3 April 1998

MODULATION BEGINS

TO TAKE SHAPE

Now that the EU is beginning to firm up its modulation

proposals, how might they affect UK farmers?

Christopher Monk from Strutt & Parker looks at some

possible different scenarios

THE final shape of farm support under Agenda 2000 will be negotiated over the next 18 months. But it is clear that there are firm proposals to couple the provision of aid with environmental and employment criteria as well as cutting overall payments by applying ceilings on amounts received.

This means that larger farms will be hit from three angles – first for being too efficient, second for failing to meet certain environmental criteria and third for simply being too big.

Under the proposals, cuts of up to 40% could be made by member states depending whether or not farms meet labour and environmental criteria – which although defined broadly by the EU, will in practice be interpreted and administered by member states.

The employment criteria could be related to the number of standard man days that farm clocks up during the course of the year. These will be based on the number of acres cropped, size of the dairy herd and so on. If the final figure falls short of the national average, support will be cut.

Assessments may examine whether a farm breaks existing environmental provisions, for example in the disposal of farm waste. They may also look at the extent to which it complies with new national standards – which could be anything from public access rights to provision of conservation headlands. Such criteria would be defined by MAFF.

Any ceilings on area payments will be applied to the net figure once the environmental and employment criteria deductions have been made. It is proposed that the first 100,000 ecu (approximately £70,000) would be received at the full rate, the second 100,000 ecu would be received at 80% and any remaining aid over 200,000 ecu would be paid at 75%.

For example, an 800ha (2000-acre) arable farm employing two men and two seasonal workers which receives £236,200 in area aid, could see that level of support cut by £108,910. This would take the form of a 40% cut because the farm fails to meet the employment and environmental criteria (£94,480) followed by the application of the ceilings leaving a net payment of £127,290.

Later requirements

It is ironic that farms which have in the past sought to be as efficient as possible will actually be the hardest hit. Farmers could well find themselves thinking about employing (or at the very least retaining) an additional man so as not to lose support.

In the example above, the fact that the farms labour requirement came to only 680 standard man days, as against a national average of 960 standard man days, means that the cut for failing to meet the labour criteria alone, could be as much as £47,240.

The Agenda 2000 package is the EUs response to a mixture of pressures extending from the overall costs of the agricultural policy in terms of the total EU budget. There are also strong political pressures for farm policy to deliver tangible environmental benefits and EU farm support to be more in tune with the liberalisation of world trade.

Moreover, ministers will need to show progress in the dismantling of the EUs regime, regarded elsewhere as too protectionist, when the world trade organisation meets again in 1999.

The Agenda 2000 proposals seek to reduce the support for commodities – a 30% cut in the intervention support for beef, and 20% cut in cereals and 15% cut for milk. Ironically, the proposals seem likely to increase the cost of the CAP. Mr Fischler argues that taxpayers will be prepared to pay for the additional environmental benefits that the reforms will bring about.

Limiting the total amount that an individual producer can claim is going to hit the larger, more efficient farm. Farmers will have to become even more competitive and efficient if they are to survive. Smaller farms may well be much less affected by the introduction of modulation.

For example, a 400ha (1000-acre) arable farm employing two men and a seasonal worker would probably meet the standard man-day criteria and, therefore, might only suffer deduction so far as the environment criteria are concerned. The ceilings would then be applied to the net figure, and at the current 100,000 ecu cut-off, the total reduction in support for this farm would fall from approximately £118,000 to £89,500, proportionately a much smaller decrease than in the 800ha (2000-acre) example given earlier.

Standard man days

Another of the changes announced in the Agenda 2000 proposals is the introduction of a new dairy cow premium and a single rate of payment for cereals, oilseed rape, linseed and voluntary set-aside – peas and beans would attract a premium above this rate.

For a 530ha (1300-acre) mixed farm employing four men and a seasonal worker, the impact of the modulation and ceiling proposals would be significant.

Assessed on the basis of 0.5 standard man days (SMD) on each acre of crops and 5 SMDs for each head of cattle, such a farm with a 180-strong herd of dairy cows would need to employ 1530 SMDs in order to avoid the cuts. The example farm in question can only fulfil 1075 SMDs leading to a £25,800 reduction in aid. Coupled with a £6640 reduction in support following imposition of the ceilings, this would result in the farm receiving £32,440 less in overall subsidies.

One of the upsides of the proposals is that the savings made through the 20% cuts from failing to meet the employment and environment criteria will be channelled back into agri-environmental schemes in which farmers can participate. It is theoretically possible, therefore, that farmers could apply for all the schemes available to them and reclaim this "lost" support. However, this has to be taken in the context of any additional cost which may be incurred in order to fulfil the requirements of such schemes.

A form of modulation has existed in some countries for a while. In the US, there is already a ceiling on total aid payments.

Below: Fear of modulation in the UK has been based on the relatively large size of UK farms compared to those in mainland Europe.