28 June 2002

Make a radical response

Modulation aims to siphon

money away from direct aid

payments and reinvest it in

social and environmental

schemes. That leaves

arable farmers in need of

radical restructuring.

Charles Abel reports

MODULATION is wrong and must be resisted, but growers must also adjust their businesses to cope with having a slice of their direct aid payments removed to fund rural, environmental and marketing schemes.

That was the message for delegates at two conferences organised by farm consultancy Farmacy and farmers weekly over recent weeks.

For Farmacy chairman and Lincs farmer Vincent Hedley-Lewis, modulation is such a dark cloud, on top of low crop prices, that it has prompted him to radically restructure his own farm business.

"The trouble with modulation is the only money it offers back is money that has already been taken from growers. And even if we get the money back through one of the schemes there is still a cost. What you are doing under the scheme has a cost, and remember that you have already lost the money once through modulation."

Last year poor weather and mainly heavy grade three land near Grantham meant Mr Hedley-Lewiss Birkholme Estate lost £2/ha. Had modulation been at 10% he would have lost £26/ha and at the 20% proposed in the Curry report he would have lost £49/ha.

His response to the threat of increasing modulation and todays low crop prices is to restrict cropping to fields that can produce an economically viable yield and put the rest into set-aside. But that has downsides. "It only works if you can cut overheads in line with the set-aside. Its no good going to 50% set-aside if you are not removing half the costs," he notes. Re-kitting to bring set-aside back into production could also be costly.

So Mr Hedley-Lewis is renting in better land to replace the poorer land going into set-aside, in a bid to boost average yields to cover existing overheads.

Joint ventures, contracts and mergers are all being looked at to expand the area of economically viable cropping.

Cashflow need not suffer, he adds. "I can take on land at £80/acre first charge, which is roughly equivalent to the set-aside payment, less the cost of set-aside management." &#42

MODULATIONFIGHT-BACK

&#8226 Direct aid payments skim-off.

&#8226 3% now, 10% 2006, 20% 2010?

&#8226 Adapt business accordingly.

&#8226 Economic cropping plus set-aside.

&#8226 Beware hassle factor of schemes.

REASONSTOBECHEERFUL

1 Modulation may not be as severe or implemented as quickly as some suggest, says Andersons consultant David Bolton. The current rate is 3%, rising to 4.5% in 2005 and the government has already agreed to match funding over that period. Look at the fears we had for EU reform under McSharry. It took a long time for them to be realised.

2 Is the currency finally moving? With the k up from 61.4p in May to 64.3p in mid-June there is the prospect of a 5% rise in aid.

3 Farm labour cost will not go up until October, when the Agricultural Wages Board meets. I will be surprised if their rate is seriously adverse.

USFarm Bill: Enemy or ally?

Farmers in the US have gone from uncertainty to predictability, with the arrival of the US Farm Bill providing a guaranteed base price equivalent to £97-98/t for the next six years, says HGCA board member and Norfolk farmer Maris Skinner. That could be a huge ally for UK farmers, softening pressure for further reform of farm aid in World Trade talks. "Food and energy security have become big issues for the US since September 11." But the new US regime also encourages growers to produce more cereals, potentially flooding world markets and driving the world price even further below the $150/t on which Agenda 2000 CAP reforms were based. To combat market volatility growers need to identify a breakeven cereal price and lock into forward prices that give a profit, she advises. "HGCA modelling shows there is scope for a small upturn in profit in 2002/3 if growers lock into the forward prices that are available now."