On June 26, 2013, the European Commission, EU Council of Ministers and European Parliament reached a political agreement on the new “multi-year financial framework budget”. This will run from January 1, 2014 to December 31, 2020. This article examines the main elements of this agreement that may be relevant for rural practice surveyors. It also assesses what impact it may have on the Irish agricultural land market.
Why do we need a Common Agricultural Policy?
The primary rationale for the Common Agricultural Policy (CAP) is that citizens of the European Union (EU) demand high-quality food, which is competitively priced and produced in an environmentally sustainable manner that promotes high-level animal health and welfare. To do this, the EU put in place a payment system to enable farmers to meet these expensive measures and produce a steady supply of food for the community, while keeping producers in business.
CAP 2013 – the context
Since 2007, Irish taxpayers have become accustomed to spending cuts and tough budgets aimed at reducing the country’s deficit. In 2013, for the first time in the European project’s 56-year history, the EU’s budget will be cut. The cut is expected to be about 6%. The CAP has traditionally received a significant proportion of the overall budget. However, as Figure 1 highlights, this proportion has been on a downward trend since 1980.
In this context it is not surprising that there have been significant cuts to the CAP budget for both Pillar 1 (direct payments) and Pillar 2 (rural development) spending under CAP 2013. Over the period of the budget, direct payments are set to be reduced by 13% and rural development spending is scheduled to be cut by 18%. One of the major aims of the CAP reform was to reallocate Pillar 1 spending from old Member States (OMS) to new Member States (NMS). This means that in most OMS, such as Ireland, the budget should see the largest decline for Pillar 1 spending. However, the national annual budget for the Single Farm Payment (SFP), which is one of the main elements of Pillar 1 spending in Ireland, has only been reduced by 3.2% from €1.23 billion (net of modulation) in 2013 (Source: IFA http://www.ifa.ie/).
Despite this relatively small reduction, contentious issues remain over the redistribution of payments. These changes are likely to have an impact on land sale and rental markets in the coming years.
Society survey of rural practice surveyors on CAP reform and the impact on the land market
Studies demonstrate that direct payments are capitalised in land prices (European Parliament, 2013). It is recognised that measuring the impact of CAP on land markets is often difficult because land prices are influenced by a variety of other factors, such as location, agricultural commodity prices, farm profits, availability of funding to adjoining farmers, zoning, planning and other factors.
Common or flexible?
Another challenge is that while the reforms have been agreed between Member States, Member States still have flexibility over their implementation. At the time of writing, exact details of how these policy changes will be implemented in Ireland have yet to be finalised. This means that the impact of these changes on the land market will only be truly known following detailed analysis after 2020.
One of the major objectives that the CAP reform sets out to achieve is that no single Member State will receive less than 75% of the community average by 2019. To do this the European Commission proposed to move away from production-based awards of payments and towards more comparable land-based ones. Many lobby groups objected to this approach on the basis that it discriminated against the most productive farmers. The result was a compromise, which included measures that only “active farmers” would be entitled to claim direct payments. After 2013, the Commission is proposing a definition of “active farmers” that will ensure that subsidies are no longer paid to entities that have nothing to do with farming.
The maximum permitted direct payment from the CAP budget to any one farm in the EU was capped at €300,000. The savings from this were to be redistributed to smaller farmers. However, all Member States will be obliged to move towards a uniform payment per hectare at national or regional level by the start of 2019. John Bryan, the current Irish Farmers Association (IFA) President, claims that 50,000 of the most active farmers in Ireland will take an estimated 20% cut in their direct payments as a result of these reforms. The redistribution discussed above may shift payments from highly productive land to land of lower productivity.
This means that there could be some convergence in prices between land of different qualities. The changes are also likely to increase the level of demand for smaller lot sizes, as a higher number of relatively small farmers may re-enter the land purchase market. Responses to the Society’s recent survey show that rural practitioners are of the opinion that the CAP reforms will have a greater positive impact on the sale price for smaller farms (below 50 acres).
Reduction in Pillar 1 spending and the ‘naked’ land debate
One of the key findings of a European Parliament study on the possible effects on EU land markets of new CAP direct payments (2013) was that much of the effect of the decline in Pillar 1 spending would be reflected in land prices. However, according to Alan Matthews, Professor Emeritus of Agricultural Economics at Trinity College Dublin, there is an unfinished debate about whether more of the SFP is passed back to land prices if the system moves from the historic one to a flat rate-based system. This has to do with the existence of ‘naked’ land, i.e., eligible land on which payments are not claimed. It is generally agreed that there is more naked land under the historic system. With naked land, there is more land than entitlements, so the scarce ‘factor of production’ becomes the entitlement. This means that the owner of the entitlement captures much of the benefit of the SFP rather than the owner of the land. Under the flat rate system, naked land virtually disappears as all eligible land in the first year receives an entitlement. Other things being equal, this should show up in lower prices for entitlements and higher prices for land.
These are measures aimed at encouraging the maintenance of permanent grassland, crop diversification and ecological focus areas.
Linking greening measures to Pillar 1 direct payments is a change in direction for CAP. Some 30% of the SFP will be paid to farmers for undertaking greening measures. According to the IFA, the majority of Irish farmers will qualify for the greening payment automatically as the majority of land on most farms is already in permanent grassland. Crop diversification policies, as currently proposed, are likely to increase the costs of compliance for tillage farmers. Higher input costs would have a negative impact on farmers’ profits and, consequently (other things being equal), on both land rental and sale prices. Another consequence of linking greening measures to Pillar 1 direct payments is that the additional costs of compliance will reinforce the tendency for Pillar 1 direct payments to have a smaller impact on land prices in the future.
Young farmers’ allowance
Reserving part of the fund to encourage young farmers into the business could provide an incentive to these young farmers to rent or buy land, thus marginally increasing demand. Any impact on land prices is likely to be small. The young farmers’ allowance could help to encourage land mobility from one generation to the next, which is generally seen as a good thing.
Other measures such as the removal of milk and sugar beet quotas are likely to have a positive impact on the price of agricultural land in certain locations. Almost 63% of respondents to the Society’s CAP survey said that the abolition of the milk quotas in 2015 would have a positive impact on agricultural land prices in their area. With the growing demand for milk and dairy products worldwide, opportunities for expansion in the dairy industry look favourable in the medium term. Farmers seeking to expand their milk production or re-enter sugar beet production are likely to increase the level of demand for agricultural land, causing increases in sale and rental prices.
Finally, many rural practitioners will be aware that the transition from the current to the new system has already been disruptive to the operation of the land sale and rental markets. The uncertainty generated by the change has encouraged some owners of land to hold on to it, reducing the supply of land, particularly on the rental market. They fear that they could otherwise forego the future stream of payments. This uncertainty is likely to be short lived now that agreement has been reached.
Summary and conclusions
Given the context, this EU budget was never going to please everyone. While the overall budgets have been significantly decreased in CAP 2013, first impressions are that Minister Coveney has negotiated a relatively good deal in terms of its likely impact on the Irish agricultural land market. While the cuts to the SFP and other measures introduced are likely to have a negative impact on land sale and rental prices, this is likely to be balanced out by other measures, such as the young farmers’ initiative, the removal of milk and sugar beet quotas, and marginal improvement for small farmers. It is therefore our opinion that the changes introduced in CAP 2013 are unlikely to have a major impact on Irish agricultural land values.
Members with an interest in the subject are encouraged to contact the Surveyors Journal or the author directly with their views or observations.
Frank Harrington MSc BSc MSCSI MRICS
Frank is a Chartered Surveyor and Registered Valuer
with Smith Harrington.
Edward is Professional Groups & Standards
Executive with the Society of Chartered Surveyors