DECEMBER ENTITLEMENT TRADING UPDATE
December trade for Non-SDA entitlements has been strong, up approximately 59% on the same period in 2012, with many purchasers utilising their 2013 SPS payments to top-up their entitlements in preparation for the new scheme starting in 2015. As usual we have seen additional purchasers come onto the market, newly ‘cashed up’, following their 2013 payments. Some purchasers are beginning to ‘test the market’ to ascertain if vendors will accept offers lower than the £300 per unit mark, however at this stage most vendors are waiting to see what the New Year brings, and if there will be any prospect of a price increase. Those that are willing to sell now are ‘holding fast’ at £300 per unit and overall the market price for Non-SDA remains firm at £300 per unit, with non-VAT entitlements achieving £340 per unit.
The confirmation that English modulation in 2014 will be 12% suggests that we could see purchasers arguing for a reduced price in the New Year. This argument could be compounded by the recent news that the SDA and Non-SDA payments will be at the same level after 2015. Despite this, and considering that purchasing entitlements can produce a profit after the first 1.5 years of a seven year investment, which constitutes a return of circa 466% over seven years or an average annual return of 66%, vendors have a strong argument for keeping Non-SDA prices at current levels. DEFRA confirmed yesterday (19th December 2013) that the SDA payment will be increased to bring it more in line with the Non-SDA payment. Although the impact on the Non-SDA rate is expected to be minimal, it will drop slightly, presumably to balance funding, making this a weak argument for reduced prices.
The impact on the SDA price will likely be more dramatic. Although we do not yet know what the payment per hectare will be, the fact that the SDA rate will be increased more in line with the Non-SDA payment suggests that SDA prices will rise to the level of Non-SDA entitlements. DEFRA stated “Equalisation will result in only a modest decrease in the lowland rate”.
We do not yet know by how much the Moorland payment will be increased in 2015, or indeed if it will be, and therefore one cannot predict the likely increase in the price of entitlements. However the fact that SDA and Non-SDA payments are being ‘equalised’ suggests that the Moorland payment will be increased, as set out in the October DEFRA consultation document. Those looking to purchase Moorland entitlements would therefore be advised to do so sooner rather than later, if a willing vendor can be found, in order to benefit from potentially lower ‘uncertain’ prices and the prospect of an increased payment in the Basic Payment Scheme.
WHAT TO DO WITH LESS THAN 5HA
When the new scheme is introduced in 2015 the minimum claim size will be 5ha. This means that those with less than five entitlements should begin to consider their position for the future. There are a number of points to consider, all of which are yet to be ‘set in stone’ through England’s CAP implementation regulations. On the 31st December 2014 entitlements held by a claimant will be rolled forward as Basic Payment Scheme entitlements. However it is as yet unclear what will happen to farmers who hold less than five entitlements on this date. Will they simply be taken away from the 1st January 2015, or will the removal of these entitlements occur later on in the year, when one submits one’s 2015 BPS claim?
It would seem prudent for DEFRA to put the latter option into place, because similarly a claimant with excess entitlements in 2015 will lose their excess at some point, presumably (but not certainly) if they are not activated in the 2015 claim. This ‘rebalancing’ of entitlements would then all occur at the same time, presumably making the logistical process simpler. Although this would seem the most logical option, it is not confirmed and for those with less than 5 entitlements, waiting to see what happens could be a potential pitfall. Cancelling entitlements for those with less than 5ha after the 31st December would seem an unlikely route for DEFRA to take because anyone holding less than 5 entitlements, but whom has recently purchased additional eligible land to include in their 2015 claim, would lose out as a result.
A further point to consider is when the transfer of entitlements will be possible in 2014/2015. It is not yet clear if one will be able to transfer entitlements between May 2014 and the 31st December 2014, and similarly between the 1st January 2015 and when the BPS entitlement transfer window closes (presumably this will be in April in order to avoid disruption with the usual course of things, but again this is unconfirmed).
Therefore the ‘safest’ option in this scenario would be to sell entitlements now for the 2014 Scheme Year. However one then would lose out on the 2014 payment. Despite this, with prices at £300/ha for Non-SDA, the sale option could produce a greater return than waiting for the 2014 payment, which is expected to be in the region of £211.27 (based on 2013 value, exchange rate and assuming no Financial Discipline in 2014 and EU & England band 2 modulation at 22% combined), only to find that one’s entitlements cannot then be transferred/sold before they are cancelled. This figure is however subject to change because of the variations in the EU budget which mean that EU modulation will be taken off further ‘up the chain’ as part of the Multiannual Financial Framework (2014-2020), and it is not yet fully clear how this will affect the entitlement value in the UK.
DEFRA CAP CONSULTATION RESPONSES
DEFRA have now provided their responses to the October consultation document and we set out below some of the decisions set out within:
· English modulation will be set at 12% from 2014 until 2019, with a review in 2016 based on the uptake of agri-environment schemes.
· SDA payment rates will be equalised with Non-SDA rates and the Moorland payment will likely be increased, however the amounts are yet to be confirmed. We could see these confirmed in the first half of 2014, however it is unlikely that Non-SDA rates will be reduced significantly (2.47% Non-SDA reduction predicted in DEFRA consultation). It is unclear as yet if we will also see the practical merger of SDA and Non-SDA regions ‘on the ground’.
· Basic payments over €150,000 will be reduced by 5%. Salary offsets will not apply.
· The EU list of six ineligible activities (golf courses, airports etc.) will not be added to in England.
· The EU standard Greening measures will be applied (see our newsletter of the 6th December) – Crop Diversification, Maintenance of Permanent Grassland and Ecological Focus Areas (EFA options to be confirmed).
DEFRA will undertake further discussions with stakeholder organisations in the first quarter of 2014 regarding:
· The direct payment mechanism for common land.
· The use of the National Reserve (including how qualifying farmers & young entrants may be able to apply for entitlement allocations).
· Details of the ‘active farmer’ test.
· The ways by which claimants who operate any of the six ineligible activities will be able to demonstrate that their agricultural activities are significant enough to justify readmission to direct payments.
CROP DIVERSIFICATION
The requirement through Greening for certain sized arable farms to have either two or three different crops has led to much debate, particularly from those in continuous wheat systems. However it seems that it could be too late for the UK to seek a review on this point from the EU Commission, who have made clear that they will not allow an option to establish additional EFA as an alternative to Crop Diversification, as had been suggested as an alternative. Therefore DEFRA comment that “whilst there may be differing views over the number of farmers who may find this measure challenging, there is no alternative way forward”.
NAKED ACRES & HOSTING
This year has seen an early start to the Hosting season, with initial trades agreed at £55 per acre. Market interest thus far has been predominantly in the hosting sector, rather than for traditional naked acre lettings, however rental prices for the 2014 Scheme Year are also expected to be around the £55 per acre mark. Traditionally trade in the naked acre & hosting markets picks up in the New Year when claimants begin to consider their shortfalls and surpluses of entitlements, particularly following the 2nd April entitlement transfer deadline. We do usually see a good number of naked acre and hosting agreements being agreed before this deadline and there are already a good number of both on the market.
Hosting provides a useful tool for those looking to keep ownership of their entitlements going forward if they do not currently have the eligible hectares available to activate them on.
MILK QUOTA
After a slow start in April 2013, UK milk production is continuing its strong upward trend which started in June with the good weather, and the November 2013 figures released by the RPA on the 6th December show the highest monthly production for 10 years of 1,066.1 million litres, which is 9.5% more than November 2012. The butterfat was also high, with an average of 4.17% for November, which has now brought the cumulative butterfat up to just above the 3.97% UK Base. Cumulative production for the first 8 months is up overall by 218.8m litres (+2.5%), and looks set to continue increasing due to the good and plentiful supplies of forage. Therefore although the spectre of a super levy is a long distant memory to most dairy farmers, there is an increasing chance that the UK could come close to reaching its national quota, and those dairy farmers without sufficient quota to cover their production should perhaps consider purchasing some as cheap insurance against the chance of being caught in the super levy net.
The period before Christmas is traditionally a quiet time for milk quota trading, but due to the UK production news, there has been some interest in the larger lots we have available, and we have been trading 4.00% quota at around 0.15ppl, with higher butterfats achieving 0.2ppl. More quota is expected to come on to the market after the holidays, when dairy farmers traditionally prepare for the end of the milk year and assess their own production, and those who finished milking in this milk year or the one before try and dispose of the quota.
If you would like to discuss your situation regarding the purchase or sale of entitlements, or the CAP reform in general please do not hesitate to contact Ashley Taylor for detailed CAP reform information, naked acre hosting & letting and Non-SDA entitlements, Charles Gregory for SDA, Moorland & Welsh entitlements, James Clack for Scottish & Northern Irish entitlements and Julia Clark to discuss milk quota.
Thank you to everyone who has put their business our way in 2013 and our best wishes to all for a Merry Christmas and a happy New Year.