(BRUSSELS) - The European Commission will unveil Tuesday a proposed shake-up of the EU's common agriculture policy to lift output in the face of a food crisis, with Britain and France gearing up for battle over hand-outs for farmers.

According to a draft seen by AFP, the proposals focus on phasing out milk quotas and scrapping rules on keeping land fallow in order to encourage more production.

Although the proposals are likely to ensure a fierce debate, the European Union's executive arm has already had to water down an early plan to cap hand-outs to the biggest farms in the face of British and German criticism.

The proposals will next go to member states and the European Parliament to consider in the second half of 2008, when France -- the biggest recipient of EU farm subsidies -- holds the bloc's rotating presidency.

While past reforms have geared the European Union's Common Agriculture Policy (CAP) towards reining in production, farmers are now struggling to keep up with surging demand fuelled by explosive growth in China and India.

Even though prices of farm products have eased off recent peaks, they remain at historically high levels with wheat up 84 percent over one year, maize 21 percent, butter 21 percent and eggs 17 percent.

Following the suspension of rules on keeping land fallow for one season, the commission hopes that by scrapping them all together four to five million hectares (10-12 million acres) of land can be brought into production to increase food supply.

The commission wants the new wave of reforms to build on an earlier shake-up in 2003, just before the EU took in 10 mostly former communist countries in May 2004 and whose farming sectors have had to modernise quickly.

The 2003 reform sought to discourage overproduction by making subsidies to farmers less proportionate on how much they produced, in what is known as "decoupling" in EU jargon.

The commission wants to take that principle even further, making it applicable to a broader range of crops and products.

However, some member states, led by Britain, want the EU to shake up the subsidy system even more, much to the horror of France, Europe's leading agriculture power.

In an opening salvo in what could easily flare into a major battle, British finance minister Alistair Darling called last week for a "fundamental reform of Europe's agriculture."

He said that a root-and-branch reform should include "phasing out all elements of the CAP that are designed to keep EU agriculture prices above world market levels," which he said cost EU consumers 43 billion euros in 2006.

Darling also called for "an end to direct payments to EU farmers," which he said cost European taxpayers 34 billion euros in 2006.

"Barriers and distortions in the global food market increase volatility and stifle the incentives to increase supply to match demand," Darling argued.

His appeal comes in the wake of recent statements by French Agriculture Minister Michel Barnier defending the EU's farm subsidy system, insisting that Europe must remain "a strong agricultural power."

"If you get rid of all the regulation or market stabilisation tools ... and you get rid of the farm aid, then there's no more common agriculture policy," Barnier said.

Despite reforms, farm hand-outs remain the single biggest spending item in the combined EU budget, swallowing up about 40 percent of the whole.

The proposed shake-up of EU agriculture policy comes amid dramatic changes in the farming world, which is increasingly struggling to keep up with rising global demand that has driven farm commodity prices to record highs in recent months.

In addition to pressure from spiralling Asian demand, the growing use of biofuels and recent droughts in major farming powers such as Australia have also lifted commodity prices.

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