Poor crop prospects

    CAP Reform Issues – Pillar transfers

     

    Under the 2008 agricultural reform, England transferred 19% of the money initially allocated to the farm subsidy (Pillar 1) to the rural development budget (Pillar 2, principally stewardship).  The amount transferred is slightly lower in Scotland and much lower in Wales.  Approximately half the reduction (known as modulation) is a national allocation and half EU (9% English and 10% is EU with modulation for payments between €5,000 and €300,000).

    In the new regime agreed in June 2013, the transfer is described as ‘Pillar transfers’ rather than modulation.  While the details of the transfer arrangements await finalisation of the budget agreement (so may change), at present, the proposals allow 10% to be transferred from Pillar 1 to Pillar 2 by the member state.  It might be expected that the farming industry would be relieved that the transfer is lower than it has been, but this is not the case.  A number of commentators are strongly arguing against these transfers.

    Furthermore, whilst most of the money transferred remains within the farming industry, and all of it in the countryside, in order to receive Pillar 2 money, farmers have to incur additional expenditure which would not be the case if it was left in the subsidy pot.

    There is no doubt that anyone involved with farming wants a healthy and prosperous industry.  The question is whether this transfer is significant in terms of reducing competitiveness compared with other aspects of the economic environment.

    In economic terms, the English move to a regionally based system from 2005 meant that farming systems were better designed for efficiency and not differences in subsidy.  However, those with the highest payments lost out to their UK and European neighbours who did not adopt a regional payment system.  The difference for most farmers is not enormous, but a subsidy move from intensive beef rearers, a few intensive sheep producers and from intensive high yielding dairy farmers to less intensive producers and the vegetable sector was the result in England.  Sugar beet producers also lost out when the price was reduced and the compensatory payment was shared over time with other sectors in the area payment.

    The biggest change since the introduction of the last major reform in 2005 is the direction of commodity markets which have, for some producers, made the subsidy a smaller yet still important part of output. As shown in the graph below, the percentage increase in wheat price is high and whilst the increase in commodity prices is not an indication of the profitability in the sector, since it takes no account of changes in costs, the graph does provide an indication of winners and losers.  Given that the price of wheat reflects one of the major costs of the livestock sector, the impact on profitability of these farmers is even worse than suggested by the change in output price. 

    Percentage increase in UK unit price from 2005

    View graph

    Several EU countries have supported the livestock sector by diverting payments from arable farms.

    In a European context, the average UK wheat yield is about 2 tonne per ha higher than the EU average, so the average UK wheat producer has gained about 2 tonne per ha at £150 per tonne (average wheat price since 2008) or £300 per ha over their average EU competitor.  This is good news and should be supported as a clear demonstration of competitive advantage. 

    Any loss of income will be fought for and needs to be considered carefully. However, the Pillar 2 money is also used in areas that potentially produce a higher return on investment than the average direct farm subsidy, such as grants for anaerobic digesters, for precision farming or for processing grain in sophisticated central stores.  The scope to spend on innovation is now even greater than under the current regime.

    In addition, it might be worth considering the questions below in the context of how we debate the Pillar 1 to Pillar 2 transfer.

    1. If we are concerned about the level playing field and want to help the disadvantaged sectors, should money be diverted from the arable sector to livestock producers (even if this economically undesirable)?

    2. If the Pillar 2 money is not the right source for public expenditure on public goods in the countryside where should it be funded from?

    3. Since Pillar 2 funding can be more beneficial for a significant number of farmers than the subsidy, should more pressure be put on how it is used?

     
     

    Key contacts

    Andrew Wraith

    Andrew Wraith

    Director
    Food & Farming

    Savills Lincoln

    +44 (0) 1522 508 973

    +44 (0) 1522 508 973