THE SFP SYSTEM

UK Output and Subsidy

Until now, most farmer support has been from direct payments like arable area aid and livestock headage payments. Non-farming payments also went direct to farmers, mainly covering agri-environmental and other grant schemes. Market support payments tended to go to merchants and food processors rather than direct to farmers.

With decoupling of production from subsidy, driven by World Trade Organisation demands and EU enlargement, the blue box will largely disappear in the UK in 2005. It will become the single farm payment (SFP), classified as a green box payment.

This will have a fundamental impact on the economics of farming in the new era. And the SFP will decline over time, with EU budgetary pressures likely to increase the cuts for financial discipline imposed on the SFP beyond 2007. This will only be partly offset by increasing “other agricultural income” in the rural development green box.

A new era in UK farming

Breaking the link with production means cropping and stocking decisions will not be distorted by subsidy considerations – the focus should be on producing for the market.

If there is no satisfactory market, farmers can stop producing yet still receive the SFP. Eventually, it will only make sense to produce if farming can be done profitably without subsidy.

Ongoing farmer support will increasingly be payment for land management. It all starts on Jan 1, 2005, and it is essential to understand the changes over the next 12 months as the new SFP system is bedded in. It is also important to start to assess the impact on farm businesses, and decide on a business strategy.

Contact with English farmers by the RPA began in July 2004 with the issue of the SP1-4 forms. The SP1 was the information statement on which individual farm payments were based. The SP2A (for amending reference amounts) has a deadline of Jan 31, 2005. The SP3 deals with business changes from 2000 to May 16, 2005, while SP4 is for applications from farmers who came into the industry during the reference period.

The next form for English farmers will be the SP5 or the IACS 2005, which should be received in March/April 2005 and must be returned by the crucial deadline of May 16, 2005.

Summary of UK decisions

England has chosen to pay the SFP as a delayed regional area payment (RAP). Before 2012 it will be made up of a mix of a farm”s historic claim, based on subsidy receipts during 2000-02, and the flat-rate RAP. England has decided not to implement the national envelope options.

Wales has decided to pay the SFP based on historic claims (2000-02). There will be no use of national envelopes in Wales.

Scotland has also chosen the historic payment method. But it will operate a national envelope for the beef sector, with 10% of beef-derived entitlement values being used to fund a suckled-calf premium.

Northern Ireland has chosen a hybrid between the historic and the regional flat rate systems.

All regions decouple dairy payments in 2005, but there will be different cross-compliance regimes.

Historic systems

There are key differences between the historic system, adopted by Scotland and Wales, and the English regional system. The 2005 claim is less important in Scotland and Wales because most of the calculation uses figures from the reference period. There may be a question-mark over how sustainable a fully historic system is over the next eight years.

SFP regional differences

The likely consequences of the different payment methods chosen by England, Wales and Scotland for the combinable crop sector are outlined.

The figures have been calculated assuming 100ha (240 acres) of combinable crops and show the SFP/ha after all deductions.

In 2004, English growers receive a higher payment because the calculation is based on a higher cereal yield, and in 2005 they will still get more than in Scotland and Wales because the payment will be 90% historically based.

However, by 2012 English growers will receive only the RAP of about 160/ha, and after deductions this is likely to be considerably lower than their counterparts in Scotland and Wales.

For livestock producers, the general rule-of-thumb is that more intensive producers lose out under the move to an English RAP, whilst those operating extensive systems gain.

Funds

The UK national ceiling for funding the SFP is based on historic claims in the reference period 2000-2002. It has been adjusted for the inclusion of dairy compensation up to 2007. It will be divided out between the four devolved administrations and the approximate share for England is 2.5bn.

From the indicative rates published by DEFRA, it is possible to work out the approximate funding in the three English regions.

Calculation of entitlements 1

A simple example farm demonstrates how the rather complicated English system is expected to work. The farm is a 200ha (500-acre) lowland farm with cereals and sheep but no permanent pasture.

The farm will be awarded two types of payment entitlements. Firstly, set-aside entitlements equate to 8% of the total area, or 16ha-worth. These are paid at a percentage of the RAP only (by 2012 this is expected to be about 315/ha in England).

All the other hectares will be awarded standard entitlements, so on this farm there will be 184 standard one hectare entitlements paid at changing percentages of both RAP and historic values as in table overleaf.

The next stage is to calculate the historic or reference amount and divide by 184 to give a gross value for this example farm’s standard entitlements. (The basic information will be taken from the SP1 form).

On this farm, arable claims averaged 150ha (370 acres) and sheep annual premium claims averaged 600. These are multiplied by relevant euro amounts to give the gross value which is then divided by 184 to give a gross value for each standard entitlement of 371.

Calculation of entitlements 2

The next stage of the calculation is to work out the value of the example farm”s SFP before deductions, for the years through to 2012.

The set-aside and standard entitlements will have different values, and these are calculated in the transitional years from changing percentages of the RAP and historic elements.

The standard entitlement value each year is the sum of the RAP and historic elements. In 2005, the example farm standard entitlements will be worth 365.4/ha before deductions, reducing to 315 by 2012.

Calculation of entitlements 3

However, there will be deductions from the SFP. Multiplying out the 2005 values calculated above gives a total gross value for the farm of 67,738.

The first deduction is an estimated 5% for national reserve and regional ceiling. Then there are two types of modulation – EU modulation which starts at 3% in 2005, and English modulation which starts at 2%.

On all farms, the first 5000 of the SFP is exempt from EU modulation. So this has been added back to give a net SFP value of 61,114. This has then been converted to pounds (1=68p) giving an expected net SFP of 41,557.

This must be paid between December 2005 and the end of June 2006 and DEFRA has promised to try to pay as early as possible in that payment window.

ENTITLEMENT ESTABLISHMENT AND CLAIM

The 2005 IACs form

The next chance to influence the level of SFP in England will be the SP5 or the 2005 IACS return.

The 2005 year is crucial under the English delayed RAP system – land must be declared in the 2005 year to establish entitlements, or the opportunity of receiving an asset that provides an income for at least the next eight years will be lost.

The deadline for the submission of the 2005 IACS forms will be May 16, 2005.

Establishing and claiming

Farmers will establish a number of entitlements based on the number of hectares declared on their 2005 IACS.

There does not have to be any connection with land that built up the claims history in the reference period. To establish entitlements there is no need to have 10 months’ occupation – this is a payment condition. Entitlements over a particular area of land can only be granted to one claimant.

The allocation is a one-off, the opportunity to be granted entitlements will be lost on land unclaimed in 2005. If occupation of land changes after 2005 (for example a tenant quitting a holding), there would be no re-allocation – the 2005 applicant would retain them.

A number of conditions apply before land can establish entitlements. The claimant must have a holding number, it must be eligible land (see below for details), and the land must be registered on the Rural Land Register (digitally mapped). The minimum application area will be 0.3ha.

Eligible land

It will be possible to establish entitlements on most farmland, though orchards, vineyards and some nuts (traditional orchards can be eligible) are excluded, as is land used for “non-agricultural purposes” (including farm tracks and buildings). However, land used to graze horses will be eligible.

Land placed into agri-environmental schemes (for example, countryside stewardship) in the past or future will still be eligible to receive SFP.

Next, there is the question of “What land can you use to claim payment?” All eligible land you declare to establish entitlements can be claimed against, except any in fruit, vegetables or potatoes for which you have no authorisations.

Right to entitlements

The farmer who is in occupation of land in 2005 has a right to SFP entitlements whether landowner or tenant.

Where there are short-term tenancies or licences (but for at least 10 months) the right to claim the SFP in 2005 in England could belong either to the tenant or landowner depending on the agreement. However, it is generally more difficult for the landowner to claim where there is short-term cropping land let on license.

For contract-farming agreements the contractor has no right to land in a proper agreement, so entitlements are established by the landowner/farmer (or the tenant/farmer employing a contractor).

Share-farming agreements are more difficult as only one party can claim the right to entitlements and must meet all the necessary conditions.

PAYMENT CONDITIONS

Getting paid

To receive SFP, a claimant must be a farmer exercising an agricultural activity. This does not mean having to farm in the traditional sense of the word. The legislation specifically states that keeping land in good agricultural and environmental condition (ie cross-complying) makes you a “farmer”.

Having established entitlements in 2005, claims can be made against each one as long as the farmer has 1ha per entitlement. Payment conditions, which are outlined below, must be fulfilled to receive payment.

The 10-month rule

Farmers claiming the SFP must declare that the hectares are at their disposal for 10 continuous months. They will be able to choose when this 10-month period runs, within a defined window.

The 10-month rule has important implications for the transfer of land. Where the whole holding is transferred, the new occupier can take on the 10-month period from the transferor even if it is a different period than his own holding.

This does not apply to the transfer of part holdings, so that it is much more likely that SFP payments will be lost where part holdings are transferred and 10-month rule obligations are not met. This means those planning future land transfers will need to set their 10-month starting dates accordingly.

At your disposal

The term “at your disposal” in the legal text does not have any particular meaning in UK law. In most situations it is obvious whether or not the farmer has land at his disposal, and this would include the right to use land to the exclusion of others, eg, freehold (without a lease), or leasehold (without a sub-lease).

However, where more than one farmer carries out agricultural activity on the same land, there could be problems. It is most important that this is sorted out by the parties and only one puts in the claim. DEFRA has given a number of guidelines on its website.

Cross-compliance 1

The cross-compliance rules come in two parts. Firstly there are the statutory management requirements (SMRs) taken from EU directives. They will be phased in over 3 years. This legislation is already in force, and many farmers are already being inspected on parts of it under farm assurance schemes.

A Farm Advisory System will start in 2007 to help farmers meet the cross-compliance rules.

If farmers are making any claim under the SFP system in a year they must abide by these requirements on all their farmed area for the entire calendar year. It does not just apply to the area on which the SFP is being paid nor just for the duration of the 10-month period.

The second element to cross-compliance requires that land must be kept in good agricultural and environmental condition (GAEC). English rules are outlined above.

Under cross-compliance, there is no requirement for the land to be actually “farmed” – it can be left fallow and still pick up the SFP as long as it is managed correctly. These are the rules planned at present, but Brussels or Whitehall may ask for more in future.

Set-aside 1 and 2

In England, there is no set-aside in the severely disadvantaged area moorland region, but there will be in the other two regions. The rate will be 8% in lowland England and 1.3% in other SDA.

Farmers will be exempt if their total arable land is less than 19.48ha (about 48 acres) in the lowland region and less than 122.36ha (about 302 acres) in the other SDA region. Wholly organic farms are also exempt.

The calculation of how much set-aside farmers require in 2005 needs to be done carefully because it sets the number of set-aside entitlements for the whole life of the new regime.

The set-aside calculation must be applied to all arable land in 2005, except that which was in permanent pasture or permanent crops at May 15, 2003.

Arable land is all land in an arable rotation, except for grass which is more than five years old (defined as permanent pasture). Land that has been in set-aside keeps its arable status even if it has been in grass for five years or more.

Set-aside entitlements must be validated by putting arable land into set-aside and set-aside entitlements must be claimed first – they cannot be ignored. Set-aside land can be rotational and it can be used to grow non-food crops.

From 2004 it has been possible to have a minimum set-aside strip of 6m alongside a living feature (defined as water, hedges, woods or SSSIs). The full management rules for set-aside are expected to be similar to the current rules, but these will not be announced until the autumn.

Issues for 2005 and beyond

The regional and historic parts of the English SFP entitlements cannot be separated once they have been created in 2005.

In England, it is possible to concentrate entitlements onto a smaller area in 2005 only. However, any entitlements that are not validated (unused) for three years will be confiscated to the national reserve. But entitlements will have individual reference numbers so it will be possible to rotate the validation yearly amongst the entitlements held to keep them all “live” and prevent confiscation.

After 2005, farmers can transfer entitlements by sale with or without land, by lease with an equivalent number of hectares, or by inheritance.

In England, we expect very little trading of entitlements as nearly all land will have entitlements established on it in 2005 and it is not possible to add one entitlement to another. Most trade will therefore be between outgoing and incoming occupiers of land, or swaps of the different types of entitlements.

Negative list crops

Within the legislation there is a negative list’ of crops – (soft) fruit, vegetables, and potatoes (also known as FVP crops).

Under the regional payment system in England, land being used to grow these crops will be able to trigger SFP payments, but only if the farmer has been issued with special entitlements that have FVP “authorisations”.

Entitlements with an FVP authorisation do not have to be used for negative list crops – they can be used against any eligible land. Note also that FVP crops are a generic category. For example, authorisations granted due to growing of potatoes can be used against land planted to vining peas.

Authorised entitlements will be granted on the area of FVP crops grown in 2003 (241,200ha). If claims from 2003 cropping leave any spare authorisations from the national total then these will be allocated on the basis of 2004, and then 2005, FVP areas. These areas will have to be declared on the 2005 IACS form. Remember that establishing entitlements on areas growing these crops in 2005 will generate extra set-aside entitlements.

FVP – problems and solutions

Specific problems occur in this sector because much of the actual production of these crops is now undertaken by specialist growers. Fields are often taken on short-term arrangements from other farmers so that clean land can be used.

This can give rise to difficulties with the 10-month rule. In the past many of these arrangements have been informal. Difficulties also arise because, to get authorised entitlements, the person who makes the entitlement application in 2005 must also be the one who was growing the FVP crops in 2003.

Further problems arise because both the grower and land provider may think the authorisations should be theirs. All this will mainly be a problem for 2005 when all the entitlements and authorisations are being granted.

In the main, there are four different approaches that can be used – land swap, tenancy, cropping licence and contract-farming agreement.

All these arrangements have their own pros and cons, and professional advice should be taken.