CAP POST 2013 OCTOBER 2011 UPDATE smithsgore.co.uk
CHALLENGING BUT NOT RADICAL REFORM PROPOSED The European Commission published its draft proposals on 12 October 2011. They are largely the same as those leaked in August. The reform is not as radical as the rhetoric at the start of the process suggested but it will pose some practical challenges to UK farmers, particularly those who let land out.
THE KEY POINTS
THE BROAD AIM OF THE REFORM
• EU agricultural budget is largely unchanged – a significant cut had been feared
A greener, more equitably distributed CAP, which focuses on environmental protection and reducing climate change.
• Direct payments will continue but they will be at least 30% lower, but can be topped up by a ‘greening’ payment
It will also aim to support the overarching growth strategy for Europe, called Europe 2020, in making the union more competitive, innovative and the leading body on climate change.
• Farmers will have to do more ‘green’ work for their payments • UK will continue to receive a low level of Rural Development funding, as the redistribution between countries is not significant, so agri-environment schemes will continue to be underfunded. Environmental bodies will be disappointed • Capping of payments to ‘large farmers’ is proposed, affecting those receiving over £131,000 from the Basic Payment Scheme. Implementation seems overly complicated • Direct payments will only be made to ‘active farmers’ - those whose direct payments are greater than 5% of their total receipts from non-agricultural activities. Implementation seems vastly complicated
THE MAIN POLICY AIMS FOR AGRICULTURE 1. Food security This is an overarching aim as food production in Europe is now seen as strategically important given the rising world population and food price volatility 2. Environmental protection This is a key element – not a ‘nice to have’ that will be dropped due to economic circumstances 3. Social and economic - the policy will support populations in rural areas, especially ‘physically disadvantaged’ ones Based on information available in October 2011 following European Commission draft legislative proposals.
Whilst every effort has been made to ensure the accuracy of this briefing, its information may not be comprehensive and recipients should not act upon it without seeking full professional advice.
THE OVERALL BUDGET FOR AGRICULTURE It looks like the budget for agriculture could be largely the same. A small real fall is proposed in the Multi-annual Financial Framework published in June but this is still to be agreed, which is likely to happen sometime in 2012. This is probably the best deal that farmers and the CAP could have expected. 36.2% of the overall European budget has been allocated to agriculture, which is down from the current 39.4%. This is a much smaller cut than had been feared.
PILLAR 1
DIRECT PAYMENTS
Direct payments provide income support for farmers and the public goods demanded by the European public.
Payments based on historic claims will be phased out by 2019, after which they will be made on ‘uniform unit values’ in each country. The plan is to have a single flat rate across Europe by 2029.
ALLOCATION OF BUDGET
REALLOCATION OF ENTITLEMENTS IN 2014
• 30% of the Pillar 1 budget will be allocated to 'greening' so direct payments, now called the Basic Payment Scheme, will be lower. • What counts as eligible area will be recalculated in 2014, using who received the payments in 2011 as the reference period. The ideal budget for Defra is a smaller one, focused on Rural Development measures, particularly climate change and agri-environment. This is unlikely to happen. The reallocation of entitlements in 2014 could be complicated and time-consuming like it was following the 2003 reforms. New entrants or restructuring businesses beware! Purchase contracts need particularly careful drafting. Applications to a ‘National Reserve’ offers no great comfort.
GREENING
ENVIRONMENTAL WORK THAT FARMERS MUST DO TO RECEIVE DIRECT PAYMENTS
• Farmers will have to do at least three measures in addition to cross-compliance, which will continue and be simplified, to receive an additional annual payment on top of the basic direct payment. Organic farmers will automatically receive it: 1. Crop diversification: arable farms must grow at least three different crops, each covering at least 5% and no more than 70% of the area. If adopted, this would hinder 50% wheat and 50% oilseed rape rotations practiced on some farms. 2. Permanent grassland: grassland over five years old and which was not set-aside must be retained. 3. Ecological focus area: at least 7% of the farm (excluding permanent pasture) managed for the benefit of the environment (e.g. fallow, buffer strips, hedges, field margins, woods). • The payment will not be cut back by capping. • Member States will fund the top up payment using 30% of their national pot. • They may also use 5% of their national pot to finance annual area-based payments for farmers in Less Favoured Areas; this is in addition to payments to LFAs under the Rural Development pillar. The environmental top up will not be popular with Defra; it wants to separate direct payments from environmental payments as it considers this the best way to achieve its long-term objective of ending direct payments to farmers. The ‘greening’ route helps the European Union justify continuing direct payments to farmers. Given that this appears to be how the CAP will be shaped for the next six years, it will be interesting to see how Defra responds. Environmental groups do not think it will improve the farmed environment and will campaign for it to be changed.
ACTIVE FARMER
DIRECT PAYMENTS FOR REAL OR TANGIBLE AGRICULTURAL ACTIVITY ONLY
• Payments will only be made to 'active farmers' and not 'sofa farmers', such as non-agricultural recipients such as sports grounds, stud farms or airports. • Direct aid will only be paid to people whose direct payments are greater than 5% of their ‘total receipts’ from non-agricultural activities and carry out a minimum level of farming activity (defined by Defra). This could be very complicated and invasive to administer. Defra should fight against it as it would disrupt the landlord and tenant system and many 'conservation' farmers who contribute to biodiversity and social aims. This is one of the most challenging elements of the reforms.
The balance of spending between both pillars is kept the same, so that the majority of spending is on direct payments and just under a quarter is on Rural Development; but new mechanisms will be introduced so Member States can make transfers between pillars (see below). There will also be a shift in how the overall budget is spilt between Member States, so that payment rates per hectare are more equal – but not equal. The rate that this will happen will probably be slower than originally expected; the current long-term proposal is for all Member States to receive at least 90% of the EU-27 average; this reform will only achieve a third of this. This will not be popular with new Member States at all, who had wanted much quicker change, but ‘complete convergence’ will be looked at after 2020. Member States can transfer up to 10% of their annual ceiling from Pillar 1 to Pillar 2. Member States, like the UK, who receive less than 90% of the EU average direct aid can transfer 5% from Pillar 2 to Pillar 1.
CAPPING OF PAYMENTS TO LARGE FARMERS
% cut in payments
Direct Payments (€)
Direct Payments (£)
€150-200,000 €200-250,000 €250-300,000 €300,000 +
RURAL DEVELOPMENT
Rural Development means promoting competitiveness, management of the environment and development of rural areas. The threat to the whole Rural Development pillar that appeared in June 2011 has gone – Pillar 2 will stay but how it operates will change.
STRUCTURE OF RURAL DEVELOPMENT
• This is a key element of the Commission’s plans. • The proposal is to introduce a progressive capping system on direct payments, but to make allowances for farms employing high numbers of workers by allowing the salary costs (inc tax & NI) from the previous year to be deducted before the cap applies. £131-175,000 £175-219,000 £219-263,000 £263,000+
PILLAR 2
20% 40% 70% 100%
NB Based on £1:€1.14 exchange rate
• The Commission will introduce anti-avoidance measures so that farmers who have split holdings or made transfers between relatives can’t avoid the capping. The measures are likely to apply from 12 October 2011. • Environmental payments will not be capped. • Any funds generated by capping can be used by Member States for Pillar 2 Rural Development projects (but only for farmers innovation and investment projects). This will only affect around 5% of farms in the UK but it is serious for them. Like ‘active farmer’ it may be complicated to administer. For example, how will pension, housing and benefits be treated. On estates, will maintenance & keepering staff be included? A potential minefield.
•
The current structure of three axes will be replaced with a ‘measures based’ approach to contribute specifically to the achievement of one or more EU priorities in the Europe 2020 policy which include knowledge transfer, enhancing competitiveness and farming viability, preserving ecosystems, low carbon economy and job creation. A significant amount (20% minimum) of rural development funding should be on climate change reduction. • Member States will select from a menu of programmes including: • Innovation: Knowledge transfer, adaptation to low carbon farming • Strengthened farm advisory services • Restructuring and investment grants • Risk management tools, including subsidised crop and weather insurance • Agri-environment funding that supports collaboration and training • Top ups for Less Favoured Areas • Funds for villages, including rural broadband • LEADER projects, which are now the main approach for community-led development. • There will be more co-ordination between policies, such as the cohesion, social, regional and fisheries policies and CAP. We hope this also means that it will be easier to combine funding streams. • Rural Development will remain co-financed, i.e. funded by both the EC and UK Government, with 50% coming from each (apart from a few exceptions).
BUDGET There could be a significant change in allocations between Member States, which is probably good news for UK farmers as we get a small proportion of the pot. 50% of each Member State’s budget will remain based on historic or past distribution and the remaining part will be based on new objective criteria. Defra is a strong supporter of Rural Development spending - it is one of the few areas of CAP spending that it wants.
A problem for Defra’s negotiators is how to get enough RD spending in the short term, which it wants, without supporting the continuation of direct payments, which it does not!
If there is not going to be a significant increase in RD spending, environmental bodies will push for greater ‘greening’ of direct payments.
Please contact our farm management team to get the latest information on the proposals and to assess how the reforms might affect your business.
Head of Farm Management Simon Blandford t 01962 857405 e simon.blandford@smithsgore.co.uk South East England Simon Blandford t 01962 857405 e simon.blandford@smithsgore.co.uk South West England Thomas Brunt t 01672 529053 e thomas.brunt@smithsgore.co.uk East of England Robert Childerhouse t 01638 676749 e robert.childerhouse@smithsgore.co.uk
TIMETABLE EUROPEAN BUDGET TABLED
June 2011 but probably agreed in December 2012 by EU prime ministers and presidents in their December Summit
DRAFT LEGISLATIVE PROPOSALS Published 12 October 2011
PROPOSALS AGREED
2012 – but possibly slipping into 2013 due to co-decision with European Parliament
NEW CAP OPERATIONAL
1 January 2014 – but probably slipping into 2015, which will cause issues for some national rural development schemes which end in December 2012
East Midlands Robert Childerhouse t 01638 676749 e robert.childerhouse@smithsgore.co.uk West Midlands Andy Pillow t 01543 261992 e andy.pillow@smithsgore.co.uk Yorkshire and Humber Michael Yeadon t 01904 756310 e michael.yeadon@smithsgore.co.uk North East Duncan Winspear t 01434 636071 e duncan.winspear@smithsgore.co.uk North West Richard Cantillon t 01387 274384 e richard.cantillon@smithsgore.co.uk Southern Scotland James Worthington t 01387 274383 e james.worthington@smithsgore.co.uk Northern Scotland Alison McKnight t 01343 823006 e alison.mcknight@smithsgore.co.uk
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