 million tonnes, with less than 1 % of that volume being absorbed by additional exports. This has resulted in historically low milk prices. In Saxony, in the 1st half of 2016 milk producers received around 20 cents/kg. According to experts, for professional milk production a minimum price of 35 cents/kg on average would be required. Milk prices have been increasing again in 2016 but are still below the necessary level for viable milk production businesses. This is an indication that overcapacities still remain at least at regional and national level. Description (12) The scheme will support farmers to close their milk production capacity in the light of the current crisis. The aid amount is fixed at EUR 500 per cow as a oneoff payment for the closing of production, up to a ceiling of EUR 30,000 per applicant. (13) The following counterparts will be requested from the aid beneficiary: (a) (b) the aid beneficiary will have to take a legally binding commitment that the closure of the production capacity will be complete, definitive and irrevocable, the aid beneficiary must not start the same activity elsewhere (the same will apply to the future purchaser of the facility concerned). (14) Under the scheme only those aid beneficiaries are eligible for support who have actually been producing milk over the past five years before the closing of capacity with the cows that are concerned. (15) Undertakings which do not fulfil Union standards, and would be obliged to stop production anyway, are excluded from the present aid scheme. (16) Furthermore, the German authorities declared the following: 3

4 (a) (b) (c) (d) (e) the aid ensures viable food production and promotes the efficient and sustainable use of resources in order to achieve intelligent and sustainable growth; the aid will not have any negative environmental impact; each applicant will have to submit an application for the aid before the project has started. It needs to be accompanied by relevant extracts from the national database of the origin protection and information system for animals (HIT Herkunftssicherungs- und Informationssystem für Tiere), as well as through the submission of additional documents, in particular invoices of milk revenues. Since all movements of cattle (birth, sale, slaughter, etc.) are recorded in the HIT database, including data on the breed and the type of production (in this case: dairy farming), it can be seen if the concerned animals have been producing milk for sales purposes; the eligible costs will neither be cumulated with any other State aid nor with de minimis aid; neither with the exceptional support measures for milk adopted in 2016 (Commission Delegated Regulations No 2016/ and 2016/ ). In this respect, with regard to the first part of the "EUmilk package", the second application round was in October The reduction quantities have been used to the full extent. With a reference period of three months thus only reductions until including January 2017 were supported, therefore an overlap with support under the present aid scheme is not to be expected. With regard to the German "liquidity support programme" only active milk producers are eligible while under the present scheme a complete closure of milk production is required; no funding of the notified scheme is foreseen under the Rural Development Programme for Saxony. Nonetheless, the scheme is consistent with the relevant rural development policy. (17) The granting authority is the Development Bank of Saxony (Sächsische Aufbaubank). Compliance with the conditions will be checked by on-the-spot checks on a sample basis. When there is evidence of failure to comply with the provisions, an on-the-spot check is carried out in each case. (18) Applications can be collected during a six months period. From the date of approval by the European Commission the potential applicant will have a minimum period of four months for the submission of applications; this period is considered by the German authorities necessary to make an appropriate and well informed decision about the definitive and irrevocable closure of production capacity. For the examination and approval of project applications a time frame of maximum four months is foreseen. Following approval of the application, the applicant needs to produce within a reasonable period of time, but not more than six months, the proof of the actual closing of its milk production capacity and request the payment of the grant. Thus the total duration of the scheme is less than two years from the date of approval. 3 Commission Delegated Regulation (EU) 2016/1612 of 8 September 2016 providing aid for milk production reduction, OJ L 242, , p Commission Delegated Regulation (EU) 2016/1613 of 8 September 2016 providing for exceptional adjustment aid to milk producers and farmers in other livestock sectors, OJ L 242, , p

5 (19) In order to achieve maximum impact, dairy farmers that are active in Saxony are informed of the proposed scheme in detail. In addition to the publication of the Directive on the revosax website ( and on the websites of the Ministry of Environment and Agriculture of Saxony, information will be published in press releases, newsletters, and in letters to the relevant professional associations as well as in the publication "Infodienst Landwirtschaft" which is a regular specialised review of the Ministry of Environment and Agriculture of Saxony (published 5 times a year), with printed copies, that are inter alia, sent out by post to farmers. Form of aid (20) Direct grant. Eligible costs (21) The German authorities presented the eligible costs and the detailed calculation methods based the expert opinion of the Regional Office of Environment, Agriculture and Geology of Saxony (Landesamt für Umwelt, Landwirtschaft und Geologie). The calculations took into account the loss of value of the assets, the cost of destruction of the production capacity and the obligatory social costs. (22) The premium per cow is set at EUR 500. According to the information provided the economic disadvantage resulting from the closing of production capacity represents a total loss of EUR 622 per cow. The planned aid amount of EUR 500 per cow (up to a maximum of EUR 30,000 per holding), consequently is below 100% of aid intensity. The calculations are summarized in the table below: Type of economic disadvantage Calculated loss Amount (EUR) Losses of value of assets calculated on the basis of the current selling value of the assets Loss per production entity Loss calculated per cow* Cost of reduction of the production capacity (machinery) Loss per production entity Loss calculated per cow Obligatory social costs calculated on the basis of the legal period of notice of 3 months in case of dismissal and of the collective agreement in force in Saxony TOTAL economic disadvantage Loss per production entity Loss calculated per cow Loss per production entity Loss calculated per cow *in the data sample: average size of milk production entity in Saxony with 89 cows. 5

6 2.8. Other commitments (23) Germany has confirmed that it will ensure that the that the full text of the aid scheme and its implementing provisions and the identity of the granting authority will be published on the website of the Saxon State Ministry of Environment and Agriculture. With regard to the individual aid awards, Germany informed the Commission that the maximum amount of individual aid is EUR and therefore no individual aid decisions will be published. 3. ASSESSMENT 3.1. Existence of aid - Application of Article 107(1) TFEU (24) According to Article 107(1) of the TFEU, "[s]ave as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market". (25) The qualification of a measure as aid within the meaning of this provision therefore requires the following cumulative conditions to be met: (i) the measure must be imputable to the State and financed through State resources; (ii) it must confer an advantage on its recipient; (iii) that advantage must be selective; and (iv) the measure must distort or threaten to distort competition and affect trade between Member States. (26) The scheme in question confers an advantage in the form of a direct grant (recital (20)) on its recipients (recitals (7)-(9)). This advantage is granted through State resources and it favours milk farmers. According to the case law of the Court of Justice, the mere fact that the competitive position of an undertaking is strengthened compared to other competing undertakings, by giving it an economic benefit which it would not otherwise have received in the normal course of its business, points to a possible distortion of competition. 5 (27) Pursuant to the case law of the Court of Justice, aid to an undertaking appears to affect trade between Member States where that undertaking operates in a market open to intra-eu trade. 6 The beneficiaries of aid operate on the milk market, where intra-eu trade takes place. In 2015, million tonnes of cow milk were produced in the EU-28 and over one fifth (21.0 %) of all the cows milk collected by EU-28 dairies in 2015 was collected in Germany. The intra-eu trade of milk and dairy products in 2014 exceeded 9 million tons and EUR 4 billion 7. The sector concerned is open to competition at EU level and therefore sensitive to any measure in favour of the production in one or more Member States. Therefore, the present scheme is liable to distort competition and to affect trade between Member States. 5 Judgment of the Court of 17 September 1980 in Case 730/79 Philip Morris Holland BV v Commission of the European Communities, ECLI:EU:C:1980: See in particular the judgment of the Court of 13 July 1988 in Case 102/87 French Republic v Commission of the European Communities, ECLI:EU:C:1988: Source: Eurostat. See in particular: 6

7 (28) In light of the above, the conditions of Article 107(1) of the TFEU are fulfilled. It can therefore be concluded that the proposed scheme constitutes State aid within the meaning of that Article. The aid may only be considered compatible with the internal market if it can benefit from one of the derogations provided for in the TFEU Lawfulness of the aid Application of Article 108(3) TFEU (29) The aid scheme was notified to the Commission on 4 January It has not been implemented yet. Therefore, Germany has complied with its obligation under Article 108(3) TFEU Compatibility of the aid Application of Article 107(3)(c)] TFEU (30) Under Article 107(3)(c) TFEU, an aid may be considered compatible with the internal market, if it is found to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest. (31) For this derogation to be applicable, the aid must comply with the relevant Union State aid rules Application of the European Union Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to 2020 (32) As regards the notified aid scheme, Part II, Chapter of the European Union Guidelines for State aid in the agricultural and forestry sectors and in rural areas 2014 to 2020 is applicable Common Assessment Principles Objective of common interest (33) As the German authorities confirmed (recital (16)(a)), the State aid scheme contributes to a well-defined objective of common interest by ensuring viable food production and promoting the efficient and sustainable use of resources in order to achieve intelligent and sustainable growth (points (39)(a) and (43) of the Guidelines). (34) As the German authorities declared, the notified scheme is not part of the Rural Development Programme of Saxony but is consistent with the rural development policy (recital (16)(e)), the conditions of point (47) and (58) of the Guidelines are, therefore, met. (35) The German authorities confirmed that the aid is compatible with the rules on the common organisation of the markets in agricultural products. The principles of point (50) of the Guidelines concerning the rules on the common organisation of the markets in agricultural products are, therefore, respected. (36) The aid scheme does not include support for any increase in numbers of livestock animals, and the German authorities declared that no negative impact on the 7

8 environment within the meaning of point (52) of the Guidelines has been identified. Need for State intervention and appropriateness of aid (37) As described in recital (10) there is currently disturbance on the milk market. The aid scheme fulfils the specific conditions laid down in Part II of the Guidelines. Therefore, the Commission considers that the market is not delivering the expected objectives without State intervention and such aid should be considered necessary to achieve the objectives of common interest specified under Section 3.1. of Part I of the Guidelines (point (55) of the Guidelines). (38) Germany chose a direct grant as the most appropriate form of aid to meet the objective of the notified aid scheme with regard to the purpose of the scheme and the existing financial and economic situation of the beneficiaries. For the reason that the aid scheme fulfils the specific conditions laid down in Part II of the Guidelines, the Commission considers granting the notified aid an appropriate policy instrument (point (57) of the Guidelines). Incentive effect and need for aid (39) The scheme has an incentive effect if it changes the behaviour of undertakings in such a way that they engage in additional activity contributing to the development of the sector, in which they would have normally not engaged in without aid or would have engaged in a different or restricted manner. The German authorities committed that each applicant will have to submit an application for the aid before the project has started (recital (16)(c)). The aid scheme therefore satisfies the incentive effect requirements set out in points (70) to (71) of the Guidelines. Large enterprises are excluded from the scope of the aid scheme therefore points (72) and (73) of the Guidelines are not relevant. Proportionality and cumulation (40) The aid is proportionate since the aid amount per beneficiary is limited to the minimum needed to achieve the common objective aimed for and the aid amounts notified will not exceed the eligible costs (recital (22)) laid down in the relevant chapters of Part II of the Guidelines (points (81) and (82) of the Guidelines). (41) In conformity with point (99) of the Guidelines, aid will neither be granted concurrently under several schemes nor cumulated with ad hoc aid (recital (16)(d)). Applicants receiving grant from other sources for the same eligible costs will be excluded from the present aid scheme. (42) Furthermore, the proposed scheme does not conflict by means of cumulating support with the exceptional support measures for milk adopted in 2016 (Commission Delegated Regulations No 2016/1612 and 2016/1613). The support provided by the milk production reduction scheme (Regulation 2016/1612) only covers milk deliveries in the periods October 2016 to December 2016 and November 2016 to January 2017 and consequently does not overlap in time with the proposed State Aid scheme. The measure notified by the German authorities for the implementation of the exceptional adjustment aid (Regulation 2016/1613) consists in a liquidity aid with a supply discipline for active farmers, therefore not 8

9 covering the same ground as the proposed State Aid scheme which is targeted to farmers closing their production capacity. Avoidance of undue negative effects on competition and trade (43) Since the aid fulfils the conditions and does not exceed the relevant maximum aid intensities laid down in the applicable Sections of Part II of the Guidelines, the negative effect on competition and trade is limited to the minimum (point (113) of the Guidelines). Transparency (44) With respect to transparency requirements stipulated in points (128) to (132) of the Guidelines, the German authorities have committed to comply with these requirements (recital (23)). The aid scheme will be published on the website of the Saxon State Ministry of Environment and Agriculture. As for the individual aid awards, point (128)(c) of the Guidelines is not applicable Specific assessment according to the category of aid (45) In line with point (438) of the Guidelines, the objective of the notified aid scheme is to provide incentives for closing of capacities for the restructuring of the sector. (46) According to point (439) of the Guidelines, the conditions in points (425) to (429) must be fulfilled. (47) In line with point (425) of the Guidelines, there must be a sufficient counterpart from the beneficiary of the aid. According to the German authorities, this counterpart consists of a complete, definitive and irrevocable closure of the milk production capacity concerned. The beneficiaries will further commit not to start anywhere else the same activity. The German authorities have further assured that these commitments are legally binding for the beneficiary and that it can be assured that these commitments will also bind any future purchaser of the facility concerned (recital (13)). Therefore, the condition of point (425) of the Guidelines is met. (48) According to point (426) of the Guidelines only undertakings that have actually been producing, and only production capacities that have actually been in constant use over the past five years before the closing of capacity are eligible for aid. In cases where the production capacity has already closed definitively, or where such closure appears inevitable, there is no counterpart from the beneficiary, and aid may not be granted. The German authorities confirm that only those aid beneficiaries who have actually been producing milk over the past five years before closing will be eligible for support (recital (14)). The condition of point (426) of the Guidelines is, therefore, met. (49) In line with point (428) of the Guidelines, the German authorities committed that those undertakings who do not comply with the Union standards, and who would be forced to close their production capacities anyway, will be excluded from the present aid scheme (recital (16)). 9

10 (50) The German authorities have indicated that the implementation of the notified aid scheme will have no negative effects on the environment. To this extent, the German authorities committed that in case open farmland is taken out of production, the beneficiary has to commit to fulfil the requirements of point (429) of the Guidelines. For the closure of milk production installations, the thresholds of point 6.4(c) of Annex I of the Directive 2010/75/EU of the European Parliament and of the Council on industrial emissions 8 will not be reached (200 t/day) therefore the specific requirement under the said Directive is not applicable. In addition, the relevant provisions laid down in national and regional legislation in the field of construction, building, industrial emissions and environment protection apply and need to be respected. It can be, therefore, concluded that the requirements of point (429) of the Guidelines have been met. (51) With reference to point (440) of the Guidelines, Germany explained that the aid scheme is in conformity with the existing common market organisation (CMO Regulation (EU) No 1308/ ). It supplements the ongoing European Union measures against market disturbance within the framework of the second EU-milk package and contributes to the improvement of financial sustainability and stabilise the market in milk products. (52) In line with point (441), Germany set out that the aid is part of a fixed term programme with the defined objective of reducing and stabilising the dairy sector in Saxony. The aim is to support at least 30 undertakings leading to a reduction of 30 million kg of milk production. This would mean to reduce permanently the milk production in Saxony by approximately 1.7 % (1.768 million kg milk was produced in Saxony in 2015). (53) With regard to point (442) of the Guidelines, the German authorities stated that the period for collecting applications for participation will not exceed six months. As stated in recital (18) the total duration of the scheme is less than two years from the date of approval. (54) In line with point (443) the aid scheme will be accessible to all economic operators in the sector concerned under the same conditions (recital (8)). The German authorities committed to publicly invite all potentially interested undertakings to participate (recital (19)) and committed to organise and manage the aid scheme in a way that it neither requires nor facilitates anticompetitive agreements or concerted practices between the undertakings concerned (recitals (13) and (14)). (55) The German authorities stated that the aid will cover compensation for the loss of value of assets measured as the current selling value of the assets, for the costs of the destruction of the production capacity and for obligatory social costs resulting from the implementation of the closure decision. Therefore, the conditions of points (431), (433) and (434) of the Guidelines have been met. (56) The German authorities confirm that in line with point (436) of the Guidelines, the aid intensity will not exceed 100% of the amount of the eligible costs (recital (22)). To ensure that, an expert opinion of the Saxon Regional Office of Environment, Agriculture and Geology (Landesamt für Umwelt, Landwirtschaft 8 OJ L 334, , p OJ L 347 of , p

11 und Geologie) was presented (recital (21)). According to that opinion, the closing of production capacity represents a total loss of EUR 622 per cow. The planned aid amount of EUR 500 per cow (up to a maximum of EUR 30,000 per holding), is below 100%. Therefore no overcompensation takes place. (57) Consequently, the Commission considers that the notified aid for closing of capacity is in compliance with all the relevant conditions of Chapter of Part II of the Guidelines. (58) Pursuant to point (26) of the Guidelines undertakings in difficulty are in principle excluded from the scope of the scheme. As described in recital (9)(a) above, the German authorities committed to exclude undertakings in difficulty from this State aid scheme. Therefore, the scheme complies with the aforementioned point of the Guidelines. (59) The Commission takes note that in compliance with point (27) of the Guidelines and with the settled case law 10, the German authorities commit to suspend the payment of the notified aid if the beneficiary still has at its disposal an earlier unlawful aid that was declared incompatible by a Commission Decision (either concerning an individual aid or an aid scheme), until that beneficiary has reimbursed or paid into a blocked account the total amount of unlawful and incompatible aid including the corresponding recovery interest (recital (9)(b)). (60) In view of the above considerations the Commission considers that the relevant provisions of the Guidelines are complied with. 4. CONCLUSION The Commission has accordingly decided not to raise objections to the notified aid scheme on the grounds that it is compatible with the internal market pursuant to Article 107(3)(c) TFEU. If any parts of this letter are covered by the obligation of professional secrecy according to the Commission communication on professional secrecy in State aid decisions 11 and should not be published, please inform the Commission within fifteen working days of notification of this letter. If the Commission does not receive a reasoned request by that deadline Germany will be deemed to agree to the publication of the full text of this letter. If Germany wishes certain information to be covered by the obligation of professional secrecy please indicate the parts and provide a justification in respect of each part for which non-disclosure is requested Judgment of 13 September 1995, Textilwerke Deggendorf v Commission, T-244/93 and 486/93, ECLI:EU:T:1995:160, paragraphs Commission communication C(2003) 4582 of 1 December 2003 on professional secrecy in State aid decisions, OJ C 297, , p

12 Your request should be sent electronically via the secured system Public Key Infrastructure (PKI) in accordance with Article 3(3) of Commission Regulation (EC) No 794/ , to the following address: For the Commission Phil HOGAN Member of the Commission 12 Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty (OJ L 140, , p. 1). 12