Category: Policy & Business

The EU is looking into compulsory Capping and an overhaul of the current Greening measures in the next round of CAP reform.  This is according to a leaked draft of the proposals, due for formal publication on the 29^th November.  The EU Commission would like to see more distribution of support, and is looking into the idea of Capping direct payments in the range of €60,000 to €100,000 per beneficiary.  Labour would be taken into account to avoid any negative affects on jobs.  The draft, which does not include any policy options, also says payments should ‘focus on those who depend on farming for their living’, which suggests full-time farmers should take priority over part-time farmers.  How this will be judged in practice is hard to say and could be of concern to ‘part-time’ farmers, although the draft also refers to ‘enhanced support to smaller farmers’.  The leaked draft also looks towards greater simplification of the current Greening rules, giving Member States more control in delivering the schemes and reducing the administrative burden, especially with regards to compliance and encouraging young farmers into the sector.  The leaked paper suggests more of an evolution rather than revolution in EU farm policy.  Due to the Referendum, the CAP will no longer set the agricultural policies within the UK once we have left the EU, but as we have said previously, what our closest neighbours and most import export markets are doing will continue to be of considerable importance to us.

EU Auditors have asked the RPA to look at the issue of Active Farmer more closely – to undertake some investigation rather than simply take at face-value the self-declaration on the BPS form.  The RPA has therefore sent a letter and an Accountant’s certificate out to be completed.  Not every claimant will be asked for additional information; only those selected for inspection will have to complete the return.  In addition, the check is only relevant to those who received more than €5,000 from their BPS in 2016, but claimed less than 36 Ha (the area readmission route threshold) in 2017.

They are being asked (via an Accountants’ Certificate) whether they;

• Operated one of the five ‘negative list’ activities (airport, railways, water treatment, real estate, sports grounds), and if so
• Whether they meet the criteria for ‘readmission’ to the BPS through the two income-test routes

Those who receive the letter must get the certificate completed by their accountant and respond within 10 days to prevent any hold up in their payment.  Further details (plus a form) are available at https://www.gov.uk/government/publications/active-farmer-certificate

The AHDB has released its latest Horizon modelling report – ‘Brexit Scenarios: An Impact assessment’.  The report analyses the impact on Farm Business Income (FBI) of three scenarios on the main farming sectors found within the Farm Business Survey.

• Scenario 1: Evolution – No change to Pillar 1 or Pillar 2 payments, labour costs and regulatory requirements remain the same.  The UK is no longer a part of the EU’s Single Market therefore trade costs increase, but a Comprehensive Free Trade Agreement (FTA) is in place enabling tarriff-free trade between the UK and the EU.  We are not sure how realistic this scenario is.  We would be rather surprised if after Brexit, support is maintained at current levels in the long term and there is no change to labour costs if free movement ends.
• Scenario 2: Unilateral Liberalisation – Support payments reduced to 50% of current levels, and provided through Pillar 2, Rural Development payments.  Labour availability is restricted.  No trade deal between the UK and EU but import tariffs are reduced to 0% for agricultural products for EU and non-EU trade.  UK exports would be subject to WTO MFN (Most Favoured Nation) tariffs, so exports to the EU would operate under its Common External Tariffs.
• Scenario 3: Fortress UK– Support is cut to 25% of current levels and only via Rural Development payments.  Even tighter restrictions on labour availability.  World Trade Organisation (WTO) tariffs are applied to EU and non-EU trade.

Farm Business Income (FBI) (not surprisingly) sees the least change under Scenario 1 as only the additional costs of trade are reflected.  Dairy and pigs actually see an increase in FBI.  The worst affected sector is cereals as although the wheat price increases this is more than offset by decreases in barley and oilseed rape prices, which cannot be exported at a competitive price.

By contrast under the second scenario all sectors experience large changes.  All see a decrease in FBI except for pigs, with cereals, general cropping, both LFA and lowland beef & sheep and dairy businesses all experiencing large decreases.  Lowland beef and sheep FBI are only just positive.  The removal of Pillar 1 support is the biggest factor under this scenario.

Under the third scenario, FBI for cereals and LFA beef and sheep are negative, with lowland beef and sheep only just positive.  All farms except for dairy and pigs see a decrease in FBI.  The protection to domestic producers afforded by the use of WTO Most Favoured Nation (MFN) tariffs means dairy and in particular pigs see an increase to FBI.  Under scenario 3, general cropping and lowland beef and sheep FBI are actually higher than under the second scenario as the protection afforded by WTO MFN, for sectors which produce commodities for which the UK has a high import requirement.  This will see FBI protected by higher domestic prices,  which will more than offset the fall in Pillar 2 type payments.  For the beef and sheep sector, decreases in sheep prices should be offset to some extent by an increase in beef prices.

The report analyses in detail each sector and charts the breakdown of profitability into the Farm Business Income components in order to illustrate what has driven the change.  The full report can be found at https://ahdb.org.uk/brexit/documents/Horizon_BrexitScenarios_11oct17.pdf

The AHDB concludes that the most significant message (although perhaps not surprising) from the research is that high performing farms are in a better position to be able to deal with the changes associated with the different scenarios.  But it does send a message to farmers to look at their businesses now and see how they can improve output, reduce costs and move in to the ‘top-performing’ businesses to ensure they are fit to face any challenges or embrace opportunities in the future.

A report by the Natural Capital Committee (NCC) has said that public funding for agriculture should be closely targeted towards the delivery of public goods.  These should include, but not be limited to; environmental conservation and enhancement, animal welfare, biosecurity and rural development programmes to address poverty reduction and the transfer of knowledge.

The advice to DEFRA is included in a report which sets out the NCC’s advice on the development and implementation of the 25 year Environment Plan.  The report is critical of how, currently, the majority of public subsidies, in the form of direct income payments to farmers, is allocated on an area basis, so bigger farms get more support.  It states that 25% of farms capture nearly three-quarters of public subsidy.  This in turn means that a large proportion of public funding goes to some of the richest farms in the country.

The report says ‘Brexit could provide a once in a lifetime opportunity to provide a coherent approach to farming fisheries and environmental policy’.  It goes on to say that analysis by DEFRA has shown that environmental improvements provide ‘excellent value for money to the tax payer (with benefits often 3 times larger than costs’.  The report acknowledges that the Government has already committed to maintaining the overall level of funding to agriculture through to 2022 but it also says that analysis might show that a switch towards support for public goods might justify an increase rather than a reduction in overall funding.  Although it’s just one more report, it’s probably important because the chair of the Committee, environmental economist Deiter Helm, seems to have Michael Gove’s ear.  The full report can be found at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/650314/ncc-advice-on-25-year-environment-plan171009.pdf

The EU and UK have reached an understanding on how existing Tariff Rate Quotas (TRQs) should be treated after Brexit.  As outlined last month, TRQs allow set quantities of agricultural goods to be imported at low or zero tariff rates.  It is reported that the split of existing EU-28 amounts between the UK and the rest of the EU will be based on their respective average imports during a three-year period (likely to be between 2013-2016).  This would leave the UK with a greater share of New Zealand lamb TRQ, for example, as we have been the traditional destination for these imports.  The agreement has yet to be ratified by the WTO.

The NFU has set out a timetable for the transition to a new ‘Domestic Agricultural Policy’ (DAP).  This foresees a three-stage approach;

• 2019 and 2020 – Phase 1 – existing CAP schemes continue with a few minor changes to improve their operation.  Pilot schemes should be launched to help develop the DAP
• 2021 and 2022 – Phase 2 – continuation of CAP legacy schemes with further changes.  A comprehensive impact assessment sector-by-sector on the trading environment post-Brexit to inform the future level of support.  Continuation of pilot schemes plus review and assessment
• 2023 onwards – Phase 3 – the introduction of a ‘bold and ambitious’ new DAP

The continuation of ‘CAP legacy schemes’ does not just refer to the BPS, but would cover the CSS and RDPE grant funding as well.  The timing of the move from phase 2 to phase 3 should remain flexible depending on the findings of the phase 2 impact assessment.  The NFU set out its framework for support in March (see https://www.nfuonline.com/assets/94690) centred around three themes of productivity & resilience, environment, and volatility mitigation.  More detail within each of these areas is expected shortly.

It is interesting that the NFU carefully refers to a ‘domestic’ agricultural policy, rather than a British, UK or English one – neatly side-stepping the issues around how devolved farm support is going to be.  Whilst ‘phase 1’ neatly fits in with Teresa May’s proposed transition period, retaining existing support arrangements in place until 2023 (or longer) seems as much about keeping things as they are, rather than taking a considered approach.  It might be thought that Michael Gove will be keener to press-on with new arrangements for the UK. 

The Modern Limited Duration Tenancy (MDLT) will replace the Limited Duration Tenancy (LDT) as from 30^th November 2017.  The MLDT was created by the Land Reform (Scotland) Act 2016 (see article /generalpolicy/land-reform-scotland/).  Like its predecessor, the MLDT must be for a minimum of 10 years, with provisions for a 5 year break clause for new entrants.  The main difference under the new MDLT is greater freedom of contract to negotiate terms for fixed equipment and rent.  LDTs that existed before 30^th November can continue, although there are provisions to allow these to be converted into to MLDTs by agreement between both parties, prior to 30^th November 2017.  No new LDTs can be created after the end of November.

The deadline for applications to the Scottish Uplands Sheep Support Scheme (SUSSS) has been extended to the 30^th November.  Originally, due to be 16^th October the Scottish Government has made the extension due to the poor weather hampering the gathering of flocks.

Payments under the 2017 Basic Payment Scheme will be converted at a rate of €1 = 89.47p (subject to confirmation by DEFRA).  This is 5% higher than last years’ conversion rate of 85.228p and 22% better than the rate seen two years ago.  As the table below shows, it is also the best figure since 2009.

Although this is one more piece of information, it is still not quite possible to work out exact payments for 2017.   The RPA and devolved administrations still have to calculate entitlement values for 2017.  These can change on a yearly basis, depending on the number of entitlements claimed.  In addition, the final rate of Financial Discipline needsto be set at the EU level.

The conversion rate for the 2017 BPS is likely to be around 5% better than 2016, and the most favourable since 2009.  Whilst this is good news, it could have been even better.  Most readers will be aware that the average £/€ exchange rate during September sets the rate at which the BPS is converted in Sterling for that year.  At the start of this September, the weakness of the Pound saw it down to €1 = 92p (or £1 = €1.09).  A weaker Pound means higher BPS payments in Sterling terms, as each Euro buys more Pounds.  During the month, however, the Bank of England indicated that it would soon be raising UK Base Rates.  This saw Sterling firm to around 88p.  With a few days of September to go, it looks likely the average will be around €1 = 89.5p (compared to 85.228p for 2016).  We will provide the final figure next month.