Other suggested measures aim to cut bureaucracy, redistribute aid to farmers in seriously disadvantaged regions and support the establishment of risk management measures such as insurance schemes for natural disasters and mutual funds for animal disease crises
The Commission also intends to abolish the special subsidy for the production of the raw materials used in biofuels.
Commenting on the package of measures, which must be agreed by EU farm ministers before the end of this year, farm Commissioner Mariann Fischer Boel said that the Health Check is not a fundamental new reform, but an effort to further modernise, simplify and streamline the CAP.
Crucially, it also aims to clear aside remaining obstacles that hinder farmers from responding to market signals and the growing demand for food.
She added: "Last autumn saw the European Union react quickly to the rapid changes on world and European commodity markets.
"We increased milk quotas, freed arable farmers of their obligation to set aside 10 per cent of their land
and suspended import duties on cereals. The Health Check allows us to take a number of more permanent measures to equip our farmers to respond to the new situation in which we find ourselves.
"This is no knee-jerk reaction, but a well-thought-through and wide-ranging review of the CAP, which fits very well with the current market situation. It brings together a number of review clauses agreed upon in 2003 when the CAP was radically reformed and takes them a step further."
The Commissioner continued: "We are proposing to abolish mandatory set-aside once and for all, to allow arable farmers to fulfil their full production potential. However, we are well aware of the environmental benefits which have been a by-product of what was originally a measure designed to stop overproduction. We want to introduce new measures to help to retain these.
"Milk quotas will expire in 2015. They are an anachronism in the era of market-orientated farming. Between now and then, we need to ensure a 'soft landing' for the dairy sector, to avoid a sudden market crash on 1 April 2015.
"That is why I have proposed to increase quotas gradually. This liberalisation at a sensible pace will allow our producers to respond early to booming global demand, but will not cut the legs from under the healthy market that we have now.
With regard to intervention the Commissioner pointed out that when the CAP was originally established in the early 1960s, it was based on a guarantee that the EU would buy up products that could not be sold on the open market at a high guaranteed price.
"Such so-called 'public intervention' has been substantially slimmed down. But we need to go further," she stressed.
"We must make sure that intervention and our other market tools work as an effective safety net for times of genuine crisis, but do not get in between farmers and market signals."
Mariann Fischer Boel went on to point out that in 2008, farmers face a number of new challenges.
"But meeting these challenges requires money, and we have a strict limit on our agricultural budget," she further explained.
"That is why I am proposing to reduce direct payments to farmers and shift this money into our budget for rural development policy.
"Under my proposals, the transfer of funding into rural development and out of direct aid paid to all farmers receiving more than €5,000 every year would rise to 13 per cent. This money would be used to reinforce programmes in the fields of climate change, renewable energy, water management and biodiversity. There would be bigger cuts to the biggest direct payments, in response to the public's serious concerns about the balance of spending in the CAP."
If the Health Check package is accepted by farm ministers, the list of standards farmers need to respect to receive their cheques from Brussels will be updated to retain the environmental benefits of set-aside and improve water management. And, according to the farm commissioner, other unnecessary and burdensome standards will be withdrawn.
Commenting on the Health Check proposals Ulster Farmers' Union policy director Wesley Aston told Farming Life that his organisation remains fundamentally opposed to the concept of increased modulation.
"We believe that the single farm payment should not be further diluted," he added.
"One option might be for the Commission to allow individual members state flexibility on this issue. With regard to milk quotas, the principle of a soft landing has merit, as it is now inevitable that they will go in 2015.
"However, in a UK context, this approach will have very little impact at farm level as it is unlikely that milk producers will be in position to increase production in line with any expansion of quota availability. But the Union is concerned that processers may use any expansion of quota across Europe as a means of keeping producer milk prices down."