Memorandum submitted by the Central Association
of Agricultural Valuers
INQUIRY INTO IMPLEMENTATION OF CAP REFORM
The Central Association of Agricultural Valuers
(CAAV) represents, briefs and qualifies some 2,000 professionals
who advise and act in a wide range of matters effecting rural
and agricultural businesses throughout England and Wales. Instructed
by a wide range of clients including farmers, landowners, lenders,
public authorities, conservation bodies and others, this work
does not simply consist of valuations but of an understanding
of practice in all aspects bearing on rural land and business.
As such, the work of CAAV members means they have a practical
view of the issues involved in any such policy change, not limited
by the interests and perspectives of any single client group.
1. THE REFORM
AND THE
NEW MARKET
PLACE
1.1 The result of the Mid Term Review, as
agreed in June 2003 and recorded in the Council Regulation 1782/2003
finally negotiated in September 2003, represents a radical change
in the relationship between the state and agriculture and in the
financial support offered to farmers.
1.2 For the first time in most farmers'
working lives most of the enterprises in which UK agriculture
is involved will be producing for an essentially unsupported market
place as the payment of future subsidies becomes decoupled from
production decisions. This is a key change with potentially far
reaching consequences as farmers will be now be free to respond
primarily to the market rather than to the stimuli of product-related
subsidies as has been the case for many decades and, particularly
and most recently, under the MacSharry system with direct payments
for each unit of production capacity (acres of eligible arable
land in combinable crops, headage of suckler cows and ewes). Farmers
will no longer be required to produce at all and, where they do
produce, the subsidy system will not encourage them to stay with
traditional commodity enterprises.
1.3 While it is easy to focus on the requirements
and opportunities of the Regulation, the new market place is the
most important fact to come out of the reform and is the point
that faces all farmers. Policy implementation should focus on
farmers' need to make that essential adaptation.
1.4 No commentator can foresee accurately
how the new market place will develop. That lies in the hands
of farmers reacting to the removal of subsidy linked payments,
the probable reductions in marginal production, resulting price
changes and new business opportunities—as well as all the
impacts of each season's circumstances. For every general rule
and trend, there will be individual exceptions. Basic analysis
suggests that the suckler beef sector faces a particular issue
as not only is keeping suckler cows decoupled from subsidy but
at first the calf price may be reduced by the withdrawal of Beef
Special Premium and Slaughter Premium. There is likely to be an
overall reduction in EU cereals production, perhaps particularly
in the Mediterranean areas where the subsidy already exceeds income
from low yields. Many UK farms, perhaps concentrated in some areas,
are also likely to reduce cereals areas in most years. Subject
to issues of access to the EU market, lower production might increase
prices for those who can remain in production. Equally, the reform
removes obstacles to considering other non-traditional enterprises
where these appear viable. Farmers will react to the stimuli around
them, just as they did to production subsidies. Much will be new
and uncertain at first and farmers should be given the greatest
opportunity to make this transition effectively, after the years
of hard economics they have seen as well as BSE and Foot and Mouth.
2. PRINCIPLES
FOR IMPLEMENTATION
2.1 The unwinding of a long history of subsidy-influenced
production decisions will be a major task. The CAAV urges that
a key principle of the implementation of the Mid Term Review package
should be that it is done in ways which ease the introduction
of this new approach rather than complicate it. The successful
delivery of this objective with the least damage to British farming
is of great importance.
2.2 Within this key focus, the CAAV proposes
four principles:
(i) That the implementation be sensible and
workable without pointless complication, needless bureaucracy
or practical absurdity.
(ii) That the transition be as simple and
as swift as possible without undue distortion of markets.
(iii) That the practicalities of what is
proposed for the farm businesses that will have to live with the
reform are understood.
(iv) That wherever possible the implementation
gives affected farm businesses early certainty as to where they
stand. As most farm planning is a long term matter for the small
businesses involved, there is a business need for early decisions.
Among other matters, these should cover the basis of allocation
of entitlements, early notification of entitlements, early access
to and decisions from the national reserve and perhaps forward
validation of prospective transfers of entitlement. Such assistance
would reduce the long hiatus during which many will anyway need
to make major decisions—reform has been in the air for over
a year yet the first payments and transfers under the new system
may not be for another two years or more. Such an approach would
make the transition both more smooth and more effective.
2.3 While an obvious point, it must be stressed
that the Government, British farming and its advisers can only
work with the rules of the Regulation as agreed and the options
it offers. The CAAV fears that a number of the points debated
this autumn in England relate variously to options that are not
available under the Regulation, regrets that the Regulation was
not drafted to different effect and taking positions to influence
future reforms. While understandable, this can obscure the practical
job that is to hand.
2.4 The CAAV supports full decoupling at
the earliest possible date: 2005. The policy decisions have been
taken in the agreed principles of the Regulation. Many British
farm businesses have begun to prepare for the change and we see
no gain that arises from delay in implementing the core principle
of decoupling. It is expected that it is going to happen, delaying
it simply freezes the business environment for even longer than
is anyway the case. There seems no practical merit in trying to
continue to run parts of the old system in conjunction with the
new, requiring two sets of bureaucracy for both Government and
farmers. It is recognised that there may be a competitive issue
with those countries that delay until 2006 or 2007, and with those
that retain partial coupling.
2.5 The CAAV takes the same approach to
the dairy premium and additional payment—they should be
decoupled in 2005. We suggest that both payments should be allocated
on a simple per litre basis, using the volume of quota available
to the farmer on 31 March 2004 for the first payment. They should
then be decoupled on the same per litre basis as at 31 March 2005.
The short period in which it would necessarily be a coupled payment
seems too short to develop other patterns of payment: these payments
are to compensate for cuts in support prices for milk.
2.6 One important consequence of the need
for certainty is that (as has largely been followed in previous
reforms) such matters as the allocation of entitlement are based
on extant facts rather than on future facts. Extant facts are
very largely unchangeable making it easier for businesses to understand
their position and their options and then to decide how to proceed.
If allocation of entitlement is made significantly dependent on
future facts (such as the area of land held in 2005), then every
business and owner is likely to seek to maximise its opportunities.
It is unfortunate that the dairy premium is to be allocated in
this way—the consequences of this are to be seen in the
milk quota markets since late June when sale prices lifted from
10-11p per litre to 17-18 ppl—more recent rises reflect
fears of superlevy.
3. WITHIN THE
UK
3.1 The implementation of the Regulation
is likely to differ between each of England, Scotland, Wales and
Northern Ireland. The allocation and calculation of farmers' entitlement
to the new subsidy may vary and may not be transferable between
them. Wales could elect for an historic calculation with no national
envelope; England for a regional average allocation with a deduction
for a national envelope. This could be a complication for the
many farm businesses which operate in more than one part of the
UK, including those that physically straddle the boundaries. They
should not be at a disadvantage because of this.
3.2 In order to reflect this freedom of
implementation by the devolved administrations, this submission
is now couched in terms addressing England. The points may be
argued equally for the other territories.
3.3 DEFRA is to be commended for starting
consultation on implementation as early as it did. Unfortunately,
there has been much slower progress in developing the implementing
Commission Regulations—perhaps an inevitable (and, we believe,
sad) consequence of the delay in implementation from 2004 to 2005.
4. ALLOCATION
OF ENTITLEMENTS
4.1 The one remaining fundamental decision
is the basis on which the transferable producer-controlled entitlement
will be given to farmers. Once this decision is taken, businesses
will know where they stand and can begin to plan for the future.
The issues remaining, albeit important in themselves and to many
farmers, are then about developing that structure.
4.2 The CAAV believes the allocation should
be on an historic basis, in accordance with the main architecture
of the Regulation. It is perhaps regrettable that the choice is
only between the options made available by the Regulation, as,
naturally, none of them are perfect or suit English circumstances.
However, using an historic basis will more generally see most
businesses receiving a payment reflecting their circumstances
than is likely under an area system. Farms will have made investments
in equipment, taken on debts and employed staff on the basis of
their recent structure. It is wrong to redistribute these payments
in ways which do not reflect general business circumstances. A
major redistribution of subsidies between businesses offers no
obvious policy gain and would be very disruptive when they are
adapting to the unsupported market.
4.3 To offer some measure of the money at
stake:
— an arable farmer would this year
expect to receive some £101 per acre of combinable crops
— many cattle farms might receive between
£100 and £250/acre
— as would dairy farms once the dairy
premium and additional payment compensating for cuts in price
support are included (otherwise dairy farms naturally have lower
rates of historic payment)
— at the top end, some cattle businesses
(including those in the LFAs) might receive £900/acre
— at the other extreme, extensive sheep
farms on the high hills might receive £20/acre
— nothing is paid directly on land
in pigs, roots, vegetables, sugar beet.
To an extent, land and livestock values and rents
reflect these existing patterns of payment—and so do the
commitments, liabilities, investments and staffing of farms. Hill
land generally produces less and attracts less subsidy and is
generally of lesser value. The arbitrary classification of eligible
arable ground under the MacSharry reforms gave that land a value,
most obvious for the poorer land often now worth more than ineligible
land. Unsupported crops are generally grown on better (and eligible)
land as a deliberate alternative to subsidised arable crops and
so do not reflect this pattern.
4.4 Even an historic allocation of entitlement
will see businesses receive the same level of payment as the various
deductions imposed by the Regulation (modulation, national reserve,
financial discipline, etc) will be applied to it. Nonetheless,
it would result in payments reflecting previous levels.
4.5 In its simplest form, a regional average
area-based approach would see a single rate paid on almost every
acre of agricultural land in England, irrespective of the type
of land, whether heather or fen, arable or daffodil bulbs. It
would be irrespective of the type of farm or its circumstances,
or even the environmental costs or benefits that might flow from
cross compliance. We do not see that such an approach would be
just, serve any public policy purpose or be regarded as fair.
4.6 The estimates of the size of the payment
vary according to the assumptions and methods used but they generally
appear to be in the range £55-80/acre. Wherever the true
figure lies (the CAAV suspects it is at the lower end of the range),
it entails a major redistribution of support between farmers,
sectors and regions. A similar outcome was found in the change
from the headage-based HLCAs to the area-based HFA scheme, when
the safety-netting needed to cushion redistribution for LFA livestock
businesses required a first year injection of £19 million
on top of the £25 cost of the scheme. There is no extra money
available to cushion this reform.
4.7 In practice, the winners from such a
major redistribution would be those in intensive unsupported enterprises
(a serious root growing business might receive payments increased
by some 30% as well as those engaged in the more extensive forms
of livestock production. In principle, the very extensive high
hills could see payments per acre more than treble, on very large
numbers of acres—whose value might rise in response. Growers
of combinable crops would probably be general losers while those
in more intense cattle and dairy businesses are likely to be significant
losers. Businesses currently receiving £900/acre would be
£820-840/acre poorer—such a business on 42 acres could
be £35,000 worse off.
4.8 The Regulation allows a division of
payments on land use in 2003, basing:
— one area payment on whether the land
was in one of permanent pasture or grass (which includes temporary
grass but may exclude other permanent grazing) The distinction
between these two measures of pasture would be important in affecting
payment levels.
— a second payment on all land not
covered by the first payment.
As either approach to assessing grazing land is likely
to see a lower area payment for that land, this would produce
a more extreme redistribution between livestock farmers around
that lower level. The scheme does not allow a payment specifically
for ground cropped by traditional arable crops (with or without
horticulture)—only one across all land that is not, according
to the choice made, permanent pasture or grass.
4.9 The losses will be felt more sharply
by affected businesses as they will be around the lower averages
created by deductions for modulation and other matters.
4.10 There is then a difficulty over the
treatment of dairy premium and the payments likely to arise from
sugar and hops reform. Are these compensation payments for reduced
price support to be lumped in with the area payment, benefiting
all farmers pro rata to their area, or added to the affected farmers'
area payments?
4.11 There are administrative difficulties
in the approach then applied to determine the ability of fruit,
vegetable and potato growers to claim entitlement, turning on
individual areas grown in 2003, 2004 and 2005 and the 2000-02
English average.
4.12 One major problem with regional average
systems, whether simple or complicated, is that the allocation
of entitlements would turn only on the area of land held in 2005.
The payment would simply be a reward for holding as large an area
of land as the business or owner can secure for 2005—farmers
with large areas in 2005 will be given correspondingly large entitlements.
4.13 This reliance on "future facts"
is likely to lead to significant distortions in the market for
land that has usually been let short term and other markets. If
a significant payment turns on that area, farmers and owners are
likely to retain land that they would have ordinarily let out
or that they might otherwise have surrendered or sold in order
to maximise their entitlement under the new system. Farms dependent
on taking short term land, such as grass keep for dairy and stock
farms or land for specialist root cropping, may find such tenancies
harder to win in 2005 so that, even if allowed access by licence
to the land, they would not be allocated an entitlement that would
reflect their true business position.
4.14 If entitlement is allocated on area
declared in 2005, this creates a stimulus to declare land that
has not previously been in the system, so diluting payments. That
will turn on the level of payments and the cross-compliance commitments
but the CAAV suspects there is a significant are of grass that
could come forward.
4.15 The same objections apply to many of
the hybrid schemes that have been canvassed. While each proposal
needs to be analysed on its own merits, insofar as a significant
payment turns on occupying as much land as possible in 2005 it
will have damaging and distorting effects. One model under active
discussion takes 10% of total English livestock payments (including
dairy premium) and allocates it as an area payment of some £8/acre
to pasture land (not clearly answering the important point as
to whether this is permanent pasture or all grass). This payment
would then be topped up with individuals receiving 90% of their
historic allocation. That would remove many of the problems that
a 2005 basis for allocation poses for the livestock sector—it
is unlikely either that many would distort the land market or
that previously unclaimed grass would be declared for a right
to £8/acre. However, the Commission is understood to have
indicated that a basic area payment at 10% is too low and that
25% is preferable—a right to £20/acre does threaten
to distort markets in the poorer grazing districts. Arable payments
would be simply spread over all non-grass land with the consequent
distortions for short term cropping land remaining unaltered.
4.16 Some support simple area payments as
cheaper to administer. This is not a good reason for rewriting
the financial position of individual businesses. If a more complex
or hybrid system is chosen to temper the redistribution, the system
becomes as, or more, complex as an historic allocation.
5. NATIONAL RESERVE
5.1 Once it is decided how entitlement is
to be allocated, it becomes important to consider the issues of
managing the transition. For an historic allocation, these concern
handling of claims for entitlement under the hardship or national
reserve provisions. There appears to be much greater discretion
in establishing the regional frameworks for the National Reserve.
It would be helpful if this were set in hand early so that farmers
who might rely on it can understand their prospects.
5.2 As farmers seem expected to claim in
May 2005 on the basis of national reserve allocations, it would
help if applications were received and processed in late 2004
so that either businesses were approved for an allocation when
entitlement is available ready or a partial allocation made to
them from the 3% potentially available (which could then be topped
up as entitlement is released by non-claimants in 2005). This
would help achieve a greater measure of certainty for all involved.
5.3 In principle, the national reserve should
cater for those who have started farming since the last date of
which they could have claimed a subsidy in the base period and
those who have been expanding. There may also be a case for those
who have changed enterprise—as, for example, those who left
dairying after foot and mouth. Cases should be provable by contemporaneous
evidence with investments committed no later than the date of
the Council Regulation last September. The object is to aid those
who were caught unwittingly by the reform, not those who have
taken business decisions when they should reasonably have known
about it. Indeed, there may be justice in focussing help on those
who acted before the package was developed and agreed in June
when much less was known.
5.4 In operating the national reserve, it
is important that Article 42(9) of the Regulation is not implemented
in this country. It appears to be a matter of national discretion
whether entitlement can be taken from vendors and lessors where
land was sold or leased for more than six years during the reference
period or where premium rights (sheep and suckler cow quota) were
sold in that period. The provision appears to be about feeding
the National Reserve rather than providing any benefit to the
purchaser while its operation would introduce a considerable element
of instability into the system. The RPA can have no means of telling
whether land has been sold or let for more than six years while
the disruption caused by chasing sales of premium rights would
be considerable. It would be absurd in the cases where the vendors
have then bought other farms or premium rights—and more
complex still where they have moved into another territory in
the UK. In short, operating this sub-article would be to make
matters capricious where there is no need.
5.5 Much less thought has been given to
the application of the national reserve to a regional average
basis for allocation. The most obviously deserving claimants would
be those whose land holdings in 2005 were unrepresentatively smaller
than their normal business size because of the distortions inevitably
arising in the land market in that year. It is uncertain whether
the Regulation allows for this.
6. CROSS COMPLIANCE
AND GOOD
AGRICULTURAL AND
ENVIRONMENTAL CONDITION
6.1 While the reform is not expressly a
new environmental settlement—thoughts that it might (or
ought to) be have confused much of the debate—it does allow
part or all of the payment to be taken in penalties where the
farmer breaches the cross compliance conditions. The requirement
for land to be kept in "Good Agricultural and Environmental
Condition" sets the minimum that is required for farmers
(as defined) to receive the subsidy without producing.
6.2 As well as the statutory management
requirements (for which this is an extra form of penalty), Annex
IV lays out the key requirements for this regime. It requires
a minimum level of maintenance and concern about soil erosion,
structure and organic content. Implementation of this framework
faces several problems. It has to confront the very wide range
of farm types, geographies, soil conditions and climates that
exist in England and other parts of the UK. While there is considerable
guidance available as to good practice, it is not easy to turn
practical advice (which can be tempered to individual circumstances)
into a legal framework to be used for levying penalties. It is
one thing to suggest that maize should not be grown on slopes
of more than 11 but another thing to make that a legal requirement
with detailed definitions capable of being considered at an appeal.
Similarly for potatoes, a concern to increase organic content
of soil can run counter to the demands of the market place which
prefers the skins grown in soils with less organic content.
6.3 In framing the cross compliance regime,
it seems widely accepted that the drafting of the Regulation only
allows for a light touch. Issues arise from interactions with
the lower tiers of existing schemes under which farmers may be
paid for some of the requirements that may become cross compliance
conditions. There is concern that, in the new competitive market
place, the cross compliance conditions could be developed so as
to handicap English farmers if the result is well out of line
with that in other significant member states or, indeed, other
parts of the UK. Perhaps farm assurance schemes could offer a
partial framework.
6.4 Assessing compliance will be very much
more subjective than has been the case under IACS where the issues
are largely ones of numerical accuracy. Monitoring compliance
will be much more onerous, and even more so if the requirements
are made complex, never minding the resolution of disputes.
7. NATIONAL ENVELOPE
7.1 DEFRA has not yet issued its consultation
on the possible use of the National Envelope. While DEFRA introduced
this into the European negotiations to handle the problems that
some foresaw from decoupling, the final result of the negotiations
may not offer a useful tool. Not only must it be defined by August
2004, well ahead of knowledge of problems arising from decoupling,
but it is specifically targeted on areas of spending which resemble
Rural Development Regulation issues:
— specific types of farming important
for protection or enhancement of the environment, and
— quality and marketing of produce.
7.2 Where money is spent in a particular
sector, it can only be money retained for the Envelope from that
sector. That is potentially robbing Peter to pay Peter, an exercise
in churning with administrative cost attached. The more focused
(and potentially useful) the schemes, the greater the administrative
cost. More generally, the 10% of the entitlement that could go
to the National Envelope would otherwise be income to the farmer
unmatched by cost but if offered through agri-environment type
schemes it is more often simply intended to match costs, so reducing
net income.
7.3 It is not immediately obvious how far
there is a role for the state to decide and then subsidise what
is quality produce—that may be something left to the market
rather than to encourage unsustainable patterns of production.
8. ENERGY CROPS
8.1 While the Regulation offers an energy
crops scheme, the low level of payment means that this is not
the key issue. It is more important for land in energy crops,
whether annual or permanent, to be matchable against entitlement
with the much higher levels of payment that would unlock. There
appears to be no problem with annual crops and the rules for compliance
with set-aside entitlement suggest (by implication) that it can
be used against land in permanent energy crops. However, it has
not been stated clearly in legislative form that ordinary entitlement
can be matched against land in permanent energy crops such as
miscanthus. It is very important to that sector that this be allowed.
9. PERMANENT
PASTURE
9.1 The package imposes restrictions on
permanent pasture but the Regulation does not define this. If
the IACS type definition of permanent pasture (land in grass over
the previous five years) is taken, this will cover much grass
that might ordinarily be part of a rotation and which, being managed
as temporary grass, may offer little environmental benefit. There
are environmental benefits in enlarging the arable area in pasture
districts and there seems little merit in trying to protect grass
that does not fall within the commonsense definition of permanent
pasture. In the newly flexible market place there seems no reason
why grass that is unimportant should be protected.
10. ENVIRONMENTAL
ISSUES
10.1 While some of the debates about environmental
policy that attend English discussion of this package may, to
an extent, be misdirected in the context of this Regulation, they
may be very pertinent to the next round of reform. Few who have
spent much time on this issue take the 2012 date seriously. Many
anticipate a significant review before then. It might much assist
that review if thinking and analysis were more advanced on how
levels of payment to farmers might reflect the environmental benefits
they can offer. The regional average area payment options in the
Regulation are clearly not the vehicle for that, being unable
to take any account of such issues. A standard pattern of payments
would bear no logical relationship to either the costs of or benefits
from delivering an environmental package. An historic basis of
allocation (albeit reduced by the Regulation's deductions) would
tend to support the current level of compliance; redistribution
gives more finance to some to develop their businesses while weakening
other businesses' ability to comply. This is a debate for the
future for which it would be wise to be better prepared. It may
rear its head earlier than expected if payments for agri-environment
schemes and management agreements are reduced to reflect decoupling.
Significant reductions may affect the voluntary co-operation inherent
in these schemes so driving a review.
11. EFFECTS OF
IMPLEMENTATION ELSEWHERE
11.1 It is too early to comment in depth
on implementation of the reform across the EU. Many member states
appeared not to recognise the scale of the reform during the negotiations,
ultimately leading to the delayed implementation. Only a few states,
fortunately including the UK, engaged closely with the detail
as it emerged.
11.2 As a result, DEFRA is probably more
advanced than many other Ministries but all are evaluating their
options, some faster than others. The allocation of entitlement
may affect the financial standing of the more intense cattle and
dairy farms. Wales and Scotland both expressed a basic preference
for an historic allocation (Wales with an initial preference for
no national envelope, preferring to use agri-environmental schemes
directly) and Ireland is thought to have found this a very easy
choice. Northern Ireland appears to be considering a more complex
answer following concerns about its beef sector.
11.3 Germany and Denmark are expected to
run an area system, Finland is considering it, and this is the
approach for the accession states. There are competition issues
here, especially for unsupported crops. Holland is thought to
be taking an historic approach, despite its large unsupported
production sector, as are most states.
11.4 Ireland has now swung to support full
decoupling in 2005 so UK farmers will compete with Irish beef
and dairy sectors on the same basis. There seems little discussion
of any use of the arable partial coupling option, offering only
a quarter of the payment but operation of the full scheme. There
is more discussion of the livestock options but it is too early
to know how many states will take up the various options available,
all of which would require compliance with retention periods and
other burdens of those schemes. Use of a major beef scheme by
a significant country could have competition effects.
11.5 It is too early to assess other states'
approaches to more detailed matters such as national envelopes,
especially as the Commission regulations are awaited.
Central Association of Agricultural Valuers
December 2003
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