DOES THE NEW CAP FIT?

Rachel Mc Killop, Birketts LLP3 March 2014

Page 2

NEW SCHEME

• The new scheme will become effective on 1st January 2015.

• The new scheme payments will be made up of several different elements:-

• Basic Payment Scheme (BPS) – 70%;

• Greening Payment – 30%;

• Young Farmers Payment – up to 25% top-up.

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GREENING

• The Greening Payment is separate from the BPS.

• To qualify for the additional 30% you must satisfy the following:-

• Crop diversification.

• 10 – 30 ha of arable land - you must grow 2 crops. The main crop must not be more than

75% of the land cropped.

• More 30 ha of arable land - you must grow 3 crops. The main crop must not be more than

75% of the land cropped and the two main crops must not be more than 95% of the land

cropped.

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GREENING

• Ecological Focus Areas (EFA)

• More than 15ha arable land you must have 5% EFA on or adjacent to the arable land.

• E.g., nitrogen fixing plants, ponds, hedges and buffer strips (not an exhaustive list).

• Environmentally Sensitive Grasslands (ESG)

• This is a control on permanent grassland at a national level. No “on-farm” control so long as

the national level does not fall by more than 5%.

• EIA directives and undertakings under agri schemes remain in place.

• Exemptions

• E.g. organic farms, more than 75% pasture.

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YOUNG FARMERS

• Up to 25% additional payment for young farmers for each of the first five years of the operation of

their business.

• To qualify as a young farmer you must be:-

• A natural person; and

• Not more than 40 years old in the year you make your payment application; and

• Set up as a farmer or head of holding within the previous five years.

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ACTIVE FARMER

• You have to be an active famer to claim the payments under the new scheme.

• To be an active farmer you must carry out a minimum agricultural activity on the land.

• Payments will not be made to those on the “negative list”:-

• Railway services;

• Real Estate Services;

• Permanent Sport and Recreation Grounds;

• Airports;

• Water Works.

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ELIGIBLE AREAS

• Minimum area for a claim will be 5 ha.

• Departure from before and designed to get rid of small areas which were perhaps not being used for

agricultural purposes in the last scheme e.g. pony paddocks.

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MODULATION

There will be a movement of 12% from Pillar 1 to Pillar 2 in years 2015, 2016 and 2017. This may rise to

15% in the next review.

12%

Pillar 2Pillar 1

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NON-CAPPING MEASURE

The spectre of capping was I believe used again in the review so that member states would negotiate

on and accept more unpalatable measures. Whilst we have escaped it again this time around there is

what is being called a “degressivity” measure which basically means that although payments will not be

be capped at a particular level there will be a 5% reduction on payments over.

150,000

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CASE STUDY

• Joe Farmer is a co-owner of 1000 hectares with his brother Ben Farmer. They farm 900 hectares in-

hand and let 97 hectares to a neighbour called Mrs Sprout, which is due for renewal and the

remaining 3 hectares is let to Ms Toggi.

• Joe and Ben are also in the process of buying another 300 hectares from a neighbour.

• Joe and Ben grow spring and winter wheat, barley, rape and beans.

• Joe and Ben have an old written partnership agreement but Ben is thinking of retiring and Joe‟s son

Harry, who is also a farmer, may join the business.

• Harry has a small holding of 20 hectares but is keen to do more. He turned 33 on 11 February 2014

and may want to join his father in the partnership.

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CASE STUDY

Issues arising from the Case Study

• Transfer of entitlements when Joe and Ben are buying the additional land.

• As you were! – we will continue to include a clause in our sale and purchase agreements which

allows for the transferral of the specified amount of entitlements. It will ensure that the relevant

parties comply with the cross compliance matters, submission of the RLE1 form and provide

indemnities for any loss or reduction in the amount to entitlements transferred. This process has

been made a lot easier because it has been agreed that existing entitlements can be rolled over

instead of a whole new system being introduced.

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CASE STUDY

Issues arising from the Case Study

• Mrs Sprout‟s FBT

• We will continue to include clauses in our FBTs which will, in the majority of cases, allow for the

tenant to use the entitlements whilst in occupation and to transfer them back to the landlord at

the end of the term.

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CASE STUDY

Issues arising from the Case Study

• Ms Toggi‟s FBT

• Miss Toggi will no longer be able to claim under the new scheme as she only rents 3 ha which

is below the minimum eligible area threshold of 5 ha.

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CASE STUDY

Issues arising from the Case Study

• Crop diversification

• Joe and Ben‟s in-hand land – they will need to grow three different crops on this land. This

could be the wheat, rape and beans.

• They will need to have 5% of their land under EFA. If DEFRA decide that a nitrogen fixing crop

is an EFA then the beans could also count as an EFA.

• Cropping licence v FBT – there has been debate about the use of cropping licences since the

days of the FVP arrangements. The RPA have never really taken the point but the academic

debate has raged. It is probably better from a pure land law point of view and cross compliance

control point of view to have an FBT rather than a licence but no doubt licences will be used.

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CASE STUDY

Issues arising from the Case Study

• Crop diversification

• Harry‟s Land – Harry will only need to grow 2 crops on his land because he is within the 10-30

ha threshold.

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CASE STUDY

Issues arising from the Case Study

• Young Farmers and business restructuring

• Harry could qualify as a young farmer and obtain the top-up payment on the land he owns.

• What if he became a partner in his father and uncle‟s business – probably not as he would not

be the head of holding and any split of the business would be heavily scrutinised by the RPA.

Unless there are other sound business reasons to restructure the business this additional

payment incentive would probably not warrant a restructure of a business either in terms of the

success rate or the professional costs involved.

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UNANSWERED QUESTIONS

• EFA – what are they?

• ESG – what land will be designated?

• How will the existing agri-schemes be affected by greening?

• How will the national reserve scheme work?

• Will dual claims be allowed?

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THANK YOU

CAP Reform Workshop

Monday 3rd March 2014

Christopher Monk

CAP Reform- Implications for your Farm

• Entitlements

• Greening Measures

• Environmental Stewardship Overlap

• Case Studies

• Degressivity

• Active Farmers & Young Farmers

• 2014 SPS Applications

CAP Reform Workshop

Entitlements

CAP Reform Workshop

New Basic Payment Scheme introduced on 1st Jan 2015

Single Payment Entitlements ‘rolled over’ in England to Basic Payment Entitlements

Need to transfer Single Payment Entitlements by 19th Oct 2014

Surplus Single Payment Entitlements will be lost

Basic Payment Entitlements can transfer from 15th Jan 2015 to 2nd April 2015?

Entitlements – implications

Make sure in correct ownership

If taking on/giving up land in September – act quickly

Do sums now- sell surplus

2 year use rule

Cap Reform Workshop

Greening Measures

Will make up 30% of the new annual payment

Non compliance penalty to rise to 37.5% by 2018

Ecological Focus Area (i)

Crop Diversification (ii)

Permanent Grassland (iii)

CAP Reform Workshop

i) Ecological Focus Area (EFA)

5% of arable area (7% in 2018?)

Range of options

Nitrogen fixing crops – Input restrictions

Landscape Features

Exemptions: > 75% perm grassland or organic

Overlap with Environmental Stewardship

Cap Reform Workshop

Ecological Focus Area

Source: European Commission

EXAMPLE EFA WEIGHTINGS

Landscape Features Unit Equivalent EFA area Comments

Hedges /m 4.5 Up to 10m

Wooded bank /m 12

Isolated tree /m 30 Crown >4m

Trees in line /m 6 Crown >4m

Field copses /m² 1.5 Overlapping crown <0.3ha

Field margin /m 9 >1m

Ponds /m² 1.5 <0.1 ha

Ditches /m 3 <6m

Fallow /m² 1

Buffer strips /m² 9 >1m

Agro-forestry /m² 1

Forest edges /m² 9 >1m

Short rotation coppice /m² 0.3

Catch crops/green cover /m² 0.3

Nitrogen fixing crops /m² 0.3

CAP Reform Workshop

Environmental Stewardship Overlap

Now closed existing schemes continue to end of term

No double funding allowed but;

Pre 2012 Agreements likely to allow options to be used for EFA

Post 2012 Agreements likely to suffer reduction where conflict with EFA

Some options can be used for ELS & EFA

New Environmental Land Management Scheme (NELMS) starts January

2016

CAP Reform Workshop

ii) Crop Diversification

2 crops if over 10 hectares

3 crops if over 30 hectares

Main crop up to 75%; 2 main crops together not more than 95%

Third crop could be EFA but input restrictions

Exemptions: holding is organic; or

>75% of the holding is permanent grassland and arable area is <30h

>75% of the arable area is grassland/fallow and arable area is <30 ha

> 50% of the arable new and not declared previous year- primarily for specialist cropping

arrangements

CAP Reform Workshop

iii) Permanent Grassland

Defined as grassland- established more than 5 years

Possibly grass margins?

2012/15 reference year – 5% tolerance

Administered at National level

CAP Reform Workshop

Case Study 1 80 Hectares CFA Block Cropped

Pre reform rotation: year one 1st wheat, year two 2nd wheat, year three: OSR

Basic contractors charge: £250/ha, Farmers first charge £250/ha, 50% divisible surplus

Greening rotation: 50% first wheat, 45% OSR, 5% fallow + increased contractors charge £275/ha

Consider opting out of greening

CAP Reform Workshop

Pre CAP Reform With Greening (10%

Increased Contractor

Charge)

Opting out of Greening

(30% Reduction in SP)

Average Arable Output £100,801 £93,960 £100,801

Gross Margin £55,867 £51,440 £55,867

Single Payment (£200/ha) £16,000 £16,000 £11,200

Net Margin £38,067 £33,240 £33,267

Divisible Surplus £18,067 £13,240 £13,267

Farmers Return £29,034 £26,620 £26,634

Contractors Return £29,034 £27,520 £26,634

Case Study 2 300 Hectares (Combinable) Farmed in Hand

Pre reform rotation: 1/3 1st wheat, 1/3 2nd wheat, 1/3 OSR

Greening rotation: 95ha 1st wheat, 95ha 2nd wheat, 95ha OSR, 15ha fallow

Not worth opting out of greening

CAP Reform Workshop

Pre Cap Reform With Greening Opting out of greening (30%

Reduction in SP)

Arable Output £378,000 £359,000 £378,000

Gross Margin £209,500 £199,025 £209,500

Single Payment (£200/ha) £60,000 £60,000 £42,000

Profit (before rent) £134,500 £125,525 £116,500

Case Study 3300 Hectares (High Value Crops) Farmed in hand

Pre reform rotation: 50% 1st wheat, 1/6 sugar beet, 1/6 onion, 1/6 pots

Greening rotation: 143ha wheat, 47ha s - beet, 47ha onions, 48ha pots, 15ha fallow

* Rent paid for fallow land £7425, £475/ha (£200/ac)

Consider renting in ‘green’ area

CAP Reform Workshop

Pre Cap Reform With Greening Opting out of greening

(30% Reduction in SP)

Renting 15ha

Fallow from 3rd

party*

Arable Output £886,500 £838,425 £886,500 £886,500

Gross Margin £614,200 £580,632 £614,200 £614,200

Single Payment (£200/ha) £60,000 £60,000 £42,000 £63,000

Profit (before rent) £404,200 £370,632 £386,200 £399,775

Degressivity

‘Degressivity’ instead of Capping – obligatory

5% above €150,000

Based on Basic Payment element only (not greening)

Salary offset – not available in UK

Up to 2275 acres – no deduction

4000 acres – £4830 deducted

CAP Reform Workshop

Other details

Active Farmer rule:

„Minimum Level of Agricultural Activity‟

„Negative List‟

Young Farmers’ Scheme:

Under 40 years old; Head of Business

25% top-up, for first 5 years, limited area

Estimate £22,000 over 5 years?

CAP Reform Workshop

2014 SPS Applications- Action

Entitlements in correct name

Calculate number of Entitlements – sell excess

Woods registered

Online preferred

Check Crop Coding – grassland and margins in ELS

CAP Reform Workshop

Summary

Basic Payments less

Greening – Final details to be confirmed

Simplification?

Mapping features – changes online – one set maps

Farm cropping/policy needs review – opt out/rent in

CAP Reform Workshop