Examination of Witnesses (Questions 183-199)
DR JAMES
JONES, MR
RICHARD LOLE
AND MR
STEVE ELLWOOD
11 FEBRUARY 2004
Chairman: Can I welcome our witnesses
this afternoon and thank them in advance for their written submissions
to the Committee, they were much appreciated. For the record we
have Dr James Jones, Head of Farm Management at the Royal Agricultural
College, Cirencester and a Member of the Royal Institution of
Chartered Surveyors' Countryside Policy Panel; from Barclays Bank,
Mr Richard Lole, who is their National Agricultural Policy Manager;
and from HSCB, Head of Agriculture, Steve Ellwood. Gentlemen,
you are very welcome. Apologies that the usual problems with the
House of Commons voting delayed us starting and we will not delay
any more. I would like Bill Wiggin to start the questioning.
Q183 Mr Wiggin: A nice easy one to kick
off with. What effect do you think the Single Farm Payment will
have on land values?
Dr Jones: This has been set out
in a paper recently by Professor Alan Buckwell from the CLA. He
set it out in some detail and I think you have had a copy of that
paper[1].
I would broadly support all his conclusions. I think the difficulty
is it depends whether the Single Farm Payment will be a separate
tradable entity, not just legally, because we know that that is
going to be the case regardless of the system, but actually in
practice, and it will be most effective as a tradable entity under
the historic system. If we move to a regional average payment
system then effectively it will not be tradable. If it is not
tradable then obviously the value attached to the subsidy can
only attach to the land because it is referenced against it. Under
the historic system the Single Farm Payment itself can be detached
from the land and has an independent value, so I think it rather
depends on the system.
Q184 Mr Wiggin: Of course.
Dr Jones: I think I would broadly
agree with Professor Buckwell in that there are some pluses and
minuses. Effectively, the subsidy becomes worth more because it
is not attached to the same sort of farming obligations as it
has been in the past; it is attached to some cross-compliance
obligations but arguably that is a smaller requirement than having
to keep suckler cows or keep sheep or whatever in terms of the
costs. As a result of that it might be worth more but in turn
the income stream from it will be reduced in time, so the two
effects will counteract each other and I think the effect on land
values broadly will be neutral.
Q185 Mr Wiggin: You do not think that
the type of model used will have an effect on the land value and
rental value as well?
Dr Jones: I think the type of
model really affects individual cases because if we move, say,
to an historic system then it is not only more tradable and therefore
it is a separate entity that can be detached from the land so
you would have to make your valuations separately, but it is also
going to be more variable from one farm to another. If the payments
are averaged and there is just a flat rate entitlement it then
simply has to attach to land at a flat rate.
Q186 Chairman: What do the bankers think?
Which one do you want?
Mr Lole: Just expanding on that,
although I agree with the majority of what has been said, with
a couple of other thoughts. One is that the existing arable land
value usually has some value associated with that payment capitalised
within it and that is not the case in the livestock sector, so
the impact on land values could be different according to different
sectors. The other point is obviously a caution that land value
is not directly related to productivity but there are amenity
values potentially which will insulate land value from the straightforward
productivity of the land.
Q187 Chairman: What does Mr Ellwood have
to say on behalf of his bank?
Mr Ellwood: The only other comment
I would make that adds to that is that it would be fair and accurate
to say that it is not just in farm incomes or even a part of farm
incomes that Single Farm Payments affect land value. There is
plenty of evidence over the last decade or two that land values
are affected by the value of rural property by non-farm buyers
as well as by agricultural issues. That is the only other bit
that I would add to that equation. One further point if I may,
clearly, the different sectors can be affected in different ways
if we go for either an historic or regional payment basis. I would
have expected to see more discrepancy or distortion in the livestock
sector than the arable sector. I would not make a prediction as
to what the percentage is but within that percentage there is
more distortion within the livestock sector than the arable sector.
Q188 Alan Simpson: Are we not being conned
by all this into deciding which group of extremely rich people
we subsidise? It seems to me that you have taken us into this
trap that says, "Where is our angst, and should we stick
with a model that funds historic payments to those large farm
owners who produce arable crops or should we switch to a system
based on acreage so we reward the largest landowners?" Surely
this is just a scam to ensure that one way or another we continue
to provide subsidies to the extremely rich?
Dr Jones: It has another name,
which is the Common Agricultural Policy! We are members of the
European Union, we are members of the Common Agricultural Policy,
and therefore this amount of money has to be made available to
our farmers, and we are simply trying to decide which is the most
effective, fairest and most desirable means of delivering it.
Q189 Alan Simpson: Would we have been
better off going for the proposals that came up at the Commission
last year that suggested a cap on the payments to the largest
farmers or landholders, the £187,000 ceiling on payments?
That would still be redistributing the money but in terms of the
objective of transfers towards sustainable farming and towards
land management, would it not have been better to say that infrastructure
payments will go to farming on a sustainable scale would and would
have been a better system than one that locked us into this debate
as to which group of rich landowners we want to shovel lots of
cash to?
Dr Jones: That has happened before.
We have had those sorts of proposals coming up from time to time
since the early 1990s. One of the reasons why it has never been
adopted is partly because we have larger farms in the UK, for
example, than is common elsewhere in Europe, so if you applied
a larger farm cut-off in payments you would be cutting payments
to the UK whereas you would not then be cutting payments to Portugal,
say, where the farm size is very, very much smaller. That is one
of the reasons why it has not been adopted. The other one is that
you end up spending a lot of money chasing around after people
who have taken professional advice to divide up their businesses
so that they no longer appear to be large farms—and you
are familiar with it in other contexts—and I think it is
generally believed that it is simply not worthwhile. There is
another Member State angle on this which is that there are some
very large farms in Eastern Germany and of course there are some
very large farms in the accession states. It is this business
about the skewed farm structure that would cause a problem with
capping.
Q190 Alan Simpson: In terms of the land
value aspect of this, if we take the current situation, as I understand
it, if you take someone who is a definite beneficiary like Sir
Gerald Cavendish Grosvenor, the Duke of Westminster, his farm,
Grosvenor Farm in Chester, is eligible for subsidy payments which
currently work out at about the rate of £1,000 a day. That
is based on the historic payments model. If we shifted to another
subsidy system would he end up having to struggle to work out
who he would have to pay to get out of bed to pick up the subsidy
for him on a larger scale or on a smaller scale if we changed
the model?
Dr Jones: If you average payments
on an area basis, then obviously the larger the area you farm
the more payments you get, so it does not necessarily mean that
by spreading the farm payments out that larger farmers will be
worse off. It has different sorts of redistribution effects and
sometimes smaller farmers tend to be more intensive so that their
subsidy per hectare might be higher even if they are farming less
hectares. I am not sure that this idea that one system or another
will redistribute wealth is quite the case.
Q191 David Taylor: Can we move from Alan's
subsidy payment that dare not speak its name to the area of taxation.
You have said that you believe broadly that there will be little
impact on land values if we went down the Single Farm Payment
route. Can we infer from that also that there would be relatively
little effect on capital tax payments due?
Dr Jones: There are some specific
capital tax issues tied up with any type of quota or any type
of entitlement. We have already got that with the milk quota,
beef quota, sheep quota, and so on. The system which attracts
the highest entitlement value, if you like, because it is the
most tradable, is the historic entitlement basis, so there are
some specific capital issues tied up in that. There is only a
finite amount of value in subsidy converted into a capital sum.
Quite rightly, as Alan Buckwell points out in his paper, if you
have a system where it is focused on a moveable element of subsidy
then there has got to be rather less value in the land. In terms
of the proportion it is still pretty small because the underlying
value of the land is its amenity and its long-term value and the
fact that, as Mark Twain pointed out, they do not make it any
more. Obviously I would support what my colleagues here have said
about the fact that we are not talking about a vast difference
in land values based on the subsidy movement.
Q192 David Taylor: So moving from capital
tax to revenue tax, on the precedent of how set-aside payments
are treated, there will be a situation, and you said so in your
evidence Dr Jones, where the SFP will be treated as an income
and the recipient of the payments will be regarded as a farmer
engaging in a trade in most circumstances. There will be a temptation
for a good number of farmers to simply abandon land, will there
not, but that will be constrained by the tax implications of that
which seem to sit between abandoning productive farming and merely
doing a minimum for cross-compliance activity? Where will that
boundary lie? At which point do you feel that the Inland Revenue
say this is not a trading activity, we are not going to treat
it as such and we will not allow expenses to be charged against
it in terms of transport and buildings and so on? There is a dilemma
here, is there not, for farmers?
Dr Jones: There is a dilemma.
The background to the dilemma is that the whole reason why we
are decoupling subsidies is largely to avoid the trade distorting
effects of subsidy. We must, as far as the WTO is concerned, put
these subsidy payments into the "green box" and that
means that they cannot be linked to agricultural production, even
tenuously. On the other hand, it is hard to then argue with the
Inland Revenue that they are linked with agriculture because they
are not, they are simply linked with some cross-compliance conditions,
and those cross-compliance conditions, whilst they might possibly
encompass things like minimum stocking rates, if those minimum
stocking rates are anything other than very slight and very focused
on environmental care, then the subsidy will no longer be in the
green box and we will have to start all over again. The answer
is that they are under threat in terms of their tax status and
I think the Inland Revenue will probably start to look differently
at them if people are de facto not really engaged in farming.
Q193 David Taylor: Have the RICS sounded
out the Inland Revenue in any way to assess in what way tax treatment
might change?
Dr Jones: No, we have not. Although
there has been a meeting of the Agricultural Law Association that
discussed what the implications might be, we have not got as far
as discussing it with the Revenue.
Q194 Chairman: Can I ask the bankers
have you had your tax experts crawl over this? If one of your
customers came to you and said, "Right, well, I am going
for the minimalist farm approach now," are you giving them
some advice that they ought to take some professional tax advice
because they might lose their position as a result of that?
Mr Lole: We will be awaiting a
clear understanding of what the finished situation looks like
because the level of activity required for cross-compliance will
clearly have an impact on that and some of the implementation
will clearly have an impact on that.
Q195 Chairman: Have either of you had
any dialogue with the farming community in discussing with them
their choice either of historic or regional averaging in terms
of the implications that we have discussed both in terms of land
value and tax so far? Have they come to you and said, "What
do you as bankers to the agricultural industry think about it?",
or do they see you waiting to give judgment when the facts are
known?
Mr Ellwood: I think in answer
to your first question, and just to be clear, the answer is no,
the HSBC have had no conversations whatsoever with tax experts.
Clearly interacting with the farming community on a regular basis
then all sorts of hypotheses are put forward as to what might
be the outcome, but I can honestly say that no-one has talked
to me about taxation in those conversations. At this moment in
time income tax is not the primary concern for a lot of farmers.
Q196 Mr Drew: I am sorry to have missed
the early part of what you were saying, but if I can move us on
to production and the environment. This is principally to Dr Jones.
Can you give us a very quick synopsis of whether you think the
view that there will be quite a production cut is likely to be
what is now fulfilled or is there a rationalist view, which I
gather is what Ben Gill has been putting around, that in fact
there are some compromises that can be made which is going to
result in less of a production cut for them than was originally
anticipated?
Dr Jones: I suppose it is difficult
because Ben Gill made the point in his evidence, which I read
from your last session, that whilst decoupling might mean something
rather drastic to an economist, to a farmer, who is dedicated
to farming, it might provide him with an opportunity of receiving
his subsidy in a different way, possibly with different sorts
of strings attached but otherwise he might carry on pretty much
as he is at the moment. Personally I do not quite share that view.
I think farmers are astute as businessmen as well as enjoying
a certain lifestyle and I think they look pretty carefully at
their costs and if something really is not making sense they will
not necessarily continue with it. Of course it will vary considerably
because production levels vary across the country and all the
rest of it. I would like to take issue, if I may, with his response
to a question that the Chairman asked him in the evidence last
time which is this issue about beef farming which in particular
I have suggested will see a downturn. I have suggested that that
is on the basis that calves for beef fattening come either from
the dairy herd, which we know is going to go through a process
of rationalisation, and also from beef suckler herds, and beef
suckler herds are supported by subsidy to an extraordinary extent.
The level of headage payment at the moment is £158 a head.
I have calculated that the possible amount of subsidy coming back
through the calf, if you like, because of its fattening subsidies
later on in the chain, might be worth, say, another £75 a
head. The gross margin, which is the income from a beef suckler
cow less its direct costs of feed and so forth, is around £212-£215
a head. That is less than the subsidy. So if you take the subsidy
away you get a negative result, and I cannot see under those circumstances
quite why people would want to keep them unless they are getting
premium prices for their calves. His response to that was that
beef is a "Cinderella" enterprise, it is maybe the second,
third or fourth enterprise on a farm, but really, even if it is,
under those circumstances and if subsidy is now being paid in
a different form, why on earth do it?
Q197 Mr Drew: We will take that as an
imponderable about what really is going to happen with production
but we do on the back of that then have a fairly stark situation
with regard to the impact on the environment and there are those
who say less farming potentially a better environment, particularly
if you pay farmers then to be stewards of the countryside to put
some positive public good back into the countryside. There are
those who will then argue, well, if you have lost that subsidy
the only way that farmers can really react is to farm more intensively
with more artificial aids. Which of those points of view are likely
to be the more predominant or will both be the case and it will
depend on where and who is doing it?
Dr Jones: In a rational market
you would expect that if something were not profitable any longer
enough people would get out of it, that supply would shorten and
the price would strengthen and you would hit a new equilibrium.
It might be at a lower level of output but nevertheless the thing
would sort itself out by free market economics. The problem is
that elsewhere in Europe three-quarters of the suckler cows might
well continue to receive their full payment. We operate in a European
market or a global market so what we do not really know is the
extent to which these cutbacks in production might be compensated
by better prices for farmers. We know that where it is in a particular
production supplied to a local market there has to be a point
at which the price starts to rise and compensate.
Q198 Chairman: Can I ask our two bankers
what are your initial thoughts about how a farmer should actually
view these payments? Should they tuck them away in the back pocket
and say, "Well, that is money I can use to do something else
on the enterprise known as my farm" or should I devise some
accounting method to effectively cross-subsidise activities, going
back to the point Dr Jones was making a second ago, do not in
themselves pay. What is your financial advice going to be to farmers
who may seek an indication as to how to treat these monies by
whatever mechanism they get to them?
Mr Lole: We have been trying to
work with our customers to help them understand that they do not
need to continue an existing enterprise if it is not profitable
in its own right and also to view the payments as a means of making
a change and possibly a transitional payment as something they
should try to grasp earlier rather than later along with the change
so that their end position improves.
Q199 Chairman: Because we have talked
about the payment and the attitude to it. The money going to farming
is going to be top-sliced in various ways. There is going to be
a net leaching of cash out of farming in addition to a different
view to it that will be taken as a payment as opposed to a subsidy
which is directly related to production. In terms of the general
health of agricultural finance—and perhaps Mr Ellwood would
like to comment on this—is farming going to be able to cope,
say, over the next five years with the movement of some money
out of direct payment to farmers and this very focused, market-based
decision-making process to which Mr Lole referred?
Mr Ellwood: I think the answer
is we do not know.
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