22 August 1997

MODULATION: ON

THE AGENDA BUT

AT WHAT CUT-OFF?

Modulation – capping the amount of aid an individual farmer can receive – seems to be on the agenda again. George Chichester, a farm business consultant with Strutt and Parker, tries to predict what form it might take

BRUSSELS has spoken and the latest thoroughgoing revision of the Common Agricultural Policy is now under way. Two of the key questions now facing all but the smallest of Britains farmers are: Where will the threatened cut-off point for EU aid be set? And how will EU legislation affect the future management of UK farms?

The background, as most farmers are all too aware, is the Agenda 2000 package of reforms announced by Jacques Santer in Brussels on July 16.

The main feature is the further phasing out of intervention policies in favour of direct aid, something that most people regard as inevitable because guaranteed production subsidies led to Europes notorious mountains of food and drink.

However, nothing in Europe comes cheaply, least of all reform. Although cutting support prices will save up to 3.7bn ecu (£2.6bn), extending direct aid on each tonne of cereal or head of cattle will cost up to Ecu 7.7bn ecu (£5.5bn) putting an additional 4bn ecu (£2.9bn) on the CAP bill. Even though this level of payment is likely to come under pressure in the future, savings are already being sought.

One of the most radical ways of restraining cost is to introduce a ceiling on the amount of aid an individual farmer could receive – the concept of "modulation". If it happens, UK agriculture would be penalised more heavily than virtually all other EU members because it has a greater proportion of larger, more efficient farms.

The meaning of modulation, like many concepts emanating from Brussels, is obscure, but the idea is definitely not new. We already have a ceiling on the headage payments for beef cattle. "Larger" arable farmers with more than 15.6ha (38.5 acres) are obliged to put part of their land out of production into set-aside if they wish to receive arable area payments. Sheep premium was allocated at the full rate on the first 500 head, and at half rate thereafter. Milk quotas have been around since 1984.

General principle

Modulation was proposed as a general principle in the run-up to the 1992 reform of the CAP, but was not proceeded with, mainly because of sustained and reasoned objections from the UK. Its residual influence was the rule which exempted from set-aside requirements those EU farmers producing less than 92t of cereals.

The present proposals are as yet vague, and they may of course – and indeed ought to – include a phased reduction in support on a sliding scale, but they indicate the possibility of a ceiling on the total subsidy payment for each farmer, akin to the system already operating in the United States.

What everyone wants to know is the level at which the ceiling might be set? Figures being talked about behind the scenes in Brussels suggest a ceiling of 150ha (370 acres), but there is another rumour that £175,000 may be the ceiling!

Another approach is to translate the US system into European terms. Their ceiling is normally $40,000 (£25,000), but farmers find that $80,000 (£50,000) is readily attainable. Taking the larger sum to equate to about £50,000, and dividing it by the current arable area payment across a rotation of £250-£300/ha (£100-120/acre) gives a figure of around 165ha (416 acres).

Both of these guesses are reasonably close to each other, but neither would constitute a viable holding in many areas of farming.

The second issue which must concern farmers is what constitutes an agricultural holding for the purposes of modulation. Reports of the Brussels announcement have spoken simply of "large farmers" and "large landowners" – acceptable shorthand in a brief report, but not much help for people who need to plan ahead.

Structure of ownership

The issue is not only the size of a holding, but its structure of ownership. The most obvious complication is tenancy. Under present rules, direct aid will be paid to the operator or tenant, but this means that a large estate with many individual tenancies will benefit, albeit indirectly, for the payments, whereas farms held in a single ownership will be penalised.

Current rules on ownership clearly define a holding as being all the production units managed by an individual (which includes individual farming companies and other arrangements) in a single EU member state, where that individual benefits from the profits of such units or bears their losses.

MAFF, in seeking to define ownership of the present criteria for IACS purposes, asks a wide range of questions which appear in a three-page annex to the form.

They start with the location of the farms, whether they are close or adjoin each other. They want to know the status of businesses, when they were set up, and why. They want to know all the details of directorship, share-holding and day-to-day management, and the extent of managers authority, including the discretion to purchase inputs and sell produce.

They want to know full details of any transaction between the holdings, and whether they are on a fully commercial basis. Do the businesses invest in each other, and would they subsidise losses?

MAFF wants to see separate accounts, farm plans, sales contracts, tax status, VAT registration, livestock records where applicable, registration and herd marks. Does each business have its own complement of working machinery and equipment, and sufficient labour to cover its needs?

The ministry obviously wants to know about sharing arrangements, whether they include labour, buildings, land, materials or machinery. Share farming agreements and farm management agreements will obviously come under the closest scrutiny.

If modulation becomes a general principle in European farming, two issues immediately arise.

Firstly, some farmers will undoubtedly be tempted to reorganise the structure of their holdings to benefit more fully from the EUs direct aid. However, the criteria will need to be much clearer before anyone contemplates action, and there is also the possibility that Agenda 2000 will change in the light of experience.

It is equally certain that MAFF, which is possibly the most rigorous enforcer of EU agriculture law throughout the community, will be on the lookout for any move designed primarily to claim more subsidy.

We have much experience in the MAFF rules concerning separately managed businesses which must be considered for businesses which have altered their structure since 1992 or plan to so in the future. There are also serious implications regarding such changes for the long-term effects, tax liabilities and problems of succession.

Farmers may have instituted changes for operational or financial reasons, or to ensure the inheritance of sons or daughters, but all such arrangements will be subject to special scrutiny, as will share farming arrangements. If a farmer now proposes setting up a new business – and his motives may be totally unconnected with getting round modulation – the implications will need serious consideration. MAFF is certain to examine any new structures closely.

Many UK farms

A general extension of modulation, on the evidence we have so far, would affect a great many UK farms. It would certainly penalise the most efficient; the arguments which John Gummer successfully deployed against modulation in 1992 remain as compelling today as they did then.

Applied in their most draconian form, the modulation proposals would reverse all the environmental progress of recent years, and intensify the economic pressures towards an extension of prairie farming and away from the patchwork countryside which the public holds so dear.

There would also be a general end to investment in capital projects, equipment and machinery.

However, it would be wrong to underestimate the emotional appeal of the counter-arguments in favour of capping farm aid. Much play has been made of the scale of current area payments to large farms, which seem grotesquely large to a public which has no way of relating them to the size of the business concerned. The Press is not generally supportive of large farms, and some form of modulation might indeed be popular in the short term.

It is highly unfortunate that its ill effects will not become apparent until it is too late. Modulation, even if skilfully devised, is likely to be a very crude instrument for tackling the cost of direct farm payments. It is bad, too, in the way that it penalises even medium-sized farms for the efforts they have made to achieve economies of scale.

Strutt and Parker Farm business consultant George Chichester says modulation would be a very crude way of cutting EU farm costs.

Modulation would inevitably penalise UK agriculture more than it would other EC members because it has a higher proportion of large farms.

In seeking to define whether farms are separate or not, MAFF will look at (among many other things) whether each farm has its own complement of machinery, labour and equipment.

The national press is not generally supportive of large farms and some form of modulation might be popular publicly in the short-term.