UK: Agricultural Bulletin - A Briefing For Farmers And Land Agents – Winter 2011/12

Last Updated: 15 November 2011
Article by Smith & Williamson

COMMON AGRICULTURAL POLICY REFORM - A WORK IN PROGRESS

On 12 October the EU Commission released legal proposals for the Common Agricultural Policy (CAP) post-2013. Negotiations will now continue through 2012 and into 2013. The proposals are for the new scheme to commence on 1 January 2014, although if this timetable slips it could conceivably be 2015 before the reforms are in place.

Since the first 'communication' was released by the Commission a year ago there have been some amendments to the plans. It also appears that cuts in the next EU budget for agriculture do not look as bad as once feared; with spending on agriculture falling from just over 40% of the budget to about 36%. Although it must be remembered these are only proposals and may change. The same can be said about the CAP plans and past experience shows us a lot can shift during negotiations. Careful consideration must be given if businesses are thinking about making decisions based on these proposals.

Looking at the reforms, the familiar two pillars will be retained, with direct payments making up pillar 1 and rural development in pillar 2, although 30% of direct payments will be made up of a compulsory 'greening' element. The table shows how the money available for direct payments, the national ceiling (NC), can be split up by member states. The Basic Payment Scheme (BPS) and the 'greening' measures will be the two main elements of any new scheme.

Basic Payment Scheme

A new BPS will replace the existing SPS. It will be largely familiar with entitlements activated on a yearly basis by eligible land.

Existing entitlements will be cancelled and an application for new entitlements will be based on the eligible area as made by 15 May of the first year of the new scheme (2014).

Entitlements will only be granted to claimants who activated at least one SPS entitlement in 2011.

The 'historic' payment method, as still used in Scotland and Wales, will be phased out over five years, but only 60% of the payment being based on 'historic' entitlements will be allowed in the first year. Farmers in Scotland and Wales with high-value entitlements may experience a sudden fall in their payments.

Environmental elements

Under the proposals, 30% of direct payments will be conditional on producers undertaking the following 'greening' measures.

  • Where the arable area exceeds 3ha, claimants will need to grow three different crops, each crop to be between 5% and 70% of the total cropped area.
  • Claimants must maintain the area of permanent grassland on the holding at 95% of the level of the first year of the scheme.
  • 7% of the holding must be maintained as an ecological focus area (e.g. fallow, landscape features, buffer strips).
  • Organic farmers will be exempt from these measures.

Other issues

Farmers in areas with natural constraints (less favoured areas) may have their payments topped up by 5%. A further 5-10% of the NC may be used by member states for coupled (headage) support payments. These are unlikely to be used in England, but could be seen in Scotland and Wales. Member states will be required to set up a Small Farmers Scheme; up to 10% of the NC can be used for this. A further 2% can be allocated to young farmers (under 40 years' old) commencing their agricultural activity and up to 3% will be used to set up a national reserve.

Capping

This would limit the amount of BPS paid to larger claimants. The proposals would introduce a system of bands (similar to income tax) shown in the table below.

Up to €150,000 Full payment €150,001 - €200,000 20% reduction €200,001 - €250,000 40% reduction €250,001 - €300,000 70% reduction Over €300,001 100% reduction The environmental element is exempt from capping, which is calculated after the previous year's salaried labour costs have been deducted. After taking these factors into account, the effects of capping are expected to be quite limited even for some of the largest farms, although more detail is required regarding how salaried labour costs are to be calculated.

Active farmers

The proposals state that direct aid will only be paid to 'active farmers'. These are defined as those whose direct payments are less than 5% of their total receipts from all non-agricultural activities.

Rural Development Regulation

The current Rural Development Regulation (pillar 2) ends at the end of 2013. Each of the devolved regions will have to draw up new rural development programmes for the period 2014 to 2020 and this means there is scope for profound changes. The current three axes will end and will be replaced by six 'priorities' (Leader will be retained). The priorities will contribute to achieving:

  • the competitiveness of agriculture
  • the sustainable management of natural resources, and climate action
  • a balanced territorial development of rural areas.

The existing range of measures will broadly continue, but there may be a shift of focus towards schemes to combat climate change. There will also be specific measures for organic farmers and farmers who carry out an agricultural activity in mountain areas and other areas 'facing natural or other specific constraints' (member states are required to designate such areas).

Footnotes

1 All funding not used within other elements defaults to be used within the Basic Payment Scheme (BPS). Within the BPS there is also a national reserve that can comprise up to 3% of the NC.

2 Member states will have to open mandatory schemes to applicants. Spending is then dependent on how many apply. For the purposes of calculating the residual funding for the BPS in the table, 1% is assumed for both schemes.

3 Up to 10% of the NC can be used for coupled payments where they have been used widely by the member state under the existing Single Payment Scheme (SPS).

FULL STEAM AHEAD

The latest statistics on land prices show the market is not running out of steam.

According to the Rural Institution of Chartered Surveyors' (RICS) Rural Land Market Survey, farmland prices reached an all-time high in the first half of 2011.

The 'opinion-based' measure saw arable land prices rise to £6,681 per acre, compared to £6,368 per acre in the second half of 2010 (a 5% increase). Pastureland values rose by 4% to £5,549 per acre.

Farmland prices rose in all regions of Great Britain, except for the North West and Wales, where prices fell by 1% and 2% respectively. However, these regions are still the two most expensive. The cheapest farmland is in Scotland at £3,813 per acre.

Full steam ahead The increases have been on the back of good demand from commercial farmers keen to expand due to strong commodity prices. At the same time, demand for residential land (lifestyle purchasers) has reduced in tandem with the national housing market.

Looking ahead, surveyors expect the current trend to continue over the next 12 months with high interest from commercial farmers but less so from the residential sector. However, with farmland availability actually increasing for the first time since the first half of 2008, the pace of price increases may slow.

The full survey can be found on the RICS website at www.rics.org

Forecasts for UK red meat production have been released by the Agriculture and Horticulture Development Board (AHDB). All three sectors are expected to have an increase in production this year compared to 2010. Production in both the sheep meat and beef and veal sectors is forecast to decrease in 2012 while pig meat production is anticipated to continue its increase.

A MEATY ISSUE

Beef and veal production

Beef slaughterings have been high in the first half of 2011. An unexpected rise in both beef cows and heifers presented to market in the first half has contributed to this, possibly due to high input costs and a strong cull cow trade. Prime cattle slaughterings have also been higher, but this is not expected to continue through the second half of the year. According to the British Cattle Movement Service there have been less dairy bull registrations over the past year. The increase in commodity prices has made bull beef less attractive and this is expected to reduce prime beef supplies throughout the second half of 2011. Prime beef supplies throughout the whole year are expected to be up on 2010 but only marginally, with the cull trade contributing the majority to the overall increase.

The increased culling in the beef herd is expected to reverse the rise in breeding cow numbers recorded in the 2010 June survey and numbers are expected to fall back to those seen in June 2009. The decline in dairy herd breeding cow numbers is forecast to stabilise (unless milk prices reduce significantly).

Production in 2012 is expected to fall quite considerably (4%). Carcass weights are expected to be lower as producers finish cattle quicker due to an increase in feed costs and, in some cases, limited winter forage. In addition to this, cull cow and dairy bull slaughterings are forecast to be lower.

Sheep meat production

The good spring weather has led to the national lamb crop forecast being increased by EBLEX. Production for 2011 is expected to be 2% more than in 2010. But even though domestic consumption is expected to continue its decline due to the relatively high price of lamb and the economic pressures on UK households, global factors are expected to maintain strong demand for UK sheep meat.

Imports from New Zealand, where production has been lower from January to May, were nearly 20% down on the year. Overall import levels are forecast to reduce by 11.5% compared to 2010. The converse can be seen for exports. Lower supplies from both New Zealand and Ireland will mean main European import markets will be available for UK exports. This situation is expected to continue into 2012, but there are indications that the New Zealand flock is recovering resulting in increased supplies for both the UK and European markets, placing pressure on demand for UK sheep meat.

Pig meat production

Pig slaughterings during the first half of the year have been higher than forecast. Sow productivity improved following the cold spell before Christmas and production for the first half of 2011 is up by 7% compared to the previous year's levels. This increased production is forecast to continue through the second half of the year with overall output anticipated to rise by about 6%. Slaughterings for the year are forecast to reach 9.9 million head – the largest since 2002 – with overall production anticipated to increase by 6%.

UK slaughterings and production is only forecast to increase marginally in 2012 following an anticipated reduction in the sow breeding herd.

MILK MONEY

A look at the profitability and prospects for a typical UK dairy business.

The table below shows Andersons' 'Friesian Farm' model. Milk price increases look like restoring profitability for a typical dairy business in the current year. However cost rises are soaking up a large part of higher revenue, so overall profitability remains marginal. The prospects for 2012/13 look better, but this relies on the market delivering further price increases, and costs abating.

Friesian Farm produces 1.125 million litres from 150 cows and their replacements. It has year-round calving and is on liquid contract. It is 100ha (of which 40ha are rented on a farm business tenancy). The proprietor provides labour along with one full time worker (plus casual/relief). The table shows the farm's performance for the previous two milk years, based on actual returns and costs. An estimate is given for the current 2011/12 year, and a forecast budget for 2012/13.

There have been significant milk price rises over the last year. The Andersons' model also assumes that further increases should be forthcoming during the remainder of the year. This will partly be driven by the whole UK milk market belatedly catching up with booming global commodity prices. It is also envisaged that payments under standard liquid milk contracts (which Friesian Farm is on) will increase to reinstate the customary premium above milk going for commodity uses. Thanks to these milk price rises, the average price for the current production year is estimated to be almost three pence per litre higher. Unfortunately, this will not translate fully into higher profits.

Variable costs increased compared to last year, largely driven by rises in feed and fertiliser prices. Often overlooked is inflation of 'other' variable costs, such as straw, vets and medication, seeds and dairy consumables. In terms of overheads, fuel and electricity contribute to the cost increases. The farm has also had to replace its main tractor this year – adding to machinery depreciation. Wage costs also continue to rise as the farm has to pay a competitive rate for increasingly scarce herdsmen.

The net effect is a positive margin from production – but only at very low levels. Adding in the SPS payment and Entry Level Scheme this provides a return of three pence per litre (it should be noted that the farmer's drawings are taken out before the margin figures). Based on the capital employed in this business (including the owned property), the return on capital is around 2.5%. This is obviously too low for long-term sustainability, and highlights the need for better returns from the market. Looking to the future, it is believed milk prices may increase a little more for 2012/13. Whether this happens is highly dependent on how the pound moves against both the dollar and euro, and currencies are presently very unstable. However, the fundamentals of global dairy commodity markets seem reasonable for the immediate future. There is some hope that costs may abate for the next milk year, albeit marginally. Fuel and fertiliser values may not reduce much, but feed costs should fall due to weakening cereals markets.

However, any reduction in raw material costs are unlikely to have a huge effect on winter 2011/12 feed costs, so an improvement for 2012/13 is perhaps more realistic. Overall, profitability is predicted to increase compared to the current year. However, the majority of the business surplus continues to come from support payments.

ARE YOU READY TO TAKE THE STAGE?

With new employer duties coming into effect soon, is your business prepared for workplace pension reform?

The Pensions Regulator's detailed guidance on workplace pensions reform has now been published. It provides clarification of how the working population is classified under the new legislation, the new employer duties and guidance on the steps an employer can take to prepare.

New employer duties and safeguards come into effect from the 1 October 2012. Each employer will be allocated a date from when these new duties will apply, known as their 'staging date'.

The staging date is dependent on the number of people in the employer's largest pay as you earn (PAYE) scheme as at 1 April 2012. If you have more than one PAYE scheme then the staging date will be that of the largest employer. For employers with fewer than 500 employees the staging dates commence from 1 January 2014 through to 1 September 2016 as the number of employees reduce. It is possible to bring forward your staging date, or defer it by up to three months.

The Pensions Regulator will contact each employer 12 months prior to the staging date to inform it of its duty to comply with the auto-enrolment laws.

Careful consideration needs to be made as to whether any existing pension arrangement meets the minimum requirements, in particular whether all eligible workers can enter the existing arrangement, and whether this has an impact on the structure and pricing of the current scheme. If no existing arrangement is in place one will have to be made available from the employer's elected staging date.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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