Agricultural Bulletin A Briefing For Farmers And Land Agents

Given the recent demand for dairy produce, we realise that Tesco’s decision to offer an increased price to farmers in April wasn’t without foresight. In this edition, we also discuss recent EU decisions regarding set-aside and the fruit and vegetable sector.

Due to increased demand for milk powder and butter, the fortunes of the dairy sector appear to have taken a sharp turn for the better.

In April, the outlook for the milk producer was grim: milk prices remained low with no indication of improvement, and feed costs rose sharply as cereal prices exploded on the back of tight global supplies.

But, since Easter, due to stock tonnages of dried milk powder and butter running low, the global demand for dairy produce has suddenly picked up.

This bull market for dairy products is reflected by the European Union (EU) recently removing all dairy export subsidies. Due to the new high world prices, European milk products are able to compete in global markets without the EU having to subsidise the price. World prices have effectively risen to match protected internal European prices. It is the first time in 40 years that such refunds have fallen to zero.

Back in April, Tesco rolled out a direct supply milk contract to farmers offering a price rise of approximately 5 pence per litre (ppl). We commented on this seemingly unbelievable price in such a bearish market, but now this 22ppl base price seems less remarkable; Tesco was clearly keeping a keen eye on the global stock position.

Dairy farmers are once again optimistic about business and expect farmgate prices to rise from sub-19ppl to 22-24ppl by the end of the milk year. This translates into a potential price rise of 33%, which is great news considering the current price (even though it will still be a penny below the 1996 average of 25ppl). However, the positive effects of this boom may take a while to trickle down to farmers.

Recent price hikes are being led by increased demand for butter and skimmed milk powder – the two components that make up the Actual Milk Price Equivalent. The UK has thus entered an unusual situation where the demand for milk to produce basic commodities is greater than the demand for ‘added value’ liquid and premium markets.

Unfortunately, dairies aren’t always able to make an immediate switch from one process to another, so may not be able to tap into this price opportunity straight away. But, as some of the processing gradually switches to the higher-valued milk powder and butter, the supply of milk for cheeses, particularly the ‘value’ cheddars, will decrease, resulting in an increased milk price for these contracts.

Furthermore, a number of farmers and dairies have booked fixed-price contracts, which means that the price rise will filter through to farmers at varying speeds over a period of time.

Although the headline milk price is looking much better, the prospects for some farmers are still uncertain. As a result of the wet weather, farms have been forced to take their cows inside and put them on winter rations which has added significantly to cost. If the silage turns out to be particularly poor, which is likely, the additional feed requirement will further swallow up the price rise.

Nevertheless, some UK dairies have already offered farmers incentives to increase output and, with a change in fortunes beckoning for the entire industry, the steady fall in milk production that the UK has experienced over the past decade might be coming to an end.

Set-Aside For 2008 Harvest... Set Aside

With set-aside not scheduled for discussion until November, the EU Commission’s recent announcement to fix it at 0% for 2008 came quite unexpectedly.

In a surprise move, EU farm ministers agreed at their July council meeting to fix compulsory set-aside at 0% for the 2008 growing season.

While the decision is not yet set in law, the Commission expects to confirm the zero rate by the end of August so that farmers can start planting additional crops this autumn. However, this is a one-off derogation and does not abolish set-aside permanently.

The decision was driven by low intervention stocks, the uncertainty of this season’s harvest due to the disruptive weather, and the livestock sector’s high prices. The Commission estimates that the move should increase EU cereal production by between 10m and 17m tonnes for the 2008 harvest.

There was little opposition to this move, with only Slovakia raising a slight objection due to the environmental benefits of set-aside. The Commission is well aware of these benefits and is in the process of trying to quantify them in time for the November Health Check, when plans to abolish set-aside permanently will be discussed.

The question is: will compulsory set-aside be reinstated in 2009 or is this the end of the mechanism in its entirety? The fact that the Commission has set it at 0% rather than abolish it suggests that farmers are meant to recognise that it could return, and should therefore be discouraged from ploughing out valuable habitats. However, there is an expectation that it could be permanently removed as early as 2009 and definitely by 2012 at the latest.

There is little doubt that whatever the outcome of set-aside under the Health Check, farmers will be encouraged to keep valuable habitats, presumably with additional agri-environmental schemes. Of course, under the existing Single Payment regime, land does not have to be cropped or grazed to trigger entitlements. It can be left in ‘arable fallow’ for one year or in longer-term fallow with a grass or other cover, both of which come under the Good Agricultural and Environmental Conditions (GAEC) 12 rules (this used to be termed voluntary set-aside). In the UK, a considerable area of poor land and some in environmental strips (Local Environmental Risk Assessement for Pesticides or other) is expected to remain in GAEC 12 in 2008.

Assuming that the 0% set-aside goes ahead, farmers will continue to have set-aside entitlements (at least for the 2008 year). But following the 0% ruling, we expect farmers will be able to activate their set-aside entitlements for payment in 2008 with land that is either in production or fallow.

Ripening The Fruit And Vegetable Sector

Proposed reforms for the fruit and vegetable sector, to which the EU Commission has now agreed, will mainly affect the UK’s SPS and POs.

To bring the fruit and vegetable sector in line with the rest of the improved Common Agricultural Policy (CAP), EU agricultural ministers have agreed to a number of wide-ranging reforms.

The primary objective of these changes is to improve the sector’s competitiveness and market orientation for sustainable production. The reforms should herald positive change for most UK growers affected by the rules, specifically in terms of the Single Payment Scheme (SPS) and Producer Organisations (POs).

The fruit and vegetable sector is already covered by the national Single Payment, but because this hasn’t been a compulsory inclusion for all Member States, the land has had to be matched against special soft fruit, vegetables and potatoes (fvp) authorised entitlements.

The reforms do away with this rule, as fvp production will be eligible in all SPS models and current fvp-authorised entitlements will be converted into normal ones.

Under the reforms, land covered by orchards – which was previously outside the SPS – will now qualify for the Single Payment.

However, with the UK not expected to receive additional funding for this, any new entitlements will need to be financed from existing funds. According to the June Agricultural Census, England has approximately 21,000 hectares of land under orchard, so there is unlikely to be enough money in the National Reserve to fully fund regional payments on this. Therefore, entitlements in England lowland could face a downwards adjustment.

Issues such as when orchard land will be eligible and reference periods are still subject to English ministerial decisions. Although it is likely that this rule change will be introduced for the 2008 SPS, we are still awaiting confirmation and expect the Department for Environment, Food and Rural Affairs to make an announcement shortly.

Other than Single Payment adjustments, the main effect of the reforms in the UK will be on the way POs operate. The aim is to strengthen POs in order to give producers more power in the marketplace.

Rules will be simplified and POs will be given more flexibility on how operation programmes are run. These programmes will now have to include some environmental measures comprising at least 10% of the budget.

Growers will be able to be members of more than one PO and cross-border POs will be allowed. Funding will be fixed at 4.1% of the value of marked produce, but this will increase to 4.6% if a PO operates a crisis management or prevention system.

With the emptying of stores masking and influencing natural market forces, a shortage of grain production has resulted in an extreme hike in wheat prices.

World grain prices have been in a bear market for the past 15 years. Values fell from the highs of the mid 1990s as consumers easily procured sufficient grain to meet their requirements.

However, since 1999, some of this supply was met not from production, but from emptying stores (Figure 1). Stored stock levels have steadily decreased as the world has become more efficient at moving bulky commodities from places of surplus to places of deficit in short time periods. This has allowed importers to hold less grain stocks and still ensure that buyers are supplied on time. Furthermore, throughout the 1990s and first five years of this decade, a relatively peaceful world gave governments a sense of national security, resulting in a drop in government-held stocks.

In a perfect market, prices fall in times of surplus, less is produced and prices rise again. But when this effect is masked by emptied stocks, the market remains capable of supplying low prices, even less is produced, and the cycle continues.

Over the past decade, as demand was met in part through stored stock, land has come out of cereal production in several of the major grain-growing regions. For example, the Black Sea region now crops only twothirds the cereal area it did 25 years ago, a drop of 40m hectares. Meanwhile, China’s 2007/08 cereal area is 12.5m hectares less than its peak in the late 1970s.

But, in the last 12 months, grain availability has tightened and store levels have fallen to a point where they can no longer supply a production shortfall. The perfect market system has come into play again, resulting in a sudden, severe, price hike. Prices are now higher than they have been for over 11 years – not just in the UK, or Europe, but globally. And so the question begs, is this reversible?

In short, yes. From just the two regions mentioned we have already identified at least 50m hectares of potential cropable land. A low yield of two tonnes per hectare would provide sufficient grain to replenish global stocks by more than the total drawdown over the past five years.

Desertification has ruined a lot of this land so not all of it could be cropped again, and the rising demand from the growing population and for biofuels would soon devour the extra stocks. But if this analysis was undertaken throughout all grain growing regions, the potential would be staggering.

The four devolved governments have announced their VM rates for 2007 and are all lower than forecast.

The UK’s devolved regions have announced their voluntary modulation (VM) rates. The Welsh, surprisingly, have come in with the lowest rates and, in a further twist, the levels of deductions that were previously fixed in Northern Ireland have been reduced by the new power-sharing executive.

All four administrations have opted for lower rates than expected. This will please farmers, but will reduce additional Government funding for rural areas via the match funding of modulation.

These VM rates are in addition to the 5% compulsory modulation imposed on all EU farmers. EU modulation has a €5,000 exemption, and deductions are not levied below this level. However, all the UK regions have chosen to impose their VM rate across the whole Single Payment.

The announcement clears up some uncertainty about future deductions from the Standard of Good Farming Practice, and should make entitlements easier to value.

However, future income streams remain uncertain. Financial Discipline will take a further percentage from Single Payments if the CAP budget is overspent. Decisions on these cuts will be taken on a year-byyear basis so can’t be accurately predicted. Such deductions are unlikely for the 2007 year, although levels of 5-6% may not be unrealistic by 2012. Furthermore, currency fluctuations must also be added into the equation, unless farmers opt to take their SPS in euros.

The Government plans to have threequarters of the value of 2007’s English Single Payments distributed by the end of March 2008 and 90% by the end of May.

These are the targets that junior minister Jeff Rooker has set the Rural Payments Agency based on the assumption that no interim payments will be made for the 2007 year.

This decision will be revisited in the autumn – presumably having progessed the processing of 2007 claims and reviewing more than 20,000 doubtful allocations from 2005.

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.