Case C-310/04

Kingdom of Spain

v

Council of the European Union

(Actions for annulment – Agriculture – Chapter 10a of Title IV of Regulation (EC) No 1782/2003, inserted by Article 1(20) of Regulation (EC) No 864/2004 – Amendment of the support scheme for cotton – Condition that the area is maintained at least until the boll opening – Compliance with Protocol 4 on cotton annexed to the Act of Accession of the Hellenic Republic to the European Communities – Concept of production aid – Obligation to state reasons – Misuse of powers – General principles of proportionality and protection of legitimate expectations)

Summary of the Judgment

1. Court of Justice – Organisation – Assignment of cases to the Grand Chamber

(Statute of the Court of Justice, Art. 16, third para.; Rules of Procedure of the Court of Justice, Art. 44(4))

(Act of Accession of the Hellenic Republic, Protocol 4; Council Regulations Nos 1782/2003 and 864/2004, Art. 1)

3. Acts of the institutions – Statement of reasons – Obligation – Scope

(Art. 253 EC; Council Regulation No 864/2004)

4. Actions for annulment – Grounds – Misuse of powers

5. Community law – Principles – Protection of legitimate expectations – Limits

(Council Regulation No 864/2004)

6. Agriculture – Common agricultural policy – Cotton – Production aid

(Act of Accession of the Hellenic Republic, Protocol 4, para. 2; Council Regulation No 864/2004)

7. Actions for annulment – Judgment annulling a measure – Effects

(Art. 231 EC; Council Regulations No 1782/2003, Title IV, Chapter 10a, and Art. 156(2)(g), and No 864/2004)

1. While the third paragraph of Article 16 of the Statute of the Court of Justice requires the Court to sit as a Grand Chamber if a request to that effect is made by inter alia an institution of the Communities which is a party to the proceedings, a referral of a case back to the Court in order that it may be reassigned to a formation composed of a greater number of judges in accordance with Article 44(4) of the Rules of Procedure constitutes a measure which the formation to which the case has been assigned decides on freely and of its own motion. However, to allow a request under the third paragraph of Article 16 of the Statute to be made at a very advanced stage of the proceedings, such as a request made after the close of the oral procedure and thus at the stage of the deliberations, is liable to cause considerable delay to the progress of the proceedings, and therefore to have effects clearly contrary to the requirement of the proper administration of justice which means that the Court must be able in any case brought before it to ensure that a decision is taken following a procedure that is efficient and completed within a proper time.

(see paras 22-23)

2. The concept of aid to cotton production, as it appears in paragraph 3 of Protocol 4 annexed to the Act of Accession of the Hellenic Republic, does not preclude the condition of eligibility for the specific aid provided for by Regulation No 1782/2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers, inserted by Article 1(20) of Regulation No 864/2004 and consisting in the requirement that the area is maintained at least up to the boll opening.

In the absence of a definition of production in Protocol 4, nothing in the text or the context of that act indicates that, in the framework of the protocol, the concept of production has a different meaning from that usually accepted, which refers to a process consisting of several stages. In that respect, the mention in the preamble to Protocol 4 of the importance of cotton as a raw material does not imply that the protocol refers only to harvested cotton, but, taken in the context of the preamble of which it forms part, must be understood as merely pointing out that in view of that importance the support scheme for cotton must not have negative effects on trade with third countries. Moreover, the explanation provided by Article 1 of Regulation No 4006/87 amending Protocol No 4 on cotton that the protocol concerns cotton, not carded or combed, falling within heading No 5201 00 of the combined nomenclature in no way excludes cotton as it is at the time of boll opening. At that stage, just indeed as at the later stage of harvesting, the cotton by definition is not carded or combed.

(see paras 41-45, 49)

3. The statement of reasons required by Article 253 EC must be appropriate to the nature of the act at issue and must disclose in a clear and unequivocal fashion the reasoning followed by the institution which adopted the measure in question in such a way as to enable the persons concerned to ascertain the reasons for the measure and to enable the Community Court to exercise its power of review. It is not necessary for the reasoning to go into all the relevant facts and points of law, since the question whether the statement of reasons for a measure meets the requirements of Article 253 EC must be assessed with regard not only to its wording but also to its context and to all the legal rules governing the matter in question. In the case of a measure intended to have general application, the statement of reasons may be limited to indicating, first, the general situation which led to its adoption and, second, the general objectives which it is intended to achieve. Moreover, if a measure of general application clearly discloses the essential objective pursued by the institution, it would be excessive to require a specific statement of reasons for the various technical choices made.

Those conditions are satisfied by Regulation No 864/2004 amending Regulation No 1782/2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers. The preamble to that regulation gives a transparent and clear summary of the general situation which led the Community legislature to adopt that act and the general objectives pursued. Recitals 5 and 6 together disclose the essence of the objective pursued in so far as the regulation introduces the new cotton support scheme. The Community legislature was not therefore required additionally to give specific reasons for the various technical choices made, such as the choice to make the grant of the specific aid for cotton conditional on the maintenance of cultivation of the cotton up to the boll opening stage.

(see paras 57-60, 64-65)

4. An act is vitiated by misuse of powers only if it appears, on the basis of objective, relevant and consistent evidence, to have been taken with the exclusive or main purpose of achieving an end other than that stated or evading a procedure specifically prescribed by the Treaty for dealing with the circumstances of the case.

(see para. 69)

5. Where a prudent and circumspect economic operator could have foreseen that the adoption of a Community measure is likely to affect his interests, he cannot rely on the principle of the protection of legitimate expectations if the measure is adopted. Furthermore, while that principle is one of the fundamental principles of the Community, economic operators are not justified in having a legitimate expectation that an existing situation which is capable of being altered by the Community institutions in the exercise of their discretionary power will be maintained, particularly in an area such as that of the common organisation of the markets, the objective of which involves constant adjustment to reflect changes in economic circumstances.

A prudent and circumspect operator could have foreseen the adoption of Regulation No 864/2004 amending Regulation No 1782/2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers and that regulation’s reform of the cotton support scheme. That reform was part of a more extensive reform that had been discussed at political level since 1992 and was moreover specifically envisaged in a Commission communication adopted in 2003, which contained a proposal for amendment to Regulation No 1782/2003 and was the subject of a notice published in the Official Journal. Furthermore, the support scheme in the cotton sector had already been the subject of several substantial reforms in the past.

(see paras 81, 83-84)

6. In view of the wide discretion enjoyed by the Community legislature where the common agricultural policy is concerned, the lawfulness of a measure adopted in that sphere can be affected only if the measure is manifestly inappropriate in terms of the objective which the competent institution is seeking to pursue. That discretion, which implies limited judicial review of its exercise, applies not only to the nature and scope of the measures to be taken but also, to some extent, to the finding of the basic facts. However, even though such judicial review is of limited scope, it requires that the Community institutions must be able to show before the Court that in adopting the act they actually exercised their discretion, which presupposes the taking into consideration of all the relevant factors and circumstances of the situation the act was intended to regulate.

The labour costs of a fixed nature, such as the costs of the farmers’ workforces and their families, were not included and were thus not taken into consideration in the comparative study drawn up by the Commission of the foreseeable profitability of cotton growing under the support scheme for cotton introduced by Regulation No 864/2004 amending Regulation No 1782/2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers, which was used as the basis of the determination of the amount of the specific aid for cotton. However, the relevance of the labour costs in question for the purposes of calculating the production costs of cotton and the foreseeable profitability of that crop appears in itself to be scarcely deniable.

Moreover, the potential effects of the reform of the cotton support scheme on the economic situation of the ginning undertakings were not examined. Cotton production is not economically possible without the presence in the vicinity of the production regions of such undertakings operating under economically sustainable conditions, since cotton has little commercial value before being processed and it cannot be transported over long distances. The production of cotton and its processing by the ginning undertakings thus appear to be inextricably linked. The potential effects of the reform of the cotton support scheme on the economic viability of the ginning undertakings therefore constitute a basic factor to be taken into account in order to assess the profitability of cotton growing.

In this respect, the Council, the author of Regulation No 864/2004, has not shown before the Court that in adopting the new cotton support scheme established by that regulation it actually exercised its discretion, involving the taking into consideration of all the relevant factors and circumstances of the case. It follows that the information submitted by the Community institutions does not enable the Court to ascertain whether the Community legislature was able, without exceeding the bounds of the broad discretion it enjoys in the matter, to reach the conclusion that fixing the amount of the specific aid for cotton at 35% of the total existing aid under the previous support scheme would suffice to guarantee the objective set out in recital 5 in the preamble to Regulation No 864/2004, namely to ensure the profitability and hence the continuation of that crop, an objective reflecting that laid down in paragraph 2 of Protocol 4 annexed to the Act of Accession of the Hellenic Republic. Consequently, the principle of proportionality was infringed.

(see paras 98, 117, 121-122, 124, 126, 128, 131-135)

7. Under Article 156(2)(g) of Regulation No 1782/2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers, inserted by Article 1(28) of Regulation No 864/2004, the new cotton support scheme provided for by Chapter 10a of Title IV of Regulation No 1782/2003 is to apply as from 1 January 2006 for the cotton sown as from that date. Farmers in the Member States concerned may consequently already have taken steps to adapt to that scheme so as to be able to benefit from the support it provides for, or at least will have to take such steps shortly. Moreover, the competent authorities of those Member States may already have taken the necessary measures for implementing the scheme, or will soon have to take such measures. In the light of those factors, and in particular in order to avoid any legal uncertainty as to the scheme applicable to aid in the cotton sector following the annulment of Chapter 10a of Title IV of Regulation No 1782/2003, the effects of the annulment must be suspended until the adoption, within a reasonable time, of a new regulation.

(see paras 139-141)

JUDGMENT OF THE COURT (Second Chamber)

7 September 2006 ( * )

(Actions for annulment – Agriculture – Chapter 10a of Title IV of Regulation (EC) No 1782/2003, inserted by Article 1(20) of Regulation (EC) No 864/2004 – Amendment of the support scheme for cotton – Condition that the area is maintained at least until the boll opening – Compliance with Protocol 4 on cotton annexed to the Act of Accession of the Hellenic Republic to the European Communities – Concept of production aid – Obligation to state reasons – Misuse of powers – General principles of proportionality and protection of legitimate expectations)

In Case C‑310/04,

ACTION for annulment under Article 230 EC, brought on 22 July 2004,

Kingdom of Spain, represented by M. Muñoz Pérez, acting as Agent, with an address for service in Luxembourg,

applicant,

v

Council of the European Union, represented by M. Balta and F. Florindo Gijón, acting as Agents,

defendant,

supported by

Commission of the European Communities, represented by M. Nolin and S. Pardo Quintillán, acting as Agents, with an address for service in Luxembourg,

intervener,

THE COURT (Second Chamber),

composed of C.W.A. Timmermans (Rapporteur), President of the Chamber, R. Schintgen, R. Silva de Lapuerta, P. Kūris and G. Arestis, Judges,

Advocate General: E. Sharpston,

Registrar: L. Hewlett, Principal Administrator,

having regard to the written procedure and further to the hearing on 19 January 2006,

after hearing the Opinion of the Advocate General at the sitting on 16 March 2006,

gives the following

Judgment

1 By its application the Kingdom of Spain asks the Court to annul Chapter 10a of Title IV of Council Regulation (EC) No 1782/2003 of 29 September 2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers and amending Regulations (EEC) No 2019/93, (EC) No 1452/2001, (EC) No 1453/2001, (EC) No 1454/2001, (EC) No 1868/94, (EC) No 1251/1999, (EC) No 1254/1999, (EC) No 1673/2000, (EEC) No 2358/71 and (EC) No 2529/2001 (OJ 2003 L 270, p. 1), inserted by Article 1(20) of Council Regulation (EC) No 864/2004 of 29 April 2004 (OJ 2004 L 161, p. 48) (‘Regulation No 1782/2003 as amended’ and, with respect to Chapter 10a of the regulation, ‘the new cotton support scheme’).

Legal context

2 On the accession of the Hellenic Republic to the European Communities in 1980 a support scheme for cotton was introduced by Protocol 4 on cotton annexed to the Act of Accession of that Member State (OJ 1979 L 291, p. 174, ‘Protocol 4’).

3 That scheme was applied for the first time to the 1981 harvest, and was later extended when the Kingdom of Spain and the Portuguese Republic acceded to the European Communities in 1986.

4 According to paragraph 2 of Protocol 4, the scheme is intended particularly to support the production of cotton in regions of the Community where it is important for the agricultural economy, to permit the producers concerned to earn a fair income, and to stabilise the market by structural improvements at the level of supply and marketing.

5 Paragraph 3 of Protocol 4, both in its original version and as amended by Council Regulation (EC) No 1050/2001 of 22 May 2001 adjusting, for the sixth time, the system of aid for cotton introduced by Protocol 4 annexed to the Act of Accession of Greece (OJ 2001 L 148, p. 1) provides that the scheme ‘shall include the grant of an aid to production’.

6 Paragraph 6 of Protocol 4, as amended by Regulation No 1050/2001, provides that ‘[t]he Council, acting by a qualified majority on a proposal from the Commission and after consulting the European Parliament, shall decide on the adjustments necessary to the system introduced pursuant to this Protocol and shall adopt the general rules necessary for implementing the provisions of this Protocol’.

7 On the basis of paragraph 6, the Council adopted Council Regulation (EC) No 1051/2001 of 22 May 2001 on production aid for cotton (OJ 2001 L 148, p. 3).

8 Under Articles 2, 11 and 12 of that regulation, the production aid for unginned cotton is equivalent to the difference between the guide price for unginned cotton fixed by the regulation and the world market price, and the aid is paid to cotton ginning undertakings for the unginned cotton purchased by them at a price at least equal to the minimum price fixed by that regulation.

9 As part of the reform of the common agricultural policy the Council adopted Regulation No 1782/2003, which lays down common rules for direct support schemes under the common agricultural policy and for certain support schemes for farmers.

10 To bring the support schemes for cotton, olive oil, raw tobacco and hops into line with those of other sectors of the common agricultural policy, the Council adopted Regulation No 864/2004.

11 Recitals 1, 2, 5, 6, 7, 22 and 23 in the preamble to Regulation No 864/2004 state:

‘(1) The decoupling of direct producer support and the introduction of the single payment scheme are essential elements in the process of reforming the common agricultural policy aimed at moving away from a policy of price and production support to a policy of farmer income support. Regulation (EC) No 1782/2003 … introduced these elements for a variety of agricultural products.

(2) In order to meet the objectives that lay at the heart of the reform of the common agricultural policy, the support for cotton, olive oil, raw tobacco and hops should be largely decoupled and integrated into the single payment scheme.

…

(5) A complete integration in the single payment scheme of the current support scheme in the cotton sector would bring a significant risk of production disruption to the cotton producer regions of the Community. A part of the support should therefore continue to be linked to the cultivation of cotton through a crop specific payment per eligible hectare. Its amount should be calculated in such a way so as to ensure economic conditions which, in regions which lend themselves to that crop, enable activity in the cotton sector to continue and prevent cotton from being driven out by other crops. In order to achieve that goal, it is justified that the total available aid per hectare per Member State is set at 35% of the national share of the aid that went indirectly to the producers.

(6) The remaining 65% of the national share of the aid that went indirectly to the producers should be available for the single payment scheme.

(7) For environmental reasons, a base area per Member State should be established in order to limit the areas sown under cotton. In addition, the eligible areas should be restricted to those authorised by the Member States.

…

(22) The decoupling of the aid for cotton and raw tobacco might require actions towards restructuring. Additional Community support for the production regions of the Member States in which Community aid for cotton and raw tobacco was granted during 2000, 2001 and 2002 should be made available by a transfer of funds from heading 1(a) to heading 1(b) of the financial perspectives. This additional support should be used as provided for in Council Regulation (EC) No 1257/1999 of 17 May 1999 on support for rural development from the European Agricultural Guidance and Guarantee Fund (EAGGF) …

(23) In order to ensure the harmonious continuation of the payment of income aid to producers in the cotton, olive oil and tobacco sectors, the option of postponing the integration of these support schemes in the single payment scheme should not apply.’

12 Regulation No 864/2004 inserted in Title IV of Regulation No 1782/2003 a Chapter 10a, ‘Crop specific payment for cotton’, which comprises Articles 110a to 110f.

13 Under Articles 110a to 110c of Regulation No 1782/2003 as amended:

‘ Article 110a

Scope

Aid shall be granted to farmers producing cotton, falling within CN code 5201 00 under the conditions laid down in this Chapter.

Article 110b

Eligibility

1. The aid shall be granted per hectare of eligible area of cotton. In order to be eligible, the area shall be located on agricultural land authorised by the Member State for cotton production, sown under authorised varieties and maintained at least until the boll opening under normal growing conditions.

However, if the cotton does not attain the stage of boll opening as a result of exceptional weather conditions recognised as such by the Member State, areas fully sown under cotton shall remain eligible for aid provided that the areas in question have up to the boll opening not been used for any other purpose than for the production of cotton.

2. Member States shall authorise the land and the varieties referred to in paragraph 1 in accordance with detailed rules and conditions to be adopted in accordance with the procedure referred to in Article 144(2).

Article 110c

Base areas and amounts

1. A national base area is hereby established for:

– Greece: 370 000 ha

– Spain: 70 000 ha

– Portugal: 360 ha.

2. The amount of the aid per eligible hectare shall be in:

– Greece: EUR 594 for 300 000 hectares and EUR 342.85 for the remaining 70 000 hectares

– Spain: EUR 1 039

– Portugal: EUR 556.

…’

14 Articles 110d and 110e of Regulation No 1782/2003 as amended deal with approved inter-branch organisations, made up of farmers producing cotton and at least one ginner and ‘aiming at, in particular, the supply of qualitatively suitable unginned cotton to the ginner’. These inter-branch organisations can differentiate a maximum of half the aid to which their farmer members are entitled in accordance with scales fixed by them which take into account in particular the quality of the unginned cotton.

15 Regulation No 864/2004 also inserted in Regulation No 1782/2003 a Title IVB, ‘Financial transfers’, containing inter alia Article 143d, ‘Financial transfer for restructuring in the cotton regions’, which reads as follows:

‘As from budget year 2007, an amount of EUR [22 million], originating from the average expenditure for cotton in the years 2000, 2001 and 2002, shall be available per calendar year as additional Community support for measures in cotton producing regions under rural development programming financed under the EAGGF “Guarantee” Section according to Regulation (EC) No 1257/1999.’

16 Finally, Regulation No 864/2004 inserted in Article 153 of Regulation No 1782/2003 inter alia a Paragraph 4a repealing Regulation No 1051/2001, which continues, however, to apply to the marketing year 2005/06. Under Article 156(2)(g) of Regulation No 1782/2003 as amended, the new support scheme for cotton is to apply from 1 January 2006 for the cotton sown as from that date.

Forms of order sought by the parties

17 The Spanish Government claims that the Court should:

– annul Chapter 10a of Title IV of Regulation No 1782/2003 as amended;

– order the Council to pay the costs.

18 The Council asks the Court to dismiss the action as unfounded and order the applicant to pay the costs.

19 The Commission, which was given leave to intervene in support of the form of order sought by the Council by order of the President of the Court of 21 September 2004, contends that the Court should dismiss the action as unfounded.

Application by the Council for the case to be referred back to the Court in order for it to be reassigned to the Grand Chamber

20 By letter lodged at the Court Registry on 5 April 2006, the Council asked for the case to be referred back to the Court in order for it to be reassigned to the Grand Chamber.

21 That application was made under the third paragraph of Article 16 of the Statute of the Court of Justice, which provides that the Court is to sit as a Grand Chamber inter alia when an institution of the Communities that is a party to the proceedings so requests, and under Article 44(4) of the Rules of Procedure of the Court of Justice, which provides that the formation to which a case has been assigned may, at any stage of the proceedings, refer the case back to the Court in order that it may be reassigned to a formation composed of a greater number of judges.

24 Moreover, the Court considers in the present case that it is in possession of all the material necessary for it to give judgment.

25 The Council’s application must therefore be rejected.

The action

26 In support of its action, the Spanish Government relies on four pleas in law: infringement of Protocol 4, breach of the obligation to state reasons, misuse of powers, and breach of the general principles of proportionality and the protection of legitimate expectations.

First plea: infringement of Protocol 4

Arguments of the parties

27 By its first plea, the Spanish Government submits that, in that it lays down as the sole condition for eligibility for the specific aid for cotton that the area must be maintained at least until the boll opening, Article 110b of Chapter 10a of Title IV of Regulation No 1782/2003 as amended is contrary to paragraph 3 of Protocol 4, a provision of primary Community law, and in particular to the requirement in that provision for a system of aid to production.

28 It submits that the term ‘production’ in paragraph 3 of Protocol 4 must be understood as laying down, as a condition for the grant of aid for cotton, that the cotton is harvested.

29 The reference in the third recital in the preamble to that protocol to the importance of cotton as a raw material should be understood as referring to cotton that has been harvested, as only harvested cotton can be processed industrially.

30 Moreover, the explanation provided by Article 1 of Commission Regulation (EEC) No 4006/87 of 23 December 1987 amending Protocol No 4 on cotton (OJ 1987 L 377, p. 49) that that protocol ‘concerns cotton, not carded or combed, falling within heading No 5201 00 of the combined nomenclature’ makes sense only if the term ‘cotton’ refers to harvested cotton, since, at the boll opening stage, the cotton is necessarily of that description.

31 Finally, according to a general principle of law common to the Member States, and enshrined in particular in the civil codes of several of those States, a natural fruit such as cotton cannot be regarded as being produced before it is harvested, since before harvesting a fruit has no legal existence separate from the plant and is thus considered to form part of the plant itself.

32 The requirement for the area to be maintained at least until the boll opening, laid down by Regulation No 1782/2003 as amended as the sole condition of eligibility for the new cotton support scheme, no longer – in contrast to the earlier support schemes – implies that the cotton has to be harvested.

33 The wording of recital 5 in the preamble to Regulation No 864/2004 and that of Chapter 10a of Title IV of Regulation No 1782/2003 as amended confirm that the new support for cotton is an aid to cultivation, not to production of cotton.

34 Studies further show that it is foreseeable that, following the entry into force of the new cotton support scheme, it will no longer be profitable for farmers to ensure that the cotton attains a minimum quality, and consequently they will no longer harvest it.

35 Moreover, according to the classification of aid for the purposes of the agreement on agriculture in Annex 1A to the Agreement establishing the World Trade Organisation, which was approved by the first indent of Article 1(1) of Council Decision 94/800/EC of 22 December 1994 concerning the conclusion on behalf of the European Community, as regards matters within its competence, of the agreements reached in the Uruguay Round multilateral negotiations (1986-1994) (OJ 1994 L 336, p. 1) (‘the WTO agreement on agriculture’), the new support scheme for cotton moves from the ‘amber box’ (support for production referred to in Article 6 of that agreement) to the ‘blue box’ (direct payments under production-limiting programmes based on fixed area and yields within the meaning of Article 6(5) of the agreement).

36 That confirms that in the new scheme no importance is attached to the production of cotton.

37 Consequently, that scheme can no longer be classified as aid to production within the meaning of paragraph 3 of Protocol 4.

38 The Council submits that the new cotton support scheme is entirely compatible with Protocol 4, in particular paragraph 3, as it is indeed a scheme of aid to production, even if the event that gives rise to the payment of the aid is now the maintenance of cultivation until the boll opening stage.

Findings of the Court

39 By its first plea the Spanish Government contests the compatibility of the new condition of eligibility for the specific aid which is part of the new cotton support scheme, namely that the area is maintained at least until boll opening, with paragraph 3 of Protocol 4.

40 It is common ground that this new condition of eligibility for aid does not require the cotton to be harvested. This plea therefore raises essentially the question whether the obligation in paragraph 3 of Protocol 4 to provide for a system of aid to production must be understood as implying that such a system must necessarily make the grant of aid subject to a condition of harvesting.

41 As the Council has observed, the concept of production as usually accepted refers to a process consisting of several stages.

42 In the absence of a definition of the term in Protocol 4, nothing in the text or the context of that act indicates that, in the framework of the protocol, the concept of production has a different meaning from that usually accepted.

43 In that respect, the mention in the preamble to Protocol 4 of the importance of cotton as a raw material does not imply that the protocol refers only to harvested cotton.

44 That mention, taken in the context of the preamble of which it forms part, must be understood as merely pointing out that in view of the importance of cotton as a raw material the support scheme for cotton must not have negative effects on trade with third countries.

45 As regards, next, the explanation provided by Article 1 of Regulation No 4006/87 that Protocol 4 concerns cotton, not carded or combed, falling within heading No 5201 00 of the combined nomenclature, that statement in no way excludes cotton as it is at the time of boll opening. At that stage, just indeed as at the later stage of harvesting, the cotton by definition is not carded or combed.

46 Furthermore, the meanings of the concepts of production, product or fruit which might be derived, as the Spanish Government submits, from definitions common to the civil laws of certain Member States, or even from the classification of aid for the purposes of the WTO agreement on agriculture, are irrelevant in this respect.

47 Consequently, the manifestly restrictive definition of production suggested by the Spanish Government, according to which that term refers only to the final stage of production constituted by the harvest, cannot be accepted.

48 Moreover, the usual meaning of the term production, which refers to the production process as a whole, must be seen in relation to the broad discretion enjoyed by the Council under paragraph 6 of Protocol 4, both in deciding on the adjustments necessary to the system introduced by that protocol and in adopting the general rules necessary for implementing the provisions of the protocol.

49 In the framework of that broad discretion, the Council can make the grant of aid for cotton conditional on the occurrence of one or other stage in the cultivation of cotton.

50 The measure chosen must nevertheless be proportionate to the objectives defined in paragraph 2 of Protocol 4. The question whether that limitation was complied with in the present case is the subject of the second part of the fourth plea put forward by the Spanish Government.

51 It was therefore permissible in principle for the Community legislature to choose, as a condition of eligibility for the aid for cotton, one stage of cultivation, in this case that of the boll opening, rather than the final stage consisting of the harvest, a stage which had to be completed in the previous support schemes.

52 Consequently, the references in recital 5 in the preamble to Regulation No 864/2004 and in the title of Chapter 10a of Title IV of Regulation No 1782/2003 as amended to the new cotton support scheme as aid to cultivation do not mean that that aid does not constitute an aid to cotton production within the meaning of paragraph 3 of Protocol 4.

53 The conclusion must be that the concept of aid to production, as it appears in paragraph 3 of Protocol 4, does not preclude the condition of eligibility for the specific aid provided for by the new cotton support scheme consisting in the requirement that the area is maintained at least up to the boll opening.

54 The first plea must therefore be rejected.

Second plea: breach of the obligation to state reasons

Arguments of the parties

55 By its second plea the Spanish Government submits that the obligation to state reasons laid down in Article 253 EC was not complied with in connection with the adoption of the new cotton support scheme, since Regulation No 864/2004 introducing that scheme nowhere mentions the reasons for which the Community legislature replaced the previous scheme, under which indirect aid was passed on to producers by ginning undertakings in relation to the cotton harvested, by a scheme introducing direct aid to producers, the grant of which is now subject to the sole condition of maintaining the cultivation of the cotton up to the boll opening.

56 The Council considers that the limits set by the Court’s case-law on statements of reasons for legislative acts of general application were observed. It suffices in this respect to note that Regulation No 864/2004 sets out the general reasons which led the Community legislature, in the exercise of its broad discretion, to adopt the provisions that are the subject of the present action. Moreover, the Community legislature was not obliged to explain specifically why under the new scheme the payment of coupled aid is no longer linked to the quantity or quality of the cotton harvested but to the cotton cultivated on a given area.

Findings of the Court

60 In this respect, it must be stated that the preamble to Regulation No 864/2004 gives a transparent and clear summary of the general situation which led the Community legislature to adopt that act and the general objectives pursued.

61 Recitals 1 and 2 in the preamble to that regulation show that the changes made by the regulation are intended to bring the support schemes in certain sectors of the common agricultural policy, including cotton, into line with the objectives of the reform introduced for the other sectors of that policy by Regulation No 1782/2003.

62 Recital 2 states that those objectives involve, for the sectors concerned, moving away from a policy of price and production support to a policy of income support for farmers, and hence decoupling a large part of the support and integrating it into the single payment scheme.

63 Recitals 5 and 6 in the preamble to Regulation No 864/2004 then set out the reasons for which support for cotton cannot be completely decoupled. They also explain the bases on which the amount of support to remain coupled is to be fixed, and state that that amount corresponds to 35% of the total existing indirect aid and that the remaining 65% of that total is to be available for the single payment scheme.

64 It must be concluded that those recitals together disclose the essence of the objective pursued by the institution in adopting Regulation No 864/2004 in so far as it introduces the new cotton support scheme.

65 The Community legislature was not therefore required additionally to give specific reasons for the various technical choices made, such as the choice to make the grant of the specific aid for cotton conditional on the maintenance of cultivation of the cotton up to the boll opening stage.

66 It follows that the second plea must also be rejected.

Third plea: misuse of powers

Arguments of the parties

67 The Spanish Government submits that, in so far as Regulation No 864/2004 establishes the new cotton support scheme, it is vitiated by the misuse of powers, since it was adopted on the basis of paragraph 6 of Protocol 4, but for a different purpose from that referred to there, and with the essential aim of circumventing the specific procedure provided for by the EC Treaty for amending the provisions of primary law in that protocol.

68 The Council replies that the introduction of the new cotton support scheme by the contested provisions of Regulation No 1782/2003 as amended corresponds perfectly to the concept of ‘necessary adjustment’ mentioned in paragraph 6 of Protocol 4, so that there can be no question of a misuse of powers.

Findings of the Court

70 The Spanish Government has not adduced any such evidence.

71 As regards the aims pursued by the Council when adopting Regulation No 864/2004, in so far as it established the new cotton support scheme, there is nothing in the case-file to support the conclusion that the Council pursued an exclusive or main aim other than that stated in recitals 1 and 2 in the preamble to that regulation, namely adjusting the support scheme in the cotton sector to bring it into line with the objectives of the reform that had already been introduced for other sectors of the common agricultural policy by Regulation No 1782/2003.

72 Nor has the Spanish Government shown that, by adopting Regulation No 864/2004 on the basis of paragraph 6 of Protocol 4, the Council pursued the exclusive or main aim of evading the procedure prescribed for the revision of provisions of primary law.

73 In this respect, it must be noted that the legal basis constituted by paragraph 6 of Protocol 4 confers a wide discretion on the Council to decide on the necessary adjustments to the cotton support scheme provided for by the protocol.

74 The Spanish Government has not produced any evidence to show that the Council in fact pursued an aim other than that of making such adjustments and thus followed the procedure laid down in paragraph 6 of Protocol 4 for making those adjustments with the exclusive or main aim of evading the procedure prescribed for the revision of provisions of primary law.

75 Finally, it is apparent from recital 5 in the preamble to Regulation No 864/2004 that, in adopting that act in so far as it amends the cotton support scheme, the Council intended to comply with the objectives laid down in paragraph 2 of Protocol 4, namely to support the production of cotton in regions of the Community where it is important for the agricultural economy, to permit the producers concerned to earn a fair income, and to stabilise the market by structural improvements at the level of supply and marketing.

76 Whether those objectives were achieved is the subject of the second part of the fourth plea, alleging breach of the principle of proportionality. There is no need therefore to consider the point in connection with the present plea.

77 In the light of the foregoing, the third plea must also be rejected.

Fourth plea: breach of the general principles of Community law of proportionality and protection of legitimate expectations

78 The second part of this plea, relating to the principle of the protection of legitimate expectations, should be examined first, followed by the first part, relating to the principle of proportionality.

Breach of the principle of the protection of legitimate expectations

– Arguments of the parties

79 The Spanish Government submits that the adoption of Regulation No 864/2004 establishing the new cotton support scheme infringed the legitimate expectations of operators in the cotton sector, who could expect to continue to benefit from a support scheme complying in any case with the objectives stated in paragraph 2 of Protocol 4, in particular the maintenance of cotton production in certain regions of the Community, and the requirement of a system of aid to production as provided for in paragraph 3 of the protocol.

80 The Council submits that the adoption of that regulation did not infringe the legitimate expectations of operators in the cotton sector in the maintenance of an aid system compatible with Protocol 4, as the new cotton support scheme is fully compatible with the objectives of that protocol and does not cause them the considerable loss alleged by the Spanish Government, their income remaining stable.

– Findings of the Court

82 In the present case, the Spanish Government has not produced any evidence to show that the operators concerned could have entertained any reasonable expectation promoted by the Community institutions that the rules applicable to aid in the cotton sector before their amendment by Regulation No 864/2004 would be maintained.

84 As the Advocate General observed in point 70 of her Opinion, that reform was part of a more extensive fundamental reform that had been discussed at political level since 1992 and was moreover specifically envisaged in point 2 of Commission Communication COM(2003) 698 final, adopted on 20 November 2003, which contained a proposal for amendment to Regulation No 1782/2003 and was the subject of a notice published in the Official Journal (OJ 2004 C 96, p. 5). Furthermore, the support scheme in the cotton sector had already been the subject of several substantial reforms in the past.

85 Finally, in so far as the Spanish Government alleges that the principle of the protection of legitimate expectations was infringed because the new cotton support scheme does not comply with the objectives of Protocol 4, that argument merges with the argument put forward in support of the first part of the fourth plea, so that it need not be examined in the context of this part.

86 Consequently, the second part of the fourth plea, alleging breach of the principle of protection of legitimate expectations, must be rejected.

Breach of the principle of proportionality

– Arguments of the parties

87 The Spanish Government submits essentially that the measures adopted in the context of the new cotton support scheme, in particular fixing the amount of the specific aid for cotton at the level of 35% of the aid available under the previous support scheme and making eligibility for the aid conditional only on the maintenance of cultivation until the boll opening, are manifestly inappropriate to the objective as set out in recital 5 in the preamble to the regulation, an objective that reflects the aim laid down in paragraph 2 of Protocol 4. The principle of proportionality has therefore been infringed.

88 Two studies produced by the Spanish Government show that the foreseeable consequence of those measures will be that the profitability of cotton production in the Spanish regions concerned will not be ensured.

89 The probable result of that will be, in particular, the abandoning of a considerable part of Spanish production of raw cotton, or even its replacement by other crops, and a substantial decrease in the degree of utilisation of the processing capacity of the ginning plants in the production regions, threatening their economic viability and possibly even leading to their definitive closure.

90 That latter development would be likely to bring about a further fall in cotton production, since production is not possible without the presence, and hence the economic viability, of such plants in the vicinity of the production regions concerned, as cotton has scarcely any commercial value before it is processed, and it cannot be transported over long distances.

91 The Council and the Commission submit that the disputed measures are not manifestly inappropriate in relation to their objectives as set out in paragraph 2 of Protocol 4 and recital 5 in the preamble to Regulation No 864/2004.

92 The income of producers under the new cotton support scheme, namely the total of the single payment, the specific aid per hectare and the selling price of the harvest, remains substantially the same as under the previous system, so that the profitability of cotton producing undertakings is not affected by the introduction of the new scheme.

93 Moreover, a comparative study of the foreseeable profitability of cotton growing under the new support scheme compared to that of other crops shows that the amount of the specific aid per hectare was fixed at a level which allows producers to achieve for cotton a gross margin excluding the single payment comparable to that produced by other crops such as durum wheat or maize.

94 Consequently, since cotton growing remains viable according to the forecasts, it is not probable that it will be driven out by other crops.

– Findings of the Court

95 The Court’s settled case-law on the principle of proportionality should first be recalled, as it applies in particular in the context of the common agricultural policy.

98 As regards judicial review of the implementation of that principle, bearing in mind the wide discretion enjoyed by the Community legislature where the common agricultural policy is concerned, the lawfulness of a measure adopted in that sphere can be affected only if the measure is manifestly inappropriate in terms of the objective which the competent institution is seeking to pursue ( Jippes , paragraph 82 and the case-law cited).

100 As to the new cotton support scheme established by Regulation No 864/2004, it is apparent from recital 5 in the preamble to that regulation that the amount of the specific aid for cotton was determined in such a way as to ensure economic conditions which, in regions which lend themselves to that crop, enable activity in that sector of agriculture to continue and thus prevent cotton from being driven out by other crops.

101 That objective reflects, and defines more precisely, those stated in paragraph 2 of Protocol 4, according to which the system of production aid in the cotton sector is intended in particular to support the production of cotton in regions of the Community where it is important for the agricultural economy, to permit the producers concerned to earn a fair income, and to stabilise the market by structural improvements at the level of supply and marketing.

102 As follows from the case-law cited in paragraphs 98 and 99 above, this part of the plea put forward by the Spanish Government implies an examination of whether the contested measures of the new cotton support scheme are manifestly inappropriate in terms of that objective, which consists essentially in fixing the amount of the specific aid for cotton at a level such that it ensures adequate profitability and hence the continuation of cotton production in regions which lend themselves to that crop, thus avoiding its being driven out by other crops.

103 It is common ground that the adoption of Regulation No 864/2004 was not preceded by a Commission study assessing the probable socio-economic effects of the proposed reform in the cotton sector, whereas such studies had been carried out in connection with the reform of support schemes in some other sectors, such as the tobacco sector.

104 The question therefore arises of the bases on which the amount of the specific aid for cotton was determined, and consequently of whether, on those bases, the Community legislature was able, without exceeding its broad discretion, to reach the conclusion that, if set at 35% of the total existing aid in the previous support scheme, that amount would suffice for attaining the objective pursued of ensuring the profitability and hence the continuation of that crop.

105 In this respect, the Council points to a table drawn up by the Commission containing a comparative study of the foreseeable profitability of cotton growing under the new support scheme in comparison with that of other crops. The Council observes that those figures were submitted to it so that they could be taken into account in the adoption of Regulation No 864/2004.

106 According to the study, the gross margin per hectare excluding the single payment is EUR 744 for cotton, and is thus between the margin for durum wheat, EUR 334, and that for maize, EUR 914. The Commission asserted at the hearing that those figures demonstrate that cotton growing will remain profitable and possible after the entry into application of the reform.

107 The margin in question is calculated according to a formula consisting essentially in subtracting from income per hectare – made up of the selling price of raw cotton, corresponding to EUR 750, and the specific aid of EUR 1 039, giving a total of EUR 1 789 – the production costs, those being the sum of the specific costs and overheads, which, according to the Commission, are to be assessed at EUR 1 045 per hectare.

108 The Council submits, however, that for the purposes of that study of the future profitability of cotton growing account should also be taken of the income deriving from the single payment equivalent to 65% of the existing aid in that sector.

109 It submits that, since the sum of the coupled and decoupled aid under the new cotton support scheme is equivalent to the total amount of the indirect aid granted under the previous support scheme, there is no reason to doubt the future profitability of cotton growing. The reform of aid for that crop is based on its budgetary neutrality.

110 That point of view must be rejected. As the Spanish Government observed without being contradicted by the Commission, in the case of a comparative study of the profitability of alternative crops, the single payment should not be taken into account, as it is granted independently of the crop chosen and even if the farmer decides not to produce anything.

111 That payment therefore has no influence on the farmer’s decision to choose one crop rather than another. The budgetary neutrality of the reform is of no relevance in itself for assessing whether in future farmers will choose to abandon cotton growing or, if so, to replace it by other crops.

112 Relying on two studies, the Spanish Government moreover challenges certain figures used in the calculation of the profitability of cotton growing put forward by the Commission, in particular that relating to production costs.

113 According to those studies, it submits, those costs in fact amount to a minimum of EUR 1 861.81 per hectare. That amount includes labour costs, whereas the corresponding amount used by the Commission wrongly excludes them. Adding the labour costs to the figure of EUR 1 045 per hectare put forward by the Commission reduces to 10% the difference between the Commission’s figure and that adduced by the Spanish Government as regards total production costs.

114 It submits that, since cotton growing requires a much larger workforce than other crops, it is essential that such costs are taken into account in a study of the future profitability of cotton growing.

115 If, then, the Commission’s calculation included labour costs and also took into consideration a selling price consistent with the present level of the market, production costs would be higher than producers’ income under the new support scheme, and the gross margin to be expected for cotton would be zero or even negative, with farmers therefore liable to be working at a loss if they continue to produce cotton.

116 On being questioned on this point at the hearing, the Commission explained that the amount of EUR 1 045 per hectare it took as overheads included in the production costs covers certain labour costs, including those of temporary or seasonal workers and persons performing specific work.

117 However, submits the Commission, a study of the comparative profitability of crops should take account only of specific costs, that is, those linked to the crops concerned, and not of fixed costs, that is, those linked to the operation. The Commission therefore did not include the labour costs of a fixed nature, such as the costs of the farmers’ workforces and their families.

118 The Commission adds that the latter costs could not in any case have been included in the calculation of profitability. First, great – and moreover inexplicable – differences had been observed between the figures for the various regions relating to those costs, so that those figures were not reliable. Second, it is very difficult to divide those costs among the different crops and other activities carried on in each farming operation.

119 In the light of those explanations, the Court must consider whether, by fixing the amount of the specific aid for cotton on the basis of the comparative study referred to in paragraph 105 above, the Community institutions infringed the principle of proportionality.

124 As was noted in paragraphs 116 to 118 above, it is apparent from the information provided by the Commission at the hearing that certain labour costs were not included and were thus not taken into consideration in the comparative study of the foreseeable profitability of cotton growing under the new support scheme which was used as the basis of the determination of the amount of the specific aid for cotton.

125 The Spanish Government submits, however, relying on studies giving figures, that those costs can be calculated, that they are significant, and that taking them into account creates serious doubts as to the profitability of cotton growing under the new support scheme.

126 Without it being necessary to take a decision on the correctness of the figures produced by the various parties, it must be said that the relevance of the labour costs in question for the purposes of calculating the production costs of cotton and the foreseeable profitability of that crop appears in itself to be scarcely deniable. The circumstance relied on by the Commission that obtaining that information would have raised certain technical problems cannot call into question its relevance.

127 Moreover, it must be observed that the Council and the Commission have not put forward specific arguments to disprove the Spanish Government’s assertion that the inclusion of those costs entails an increase in the production costs of cotton such that adequate profitability of that crop under the new support scheme is not ensured, so that that crop, or at least a substantial part of it, is liable to be given up or in some cases driven out by other crops.

128 It is also common ground that the potential effects of the reform of the cotton support scheme on the economic situation of the ginning undertakings were not examined.

129 Admittedly, as the Council observes, the requirement which follows from paragraph 2 of Protocol 4 of maintaining the profitability of cotton production applies as such to cotton producers and not to ginning undertakings.

130 However, a proper study of the effects of that reform on the profitability of cotton production requires an examination of the consequences the reform is liable to produce for ginning undertakings situated in the production regions.

131 As the Spanish Government pointed out without being contradicted, cotton production is not economically possible without the presence in the vicinity of the production regions of such undertakings operating under economically sustainable conditions, since cotton has little commercial value before being processed and it cannot be transported over long distances.

132 The production of cotton and its processing by the ginning undertakings thus appear to be inextricably linked. The potential effects of the reform of the cotton support scheme on the economic viability of the ginning undertakings therefore constitute a basic factor to be taken into account in order to assess the profitability of cotton growing.

135 Consequently, it must be concluded that the principle of proportionality was infringed.

136 It follows that the fourth plea, in so far as it alleges that that principle was infringed, is well founded, and the application must be allowed.

137 In the light of all the foregoing, Chapter 10a of Title IV of Regulation No 1782/2003 as amended must be annulled.

Limitation of the effects of the annulment

Costs

142 Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs, if they have been applied for in the successful party’s pleadings. Since the Kingdom of Spain has applied for costs and the Council has been unsuccessful, the Council must be ordered to pay the costs. In accordance with Article 69(4) of the Rules of Procedure, the institutions which have intervened in the proceedings are to bear their own costs.

On those grounds, the Court (Second Chamber) hereby:

1. Annuls Chapter 10a of Title IV of Council Regulation (EC) No 1782/2003 of 29 September 2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers and amending Regulations (EEC) No 2019/93, (EC) No 1452/2001, (EC) No 1453/2001, (EC) No 1454/2001, (EC) No 1868/94, (EC) No 1251/1999, (EC) No 1254/1999, (EC) No 1673/2000, (EEC) No 2358/71 and (EC) No 2529/2001, inserted by Article 1(20) of Council Regulation (EC) No 864/2004 of 29 April 2004;

2. Orders the effects of that annulment to be suspended until the adoption, within a reasonable time, of a new regulation;

3. Orders the Council of the European Union to pay the costs;

4. Orders the Commission of the European Communities to bear its own costs.

[Signatures]

* Language of the case: Spanish.