Negotiations in Brussels in the next few weeks will shape the future of Irish agriculture and could have serious implications for the Irish Exchequer in the next decade.

The first CAP reform package, the so-called MacSharry reform package, was phased in from 1993 and its provisions run to 2000. It involved a 30 per cent cut in cereals support prices, a 15 per cent cut in beef support prices, with compensation in the form of direct payments to farmers, and also limits on production eligible for support.

It started the process of reducing EU prices towards "world market" levels and changed the direction of EU agricultural policy from price support to income support.

The next phase, CAP Reform Two, is now being negotiated as part of the EU's Agenda 2000. It is driven by a number of factors.

First, the next round of world trade negotiations in the WTO (successor to GATT) opens next year. The EU is already committed to continuing the process of further reducing protection and support for agriculture in this round.

Second, negotiations on EU enlargement to the east have opened with five countries. These countries could become EU members from 2003, with five other countries to follow later. The Commission's objective is to have CAP Reform Two implemented before enlargement as a means of minimising its cost to the CAP budget.

Third, EU market over-supplies continue to be a problem; this is most acute in the beef sector.

The new CAP reform proposals tabled by the Commission are an extension of the MacSharry reforms. This time, the proposal is for support price cuts of 30 per cent for beef, 20 per cent for cereals and 15 per cent for milk, with less than full compensation through direct payments in all cases. Prices of sheepmeat are also likely to fall in competition with other meats.

If the Commission proposals were to be adopted in their current form, they would result in a farm income loss of £260 million annually, or about 15 per cent, to Ireland.

There are a number of particular issues in the negotiations which mean that Ireland is in a more difficult situation than ever before in similar negotiations.

The first of these relates to the CAP budget. Switching from price supports to income supports - which underlies CAP reform - is intrinsically more expensive in budget terms. Income to farmers which previously was obtained through the market from consumers is now increasingly coming in direct payments from the CAP budget. Thus, securing adequate budget resources is vital to a satisfactory outcome of CAP reform.

However, the outlook is not reassuring. Whereas the Commission's Agenda 2000 had proposed a modest 16 per cent real increase in the CAP budget between 1999 and 2006, the main net contributing member-states, led by Germany, are not prepared to agree to any real increase in the total EU budget, of which the CAP budget accounts for 45 per cent.

The alternative proposed by these countries is that the CAP direct payments would be 25 per cent co-financed by the member-states. This proposal is unacceptable to Ireland. It would involve a cost to the Exchequer of £225 million per year by 2002, and as a substantial exporting state, most of the gains would go to consumers abroad.

Because of the stringent opposition of France to co-financing, it is unlikely to prevail in this round of CAP reform. However, the underlying problem of inadequate resources remains and other unpalatable options are being proposed.

The only alternative which would avoid or minimise a loss to Irish agriculture would be to scale down the magnitude of the price cuts and focus more on a "supply management" policy, i.e., limiting EU production in line with the demand of the EU's 370 million consumers.

The second major issue for the State in the negotiations relates to the impact of the proposals on the competitiveness of Ireland's grass-based beef, milk and sheep production. I expect that this issue is not widely understood and I will seek to explain it as simply as possible.

Livestock and milk production in many regions of mainland Europe is "intensive". Output per hectare is high because grass is supplemented by high levels of concentrate feed based on cereals. In contrast, livestock production in Ireland is generally "extensive", i.e. lower output per hectare based on the grass and silage production from the land and supplemented with low levels of concentrate feed in winter.

During the State's first two decades of EU membership we benefited from a natural advantage in grass production. However, CAP reform has already cut cereals prices by 30 per cent, and with a further 20 per cent cut proposed, Continental farmers are being put on a much more competitive footing relative to Ireland. To put this in perspective, grain fed to livestock from 2000 will have received a "subsidy" under the CAP cereals policy equivalent to about £50 per tonne.

In CAP Reform One, Mr MacSharry sought to redress this imbalance by paying an "extensification premium" on livestock produced at low stocking density levels of under 1.4 adult bovine equivalents per hectare. Currently, 65 per cent to 70 per cent of suckler cows and male cattle in Ireland benefit from this top-up payment of about £30 per head.

Unfortunately, this led to a perception in countries such as Germany, the Netherlands and Italy that Ireland "did well" under the first CAP reform, while ignoring the underlying reasons. It is very regrettable that Commissioner Franz Fischler, in framing the CAP Reform Two proposals, has conceded to these pressures in two ways at this State's expense. First, his proposals would redirect more of the beef supports away from Ireland to the more intensively-producing countries. Second, he is making a direct hit on the extensification premium by tightening the qualifying conditions; our Department of Agriculture has calculated 40 per cent of current recipients of this payment in the State would be excluded.

The Minister for Agriculture and Food, Mr Walsh, is on the record at the Council of Ministers that the Government cannot accept the Fischler proposals in their current form. The secretary-general of the Department, Mr John Malone, is presenting Ireland's case at the now weekly meetings of the "High- Level Group", set up to narrow the differences before the crucial Council of Farm Ministers meeting, starting on February 22nd.

Crunch issues for Ireland in EU negotiations arise only a few times each decade. The current CAP reform is one such crunch issue and the structural funds negotiations in the next few months are likely to be another. Ireland has a reasonably good record in Brussels negotiations, but we rarely faced such difficulties as we do now.

A successful outcome on CAP Reform Two will require a substantial extra input by the Government.

First, we need allies; France is the heaviest hitter in agricultural policy in the EU. But Germany, despite the change of government, and the other EU governments must be lobbied.

Second, while the term is much overused, the concept of a "vital national interest" is still recognised in the EU. This means that a policy change must not result in serious disproportionate damage to a member-state.

The IFA welcomes the clear rejection by the Taoiseach of the CAP Reform Two proposals when Mr Fischler was in Dublin last week. It is not a time for the State to rush into an agreement. The outcome of CAP Reform Two will be in place to 2006 but will also establish the long-term framework of agricultural policy in Europe. It will also be a key determinant of Ireland's future balance-sheet of gains and losses within the Union.

Con Lucey is chief economist with the IFA