12 April 2002

Light at end of tunnel is a long, long way off

Our final report from the farmers weekly/BASF

Brave New World of Arable Farming seminars in Perth,

York, Coventry, Newmarket and Winchester looks at

where our industry is heading. Charles Abel reports

DESTINED for disaster or looking towards a light at the end of the tunnel? According to Strutt and Parker consultants, there is light there, but a lot needs doing to survive in the meantime.

Although the k/£ exchange rate dominates profits, there is little growers can do to change it. So coping with the current crisis and watching out for policy changes is vital to ensure survival in the meantime.

Euro hassle

The impact of the k/£ exchange rate is clear, says Market Harborough-based Jonathan Armitage. On a typical 300ha mixed combinable crops farm, net farm income for 2002, with the k at 61.5p, is set to be just £6/ha, totalling £1800.

But that excludes farmer labour. Moderate drawings of £22,500 send borrowings up by over £21,000. "That is clearly not sustainable."

But lift the k to 70p, the government target, and prospects are transformed. Wheat values rise £9/t, oilseed rape £19/t and area aid £31/ha, lifting net farm income to £86/ha, making the business £24,000 better off.

"Thats not great, but it covers modest drawings," says Northallerton-based Richard Taylor. It also helps explain why arable farmers in the rest of Europe, including Eire, are enjoying increasing profits, adds Chelmsford-based Will Gemmill.

But farmers cant afford to wait for the exchange rate to move. Last years agrimoney compensation was withheld and now the scheme has ended. Producers must cope with the currency headache unaided.

Modulation

Modulation adds to their woes, currently knocking 3% of support payments. That could rise to 10% in 2004, cutting income by a further £16/ha, or £4800 for the 300ha model farm.

Prospects for recouping that through the Rural Development Programme and other schemes are slim, notes Aberdeen-based Tom Stewart.

The main problem is that schemes like Countryside Stewardship only compensate for average profits foregone. So livestock farms may benefit, but more intensive arable farms are unlikely to, apart from where they can use it to improve returns on more marginal parts of the farm.

"But youve already lost the money through having aid payments modulated in the first place, so I cant quite see how it fully compensates," says Mr Taylor.

Rural Enterprise Scheme projects for marketing and processing may offer some potential, notes Mr Gemmill. But their success will largely be driven by location and soil type.

Tenant farmers have the added complication that diversification plans can conflict with tenancy agreements and investments may not be recoupable.

Furthermore, there is no guarantee that government will provide match funding, so restricting the total funds available, warns Mr Taylor. "The EC sets the principles, but it is the UK government that implements them, as we saw with agrimoney. It is another reason why we are in an unfair situation compared with other countries."

Policy changes

Further changes to policy need watching between now and 2006 when the next round of CAP reform is due.

The EUs mid-term review of Agenda 2000 CAP reforms is unlikely to bring big changes and most will benefit the UK.

Voluntary set-aside is likely to continue, but compulsory set-aside could be cut to 0%. "That makes sense," agrees Salisbury-based Simon Butcher. "If we are being asked to farm competitively on the world market then they can hardly ask us to do so with one arm tied behind our back."

Modulation could also become compulsory across the EU, instead of in the UK, France and Portugal only. "If we are going to have it, why shouldnt everybody else too, to keep the playing field level," says Mr Armitage.

Compulsory cross-compliance is also possible, requiring certain environmental standards to be met to qualify for aid. "That may be good news, putting aid payments into the WTO green box, so they can continue," he adds. Measures should be broad and shallow.

Cereal intervention prices will probably drop further, matched by a 2.5% rise in direct aid.

Alongside the CAP review, the EU will expand to include 10 east European countries. "I dont think there is any doubt that they will be added by 2004," says Mr Butcher. "That will make EU decisions more difficult as well as raising CAP budget issues."

The current World Trade Organisation round is also due to complete in 2005. "One word of warning on that is that the peace clause allowing IACS aid runs out in 2003," says Mr Gemmill. "I imagine it will be extended to 2005, to be in line with CAP reform, but it could run out thereafter."

On-farm response

To cope with such changes farms are likely to polarise into efficient low cost producers, added value producers or diversified businesses creating extra non-farm income.

To be successful, elements of all three are needed, says Mr Stewart. "But farms that do nothing will struggle to survive."

One area that is still not really being grasped fully is between-farm co-operation, says Mr Gemmill. "It can add value and cut costs." &#42

The governments failure to provide support agreed at EU level is a big disadvantage, says Stewart Taylor, Strutt and Parker, Northallerton.

No more compulsory set-aside would be welcome, says Simon Butcher, Strutt and Parker, Salisbury.

If we have to have modulation, shouldnt everyone else too? asks Jonathan Armitage, Strutt and Parker, Market Harborough.

Recouping income lost to modulation is far from easy, warns Tom Stewart, Strutt and Parker, Aberdeen.

EU biofuel goals could boost crop prospects, says Will Gemmill, Strutt and Parker, Chelmsford.

&#8226 70p/k = wheat £74/t, barley £80/t, OSR £159/t, area aid +£31/ha.

&#8226 Ave net farm income +£80/ha.

&#8226 Difficult to recoup modulation.

&#8226 Cross-compliance to protect aid payments?

&#8226 Compulsory set-aside set to go?

&#8226 New EU members = budget fears.