Europe's farm chief will soon unveil some of her ideas to shake up the European Union's 44-year- old policy on wine, a sector that was last reformed in 1999.

Wine has an annual budget of some €1.2 billion, a fraction of the roughly €44 billion eaten up each year by the Common Agricultural Policy (CAP). It is, however, one of the CAP's most complex policy areas, with many sector-specific subsidies.

The EU is by far the largest player on the international wine market. Not only is the bloc the world's largest producer, it is also the top consumer, exporter and importer.

France, Italy and Spain are the EU's three leading wine producers by volume, a ranking that has not changed in around 20 years, and they are also the world's top three winemakers. Seven EU countries rank in the list of the world's 15 main producers.

In a paper to be issued later this month, agriculture commissioner Mariann Fischer Boel outlines four broad policy options but clearly favours a "profound reform", preferably in two stages to ease the pain of adjustment among less competitive producers.

Very few financial figures are mentioned but the idea is that such an approach would not add to the existing wine budget.

The other three options are to maintain the status quo, completely deregulate the sector or overhaul wine policy along the lines of the EU's 2003 farm reform.

But they are effectively ruled out in favour of a far-reaching change: the CAP reform scenario is discarded due to the sector's particular complexities, while using the 2003 reform principles would take too long to achieve market balance.

The European Commission is not expected to issue its formal proposal to reform EU wine policy until much later this year.

The first stage would aim to eliminate EU wine surpluses as soon as possible by aligning supply and demand. The second would target improved competitiveness of European wines in the face of rising imports from New World rivals like Australia and Chile.

The paper recommends a carrot-and-stick approach similar to that agreed in the EU's recent sugar reform, where less competitive producers would be offered generous cash incentives to cut back operations or even leave the sector altogether. These subsidies would gradually decrease each year to encourage producers to reduce oversupply as soon as possible. The aim is to dig up 400,000 hectares of vines over five years at a maximum cost of some €2.4 billion.

Once the vines are removed, that land would be eligible for the EU's single farm payment - the streamlined subsidy scheme agreed for several sectors in the 2003 reform - based on an average regional payment that is not tied to production volume.

The EU's ban on planting new vines, which applies with some exceptions until August 2010, would be extended until 2013, when it would expire. The ban has regularly been extended since it first came into existence in 1976, for two years only.

A key part of Fischer Boel's plan is for EU countries to be allocated allowances based on their production over a historical reference period.

Countries would be able to choose from a menu of measures, subject to Commission approval, giving them leeway to control vineyard abandonment, restructuring and essential distillation.

These could include insurance against natural disasters and basic coverage against income loss, for example. The national envelopes could be separate grants or allocated within EU rural development policy, which entails environmental obligations.

To give an additional incentive for permanent removal of vines, national envelopes could be topped up by a certain amount of cash at a rate based on each hectare of land dug up.

Much of the system for distilling surplus wine would be scrapped from the start, including specific schemes for distilling by-products like grape marc and wine lees, among others.

Private storage aid would be abolished, as would subsidies for grape must, used for enriching wine and making juice.

Crisis distillation, a last-resort tool to repair serious imbalances, would be eliminated from the start but could be replaced by a safety-net mechanism funded by national envelopes. - (Reuters)