26.06.15 – ENTITLEMENT TRADING – END OF SEASON MARKET SUMMARY

What a season for entitlement trading!  Deadline extensions, over-supply, under-supply, policy changes, swings, roundabouts and double deadlines, all led to an ‘exciting’ trading period.

Non-SDA

Following the first period of trading for the 2015 Scheme Year, which ended in October 2014 and saw prices ranging between £170 and £110 per hectare, the surplus of Non-SDA entitlements coming onto the market continued to increase as the second transfer window finally opened in March this year.  Some early transfers were agreed whereby entitlements were sold forward before the RPA announced that their system would revert to a paper based version using RLE1 forms.  Prices for these early sales followed on from the end of the previous trading window in October at £140 per unit for Non-SDA.  By the time RLE1s could be submitted, however, the market was well saturated with Non-SDA entitlements and accordingly the price fell sharply to £115/ha by March.  Non-SDA prices held just above the £100 mark until early April, which subsequently saw the first transfers under £100/ha, despite many vendors finding it hard to accept offers below this ‘barrier’.  With the level of over-supply at this stage something had to give, with initially vendors seeking to get rid of larger blocks, or risk losing them to the national reserve, accepting offers under £100 per unit.  Vendors with smaller blocks followed suit shortly after.

Throughout the season some purchasers were making offers well below the market rate in the hope that vendors would be fearful of the ‘use it or lose it’ scenario.  However the transfer deadline extension from May to June allowed vendors a month’s grace and many would not accept the rock bottom offers being made by some.  In May the doldrums really hit home for vendors as many at this stage were accepting offers between £60 and £80 per unit.  This has truly been a buyers’ market, however those purchasers who held on to the very end of the trading window, hoping to push the price down even further, as many tried, were in many cases disappointed and perhaps this was not the most advantageous course of action.  June saw some significant purchasers in the market, buying up large swaths of entitlements and tipping the balance somewhat.  This took the wind out of the oversupply argument many purchasers had been hoping to take advantage of at the very end of the trading window, and resulted in a steady rise in prices in the first week in June to around £100 per hectare; a significant swing in the market in such a short period.  Thereafter, apart from the last minute desperate trading on the 15th which saw the odd sale up to £170 per unit, the market peaked at around £120 per unit.  At the deadline on the 15th June there still remained unsatisfied buyers and sellers.  It was a very inefficient and volatile marketplace with other agents experiencing different trends throughout the country within the same period.

Therefore the average price per unit of Non-SDA was £98 for the whole 2015 trading period (both windows) which, in comparison with last season’s average of £230 per unit, represents a 57% reduction in the average price over the trading period (see table below for further historical comparison).  Despite the reduction in the payment rate, this still represents an average annual return on investment in 2015/16 of 73.5% (considering an estimated payment for 2015 of £170 per unit), which many would struggle to beat in other sectors and particularly when considering the 2013/14 entitlements return on investment which, on average, produced a return only after the second year of payment.

Average annual purchase price of entitlements in England

SDA

Up to the end of the first trading window (October 2014) SDA prices had been fairly similar to Non-SDA, following the RPA confirmation that the payment would be increased to bring it more in line with Non-SDA.  Prices to October were therefore ranging between £130 and £180 per unit.  In 2015 SDA prices remained relatively constant around £140 per unit until May when prices crept up to £160 due to a shortage of SDA entitlements on the market.  The market slowly rose towards a peak at the end of the trading period of £165 per unit, which led to a season average of £147 per unit.

SDA-Moorland

There has been a shortage of Moorland entitlements throughout the season coupled with a number of purchasers looking for large blocks, and this has been reflected in the prices achieved.  Prices have also been higher when compared to previous years due to the increase in the moorland payment rate, which is expected to be approximately £68 per unit (Source: ABC), an increase of some 48% on the 2014 payment, which is good news for the uplands.  As a result Moorland entitlements have been trading throughout the season at between £55 and £70 per unit, but with a typical lower number of transfers compared to Non-SDA, which may have been the reason why the shortage of Moorland entitlements did not lead to more inflated prices, which averaged over the season at £64 per unit.

Hosted Leasing

The market for hosting has naturally been depressed in terms of the number of landowners looking to host others’ entitlements.  This seems to be as a direct result of the low price of Non-SDA, the predominant ringfence in which entitlement hosting operates.  This essentially means that if the funds were available, most landowners who had rented out “naked acres” or hosted entitlements previously decided to purchase entitlements this year, taking advantage of the lower prices.  Those that did not were however in a strong position as many entitlement owners were seeking any alternative to having to sell for the low prices the market was willing to pay this season.  On this basis the cost of hosting to the entitlement owner averaged £132 per hectare (£53.50 per acre) this season.  This is expensive when considering the payment is likely to be something in the region of £170 per hectare (subject to the number of applicants and the exchange rate in September).  But to be in with a chance of achieving a better price for the 2016 Scheme Year, many were happy to go down this route, if they could find a landowner willing to host their entitlements.

2016 Entitlement Transfers

Following a busy 2015 season we already have interest from both purchasers and vendors looking to arrange early transfers for the 2016 season.  The RPA are however advising to wait before submitting RLE1s for the 2016 season until they have had a chance to process those submitted for the 2015 window.  We understand that most of the 80,000 (approx.) BPS applicants will have submitted RLE1s for parcel information and/or changes which, when combined with the number of RLE1s for entitlement transfers this year, which was considerably more than in previous years, and processing these manually this year looks to be a tall task for the RPA in the coming months.  This begs the question, when in the payment window (between December 2015 and the 30th June 2016) will claimants begin to receive their BPS funds… Claimants heavily dependent on receiving BPS monies in December are well advised to undertake cash flow planning now, as they may need to put financing measures in place.  Some banks are already offering products to deal with the likely delayed payment this year, but the advice is to discuss your options early so as not to fall foul of payment delays in 2015/16.

We also expect the RPA will attempt to resurrect the failed online system for making entitlement transfers for 2016 which, they say, means there may be an RLE1 cut off, similar to the October 2014 deadline for this season’s trade before the online system is operational.  One can only hope.

We would, once again, like to thank all of you who placed your business with us this season and look forward to working with you again in the future, whether in respect to entitlement transfers or otherwise.  If you have any queries regarding the new Basic Payment Scheme or other rural business matters, our team are always on hand to discuss things with you.

As usual our historical entitlement price graphs are available on our website, and we will shortly be uploading the latest graphs for the 2015 season.