27 March 1998

Not all gloom for cropping

Official proposals for

Agenda 2000 CAP reform

suggest a gloomy future for

cropping enterprises.

FARMERS WEEKLYs Europe

Editor Philip Clarke

examines the detail

OPINIONS are split over the likely impact of formal proposals for Agenda 2000 CAP reform. On the one hand the NFU sees tumbling crop margins; on the other independent consultant Andersons sees scope for margins to hold steady.

The official documents confirm the widely-expected large cuts in support prices, which are only partly offset by higher area aid (see table).

Downward movement

The chances of on-farm cereal prices falling all the way to the proposed intervention price of £66/t are slim, the commission argues. But some downward movement in prices can be expected – and should be welcomed, says economist Sean Rickard of the Cranfield School of Management.

With UK and EU prices at world levels, the industry will no longer need export subsidies, so would be able to ship unlimited volumes, free of WTO restraints, he argues.

UK arable farmers would be able to compete in growing world markets, basing their planting decisions on price signals rather than support considerations. With an end to set-aside, there would also be scope to expand production, spreading fixed costs over an increased output.

The biggest downside is that oilseed rape and non-textile linseed will get the same area aid as cereals. Assuming current green rates, that would cut payments by £65/ha and £183/ha, respectively – and much more if the currency factor worsens.

That would decimate the EUs involvement in the world oilseeds business, says Paris-based consultant, Pierre Coutris of Valeur Agricole.

"Things may not look that bad today, as the oilseed price is relatively strong. But it will not stay like that and, once prices fall again, growers will simply grow wheat and corn."

Oilseeds argument

The commission argues that ending the area aid premium for oilseeds eliminates the need for a maximum guaranteed area, so ending subsidy scalebacks. Traders say oilseeds will be so unpopular that there will be no danger of overplanting. They want a phased reduction of aid rates, at the very least.

But, despite the gloom, arable farm profits could be maintained, says consultant Francis Mordaunt of Andersons. Yields are likely to rise and variable costs could fall, he says. Favourable movements in sterling, static rather than falling prices and effective cost control could also help.

NFUview

NFU analysis is less optimistic. Intervention prices in sterling terms are currently more that 5% higher than they would be if based on commercial exchange rates. And "frozen" green rates for calculating area aid are 11.5% higher still. It is doubtful whether this protection will survive much longer and support payments will be hit as a consequence.

But even assuming current green rates, the NFU believes margins will be hit as prices fall and variable costs rise in line with inflation.

Wheat and barley margins are only slightly affected in 2000, as shown in the table above. They could rise by 2006 as productivity improves. But oilseeds and pulses take a hammering, with linseed down by as much as 35%.

The NFU analysis also looks at the effects of capping (see panel). At current rates, arable farms above 257ha (635 acres) would be affected.

In 1996 3200 UK farms were above the £80,000 threshold, the NFU notes. But if green exchange rates worsen and the threshold drops to £70,000 over 6000 would be affected.

Assessing the impact of Agenda 2000 depends on the assumptions applied and many uncertainties remain. But whatever happens to the small print over the next 18 months, the single most important factor will remain the future of sterling and the value of green exchange rates.

Impact of Agenda 2000 proposals (£/ha)


wheat barley oilseed rape linseed beans

1998

Yield (t/ha) 8.0 6.2 3.0 1.5 3.4

Price (£/t) 78 73 160 150 113

Output 624 456 480 225 384

Area aid 257 257 378 496 372

Variable cost 240 190 230 170 165

Gross margin 641 523 628 551 591

2000

Yield (t/ha) 8.2 6.4 3.1 1.5 3.4

Price (£/t) 70 62 150 150 92

Output 578 397 453 227 316

Area aid 313 313 313 313 343

Variable cost 252 200 230 179 173

Gross margin 639 510 536 361 486

CHANGE (-0.5%) (-2.5%) (-15%) (-35%) (-18%)

Assumes: Variable costs increase 2.5% a year; yields grow by 2% a year for wheat, 1.5% for barley and rape, 1% for pulses and 0.5% for linseed; wheat price falls 10%, barley 15%, pulses 10% and oilseeds unchanged; green rate fixed at 0.80372.

Source:NFU

AGENDA 2000 SUMMARY


&#8226 20% cut in intervention price in 2000 from £83/t (119ecu/t) to £66/t (95ecu/t), with no monthly increments.

&#8226 Area aid increase from £43/t (54ecu/t) to £53/t (66ecu/t), equivalent to £313/ha (£127/acre) in England. Payments to be made from Jan 1 to Mar 31.

&#8226 Peas and beans to get a small £5.20/t (6.5ecu/t) premium, taking area aid to £343/ha (£139/acre).

&#8226 Oilseed rape and non-textile linseed to receive the same area aid as cereals of £313/ha, compared with £378/ha and £496/ha respectively now.

&#8226 Silage maize to still be eligible for area aid (a reversal of the original Agenda 2000 ideas). But no separate maize base area.

&#8226 Area aid rates can be modified by the commission according to market developments.

&#8226 Set-aside to be reduced to 0%, though commission retains the right to reintroduce it as an emergency measure. Voluntary set-aside retained, paid at cereal aid rate.

&#8226 Arable base area retained on a regional basis, but not on an individual farm basis. When exceeded, area aid will be cut. But penalty set-aside is abolished.

&#8226 An individual farm ceiling introduced for all direct payments at about £80,000 (100,000 ecu). Payments between £80,000 and £160,000 to be scaled back 20%, and by 25% above that.

&#8226 NB. Figures assume current green rates prevail ie £0.696/ecu for intervention prices and £0.804/ecu for area aid. This is unlikely, as new agrimonetary arrangements and currency fluctuations could move rates up or down.

Modulation


Assumes cropping plan of 43% wheat, 30% barley, 10% osr, 2% linseed, 5% peas, 5% beans and 5% set-aside.

Arable

area 100ha 300ha 600ha

98 GM £57,823 £173,468 £346,935

2000

GM £55,262 £163,087 £308,574

Area aid

loss – £2,700 £23,000

Margin

change (-4.4%) (-6.0%) (-11.0%)

CAP REFORM TIMETABLE


&#8226 1992 MacSharry package – introduces concept of price cuts and direct income aid.

&#8226 Dec 1995 Commission strategy paper – admits more of the same is needed.

&#8226 Jul 1997 Agenda 2000 launched by commission president, Jacques Santer.

&#8226 Mar 1998 Legal texts published – puts flesh on the bones of CAP reform. Negotiations begin.

&#8226 Late 1999 Farm ministers agree new farm policy in time for 2000 start date.