28.01.16 – ENTITLEMENT MARKET UPDATE – JANUARY 2016

English Non-SDA
 
Sales – VAT registered

Since our last update a few days before Christmas, not surprisingly with everyone closing down for the festive season, the market did not “kick off” again until the 7th January. This however only continued for a week with prices at £220-230 until mid-January, when some vendor’s patience gave up due to the slow trade. Our register is full of purchasers needing entitlements, but the hesitation before Christmas with the lack of BPS payments hitting the bank account seems to have continued into the New Year.  The threat to purchasers of the RPA suddenly paying out all the money due has not materialised.  Whilst the majority of claimants have been paid out in December and January, only a third of the total money to be distributed has been confirmed as having been paid.  Subsequently the market weakened again and in the last couple of weeks of January there has been a wider range of prices achieved, depending on lot sizes wanted by the purchasers, and lot sizes available from the vendors. This has ranged from £215 up to £240.

Purchasers however would be unwise to assume the decline in price is likely to continue, as our “available” register does not show as high a volume of entitlements being marketed as our “wanted” register, and it would only take one or two big buyers to make a move to tip the balance and firm up the price. We have already seen, as last year, commoners, buyers and sellers, adding to the volatility of the market, already trading in 250 ha blocks.  Therefore whatever one’s hunch is about where the market is going next, it will probably have the same rollercoaster effect as last year where price can dramatically change in a matter of days.

The prices, as always, will be affected not by the economics of the payment to be received, but what the supply and demand is on that particular day. Therefore this adds volatility to the market as it is based as much on “herd instinct” as anything else.  Consequently it is a dangerous market to predict going forward.

The threat to vendors is that the EU referendum will cause some hesitation which may now be having some impact on the market, adding to the hesitation already caused by the delayed payments of BPS claims. Our opinion of the referendum, for what it is worth, is that even if we went out of Europe, to put into legal effect the political mandate given to Parliament, to effect appropriate legislation and disentangle itself from Europe, will take a considerable length of time if not many years until a completion date has been set for all or parts of the legislature. Therefore we believe there is little threat to the 2016 or 2017 payments. With these two years payment, a purchaser is still as near as guaranteed to make a profit at today’s prices.  However, it could then take still a number of years more before the UK effected its own agricultural policy. Whilst the Conservative government’s stated policy long term is to remove subsidies, it would be impossible to do this overnight, and at worst there would have to be years of declining payments to avoid the chaos it would otherwise produce. It may be that a phased reduction of subsidies would not necessarily leave us with no subsidies at all.  Subsequently one would expect a “gentle” adjustment.  Practically one may be, in fact, looking at the current BPS scheme running it’s full course until 2020. Even then, if a form of subsidy is to be paid thereafter, logically one would expect those that have entitlements would have these “rolled over” into any new UK scheme. Interesting times.

However the threat now to purchasers is still the point at which all the BPS monies will have been paid. At the time of writing at least 65% of claimants have received their payments. However we are told this only represents 54% of the total money.  Whilst we now know some monies will not be paid until April, the additional cash paid over last weekend will have increased the 54% figure, and there is another payment due at the end of this week.  However no-one knows where this will bring us to in respect to the total amount of monies then paid.

Whilst there has been pressure on prices, the volume of trade however has been picking up since last week, and the threat to a purchaser is that payments received next week will fund the long list of purchasers registered with us to make their move.

Sales – Non-VAT registered

We have seen a sizeable market already develop this year for those able to sell entitlements without charging VAT to meet the regular demand we have from people who want to buy, usually smaller lot sizes, who are non-VAT registered themselves and who cannot recover the VAT.  Effectively there is a saving on the purchase price of 20% to the buyer, and vendors are prepared to share some of this, making their entitlements cheaper to a non-VAT registered purchaser than if buying from someone who has to charge VAT. So for a sale at a market rate of, say, £230, a non-VAT registered purchaser would be paying £276 per ha including VAT, and any saving below this is attractive. Subsequently non-VAT registered vendors are achieving considerably higher prices as a result.
Whilst the supply of non-VAT chargeable entitlements have traditionally come from people who operate below the threshold and do not make regular returns, there is also the situation where farmers are retiring or closing down a business and have become non-VAT registered, but still hold the entitlements. Subsequently there appears to be a legitimate opportunity, subject to confirmation from a vendor’s accountant, that those in that situation with large amounts of entitlements can benefit from this situation.

Leasing

We are increasingly asked by people with entitlements to sell as to the option of leasing them out. It should not be forgotten that although this is now an RPA operated leasing scheme, there is still a risk involved, although considerably reduced compared to naked acre letting or entitlement hosting, which we no longer offer now the RPA have allowed leasing without land, which of course they should have done from the outset.  Whilst entitlements are automatically returned to the entitlement owner at a set date by the RPA, if the lessee falls foul of the latest usage rules, these could be lost to the national reserve.  For example, and we have already had them, some people did not make a claim successfully in 2015 and then if they try to lease in entitlement for 2016 they would be a higher risk than someone who successfully claimed on all their entitlements. Whilst guarantees can be given and contractual arrangements entered into, one always should be considering what type of business would want to lease in entitlements rather than buy them. With naked acres and entitlement hosting effectively the payment was split 50/50, and therefore we would be looking at a leasing fee of £90 per ha.  Why would someone not pay £230 per ha to own them for the whole scheme?  The answer usually is that they cannot afford it. Consequently one must recognise that those who cannot afford, what in effect is such a good financial investment where profit is made in the second year, are at a higher risk of getting into financial trouble. Therefore unfortunately the RPA leasing scheme does not provide the same security as it did with the old milk quota leasing scheme.

The question then needs to be asked as to why entitlements owners are thinking of this option? Generally this is because of the new usage rules and the habit that has been created in the past whereby a lot of farmers have held unused entitlements from year to year, keeping them live by using the rotation rules, on the basis that a lot of farmers are always hoping to rent or buy more land, and want the entitlement to go with it. In one way this approach makes sense, so that at least you get some money whilst keeping hold of these entitlements for future years. The question is, does the amount of money gained, less fees, justify the risk involved?  Each individual has to make up their own mind about this. At £80-90 per ha the answer might be yes, subject to carrying out appropriate checks on the lessees history for making successful claims using entitlements they held previously.  However will the market start at this rate? With leasing, in effect the cash flow has reversed compared with naked acres and hosting. Previously the entitlement owners were paying the other party to “shelter” their entitlements and making a payment up front.  It was the naked acre landlord or host who then received this money.  However with leasing this will be around the other way, and it will be the lessee who will pay the leasing fee to lease in the entitlements from the entitlement owners.  Bearing in mind we are talking about lessees who do not have the cash flow to buy the entitlements, these businesses may not be so keen to find the cash, or indeed able to find it, in order to make an up-front cash payment which they will not see back for 7-12 months.  Therefore if a market is created for leasing, there will be a natural downward pressure on the leasing fee.  The entitlement owner will then need to weigh up the risks compared with the smaller gain. With minimum transaction fees, the smaller lot sizes are certainly not going to be so attractive.  The entitlement owners will then have to decide whether it would be better to sell the entitlements and buy back every year what is needed or not. The question is, can the entitlement owner make better use of the money in the meantime? Obviously this exposes the entitlement owner to the vagaries of the market going up and down, and this has to be weighed with the risks and the economics of leasing.

SDA and Moorland

Unlike the Non-SDA market, the SDA and Moorland markets are yet to experience the same level of activity at this stage.

As was discussed in the ‘Entitlement Trading Christmas Update’ (21.12.15) the increase in SDA and Moorland entitlement values and their scarcity is likely to result in different trading conditions compared to the Non-SDA market.  The SDA payment has increased by £13 and the Moorland payment has increased by £24 from 2014, making these entitlements now more valuable.

The Moorland market has a small number of vendors with varying lot sizes but as yet there is very little demand for these entitlements and fewer still are prepared to make a deal at this stage.  Moorland entitlements have traded at £75 per entitlement although as we approach the May 16th deadline we predict an increased in both supply and demand which is likely to result in a fluctuation in prices.  Despite this we are still waiting for the RPA to pay out all of the 2015 claims, which is no doubt contributing to the suppressed market.

Similarly the SDA market is subdued although we anticipate that this will change on the run in to the May deadline.  Despite having a number of vendors with varying block sizes and a number of corresponding purchasers, deals have been few and far between as parties are hoping for the market to turn in their favour.    SDA entitlements have traded at £240 already this year and if they continue to remain scarce this price could increase to record levels.

The Regions

Entitlement trading in the British regions is yet to kick off with a fair amount of uncertainty amongst vendors and purchasers alike.  With the respective Governmental department’s continuing to pay out 2015 claims the uncertainty within the market is not unfounded.

It is believed that demand for entitlements is likely to be supressed compared to previous years based on a number of contributory factors.  As BPS claimants will receive a new allocation of entitlements following the submission of a 2015 claim (which can include all of a farmer’s land whether they have had entitlements before or not) the number of claimants in need of additional entitlements on additional land will be reduced.

Those farmers who need to purchase more entitlements are unlikely to do so until they receive their full 2015 claim money.  The economic situation in farming has been well documented and it is therefore unlikely that farmers will be prepared to purchase entitlements until they receive their previous year’s payment.

Scotland 

It was announced at the end of December that 3,500 farmers and crofters had their payments authorised by the Scottish Government with payments continuing to be made through to March.  Claimants are not receiving full payments as yet.  They are currently only receiving instalments of 75% of the Basic Payment and 90% of the Greening payment with the remainder to be paid at a later date.  The flat rate values to be reached in 2019 have been estimated to be: Payment Region 1 – €145 per ha, Payment Region 2 – €25 per ha, Payment Region 3 – €7 per ha.  The deadline for entitlement trading in Scotland is thought to be the 2nd April, providing a 6 week prior notification deadline.  This date is yet to be confirmed however as it falls on a Saturday.

Wales

In November the Welsh Government announced it would make a part payment of 80% to the majority of farmers before the early New Year, with the remaining 20% and a definitive statement to follow, expected to be in April.  This progress is yet to be published.  The Welsh Government is assuming a 2019 flat rate value of €121.59.  The Welsh Government has announced that the entitlement trading deadline is the 3rd May, leaving a very short period for entitlement trading as it is anticipated that entitlement statements won’t be released until the end of February at the earliest.  This short period is likely to pressurise both vendors and purchasers into dealing quickly.  It will be interesting to see who this benefits.

Northern Ireland

DARD announced at the end of December that they had made 95% of the BPS payments to eligible claimants by the 21st December.  This figure includes many claims which had been subject to inspection.  A 2019 total payment value of €330.421602 per ha has been confirmed with a flat rate phasing over 7 years rather than 5, meaning a flat rate only payment will be reached in 2021.  DARD are yet to announce the mechanism which will be used for implementing the transfer of entitlements and until they do so there will be no trade.  It is thought that at best the trading window will be a four week period with an early May deadline.

If you are thinking of buying, selling or leasing entitlements, please contact Hugh Townsend for English Non-SDA or Dominic Rees for SDA and Moorland, Welsh, Scottish and Northern Irish on 01392 823935.