Both demand and supply for Non-SDA entitlements continues to be very strong, particularly for this time of year, with Non-SDA trade up 59% on the same trading period in 2012. Some vendors are slightly reluctant to sell so early after confirmation of the roll-over, possibly waiting for prices to fully bed in and maybe increase further. However with a strong flow of offers being received around £300 per unit plus VAT, it seems that the ‘rolled-on’ price is now set to continue around this level, with demand and supply being the primary influencing factors in the future. One other factor to keep in mind however is the potential for the combination of the Non-SDA and SDA payments in 2015, which DEFRA continue to consult on. However the effect of such a combination would likely have a greater impact on claimants needing to purchase SDA entitlements than Non-SDA. The 2015 SDA payment could increase by 17% (from the 2015 SDA predicted payment if no combination of SDA & Non-SDA) if the two were combined (based on DEFRA predicted rates for 2015, 15% modulation, predicted UK budget allocations and existing UK direct payment ceiling allocations), whereas Non-SDA payments may only be reduced by circa 2.5% as a result of such a combination (based on the same criteria).
As such, if demand and supply remain strong, it is expected that Non-SDA will continue to trade around £300 per unit, with non-VAT entitlements demanding a premium of approximately £350 per unit.
SDA entitlement trade continues to be relatively slow, with offers of £260 to £280 per hectare invoking interest from vendors, however with little supply and good demand prices are expected to rise, with some vendors already asking prices closer to the £290/ha mark. Both parties should be keeping a close eye on the results of the CAP reform consultation as to whether DEFRA will commit to their proposal of increasing SDA and SDA Moorland payments, which would confirm some vendor’s opinions that much higher prices would be reasonable. Those looking to purchase SDA and Moorland would be advised to do so sooner rather than later, vendor permitting, in order to secure competitive rates. SDA Moorland has not surprised with its slow start to trading, however prices are looking strong with trade at the moment at £43 to £50 per hectare plus. If demand remains very strong and supply so weak then these prices could increase considerably before the 2nd April trading deadline, especially considering this is the second year running when Moorland entitlements have been in short supply. Vendors looking to sell Moorland entitlements would be advised to start the process as soon as possible in order to discuss when they are likely to obtain the most competitive prices.
Overall trade has been slower than for the 2013 Scheme Year in all areas except for Non-SDA, which has started its fastest trade for some years. The slow start otherwise has been due to the uncertainty of payment rates under the new Basic Payment Scheme (BPS), which will hopefully be somewhat appeased by the recent DEFRA consultation paper. Non-SDA purchasers have however been intent on securing at least a proportion of their entitlements prior to the usual trade rush in the New Year. With the RPA aiming to pay out in the region of £1.4bn in Single Farm Payment claims by the 31st December, representing 93% of claimants (they have already paid 92.3%), we may see some farmers looking to secure entitlements before the New Year, taking advantage of this added liquidity.
There has been little or no trade in Welsh, Scottish & Northern Irish entitlements yet this season. As is so often the case the market for these entitlements is expected to ‘kick off’ in the New Year.
If you would like to discuss your entitlements situation, please contact Ashley Taylor (for Non-SDA), Charles Gregory (for SDA, SDA Moorland, Welsh) or James Clack (for Northern Irish or Scottish).
MILK QUOTA TRADING
Milk Quota trading is currently very quiet as is traditional at this time of year, but with more lots now becoming available for sale. It is interesting however that we have had regular enquiries from potential purchasers who are considering buying quota as a form of cheap insurance against the EU changing its mind in the future over the withdrawal of Milk Quota. Some speculate that, after the expiry of milk quota in April 2015, there is a possibility the EU milk market will not “sort itself out” naturally as hoped by the EU through the normal market forces, and that at some point some kind of production control will again be needed. Some farmers believe that the reinstatement of milk quota may be the quickest and easiest option for the EU to achieve this.
Meanwhile dairy farmers who are over-producing need to keep an eye on the national production levels, as the monthly production for October rose to its highest level for 10 years. RPA production figures for the UK (released on the 7th November) show that after a slow start this milk year, national production in October increased by 9.7% (96.2 million litres) to 1.09 billion litres compared to 994.4 million litres in October 2012. This means cumulative production for the first 7 months of the quota year is 7.936 billion litres and rising, which is 1.6% (123.2 million litres) higher than last year. At the same point in 2012 this figure was 7,812.4 million litres. If UK production continues to rise at this level over the remaining months of this milk year, on the back of the excellent and plentiful silage grown this summer, there is a chance we could come closer to hitting our national quota target of 15,294 billion litres, and as such over-producers would then of course be risking a levy if they did not have quota to cover all their production.
4% butterfat quota is currently trading at about 0.15 ppl, depending on the lot size.
If you would like to discuss your milk quota situation, please contact Julia Clark.
CAP REFORM UPDATE
Direct payments: changes in the new regime
We summarise below the main points set out in DEFRA’s new consultation document on the CAP Reform.
Number of basic payment regions
· With the new direct payment system the Government have the option to revisit the allocation of regional boundaries in England.
· Under the current scheme land has three different classifications; Non-severely disadvantaged areas (Non-SDA), severely disadvantaged areas other than moorland (SDA), and moorland (SDA Moorland).
· The Government has confirmed they will not create new regions nor amend existing regional boundaries.
Regional distribution of direct payments
· There are two proposed options for how the Government will distribute money available for direct payments under the new scheme;
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Option 1: payment rate per hectare with no change to current distribution of the budget
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Non-SDA
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SDA
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SDA Moorland
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Basic payment incl. greening payment
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€242
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€195
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€34
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Option 2: payment rate per hectare with redistribution of payment to increase SDA & SDA Moorland direct payments
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Non-SDA & SDA
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SDA Moorland
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Basic payment incl. greening payment
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€236
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€62
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· Option 1 rates shown are about 8% below 2012 rates in nominal terms.
· Option 2 shows the price if the SDA rate was raised to the same level as the Non-SDA rate, amounting to an increase of €25 on the 2012 rate. The same increase of €25 would also be applied to the SDA Moorland rate.
· The Government is still to decide which option they feel best supports the needs of all farmers within the reduced budget available to them.
Areas facing natural constraints
· The ‘Areas facing Natural Constraints’ (ANCs) designation has been introduced by the European Commission in response to EU findings that the current LFA based approach across the EU is inconsistent and does not provide value for money for EU taxpayers.
· If introduced ANC would replace current LFA and SDA designations. However the English Government has confirmed that they believe our current regional designations remain valid and they will not proceed with the expensive ANC mapping process at this time. This is not to say they will not revisit this issue in 2015.
Capping
· During the negotiations on the CAP reform the English Government claims to have successfully opposed capping of farmers’ direct payments, saying it would cause an additional administrative burden on both farmers and paying agencies. DEFRA also proposes to adopt the lowest possible level of reductions.
· There are two options available to the RPA in order to achieve this reduction.
Option 1. Reductions
· The first option is to introduce a system of reductions on basic payments over €150,000. This would have a minimum rate of 5% but with the option of increasing rates up to 100%.
· The greening payment, however large, would not be subject to these reductions.
Salary Mitigation
· The European regulation offers the option to avoid a reduction on payments spent on agricultural salaries and employment taxes. This could apply as set out below:
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Example of reductions to basic payment with and without salary mitigation
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Without salary mitigation
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With salary mitigation
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Basic payment due
Eligible agricultural salaries
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€180,000
€20,000
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Assume reductions at 5% over a threshold of €150,000
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Basic payment liable to reductions
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€180,000
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€180,000 – € 20,000 = €160,000
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Reductions
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(€180,000 – €150,000) x 5% = €1,500
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(€160,000 – €150,000) x 5% = €500
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Basic payment after reductions
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€180,000 – €1,500 = €178,500
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€180,000 – €500 = €179,500
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· The Government believes the administrative burden and costs, on both claimant and the RPA, to prove salary payments is not worth the slight benefit which they calculate would only affect 35-80 farms in England.
· They therefore hope to implement a system that produces the smallest possible reduction, whilst making administrative procedures as simple as possible, by reducing the gross amount of the farmers’ basic payment (possibly be 5% on payments less that €150,000) and not allowing for salary mitigation.
Option 2. Redistributive payments
· The second is to make redistributive payments to top up payments on a claimants first tier of hectares
· Although the English Government’s preferred option is not to implement this option, the European regulation contains a provision to redistribute Pillar 1 funds to support smaller farmers. By redistributing payments, Member States would be able to ‘top up’ claimants’ direct payment for their first tranche of land (up to 54 hectares in the UK) by up to 65%.
· These enhanced payments on the first tranche of land would be instead of a cap on all payments, mentioned above.
· Such a redistributed payment could be a flat rate payment or graded (with a larger payment on say the first 20 hectares, and less thereafter).
Coupled support
· The European regulation has again given Member States the option to use a proportion of the money available for direct payments to fund schemes where payments are linked to production, commonly known as ‘coupled support’.
· England has decided not to introduce any coupled support scheme, as was expected.
Minimum claim size
· It is a requirement that Member States set a minimum claim size for direct payments. This can be by area, in the range of one to five hectares, or by value, in the range of €100-€200.
· The current minimum claim size in England is set at one hectare.
· The Government has decided to raise the minimum claim size to five hectares under the new CAP.
· They say that in doing this they will reduce the number of claims by 16,000 or 15% of all claims. By removing these claimants they believe that the processing speed for the remaining claims will be quicker.
· DEFRA also believes that removing payment to these claimants will not have an adverse impact on the environment, despite no longer needing to comply with cross-compliance.
Entitlements and National Reserve
· The Government has decided to roll forward Single Payment Scheme entitlements into the new scheme to avoid unnecessary upheaval for farmers and additional administrative burdens for the RPA.
· This means that the number of entitlements a farmer holds on 31st December 2014 will be rolled forward into the new scheme.
· However, excess entitlements held in 2015 will be automatically cancelled. It is expected that this will happen once 2015 claims are processed, which would mean that entitlements not activated in 2015 would be lost. However this will need to be confirmed as part of the implementing regulations in due course and is subject to change.
· New entrants and some young farmers will be able to apply to the ‘national reserve’ for an allocation of entitlements. The eligibility rules are as yet unknown.
Active Farmer Test
· Following concerns at an EU level as to whether direct payments were being made to ‘genuine farmers’, they have developed a two part ‘active farmer test’.
o The first part addresses the minimum activity criteria for farmers whose majority holding is naturally kept in a state suitable for grazing or agriculture.
o The second part introduces a ‘negative list’ of business types which will be ineligible to apply for direct payments. For example; operators of airports, railway services, waterworks, real estate services and permanent sport and recreational grounds.
· However businesses that fall under the ‘negative list’ will have their eligibility restored if they can show that they qualify with one or more of the following;
o Their direct payments represent 5% or more of their non-agricultural receipts
o Their agricultural activities are ‘not insignificant’
o Their organisation’s principal objective is an agricultural activity.
· This negative list will not apply if one’s claim is less than €5,000, and detailed criteria is to be continued by the EU Commission.
Small Farmer Scheme
· The English Government has chosen not to operate a Small Farmers Scheme.
Young Farmers Scheme
· England will develop a Young Farmers Scheme (YFS) as required by the European regulation.
· Those eligible to participate in the YFS will receive an additional payment equivalent to approximately 25% of their basic payment for each of the first five years of the operation of their holding.
· To be eligible for the YFS a claimant must meet all three criteria;
o Be an individual (i.e. not an incorporated body), and
o Be no older than 40 in the year the direct payment application is made, and
o Have set up as a farmer (i.e. as ‘head of holding’) within the previous five years.
· Each Member State must decide on the number of entitlements for which a claim for additional payment can be made, which must be between 25 and 90. England is yet to make a decision on this.
· Member States may also, if they wish, introduce further criteria such as training certificates as evidence that a farmer is eligible for the payment. The Government is not minded to introduce further criteria at this stage.
Direct payments : greening
Blueprint for greening in England
· England has decided that the broad approach to greening in England should be to adhere closely to the measures in the direct payments Regulation, as set out below.
· They do not intend to take up the option to implement greening through a Certification Scheme, which would contain additional, equivalent measures.
The EU greening requirements
· There will be three elements to the greening requirements;
o Crop diversification
o The maintenance of permanent grassland
o The need to establish Ecological Focus Areas on 5% of arable land.
Crop diversification
· The regulations provide a three tier approach to Crop Diversification depending on the area of arable land on the holding;
o Farmers with less than 10ha of arable land do not have to apply this requirement
o Farmers with between 10 and 30ha of arable land must grow at least two different crops. No one crop can cover more than 75% of the arable land.
o Farmers with more than 30ha of arable land must grow at least three different crops. The main crop must not cover more than 75% of the arable land and the two main crops together must not cover more than 95% of the arable land.
· In this context winter and spring varieties will count as different crops.
Permanent grassland
· These rules require that there is no conversion and no ploughing of designated environmentally sensitive grassland on Natura 2000 sites (Special Areas of Conservation under the European Habitat Directive and Special Protection Areas under the Bird Directive) and possibly elsewhere.
· These sites will also be designated SSSIs, however a SSSI will not always be a Natura 2000 site.
Ecological Focus Areas (EFA)
· Where the arable land on a holding exceeds 15 hectares, 5% of that land must be designated as an EFA.
· Member States must choose from the following land-use types to count towards fulfilling the 5% EFA requirement;
o Land laying fallow
o Terraces
o Landscape features
o Buffer strips
o Supported agro-forestry
o Uncultivated land along forest edge
o Areas of short-rotation coppice
o Forested areas established under rural development schemes
o Areas with catch crops or green cover
o Areas with nitrogen fixing crops.
· England is currently consulting on which options are preferred.
Exemptions
· The European Regulations set out a number of circumstances where the greening payment will be made without farmers needing to carry out some or all of the greening requirements;
o Greening requirements will not apply to units of a holding which are farmed organically
o Farmers with more than 75% of their eligible area in permanent grassland, and where their arable area does not exceed 30 hectares, will not have to apply Crop Diversification and EFA requirements
o Farmers with more than 75% of arable land used for the production of grass or laying fallow and the remaining arable land is less than 30 hectares do not have to apply Crop Diversification and EFA requirements
o Farmers who have less than 10 hectares of arable land do not have to apply the Crop Diversification requirements.
o Farmers with less than 15 hectares of arable land do not have to apply EFA requirements.
Cross Compliance
· Under the new CAP, Cross Compliance requirements will not change significantly. The main changes are;
o Statutory Management Requirements (SMRs) and Good Agricultural and Environmental Conditions (GAECs) have been renumbered and combined into a single framework
o Four SMRs have been deleted (sewage sludge and three relating to animal disease) and a further one (groundwater) has been changed to a GAEC requirement.
o GAEC requirements have been reduced to seven compulsory standards with a single element, relating to invasive weeds.
· Some flexibility is retained by Member States in setting farmer requirements for GAECs and DEFRA will consult on each GAEC further in early 2014.
If you wish to discuss any of the above further, please do not hesitate to contact us. Please see our website for current entitlements available and wanted, or by clicking here.