27 March 1999

UNDOUBTEDLY TOUGH …BUT ITS WORKABLE

Agenda 2000 may not be as bad as you feared. Gilly Johnson reports.

ITS tough, but its manageable. The Agenda 2000 reform package will hurt arable businesses. But if growers are clever with rotational changes, keep fixed costs low and are prepared for volatile commodity prices, the damage can be repaired – to a large extent.

Sifting through the finer points of the Agenda 2000 deal is Jim Ward, economist with FPDSavills. With his "most pessimistic" forecast, using grain prices and euro conversions plugged at todays values, and assuming no yield increase, cereal gross margins drop by about £138/ha (£56/acre). But this is a worst case scenario, he argues.

The actual picture is likely to pan out differently. On the back of a drop in global plantings, world wheat prices will rise, which will take the sting out of the potential drop in returns, he predicts.

"We think world wheat prices will rise from current levels of $100/t to about $125-130/t by 2002. That would mean EU domestic wheat prices could come back by £4/t at the most, between now and then."

By comparison, barley performance will fall, due to a lack of support from world barley markets, says Mr Ward.

More wheat

Adjustments to the rotation will also lessen the financial damage to whole farm profitability. "We expect more wheat to be grown. Instead of taking half, it will move to two-thirds of the rotation, with oilseed rape staying as the main break crop. This, coupled with a drop in set-aside as wheat stocks fall, will boost average farm gross margins from £512/ha in 1999 to £547/ha in 2002." Short term, there is a drop in returns for harvest 2000, but from then on prospects pick up.

Although returns still appear lacklustre as compared with the profitable years of 1995 and 1996, when gross margins topped the £700/ha (£283/acre) mark, Mr Ward remains positive. "Doom and gloom is not justified. Arable growers can live with Agenda 2000."

WHATS THE DEAL?

Oilseed rape

Its still a worthwhile break. Although the new flat rate area aid payment, which applies both to cereals and oilseeds, is far less than the original oilseed rape payment, the actual amount growers receive has already been whittled down by cumulative penalties, courtesy of the Blair House agreement.

So post Agenda 2000, rape returns will be similar – if not slightly more. One complication of the new deal is that the oilseed payment reductions are to be phased in over three years. The drawback is that this means the Blair House over-planting penalties remain in place, because the subsidy remains tied to the crop. However, agriculture minister Nick Brown won a crucial concession, and now oilseed payments will not be allowed to fall below the cereal payment rate during the phase-in period, even if over planting penalties are triggered.

For the Blair House agreement to be dismantled, the Commission has to prove to the US that rape area aid payments have been disentangled from production. During the three-year phase-in period, this argument doesnt stand up, although the Commission hasnt officially clarified the position.

Mr Wards forecasts for rape payments (see table) assume the worst – that area penalties are imposed. But he doesnt think the rape area will drop significantly. "Its a valuable break crop. I would expect barley to suffer more than rape when rotations come under pressure."

Cereals

No surprises here. As expected, area aid goes up under Agenda 2000 (see table). This is part compensation for a 20% cut in intervention prices. However, the monthly incremental rise in intervention prices is to be discontinued. It will be set in November for the whole season – which effectively cuts the forward price by about £5/t at current exchange rates. But in the longer term, this will become less relevant as EU domestic prices align with world prices and intervention plays a lesser role.

Linseed

A reprieve, of sorts, is granted. The cut to linseed area aid – to bring it in line with the flat rate for cereals, rape and set-aside – is to be phased in over three years. This could allow linseed to stay in the running, just, for one more year, for harvest 2000. However, the gross margin position then is below that for pulses, according to Mr Wards figures. By the following season, returns are falling well behind, and it is unlikely to retain a place in the rotation, he says.

Modulation

The dreaded prospect of capping aid payments to larger farm businesses remains open within Agenda 2000.

Despite fierce opposition from agriculture minister Nick Brown on the grounds of anti-competitiveness, a last minute intervention by the French has kept modulation on the menu of options which individual states may apply at their discretion. UK growers should be safe, given the Governments position.

Degressivity

This is the policy of reducing aid payments over time, in order to keep a lid on EU farm spending in the run up to enlargement. Figures in the order of a 3% cut over six years have been suggested; over time this would mean a significant 18% fall in payments.

However, degressivity is not included, as yet, within Agenda 2000, because some member states are against it. But the UK Government would have preferred degressivity to modulation as a tool for limiting total spend.

The degressivity option may yet be bolted on to the Agenda 2000 reforms when the EU finance ministers meet at the end of March. "Its my guess that it will be included," says Mr Ward. "Its a clean, neat solution to the financial problem."

Agri-environment

No progress here. Agenda 2000 does not include any specific tool for linking green measures to its reforms, or extra funds. But any money released under modulation or cross compliance would now be made available to a wider number of uses, apparently including programmes such as the Countryside and Arable Stewardship Schemes.

However, Mr Ward expects growers will end up paying a charge, either directly or indirectly, to fund agri-environment measures. He has deducted a nominal £25/ha (£10/acre) from the gross margin figures to reflect this.

Seeking profitable alternatives

Andrew Davies (left) asks Morley consultant Matthew Smallwood whether linseed is still viable on his heavy clay soils at Hydes Farm, near Thaxted in Essex.

Linseed has not only been a profitable break, but it has been an important part of his anti-resistant blackgrass strategy until now. But with a £100/ha less on the subsidy linseed will be ousted from his rotation next spring. The alternative?

On paper, continuous winter wheat is his most profitable replacement.

With take-all seed treatments and new blackgrass chemistry on the horizon, Mr Davies is going to consider it on his half acreage. At Hydes Farm there are no logistical limitations with harvesting and grain storage capacity.

Winter beans will also suffer post Agenda 2000 and Mr Davies plans to minimise this crop, aiming for as much wheat as possible in his rotation. Winter rape is likely to take up the shortfall in break crops; spring rape doesnt suit the heavy clays on Hydes Farm.

Agenda 2000 in a nutshell

&#8226 Total cost to EU is 314 billion euro from 2000-2006, some 7bn above the budget ceiling outlined by EU ministers in February.

&#8226 Single flat rate aid for cereals, oilseeds, linseed and set-aside.

&#8226 Intervention prices cut by 20% in two stages to £63/t at current exchange rates. No more monthly increments.

&#8226 Single oilseed payment between Nov and Jan.

&#8226 Oilseeds and linseed payment to be phased in over three years – Blair House penalties will apply during this period.

&#8226 Safety net set on oilseed payments: oilseed payment will not be less than cereals payment, despite any penalty cuts.

&#8226 Oilseed area aid penalties due to world reference price calculations to be scrapped.

&#8226 Area of industrial cropping on set-aside (rape) could still be capped by Blair House agreement during the three-year phase-in.

&#8226 Pulses given a preferential higher rate – but will this be acceptable to the WTO, given the requirement for non-specific crop payments?

&#8226 Default base set-aside rate set at 10%, falling to 0% in 2002; actual rate decided annually by EU farm ministers.

&#8226 As yet unclear whether voluntary set-aside of more than 50% will be allowed.

&#8226 Modulation – putting a ceiling on aid payments – remains an option for individual member states.

&#8226 Degressivity – reducing aid payments by 3% over six years – has not been adopted but may be introduced before the end of March by finance ministers as a tool for limiting total spend.

All figures dependent on exchange rates; source FPDSavills


Harvest year 1998 1999 2000 2001 2002 2003

Set aside (default) 5% 10% 10% 10% 0% 0%

Nov intervention £84 £81 £72 £63 £63 £63

price £/t

Area payments £/ha:

Cereals £238 £238 £245 £264 £259 £259

Rape £299 £273 £269 £264 £259 £259

Linseed £461 £461 £365 £311 £259 £259

Pulses £344 £344 £296 £290 £285 £285

Set-aside £302 £302 £269 £264 £259 £259

Source: FPDSavills. Assumptions have been made on exchange rates, euro compensation and a continued Blair House overshoot penalty on rape