Examination of Witnesses (Questions 200-212)
DR JAMES
JONES, MR
RICHARD LOLE
AND MR
STEVE ELLWOOD
11 FEBRUARY 2004
Q200 Chairman: But what does your intuition
as a man of long experience in this field tell you?
Mr Ellwood: What it tells me is
that we might be arguing about the extent of this but over a period
there is no doubt in my mind that farmers will increasingly see
Single Farm Payments as something that they have and there are
certain costs and obligations that they will need to comply with
to fulfil that cross-compliance. And then they will have the job
of producing food or other goods for the market-place and over
the period that will happen to a greater or lesser extent. What
happens in terms of the market-place depends on a whole myriad
of signals. To name but two: exchange rates in the UK have a big
influence on farmers' incomes because they are primarily producers
of commodities; and there is also the general issue of market
price. Whilst I can see in the short term that many farmers would
use their support payments to cross-subsidise loss-making farming
enterprises, over a period that will change and so this will have
implications not just for UK farmers but also for UK processors
and others who are using food as part of the food chain.
Q201 Paddy Tipping: The decision on decoupling
was taken in the middle of last year. How do you rate the consultation
process that has gone on since then? You have mentioned Alan Buckwell
but does there seem to have been a lot of work going on to try
and bring forward a model that will work?
Dr Jones: I think Defra have done
a good job in getting their stakeholders together and consulting
with us and there have been many, many meetings going on now over
almost a two-year period. I think what has been lacking in that
process is enough hard information to go by. Particularly when
we are looking at the effects of these various models for the
delivery of the Single Farm Payment system, I think we needed
more detailed information than we even have now, and what information
has been provided has been slow in coming.
Q202 Paddy Tipping: Conceptually we were
entering a negotiation and one really ought to have had before
last summer a set of options, a set of illustrations of what might
happen. As I understand it, it was only fairly recently that we
have had some of those illustrations.
Dr Jones: I agree with that entirely.
I think the amount of money that we have put behind research to
try and anticipate what the effects might be of decoupling in
particular is very small in comparison to the overall research
budget and we were still, even once the "cat was let out
of the bag" in July 2002, sponsoring research into things
that would be fundamentally impacted by decoupling but not looking
at the decoupling itself. I think that is a very good point.
Q203 Paddy Tipping: Are we going to get
the new way of payments in place by 2005? Can anything go wrong?
Dr Jones: I am sorry, I did not
quite catch that?
Q204 Paddy Tipping: Are we going to get
the new system in place for 2005? Is it achievable?
Dr Jones: I think it has to be.
We do not have a choice about that. Well, we do have a choice
about that and the UK had that choice and it has made its decision
that we will have a new system in place for 2005.
Q205 Chairman: Given that this process
represents a transfer from Pillar One to Pillar Two, do you think
we have enough information in the geographic sense in the United
Kingdom of winners and losers and of the regional impact and of
the flows of money around agriculture?
Dr Jones: I suppose that is another
issue. We have got the issue of the redistribution of the Single
Farm Payment which is within Pillar One, if you like. We also
then have this movement of money from Pillar One to Pillar Two.
I think that is more adequately researched than purely the decoupling
effect and then also the effects of delivering the Single Farm
Payment in different ways.
Q206 Alan Simpson: Chairman, what I just
wanted to ask about was this issue about trade in entitlements.
Some of the figures were quite hard going but you certainly livened
things up at the mention of "naked acres" and "virtually
naked" and "scantily clad". I am sure you will
defend yourselves against the charge of "sexing up"
the documentation but can you try and tell us what are the differences
between naked, virtually naked and scantily clad?
Dr Jones: Certainly. I think the
reason why we have all been a bit fixated by naked acres is that
unless you have an area of land—and the subsidies are based
on an area and you need eligible acres in order to exercise the
subsidy under the historic allocation—that effectively does
not have subsidy or possibly has a very low entitlement per hectare,
sufficiently low that you might just choose not to exercise it,
then you have not got a basis for trade because the subsidy can
only be bought by somebody who is not already using his land to
reference the Single Farm Payment against. It could end up being
a bit like a game of musical chairs in the sense that one person
buys a Single Farm Payment from somebody who is already using
a certain area of land. That then becomes naked as a result of
having moved the subsidy so other subsidy can move in from somewhere
else, and that makes that area naked, and so on. If you are relying
purely on this wonderful great game of musical chairs, which might
take place at Michaelmas when tenants move off farms and so forth,
then you will not really have a big enough basis for a market
or it will be a very strange sort of market because it will be
very incestuous because you are all trading amongst yourselves.
What you therefore want to anticipate is how many people might
be in a position to buy because they have land that has not already
got subsidy referenced against it and, secondly, would they want
to by it, ie, would they feel it was worthwhile? Are they interested
in buying subsidy to reference against it? We have identified
in the RICS paper nearly one million acres in England that might
be naked acres. An estimate that was used by Alan Buckwell in
his paper also came to a similar sort of figure by a rather different
route. Nevertheless, it appears that there is quite a lot of land
under the historic system that would be not clothed in subsidy,
if I can put if that way, and as a result there is a basis of
trade with those people who own that or have control over those
million acres. Would those people be interested in buying it?
Personally I think that is a matter of price and whether it is
worthwhile. It is a business decision. Basically if you have got
land that is capable of being used with reference to the subsidy
and the subsidy look likes quite a good deal, if, let us say,
it is worth twice the annual level of payment, well, that is a
very good rate of return really. It would be hard to find investments
that could offer you much more, so you would. If it was five times,
well, that is not quite so good, it is a 20% return and it is
a declining level of income. It then simply becomes an investment
decision and some farmers will be attracted by that; some will
not.
Q207 Alan Simpson: Have you been working
on a reference value of what you think a per acre or per hectare
entitlement would be?
Dr Jones: One of the other issues
is that there are some subsidies, particularly once they become
available, the dairy subsidies, once the reform process is complete,
that will be very high value per hectare and high value per hectare
subsidies are going to be worth more than low value per hectare
subsidies. So there will be subsidies that come from the hills
that will be very diluted and very low value per hectare. There
will not only be a low income potential from these subsidies but
the capital value as a multiplier of that income will be even
less because people will need a very large area in order to get
the same amount of money. I am not ducking the question. I put
an example in my paper which was based on an arable farm where
the subsidy levels are much easier to reference against, and using
a discounted cashflow of the income stream and building in some
assumptions about the way in which that income would reduce over
time, we thought that it might be in the order of three times
the current level of payment or five times the discounted level
of payment in rough terms. It is also affected by scheme rules
and we did not know the scheme rules then and we do not know the
scheme rules now but there are such things, for example, as siphons.
This occurs with the beef and sheep quotas at the moment. A proportion
of the subsidy each time it is traded gets taken and put into
the national reserve and can be used for worthy cases. If that
sort of process goes on, obviously it undermines the value of
the subsidy.
Q208 Chairman: Can I jump in here and
ask a question? Does the concept of decoupling work better with
a tradable element in it?
Dr Jones: The decoupling is taking
place anyway so regardless of whether it is tradable or not I
suppose we are looking at a separate entity here. We are looking
at delivery of subsidy in return for cross-compliance and as a
compensation for subsidies received in the past that are no longer
available.
Q209 Chairman: What I was driving at,
just to help you, was if we have got assets which are moving around
agriculture, under the historic arrangement where trading is possible,
then assets can move to different land for different purposes
and people can make commercial decisions and financial decisions.
With regional averaging it is locked in place and you cannot trade
it, there is no point in doing it, so in terms of the economic
outcome for agriculture as a whole does trading represent a better
buy than a position with no trading of entitlement?
Dr Jones: I think that is quite
a difficult question to answer because one comes back to the fact
that it is not coupled any more.
Q210 Chairman: But it does have an impact
on what farmers do because you talked about naked acres, and those
are acres currently without any cash. People are going to make
a financial decision, as our bankers reflected in their paper,
to acquire the right to monies and they are doing it for a purpose
because they want to do something different with the land.
Mr Ellwood: Taking that question
in absolute isolation, it strikes me that if we had an historic
system that enabled trading of payments then the element of the
payment that related to subsidies for incomes foregone, if you
use that argument, the original owner of that entitlement would
sell that and he would take a simple decision to sell that and
cash in his chips at the beginning rather than taking an annual
payment. Anybody else buying it subsequently is going to be influenced
by two things, one of which is the simple rate of return, does
he feel that he is going to get a good rate of return, and the
cost or benefit (but more likely cost) of cross-compliance that
then comes with and having to fit with that. Frankly, it has got
very little to do with food production at that point. Looking
at that point in isolation.
Q211 Alan Simpson: Chairman, I can see
how if you are a banker or a land valuer that there are attractions
to a market in the trade in entitlements without land but, as
Mr Ellwood said, this does not have much to do with food production
any more. I was just wondering, if you were looking at this from
the perspective of the taxpayer, would you see any value at all
in there being such a market? Why do we just not have a system
that says use it or lose it? Why create a trade in entitlements
without land?
Mr Lole: If this is intended to
be a transition to a market value, what this provides the opportunity
for is for businesses to have the option on how they restructure
and how they use that value from past expectation.
Q212 Mr Lazarowicz: How do the banks
envisage that a market in entitlements would operate, the mechanics
of it, how do we envisage it functioning?
Mr Lole: If we assume for a moment
that we are looking at the historic basis, which is the one which
allows a market function, we have plenty of precedent of other
quotas being traded and the industry is well supplied with brokers
to be able to make that trade.
Mr Ellwood: I have no view on
that. I think that as far as I am concerned at the moment it is
just a hypothetical possibility and it has, as I have said, little
bearing on the production value. The maths of this become relatively
straightforward as an investment if we get to that point at some
future date.
Mr Lole: To briefly come back
if I may, the question was what do bankers think of it What will
make that market a more attractive market to lend to is if this
becomes a separate asset, then it would give bankers comfort to
be able to secure a charge against that asset and to become an
interested party at the time of transfer of that asset. In other
words, that charge would be registered with the administrative
body and the lender with a charge on that asset would have to
consent to sale.
Dr Jones: Because the payment
is decoupled, in theory at least, it should not really make any
difference to production decisions because what a farmer does
with his land is conditioned by other things. The fact that at
the moment he is conditioned in what he can do by receipt of the
subsidy payment because it comes with a whole lot of conditions
means that in a sense there is a new world out there which means
that production will follow the market rather than follow the
subsidy. Another difference needs to be brought out which is the
balance of power between landlord and tenant. I am reluctant to
walk into that because you know from the evidence that you have
received already that the views are polarised and I think there
is a lot of discomfort in the industry about it. There is little
doubt that despite the fact that the receipt of payment is quite
firmly in the hands of the occupier, and therefore the tenant
under any of these systems, because that is a requirement of the
CAP reform, in practice a system in which a tenant can sell the
entitlement gives him a lot of power whereas a system that has
no market for the entitlement, which is the regional averaging
system, does not give him that opportunity, and that is a crucial
difference. That is really why I think the views that you have
had from various organisations have been quite so polarised on
the subject.
Chairman: Gentlemen, thank you very much
for the perspectives that you have been able to bring on to what
is as we have gone into it an incredibly complicated subject.
There may be one or two other points we would like through our
Clerks to take up with you for further education on this subject.
May I thank all three of you, as I did at the beginning, for the
papers you have put in and for your very helpful answers this
afternoon.
| 
