Select Committee on Environment, Food and Rural Affairs Minutes of Evidence

Supplementary memorandum submitted by Dr James V.H. Jones

IMPLICATIONS OF THE CAP REFORM DECISIONS FOR ENGLAND ANNOUNCED ON 12 FEBRUARY 2004

SUMMARY

—  The Single Payment is to be delivered to farmers in England by way of a "dynamic hybrid" system that phases out the individual historic claims element by 2012.

—  A flat rate payment will be calculated separately in the Specially Disadvantaged Area.

—  Ignoring the effect of payment cuts for modulation etc. the payment should be around £65-85/ha (£26-34/acre) in the SDA and £210-230/ha (£93-85/acre) elsewhere.

—  The exact level of payments over time is complicated by changes in the overall ceiling on payments on the one hand and cuts due to modulation and financial discipline on the other.

—  The modulation cuts are now likely to be greater than those envisaged by the Curry Commission because the UK government match funding contribution will be lower and because some of the EU compulsory modulation funds will not be refunded.

—  Together financial discipline and modulation cuts alone are likely to reduce payments by between 19 and 25% by 2012.

—  The reform of the sugar sector might create require some rearrangement in the UK ceiling to compensate sugar producers who are exclusively in England.

—  Set aside rates are likely to be reduced by being applied over a larger area—possibly from 10% down to 7%.

—  In the SDA sheep farmers are likely to benefit from the change to flat rate average payment but beef farmers will loose out unless they are very lightly stocked.

—  Farmers in the Disadvantaged Area are likely to benefit but more in the case of sheep farmers than for those with beef suckler cows.

—  Dairy farmers are likely to loose out unless they average less than 7,750 litres per hectare (3,135 litres per acre). Intensive units with flying herds, maize forage and high yields are most likely to be worse off and extensive grass based dairies with lower yields and rearing their own replacements will fare better.

—  Lowland sheep producers are likely to be better off and suckler beef producers worse off than they would have been under an historic entitlement system.

—  Tradability of the Single Payment is likely to be restricted and at low values.

—  This will adversely affect the balance sheets of farmers with existing quotas.

—  Tenants will fare markedly worse and landlords better than under an historic system.

—  Land prices will be distorted by what is effectively a flat rate subsidy attachment.

—  Scotland and Wales are to adopt an historic basis and the Northern Irish hybrid is "static"—the main potential implication of the use of alternative methods is the potential migration of milk quota out of England in 2005.

INTRODUCTION

  1.  The Secretary of State Margaret Beckett announced decisions on what is intended for CAP reform implementation in England in the House of Commons on 12 February. It was preceded by announcements from Edinburgh, Belfast and Cardiff earlier in the week. The most important element in all these announcements has been on the delivery of the new single payment. Scotland and Wales have opted for an historic basis of entitlement. Northern Ireland and England have opted for "hybrids" between historic basis and flat rate payments but of a very different nature.

Northern Ireland

  2.  In Northern Ireland the hybrid proposed is of a type referred to as "vertical" because it treats current subsidy regimes differently. So some will contribute wholly or partially to historic payment entitlement whereas others contribute more to a flat rate average payment which all farmers receive. There are no proposals to change the percentages over time. So it is a "static" hybrid.

England

  3.  In England however there is no differentiation based on subsidy regimes from which the money was, in effect, derived. But across the board there will be an element based on past receipts and an element that is a flat rate based on averaging all payments. This will not stay the same but will alter over time so that the flat rate element will increase and the historic element will be phased out. In order to try and avoid some of the extremes of redistribution two separate areas are identified within which the subsidy redistribution will occur. These are the Specially Disadvantaged Area (the most extreme conditions within the Less Favoured Area) and all other land. Payment rates will be markedly different in these two areas. It will certainly not eliminate redistribution of subsidy. It will redistribute subsidy within the SDA possibly to quite a significant extent. It will leave part of the Less Favoured Area—the Disadvantaged Area with the much higher lowland rate of payment. and it will also leave those with the highest potential payments per hectare in the non-SDA area (such as dairy farmers and intensive beef units) with less subsidy than they might have had on a historic basis. Details of this are available from the Ministerial statement and a question and answer brief on the DEFRA website. It is not intended to go over these in this brief.

  4.  What we aim to do in this brief is to give a preliminary assessment of a number of the potential implications of the proposed Single Payment Scheme for England. What might appear at first sight to be a simple and possibly an uncontroversial proposal actually throws up quite a number of important issues that need to be clarified in the coming weeks and months. It is also important to stress at this stage that these proposals will have to fit the detailed implementing regulations for the CAP reform in general and these have yet to be confirmed by Brussels. DEFRA have been in close contact with the EU Commission to achieve conformity with proposed EU regulations as far as this is possible—as confirmed by Lord Whitty in his evidence to the House of Commons Environment Food and Rural Affairs Committee (EFRA) only the day before the announcement. But it was admitted by Lord Whitty to the EFRA Committee (last Wednesday) that not even Commissioner Fischler knew every detail of what those regulations would be.

THE VALUE ATTACHED TO THE HISTORIC ELEMENT IN THE SINGLE PAYMENT

  5.  The proposals alter the balance between the historic and the flat rate elements as shown in Figure 1 below. This shows that before 2008 the historic element will make up the majority of the payment but after that time it will be the smaller element and will be quickly eroded so that by 2012 it will have disappeared altogether.

Figure 1 Historic and flat rate elements in the Single Payment Scheme for England

  6.  The situation is complicated by the fact that the total amount of money available to redistribute gets larger during the early years until 2007 (see Table 1 below). After 2007 the amount is expected to remain the same for the UK although reform of the sugar sector might make it necessary to readjust the allocation of the UK ceiling giving a larger share to England (the cost of sugar reform is discussed later).

Table 1

THE UK CEILING ON ALL PAYMENTS

	Ceiling	Dairy payments	Non-dairy payments
	Euro millions	Euro millions	Euro millions
2005	3,350	167	3,183
2006	3,350	334	3,016
2007 and onwards	3,868	503	3,365

  7.  So not only does the flat rate element get bigger over time the overall amount of money that can be spread gets bigger. The allocation of the ceiling within the UK will presumably depend on the distribution of subsidy under present regimes and new ones. Table 2 below attempts to assess the breakdown. It shows that the allocation to England should increase as both the dairy and eventually the sugar sectors generate direct payments that are decoupled and converted into Single Payment.

Table 2

DISTRIBUTION OF HISTORIC SUBSIDY RECEIPTS AND PRODUCTION IN THE UNREFORMED SECTORS AS AN INDICATION OF POSSIBLE BASIS FOR SINGLE PAYMENT SUBSIDY ALLOCATION IN THE REGIONS OF THE UK

	England	Wales	Scotland	Northern Ireland	UK
Historic receipt of subsidy	£ million	£ million	£ million	£ million	£ million
Subsidy payments in 2002 Crop subsidies and set aside	902.2	11.5	118.9	8.7	1,041.3
Livestock subsidies	432.8	123.8	243.0	166.5	966.1
Total	1,335.0	135.3	361.9	175.2	2,007.4
Proportion	66.50 %	6.74 %	18.03 %	8.73 %
Subsidy basis in unreformed sectors Dairy	mil. litres	mil. litres	mil. litres	mil. litres	mil. litres
Milk quota in 2001-02	9,934.4	1,425.8	1,160.9	1,651.7	14,172.8
Proportion	70.09 %	10.06 %	8.19 %	11.65 %
Sugar	000's has	000's has	000's has	000's has	000's has
Sugar beet area	169.0	0.0	0.0	0.0	169.0
Proprtion	100.00 %	0.00 %	0.00 %	0.00 %

THE AMOUNT OF SUBSIDY PAYMENT ON THE FLAT RATE BASIS

  8.  The flat rate subsidy will depend on the allocation of the total amount of money available within the UK and how it is spread between the SDA area and the non-SDA area. The NFU have put an estimated value of between £65 and £85 per hectare (£25 and £34/acre) in the SDA and £210 and £230 per hectare (£85 and £93/acre) in the non-SDA area.The exact figures do depend on:

—  the subsidy allocation between SDA and non-SDA (and this can change as dairy and sugar are largely in the non-SDA);

—  the SDA area—this sounds easier to determine than it is because it is eligible agricultural area we need to determine and not just an area on a map; and

—  the exchange rate—which is by no means stable.

  But we have produced an estimate of the SDA eligible area based on figures used by Drew Associates and Exeter University in an Economic Evaluation of HLCA payments undertaken in 1997 (page 98) which identified just over a million hectares of SDA land farmed in conjunction with a further 230,000 hectares of SDA common land.

  Table 3 below compares this with the NFU estimates to see how the total matches up to the maximum amount of money available set by the payments ceiling (post 2007). The ceiling at an exchange rate of 68 pence to the euro lies between the NFU upper and lower limits assuming the ceiling is allocated according to the basis in Table 2 but ignoring a potential sugar payment.

Table 3

COMPARING ESTIMATES OF THE FLAT RATE PAYMENT RATES WITH THE UPPER LIMIT ON PAYMENTS SET BY THE CEILING

SDA area estimate	hectares
Land in the SDA in England	1,106,084
Common land farmed with SDA	230,000
Total	1,246,084
SDA as a % of the eligible area?	14.11%
Total eligible area (2002)	8,833,900
Non-SDA eligible area	7,587,816
NFU estimates of payments
Payment rates	Rates	Total amount
	£ per ha	£ millions	% of total
SDA high	£85	£106	5.7%
SDA low	£65	£81	4.8%
Non-SDA high	£230	£1,745
Non SDA low	£210	£1,593
Combined SDA and non-SDA
Highs		£1,851
Lows		£1,674

RICS estimate of ceiling

UK ceiling post 2007	3,868	million euros
English share	67.0%
English ceiling	2,591	million euros
Value of ceiling at 680/$	1,762

  What these figures do not allow for is any cuts in payment. These are important because before we can establish anything about the redistribution of subsidy, the influence on land prices and rents, etc. during the time that the dynamic hybrid is going to adjust them we have to establish how much the payments are going to be over time.

PAYMENTS CUTS OVER TIME

  9.  Points about these cuts have been reworked several times already and appeared in earlier briefing notes. The main charges are that we know a national reserve will be required at least initially because

—  National reserve—will be required because at least initially 90% of payments are based on historic entitlement and hence the special cases against a history subsidy not having been paid in the past for a variety of reasons is pertinent.

—  National envelopes—will not be used so what could have been a cut of up to 10% in payments will not apply

—  Scalebacks may be required against historic based allocations if these exceed the ceiling on payments (see the Update brief part 2 of 23 January Table 6) which suggests a scaleback of up to 5% might need to be applied)

—  Financial discipline cuts—are likely to be required as the Accession States that join the EU on 1st May 2004 become entitled to an increasing proportion of the full rate of their Single Payment.

—  Modulation—both by the EU and the UK.

  It is the last two of these that represent the greatest overall cut and they will apply regardless of whether payments are made on a flat rate or an historic basis. So we examine these in more depth to try and forecast a possible level of cut.

Financial discipline

  10.  Financial discipline cuts are likely to be subject to a

5,000 "franchise". This means that the first

5,000 of Single payment will escape the cut regardless of the level. This not only means that some farmers will suffer more than others but also it redistributes the burden throughout the EU dependent really on the number of small farmers each country has. It makes it harder to forecast cut levels.

Figure 2 Proportion of direct payments that would ecape cust by falling into a

5,000 franchise

  The graph above shows that the UK has 15.4% of direct payments that fall into the below

5,000 bracket. In the EU 15 the average is 33.2% and some countries have up to 70% of direct subsidy falling into the cut free bracket. Deeper cuts have to be made on the two thirds of payment that is affected in order to compensate for the third that escapes it.

  11.  The Commission originally set out financial discipline cuts on fixed percentages when they took the form of a degressive cut. They had to allow not only for the phasing in of Accession State subsidies but also any additional reform. We can see that some of this additional reform is now confirmed. But figures have not yet been revised. Table 4 below shows rates of cut that would have been dictated just by maintaining a status quo and without any contingency. Assuming that 33.2% escapes a cut (a percentage that will have to be revised as it only applies to the EU-15) then we can anticipate cuts starting in 2008 and increasing to over 4% by 2012. In reality this is probably a minimum rather than a likely figure. But one imponderable is what happens to the budget for the remaining market support. This is affected by such factors as the deal with the WTO, international commodity prices, exchange rates etc and it cannot be easily predicted.

Table 4

LIKELY MINIMUM RATES OF FINANCIAL DISCIPLINE CUT BASED ON DEFICITS PROJECTED IN JANUARY 2003 BASED ON "STATUS QUO" SUPPORT REQUIREMENTS

	Pillar 1a		Exposed
	ceiling	Deficit	to cuts	Percentage
	mil euro	mil euro	mil euro	cut
2008	46,271	-517	30,873	-1.67%
2009	46,679	-788	31,182	-2.53%
2010	47,146	-1,111	31,494	-3.53%
2011	47,617	-1,253	31,808	-3.88%
2012	48,093	-1,355	32,126	-4.22%
2013	48,574	-1,470	32,447	-4.53%

Modulation

  12.  The government has been very coy about providing any forecast on the likely level of any additional modulation above that provided for as compulsory by the EU. The reason for this may be that the level may have to be greater than might otherwise have been the case because the contribution by the UK government under new "co-financing" arrangements is likely to be less than had previously been anticipated. So in effect what might previously have been required as a 10% flat rate modulation to raise the equivalent of 20% of pillar 1 funding now becomes 5% of EU compulsory modulation plus 9.2% of flat rate modulation. This is because the EU modulation is subject to a

5,000 cut free franchise which cuts payments by 15.4% and the UK is likely to only get back 80% of the funds contributed (the minimum). Both EU and UK modulation are assumed to be co-financed at 40% and not 50% as was previously the case.

  These effects are summarised in Table 5 below.

Table 5

THE EFFECT ON NEW MODULATION ARRANGEMENTS COMPARED WITH THE FUNDS GENERATED BY UK FLAT RATE MODULATION

Pre-MTR raising Pillar 2 finance by just using UK (flat rate) modulation Modulation amount	Cofinancing at 50%	Total
10%	10%	20%
Post MTR raising Pillar 2 finance by EU compulsory and UK flat rate modulation EU modulation gets reduced: Compulsory headline rate	Franchise loss of 15.4%	20% retained by EU	Net
5%	-0.77%	0.85%	3.38%
	Rate	Co-financing at 40%	Total
EU compulsory	3.38%	1.35%	4.73%
UK modulation	9.16%	6.11%	15.27%
Total			20.00%

  13.  So whilst the generation of EU compulsory modulated funds was expected to replace the need for higher rates of UK modulation in practice it looks like merely adding to it. The additional modulation is required to fund the Entry Level Agri-environment scheme which is an addition to the requirements already earmarked in the England Rural Development Plan. That plan already envisaged modulation at 4.5% by 2006. That would now have to be 5.4% to produce the same amount of money.

  Table 6 below shows the amount of money required to fund the Entry Level Scheme at the rates used in the pilot scheme—which are £30/ha in the lowland and £15/ha in the Less Favoured Area. The Curry Commission suggested that 10% modulation would be required to fund the ELS along with other agri-environment schemes. It looks as though this might now be needed in addition to the 5% EU compulsory modulation. The Entry Level Scheme will not be the only additional demand on Pillar 2 funding. There will also be an expanded menu of funds available to meet cross-compliance conditions on areas such as food quality assurance, traceability, animal welfare and environmental protection.

Table 6

ESTIMATES OF THE BASIC COST OF THE ENTRY LEVEL AGRI-ENVIRONMENT SCHEME AND THE IMPACT ON MODULATION REQUIREMENTS

	Lowland	LFA	Total	Modulation rate on pillar 1 ceiling required
Payment rate in £ per ha	£30	£15
Area in total in millions of hectares	7.5	1.5	9.1
Cost of 10% coverage in £ million	£22.6	£2.3	£24.9	0.85%
Cost of 20% coverage in £ million	£45.2	£4.6	£49.8	1.70%
Cost of 30% coverage in £ million	£67.8	£6.9	£74.7	2.54%
Cost of 40% coverage in £ million	£90.3	£9.3	£99.6	3.39%
Cost of 50% coverage in £ million	£112.9	£11.6	£124.5	4.24%
Cost of 60% coverage in £ million	£135.5	£13.9	£149.4	5.09%
Cost of 70% coverage in £ million	£158.1	£16.2	£174.3	5.94%
Assumptions: Ceiling is £1,762 million at an exchange rate of 68 pence per euro No franchise is applied i.e. the cut is flat rate Co-financing is at 40%

Combined effect of cuts on the flat rate payment

  14.  It is difficult to estimate the overall result of all these factors. But the modulation and financial discipline alone are likely to result in cuts of between 18 and 23% by the end of the decade (as shown in Table 7 below). A national reserve of up to 3% will be needed at least until the historic element of the subsidy has been phased out.

Table 7

ESTIMATES OF THE COMBINED EFFECT OF MODULATION AND FINANCIAL DISCIPLINE

		Modulation			Financial discipline			Total effect
	EU		UK	Minimum required		Based on degression			on SP over 5,000
							min		max
2005	3%		4.5%	0%		0%	7.5%		7.5%
2006	4%		6.0%	0%		0%	10.0%		10.0%
2007	5%		8.0%	0%		1.5%	13.0%		14.5%
2008	5%		10.0%	1.7%		4.8%	16.7%		19.8%
2009	5%		10.0%	2.5%		7.7%	17.5%		22.7%
2010	5%		10.0%	3.5%		8.3%	18.5%		23.3%
2011	5%		10.0%	3.9%		9.0%	18.9%		24.0%
2012	5%		10.0%	4.2%		9.8%	19.2%		24.8%

  If we assume a 23% cut by the end of the decade. Flat rate payments would be cut back from say £220/ha to £170/ha (£89/acre to £69/acre) in the non-SDA and say from £75/ha to £58/ha (£30/acre to £23/acre) in the SDA.

THE EFFECT OF REFORM OF THE SUGAR SECTOR

  15.  Another imponderable is the effect of sugar reform. This is being examined seriously at both EU and UK level at present. But the EU have pledged to remove tariffs on "everything but arms" by 2009 to countries which include the low cost sugar cane producers of the Caribbean. If this follows the pattern of previous reforms a lowering of tariffs and the intervention price would be accompanied by the creation of an area payment. This would almost certainly be decoupled and included in the Single Payment. The ceiling set by Brussels cannot be increased. We can see that it will in any event already need to be cut after 2008 as a result of the need for Financial Discipline. So a sugar area payment would have to be accommodated within the ceiling.

  The intervention price for refined white sugar stood in 2002 at about

646 per tonne well above the world price of

264/tonne. The world price is only 41% of the intervention price level. If farm gate prices came down to world prices beet would fall to about £13.50/tonne from the present A quota price of about £33/tonne. The three-year average yield of beet 2000 to 2002 in the UK was 51.75 tonnes per hectare. If fully compensated a £19.50 price drop would be worth just over £1,000/hectare in area aid payment.The sugar beet area is about 169,000 hectares and it is all in England. Based on full compensation an area payment would add about £169 million to direct payments relative to an estimated English ceiling of about £1,762 million before any adjustments of the apportionment of the ceiling with other regions of the UK. In reality the compensation is likely to be much less and full compensation is not always made for price cuts.

SET ASIDE

  16.  The spreading of payments under the hybrid will also require a spreading of the set aside requirement. It is not clear how this will be done. But one approach would be to spread it out across the whole area registered as eligible for Arable Area Aid payments. This is an area of 5.3 million hectares in the UK relative to an actual area for crops and set aside (the base area) of 3.8 million hectares. Assuming it was scaled back in proportion a set aside rate on the base area of 10% would become a rate of about 7% on the whole AAAP area.

WINNERS AND LOSERS IN THE UPLANDS

  17.  If we compare present subsidy rates with the NFU estimate of flat rate before any overall cuts in payment (which apply whether the Single Payment is paid on a historic or a flat rate basis) then we can establish the kind of stocking densities that mark the threshold between the winners and the losers. Table 8 below shows the effects.

Table 8

THRESHOLD STOCKING RATES FOR WINNERS AND LOSERS IN THE SDA

SDA flat rate payment (before any cuts)   £75.00 per hectare

Sheep annual premium per ewe  £13.54 per ewe

Suckler cow premium with extensification  £214.99 per cow

Plus £75/cow indirect from fattening subsidies  £289.99 per cow

Threshold stocking rate for sheep  5.54 per hectare  2.24 per acre

Threshold stocking rate for suckler cows based on SCP  0.35 per hectare  0.14 per acre

Threshold stocking rate for suckler cows plus indirect  0.26 per hectare  0.10 per acre

  The lower level of support for sheep relative to that for suckler cows means that beef farmers are more likely to lose out by the conversion to flat rate than sheep farmers in the uplands. This seems to be born out by survey figures. Although the figures in Table 9 below are for the UK rather than for just England they show the much higher rates of subsidy for sheep farms in the SDA relative to cattle farms. The sheep farms might find that they receive more subsidy on the flat rate basis the beef farms will almost certainly receive less.

Table 9

DIRECT SUBSIDIES THAT ARE TO BE DECOUPLED (ie excluding the HFA payments) ON FARMS IN THE SPECIALLY DISADVANTAGED AREA

SDA mixed sheep and cattle in the UK
	Payments per farm	£ per ha
Direct livestock subsidies	£19,248	£90.33
Direct crop subsidies	£158	£0.74
	£19,406	£91.1
SDA specialist sheep in the UK
	Payments per farm	£ per ha
Direct livestock subsidies	£13,578	£46.09
Direct crop subsidies	£20	£0.07
	£13,598	£46.2
SDA specialist beef in the UK
	Payments per farm	£ per ha
Direct livestock subsidies	£18,678	£168.64
Direct crop subsidies	£805	£7.27
	£19,483	£175.9

  There is very little cropping receiving arable area payment in the SDA area. But there is a little in Northumberland and the border with Wales. This will be hit very hard, as payment levels would fall from around £245/ha on the historic basis to only around £75/ha at a flat rate.

WINNERS AND LOSERS IN THE NON-SDA AREA

  18.  One group of likely winners are the farmers in the Disadvantaged Area because they have the lower stocking rates associated with hill farming but are not in the SDA. Table 10 below shows average results for the UK and indicates that they may not be major winners overall. But as with the SDA sheep farmers are likely to be winners and cattle farmers may gain little if anything from a conversion to flat rate.

Table 10

DIRECT PAYMENTS (excluding HFA) ON DISADVANTAGED AREA FARMS IN THE UK

	Payments per farm	£ per ha
Direct livestock subsidies	£13,379	£201.81
Direct crop subsidies	£267	£4.03
	£13,646	£205.8

  Table 11 below shows the thresholds for stocking rates and milk production (based on quota holding for Dairy Premiums). Some of these subsidies overlap and to a varying extent. So there is no fixed relationship between Dairy Premiums based on quota holding and Slaughter Premiums based on replacement of cull cows. Every fattening beef animal would get a Slaughter Premium but only male animals can get a Beef Special Premium and they can get this twice although claims are limited to 90 per farm. So it is impossible to be precise. But the figures in the table give an indication.

  Dairy farms are likely to lose out. The higher the output per hectare—a function of yield and stocking rate the more likely they are to lose. If they are maize or whole crop cereal growers then they will be more likely to lose out because they also receive arable area aid payments. Those who rear their own replacements lose out less than those with flying herds. Beef farmers are likely to have stocking rates above the threshold that makes them losers. Sheep farmers are likely to be winners as their stocking rates are almost certainly below the threshold. The more extensive their production the more likely they are to gain by a move to flat rate.

Table 11

THRESHOLD STOCKING RATES AND DAIRY PRODUCTION FOR WINNERS AND LOSERS BY MOVING TO FLAT RATE PAYMENT IN THE NON-SDA

Non-SDA flat rate payment (before any cuts)	£220.00 per hectare
Milk Dairy Premium and Additional Amount after 2007	2.49 pence per litre
Dairy payments threshold on an area basis	8,835 litres per ha	3,576 per acre
Slaughter premium on cull cows	£54.17 per head	£27.09 per ha
Dairy payments threshold with slaughter premium	7,748 litres per ha	3,135 per acre
Sheep annual premium per ewe	£13.54 per ewe
Threshold stocking rate for sheep	16.25 per hectare	6.58 per acre
Slaughter Premium plus Beef Special Premium	150.66 per head
Slaughter Premium on an area basis	1.46 per hectare	0.59 per acre
Suckler cow premium without extensification	£160.82 per cow
Plus £75/cow indirect from fattening subsidies	£235.82 per cow
Threshold stocking rate for suckler cows based on SCP	1.37 per hectare	0.55 per acre
Threshold stocking rate for suckler cows plus indirect	0.93 per hectare	0.38 per acre

THE TRADABILITY OF SINGLE PAYMENT ENTITLEMENT

  19.  In order for the entitlement to Single Payment to be worth trading it must have a value over and above the flat rate level of payment. The historic basis represents 90% of the value of payment at the outset. So one might assume that this would be enough to create at least in the short term a basis for trading. However there are a number of reasons why this is not likely to be significant enough to create either much value or much trade. These are:

1.  There will not be any land that is totally without Single Payment (the so called "naked acres") even though at first the amount will be smaller it will increase quite rapidly.

2.  Trade cannot start until 2006 because in order to trade entitlement you must exercise it first. So trading cannot effectively begin until 2006 by which time the historic element has already been reduced.

3.  After 2006 the influence of the historic element reduces rapidly so that after 2008 it comprises a minority element in the entitlement.

4.  The payments that might have been the highest per hectare on the historic basis were those from dairy farms. However dairy payments do not reach their full amount until 2007 and as after 2008 the historic element is less than half the entitlement the impact will be very much diluted and short lived.

  5.  Arable derived payments will be only slightly above the rate under a flat rate system.

6.  The overall level of payments and therefore any advantage to higher payment levels generated from historic claims will be cut back by modulation, the national envelope, possibly scalebacks and eventually also by financial discipline. Even in the early years when the historic element is worth more it will be reduced by EU and UK modulation of at least 8 or 9% and a national reserve requirement of say 3%.

  The net result is that without going into detailed calculations it is unlikely that there will be much trading and that if this does take place at all values will be low.

IMPACT ON RENTAL VALUES AND LANDLORD AND TENANT RELATIONS

  20.  It was predicted in earlier briefing papers that if a historic claims based system were adopted then landlords would be very vulnerable because tenants could sell their payments entitlement or move to another farm leaving the farm without any subsidy entitlement.

  If a Regional Average ie flat rate system were adopted then tenants would be vulnerable. This is because entitlement would in effect be all but attached to the land. All farmers would receive it and all the tenant could do would be to refuse to transfer it to the landlord. They could not sell it or exercise it on land that currently did not have any entitlement.

  So it follows that if there is little value attached to the entitlement and little trade in it then even at the start of the conversion period the effect will be similar to that of a flat rate basis as far as landlords and tenants are concerned.

  21.  On Farm Business Tenancies with little security of tenure or short duration then it can be anticipated that rents will have to reflect the fact that landlords have a fairly comfortable option of receiving flat rate payment without having to actively farm the land. They would have to respect cross compliance conditions and under go maintenance. But it is bound to create a floor price. This is little different from the current situation on arable land where rents are certainly influenced if not actually pegged by the arable area aid and set aside payment levels. But on livestock farms where rents are lower due to the fact that landlords would have to keep stock and possibly have a quota for entitlement to headage payments to receive subsidy one can anticipate rent rises as the flat rate element starts to deliver subsidies without any such obligations attached.

  On Agricultural Holdings Act tenancies the security of tenure and statutory rental arbitration formula offers less chance of landlords taking advantage of the situation. But it is going to be more difficult to decide what an appropriate level of income will be and it may be that arbitrators will have to take into account whether tenants have taken advantage of the Single Payment whilst opting to do very little farming as opposed to those that are still actively engaged in production. This certainly merits some careful thinking perhaps by the cross-industry group set up to look at tenancy issues (TRIG).

POTENTIAL IMPACT ON LAND PRICES

  22.  Land prices are clearly influenced by many more factors than just subsidy income or even for that matter farming income. But in as much as this does have a bearing on price the Single Payment moving to a flat rate payment basis is likely to have the following effects:

1.  Subsidy entitlement will attach to the land and not be a separate item detachable from it—as would have been the case with the historic tradable Single Farm Payment.

2.  Land that now has subsidy attached to it and/or has subsidy that is greater that it would otherwise have been will be worth more eg the winners and losers in both the SDA and the non-SDA including land in the Disadvantaged Area.

3.  There is at present a price differential between AAAP registered land and land without—this distinction in as much as it relates to subsidy potential alone will disappear.

4.  Non farming purchasers may be more attracted to buying land which comes with a subsidy entitlement regardless of production as opposed to only being able to access the subsidy through farming activities.

  But it is worth pointing out that the land market is small and is increasingly influenced by non-farming purchasers. This might have been exaggerated by the uncertainties created by the MTR but the market has been getting smaller and more influenced by 'lifestyle buyers' in any case. The Savills Agricultural Research Briefing No. 23, which has only recently been released, makes this point convincingly.

IMPLICATIONS OF ADOPTION OF DIFFERENT SYSTEMS IN OTHER PARTS OF THE UK

  23.  The implications of running different systems of entitlement in other parts of the UK are largely ones of allocation of the initial entitlement. Farmers who have land in both England and Wales or Scotland will stand to gain more by their historic claims in those countries than on the part of their farming that relates to England. The set aside rate is likely to be lower in England.

  But there is a particular worry with dairying. That is that English dairy farmers will not now eventually stand to gain much by holding quota other than giving them a right to sell milk whereas in other parts of the UK it will create a permanent entitlement to receive subsidy based on their quota holding in 2005. That might well prompt those who were holding off from quitting dairying in England with a reason to leave and there will be an added incentive for dairy farmers in other parts of the UK to acquire their quota even if they subsequently decide to quit. So we could see a very distorted market which according to quota broker Ian Potter has already begun to develop in quota disappearing from England to other parts of the UK. This clearly could have long term implications should it develop into a large-scale movement.

BALANCE SHEET ISSUES

  24.  Another aspect of the lack of value attached to the Single Payment entitlement is the impact on balance sheets—especially of tenant farmers. The value attached to beef and sheep quota will have disappeared. The value attached to milk quota after decoupling takes place (ie after 2005) will be very small because it relates to production only and in a market which will see substantial reductions in the support price.

  So value to quota entitlements will be taken away but is now unlikely to be replaced by much value to be attached to the Single Payment entitlement.

Dr James Jones Head of Farm Management at the Royal Agricultural College, Cirencester and an RICS Countryside Policy Panel member and stakeholder representative.

February 2004

---

---

Prepared 6 May 2004