* EU leaders likely to cut future farm budget by 10 pct
* Politicians diluting farm policy reforms in response
* Plans to leave more land fallow and rotate crops at risk
* Move to liberalise EU sugar sector also facing delay
By Charlie Dunmore
BRUSSELS, Jan 21 European Union politicians will scale back or ditch reforms to the farm subsidy system as they seek to mollify powerful farmers' lobbies angry at subsidy cuts forced on them by the bloc's debt crisis.
With EU leaders likely to agree on a 10 percent reduction in farm spending from next year, governments and lawmakers want to water down plans to reform the 50-year-old common agricultural policy (CAP).
The debate centres on European Commission proposals to impose new environmental requirements on farmers and share out the subsidies more fairly across the 27-country bloc. Member governments and the European Parliament must approve the plans before they become law.
Critics of the Commission's reform proposals say dilution is essential to avoid damaging Europe's agricultural productivity.
"The proposals would increase unemployment in rural areas and risk deepening the EU's current economic crisis," said Pekka Pesonen, head of EU farm lobby COPA-COGECA.
German farm minister Ilse Aigner described the Commission's bid to boost environmental standards by forcing farmers to leave 7 percent of their cropland fallow as "absurd".
Farmers are counting on Aigner and her colleagues to intervene on their behalf. "I believe ministers will go for a lower rate than 7 percent," Pesonen told Reuters.
But reform advocates say farmers' fears are overblown and that they should do more to justify the billions of euros in public subsidies they receive each year.
"What I hear from the parliament and member states is dilution, dilution, dilution," said EU Climate Commissioner Connie Hedegaard, who supports plans to make the CAP greener by also requiring more crop rotation and permanent grassland.
"Normally farmers are rather proud people. Would it not be better, instead of being on subsidies, to be paid for doing something for the common good?" she said at a conference in Brussels this month.
Talks on the European Union's long-term budget for 2014-2020, which began in November and will continue in early February, have already whittled down the total for agriculture to about 360 billion euros ($480 billion).
That compares with about 400 billion euros in the current seven-year budget when measured in 2011 prices.
While most attention has focused on the overall CAP budget and new green rules, the biggest impact on individual farmers would come from proposals to reduce the inequality in payments.
Producers in Italy, Belgium and the Netherlands currently receive more than 400 euros in direct subsidies per hectare on average, compared with less than 150 euros per hectare in the EU's Baltic states.
And in major beneficiary countries such as France, Italy and Spain, the most productive farms currently receive far more EU cash than the rest, thanks to a link between subsidies and 200-2002 production levels.
Proposals in the reform to shift payments towards a flatter, per-hectare rate could cut up to 40 percent of the subsidies going to Europe's biggest grain and livestock producers, officials say.
"The rate of direct payments in major producing areas such as the Paris Basin will be significantly reduced," said a Commission source who spoke on condition of anonymity.
Larger EU governments, with the support of farm groups and MEPs, are aiming to reduce the extent and pace of redistribution proposed by the EU farm commissioner, Dacian Ciolos.
On Wednesday, the European Parliament's agriculture committee - traditionally sympathetic to farming interests - will vote on amendments that would delay the introduction of flat-rate payments beyond the Commission's 2019 deadline.
The committee could also delay proposals to liberalise the EU's heavily regulated sugar sector by pushing back the planned phase-out of strict production quotas from 2015 to 2020.
"There's no doubt that this is a reform without friends," said Alan Matthews, professor of European agricultural policy at Trinity College Dublin. "There really isn't anyone pushing it apart from Ciolos himself, and the longer it goes on the weaker it gets."
Despite the efforts of governments and lawmakers to dilute the CAP reform, however, Matthews said future trends in EU farm output will be determined by factors other than public policy.
"I would say the market price environment, biofuel and energy prices and things like climate change are probably more important than what is happening in terms of CAP reform," he said.