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Will Cap Reform Kill Off NI Suckler Herds?

29 October 2010

NORTHERN IRELAND, UK - Having seen some light at the end of the tunnel last year with the lowest loss over all costs, and the highest net margin since the Task Force produced its report in 2007, sucklers have now slipped back this year because of increased costs and lower prices.

The impact of this year’s lower prices combined with increased costs can be clearly seen in Table 1. As a broad generalisation half the costs are replacement plus variable costs, and half are fixed costs plus other costs; the latter half splitting one-third fixed costs and two-thirds labour, land and working capital. If farmers are prepared to produce beef and sheepmeat for no return on their land, labour and working capital, then a small net margin can be made. In 2009 efficient suckler producers would have needed to ask the question: “Am I satisfied with a net margin of £8,800 to cover my labour, land and working capital costs?” Now the same question needs to be asked when the net margin has reduced to £1,100.

However, beyond these stark production costs and returns, beef producers have sources of farming income other than just from production. These are shown in Table 2 as ‘Gross Margins’, which can then be added up before total farm fixed costs are deducted. The Gross Margins per ha from production work out at £430/ha in 2009, and £330/ha in 2010 (£28,000 and £21,400 divided by 65ha respectively from Table 1).

This alternative way of looking at whole farm income from various income streams begins to answer the question about why suckler beef farmers continue in production, as the total farm net margin is providing a return which may be considered satisfactory. Furthermore if an individual farmer was an owner-occupier and had no cash outgoings for rent, had no cash outgoings of interest if there was no borrowing of money to pay for working capital, and no cash outgoings for employed paid labour, then the net farm income would be the return for his own labour, which is somewhere near the average industrial wage. Furthermore there could also be other benefits in terms of owned land appreciating in value, and in relation to inheritance tax benefits.

The problem is that what would appear to be a satisfactory position relies on the receipt of direct subsidy payments, which for the Task Force model in 2010 constituted half of the ‘total gross margin’. In the Farm Business Survey almost half of the subsidies received on LFA cattle and sheep farms, and a quarter of those received on lowland cattle and sheep farms, were used to support unprofitable production. It is clear that the payment of these ‘subsidies’ has provided a level of ‘comfort’ to beef producers which has prevented them tackling the efficiency measures needed to make their production profitable. Therefore a valid question to ask is “has the SFP impeded producers?”

Every non-subsidised sector has made advances in efficiency by adopting new technology to a significant degree. It is also clear that the payment of ‘subsidies’ has prevented the market from reaching a proper level – the market knows that farmers are receiving subsidies and the prices paid by the market have inevitably taken that into account by remaining lower than the production costs in the knowledge that the shortfall will be covered by subsidies.

It is therefore appropriate to conclude that it is not farmers who get the most benefit from subsidies, but consumers, as the subsidies are ‘laundered’ though the supply chain to the benefit of consumers in the form of cheap food. Farmers are now about to face the CAP 2013 reform, about which the leaked document gives some clues as to the future changes to direct payments that are under consideration. Three reform options of ‘varying intensity’ have been put forward for further consideration, going from the least intense reform of Option 1 to the most intense reform of Option 3.

Option 1 could be described as an ‘enhanced status quo’ but with a key element of more equity in the distribution of direct payments between Member States – this suggests a move towards a common area payment. Option 2 is a proposal to make a major overhaul of CAP to achieve “more balanced, targeted and sustainable support” with a strong ‘greening’ element to align support measures with EU policy.

The direct payment system would be re-designed to include a basic rate of income support, plus compulsory green agri-environment aid, plus natural handicap aid through additional area payments but with the existing LFA support measures ending. Option 3 is the most radical in that it proposes the abolition of all income and market support with climate change and the environment to be the main priorities for support through limited aid for environmental public goods and natural handicap areas. Although there is a lot of water still to flow under the bridge, when there are options ranging from “do nothing” to “abolish everything” the outcome is likely to be somewhere in the middle, but it seems fairly clear that this aspect of taking account of all direct payments to farmers would become the function of a new Pillar 1.

Pillar 2 (Rural Development) would aim at fostering a competitive agricultural sector and innovation in areas like production and technological progress; economic diversification in rural areas; preserving the environment and natural resources; addressing climate change, both mitigation and adaptation; helping water management and resource efficiency; and offering specific support to the most disadvantaged in the rural economy – including those facing issues such as desertification (more arid conditions due to lack of water caused by global warming, although it could be a new term for deserting the industry!).

So what are the most likely impacts on beef production? There will probably be a reduction in the SFP as it becomes more area based in order to achieve more equity across the Member States, with beef producers potentially losing most as they had the biggest historical component, and the new Member States gaining most as they have not had any historical payments. Secondly LFA payments are likely to be diluted when they become ‘Natural Handicap’ area payments.

We posed the question at the start of this article “Why do farmers continue to produce beef when the costs for so doing are higher than the returns from the market?”. However there is now a new question arising from the leaked CAP Reform Options, and in view of the figures presented in Tables 1 and 2 above, the question is whether suckler beef production is a sensible thing to do if the CAP reform breaks the historical basis of direct payments? Unless of course there is a dramatic upward movement in market prices – from retail back to farm-gate!

A serious debate involving the entire beef industry – consumers, retailers, processors and producers – needs to begin in earnest before it is too late for the survival of the suckler sector.

Table 1. Updated Task Force Margins For Effective Suckler Beef production

Further Reading

- You can view the full report by clicking here.

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