UK: Agricultural Bulletin A Briefing For Farmers And Land Agents

It’s Been A Tough Autumn
Last Updated: 19 December 2007
Article by Susan Shaw

We look at how UK farmers areresponding to theplague of diseases affecting their livestock and the changing fortunes of the dairy industry. We also examine the EU Commission’s proposed capping system.

DOUBLE DISEASE BLOW FOR UK FARMERS

Foot-And-Mouth And Bluetongue

The outbreak of FMD and bluetongue has had severe implications for UK livestock farmers. Defra responded quickly to the spate of FMD cases, but the longterm outlook for bluetongue is dismal.

UK livestock farmers were badly hit by two serious diseases this autumn. At the start of August, foot-and-mouth disease (FMD) broke out in Surrey*. Fortunately, FMD is relatively easy to control if action is swift and decisive. The outbreak was restricted to a single county and markets are returning to normal. However, the second livestock disease to materialise this autumn – bluetongue – may have long-term consequences.

FMD tramples Surrey

At the first sign of FMD in August the Department for Environment, Food and Rural Affairs (Defra) acted promptly and applied the usual restrictions. The situation was brought under control quickly and most of the restrictions were lifted within a month. In mid-September, a further case of FMD was confirmed, followed by a number of other cases, all clustered in Surrey.

The size of the outbreak and number of animals slaughtered was tiny compared to the 2001 FMD epidemic. Nevertheless, it has had a disproportionate effect on the UK livestock industry and caused a great deal of financial hardship. The timing couldn’t have been worse. Lamb prices collapsed as the ban on exports resulted in a glut of lambs (particularly light lambs).

Furthermore, not only is autumn the period when animals are moved down from the hills to winter pastures, it is also the peak store sales season; movement restrictions disrupted these activities.

Fortunately, the UK agricultural departments have responded to the financial problem. Defra has announced a package worth a reported £12.5m (the main component consists of extra Hill Farm Allowance payments). Meanwhile, the Scottish Government has introduced a welfare scheme to cull lambs for which there is no market.

It appears that the source of infection in August was a leaking pipe at the Pirbright facility. Coupled with heavy rain and building work, the virus was able to escape. However, it is not clear which of the two organisations at Pirbright – Merial or the Institute of Animal Health – was ultimately responsible for the failure of bio-security.

Bluetongue blows in

On 22 September, a Highland cow near Ipswich, Suffolk, was found to have the bluetongue virus. This was the first reported case in the UK. Defra hoped that it would be an isolated incident. Instead, it had to announce that the disease had established itself in the area.

Blame the midges

According to Defra, a species of biting midges, blown across from the continent, carried the virus to Britain. It is now circulating between the local midge population and ruminants.

Bluetongue is a non-contagious disease. It is common in sheep in southern Europe, but flocks affected in northern Europe have had mortality rates of around 40%. Even where animals do not die, the disease reduces productivity. Thus, the economic effect is potentially disastrous for the UK, which has Europe’s largest sheep flock.

Dealing with the problem

With the bluetongue outbreak confirmed, exports of live animals have been banned and the movement of animals outside the defined ‘bluetongue protection zone’ have been restricted. An automatic culling of infected stock will not halt the spread of the disease in the same way that it does for FMD, because the virus is not spread from animal to animal. Thus, short-term prevention efforts focus on the carrier population, midges – which is obviously difficult.

A vaccine is likely to be the only way of controlling the disease in the long term. Efforts are well underway to produce an effective vaccine for the strain of the disease circulating in the UK. But this is not expected to be available until next year at the earliest. The best time to undertake a vaccination programme is in the spring, before the virus-carrying midge population becomes too active (it peaks during late summer and in the autumn). There are concerns over whether a vaccine will be ready to this timescale, and if there will be enough to immunise every animal in northern Europe.

The impact on farmers

The bluetongue outbreak has dealt UK livestock farmers a bitter blow. Any farm that has been infected will face the prospect of losing stock to the disease. However, with no automatic culling (and thus compensation), the financial consequences may be worse than for those affected by FMD. Most farm insurance policies will not cover such losses.

Farmers whose animals have not caught the disease will still be affected. Only a limited number of abattoirs are processing finished cattle and sheep within the protection zone; no livestock markets are operating. Restricted movements outside the zone mean that finishers-off are unable to access the abattoirs they usually supply. Furthermore, the uncertainty surrounding the outbreak will no doubt have an effect on future store cattle prices and breeding sheep values throughout England and Wales. Any breeding stock producers within the protection zone will not be able to market their stock in the rest of the UK.

The best hope to wipe out the disease is a long hard winter. But this is the last thing many farmers want considering the quantity and quality of forage and bedding available, and the cost of buying feed. However, recent winters have not been severe enough to stop the disease in continental Europe and there is a chance that this disease is here to stay – in the short term at least.

And, like biblical plagues, the diseases keep coming

Avian flu returned to the UK in November. Defra believes migrating wildfowl may have carried the infection.

This will impact on the poultry sector and not on those affected by FMD and bluetongue. But the poultry sector was already struggling with its own problems, such as higher costs and static prices.

Hopefully, this outbreak will be contained in the Suffolk/Norfolk area where it began.

THE UK DAIRY INDUSTRY

Factors Likely To Affect Farmers’ Fortunes

The recent increase in milk prices and the 0% set-aside come as good news for farmers. But the prospect of increased legislation and the phasing out of quotas suggests that they need to focus on controlling internal factors to ensure sustainability.

In the August edition of Agricultural Bulletin, we reported on the dairy industry’s sudden change in fortune. UK milk prices rose by more than anyone was expecting. Strong demand, coupled with reduced output and low stocks, drove prices upwards.

However, producers have yet to benefit as the booming commodity and spot prices have been slow to translate into improved farm gate returns. This is mainly because many milk buyers are locked into long-term supply contracts. With a large proportion of the UK milk supply effectively committed, the spot market is quite ‘thin’ and processors looking to secure supplies could create a price surge.

Favourable forecast for farm gate prices

Of major importance to most producers is: what will happen when existing contracts expire? There are encouraging signs that both processors and retailers are acknowledging the market realities and looking at solid price increases. It is thus feasible that, by the new year, the average farm gate price will be 25 pence per litre (ppl) and, on a rolling 12-month basis, the price for the 2007/2008 milk year will be 21.5ppl. Looking forward to 2008/2009, even though spot prices may fall from recent headline levels, maintaining a rolling average price of around 25ppl seems possible.

Health Check

The forthcoming Common Agricultural Policy (CAP) Health Check may signal further cuts in European Union (EU) support prices for milk products. But we hope this will be academic as actual market prices remain strong.

The review will almost certainly confirm the end of milk quotas in 2015. Over the past years, UK producers have had a taste of things to come as quota values have fallen to inconsequential levels. But many other EU nations still have strong quota markets. It seems unlikely that cross-border trading will play a part in the phasing out of production controls. Instead, the EU Commission appears to favour increasing quota volumes across Europe gradually so that they eventually become irrelevant.

The lowering of the set-aside rate to 0% for 2008 will benefit dairy farmers. Many farmers have been lumbered with set-aside since 2005 and will be glad to return to full cropping. Hopefully the 2009 Health Check will remove it permanently.

Increased costs and legislation

Unfortunately, there has been a surge in the cost of feed prices for the coming winter. Arable farmers may be enjoying better prices for cereals, but this sharp spike in prices is feeding through to all livestock rations. A sizeable part of the forthcoming milk price increases will disappear in higher costs.

Another cloud on the horizon is the likelihood of more environmental legislation. The Government is currently consulting on a proposal to increase the area designated as a Nitrate Vulnerable Zone (NVZ) and to tighten the NVZ rules. If these proposals are implemented, industry players will require additional capital investment in storage and treatment facilities. They will also incur greater ongoing compliance costs. On top of this, the Government may introduce further measures to comply with the Water Framework Directive (this aims to improve general water quality).

Dairy farmers also need to recognise that their Single Payment for 2006 is likely to be the largest they ever receive. The move to a regional average in England and deductions throughout the EU will result in a drop in payment between now and 2012 for almost all but the most extensive producers. It is not inconceivable that by 2020, area payments under the Single Payment Scheme (SPS) could be down to £60-80 per hectare (£24-32 per acre).

Fine tune your operations

With volatile markets, reduced support and increased legislation expected in the future, farmers need to focus on controlling internal factors. The prices for many inputs have risen strongly recently and farmers need to maximise output. This calls for the best technical efficiency. If farmers concentrate on improving cost control and technical performance, they stand to reap the benefits of booming industry prices and be immune to negative forces.

FARMLAND PRICES

22.6% Increase

UK farmland prices rose to new levels this year as demand for commercial and residential land soared.

UK farmland prices have reached record levels, according to the Royal Institution of Chartered Surveyors (RICS). The RICS rural land market survey, published in September, reported that the average price of farmland increased by 22.6% on a year earlier in the first half of 2007. This compares to an average price increase of 18.1% for the same period in 2006.

The average price of farmland is now £8,850 per hectare (£3,662 per acre). Arable land has risen to £9,287 per hectare (£3,758 per acre) from £8,451 per hectare in the second half of 2006, while pasture land has risen to £8,412 per hectare (£3,404 per acre) from £7,878 per hectare (£3,188 per acre) for the same period.

The report reveals that demand for land is booming in both the agricultural and non-agricultural sectors, with the large City bonuses paid to ‘lifestyle buyers’ fuelling the demand for residential farmland. The increase in commodity prices means commercial farmers are keen to expand. Sales to individual farmers rose to 50%, the highest increase since the survey began. There is also interest from European farmers as UK farmland is still favourably priced, particularly compared to Denmark and Ireland.

Fig 1: Farmland prices (£ per ha)

 

2007

2006

Average

8,850

8,164

Arable

9,287

8,451

Pasture

8,412

7,878

NEW CAPPING FORMULA FOR SINGLE PAYMENTS

The EU Commission has proposed a percentage-based capping system for income aid. This will hit larger farmers the hardest – potentially reducing their aid by up to 45%.

The EU Commission’s first formal Health Check proposal was tabled at the end of November. Leaks to the press and information gleaned from the commissioner’s speeches prior to publication meant there were no surprises. But one concept was watched carefully.

It emerged recently that the commission has developed a new formula for the old idea of capping individual Single Payments. Rather than the absolute cap at €300,000, which was rejected previously, it has suggested a three-tier system.

The proposed method will reduce, on a percentage basis, the amount of income aid farmers receive under the CAP (figure 2). For example, a farmer with a net €500,000 Single Payment would receive €375,000 – a reduction of £85,000 (€1=£0.68) for a UK farmer. The figures quoted are examples only and could change before the Health Check is agreed.

The commission hopes that this formula will be more acceptable to those member states that have been particularly opposed to the absolute cap, i.e. the UK and Germany. To further coerce the opposed governments, there has been talk that the reduced Single Payment funds will be available for use in the member state applying the cap. These funds could be used to support rural development programmes, i.e. for marketing initiatives or payments to disadvantaged areas.

Based on the Health Check’s timetable, legislative proposals won’t be made before May 2008; it’s unlikely the agreed capping will take effect before 2010.

Fig 2: Examples of Single Payment reduction

Size of claim (€)

<100,000

100,000 - 200,000

200,000 - 300,000

Check >300,000

Reduction (%)

0

10

25

45

ALIGNING FARMERS WITH THE MARKET

Key Messages From English Farming And Food Partnership's Fourth Annual Conference

According to EFFP, farmers and food companies need to develop a market focus and work together to take advantage of the new consumerdriven dynamic that is emerging.

Farmers and food companies in the 21st century must compete in a market shaped by global and local drivers. Take, for instance, wheat, where low stocks, bad weather, increased demand for feed, biofuels and growth in emerging economies have created a supply and demand imbalance, resulting in soaring world prices. In addition, they must also contend with a new industry dynamic, one where government no longer link subsidy to production but is driven by consumers instead. These two together present a new trading environment, one which presents significant challenges but also considerable opportunities for those who are market-focused.

Consumer driven

Today’s consumers are increasingly knowledgeable and demanding in their food purchasing behaviour. Organic, healthy, free range, premium, fair trade, ethnic and low-carbon food are all niche markets that are closely linked to their source of farm production and are growing quickly. If trends in household food expenditure and food service continue on the same trajectory, this would represent a £160-70bn industry by 2020 and one which is likely to be made up of a number of these differentiated segments. This offers farmers a unique opportunity to align themselves with the market, identifying and targeting specific consumer segments and then offering differentiated, value-added products.

A collaborative approach

How can farmers and food companies respond to this new market dynamic? Through collaboration, both vertically and horizontally throughout the food chain. Collaboration can mitigate the increasing impact of supply imbalances and volatility from global markets and create a business model that is more robust and sustainable. In collaborating, farmers and food companies can also match the quality and quantity of supply to the emerging market opportunities and take advantage of the potential this new dynamic presents.

Significant progress has been made so far, the English FCB sector is thriving and there has been an important cultural shift in working ever closer throughout the food supply chain, but there is scope to achieve far more. This challenge depends on developing innovative business models, such as the FCB model, and entrepreneurial modes of working that encourage and reward trust and commitment and provide mutual benefit to all.

Smith & Williamson has agreed a five-year sponsorship programme with EFFP in support of the future development of the farming industry.

EFFP facilitates greater cooperation between food companies and farmers to secure a profitable and sustainable future for the English food chain.

SINGLE PAYMENT SCHEME

An Update

Favourable Single Payment conversion rate

The (relative) weakness of the pound towards the end of September has resulted in a higher Single Payment conversion rate.

The 2007 Single Payment conversion rate has been set at €1 = £0.6968. This is 2.8% higher than the €1 = £0.6777 used in 2006.

This rate will be used to convert all payments under the 2007 SPS from euros into sterling, and includes the energy and protein crop supplements.

On a €50,000 claim the difference between the 2007 and 2006 rates equates to an increase of £955.

0% set-aside for 2008 harvest

The EU Commission has agreed to reduce the rate of compulsory set-aside from 10% to 0% for the 2008 harvest

Despite the concerns of the EU Environment Directorate over the loss of habitat, the EU farm ministers voted unanimously in favour of the proposal at the September Farm Council. Set-aside entitlements will remain and will still have to be activated first. But the land used, which must be eligible set-aside land, can grow any/no crop, providing the usual cross-compliance rules are followed.

As we discussed in our last Agricultural Bulletin, this move was a direct response to the surge in cereal prices. Europe hopes that extra planting will result in greater output and return some ‘balance’ to the EU cereals market.

However, the removal of set-aside is currently a derogation for 2008 only; it is theoretically possible that will return for the 2009 SPS.

Ten-month rule to be simplified

Currently, under the ten-month rule, farmers have to keep SPS-declared land parcels at their disposal for ten months. This rule has been one of the pitfalls that many farmers have experienced when exchanging land, particularly those renting land for potatoes and vegetables on a shortterm basis.

The EU Commission is now proposing that a claimant only has to hold the land on a single day in the claim year (member states may be able to choose their own date – the UK will probably use 15 May) for the claimant to take cross-compliance responsibility for the whole calendar year. This stands even if the land is not legally in his/her occupation for the whole year.

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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