Know the pluses and minuses before trading of entitlements

The Single Payment Scheme which delivered about €1.2 billion each year through farmers' letterboxes since 2005 will expire on December 31. Details of the 2015-2020 EU payments scheme are still unclear.

FARMERS are advised to tread carefully, if they see entitlements trading as a once-off chance to boost the cheque-in-the-post.

They have until the 2014 single farm payment application date, in mid-May, to act — but they should use that time well, to research possible consequences.

Many smaller-scale farmers in the marginal land areas see a make-or-break opportunity, in the next few weeks, to get a better share of the €1.2bn per year of single farm payments that have bankrolled Irish farming since 2005.

They missed out nine years ago, because Ireland opted to base the main EU-funded farmer subsidy on farmers’ ‘historical’ production in the ‘reference years’ of 2000, 2001 and 2002.

Instead of equally dividing €1.2bn per year, across every hectare, the historic model has enabled 220 farmers to earn more than €1,000 per hectare, but 2,000 farmers less than €20 per hectare.

The vast majority are in between, resulting in an average payment per hectare of 272.

The system divided farmers into ‘haves’ and ‘have-nots’. But the new CAP reform is designed to start bridging the gap in 2015.

Between then and 2019, all entitlements are subject to convergence.

Those getting less than 90% of the national-average entitlement value will see a gradual increase.

Those who hold entitlements worth more than the national average will see their value decrease gradually.

All entitlements must reach at least 60% of the national-average entitlement value by 2019.

This change has galvanised the market in which farmers can trade entitlements.

Those who have high-value entitlements can gain by selling some of them, while those at the other end of the scale can gain by buying entitlements. Entitlement brokers anticipate a ‘bull’ market up to mid-May — even though everyone is working in the dark to an extent, because some details of the 2015 CAP reform have yet to be filled in.

So far, the demand side of the entitlements market seems livelier than the supply side. There is strong interest among farmers with low entitlements, says Jerry O’Sullivan, in Ballingeary, Co Cork. As a farmer, and as a local politician who will contest the elections in May, he knows that taking advantage of the changes is a big career decision for farmers in his area — it could make the difference between staying in farming or getting out.

He says that REPS payments kept many of these farmers “above water”, but they are ending now, because REPS closed to new applicants in 2009.

That’s one of the many reasons why farmers want to buy entitlements for land that they currently occupy without entitlements, or want to trade-up existing entitlements to higher-value entitlements, to maximise their single farm payment for 2014, thus improving their base to take advantage of convergence gains.

It’s a complicated business, and delay in fully clarifying some important parts of the CAP 2015 scheme adds to uncertainty.

A graduate in communications, politics, and law from the City University of New York, O’Sullivan has been bringing his research skills to bear on the entitlements market.

His biggest worry is that wholesale selling of high-value entitlements to farmers in the €100 per hectare bracket will leave Agriculture Minister Simon Coveney without an adequate pool of high-value entitlements, to transfer to low- or zero-entitlement farmers, in his convergence plan for Ireland.

The still-awaited decision on how much to cap payments per far ms over €150,000 ( between 5% and 100%) doesn’t offer much leeway, because only about 60 Irish farmers will be affected.

O’Sullivan says “The minister’s lack of clear information, with regard to the new rules of the Single Farm Payment, post-2014, is putting Irish farm families on dangerous ground.”

His basic advice is that entitlements may offer value for purchasers at up to two times value per hectare.

O’Sullivan has calculated that a farmer (farmer B, see example) on 100 hectares, with entitlement value of €1,000/ha (€100,000 total value in 2013), stands to lose €156,000 over the next six years, a 40% loss in 2019 of his original 2013 entitlement.

“It is questionable that farmer B will agree to stand still and wait to be beaten senseless financially.

“He may choose to cash in half of his entitlements this year, before May 15, 2014.

At the other end of the spectrum is John, aged 30, whose father died when John was in secondary school, and whose mother rented out the place until John came of age ( including the reference years, 2000 to 2002).

The renter stripped the entitlements and stacked them on his own home farm. John now has 40 suckler cows, 50 claimed hectares, but no entitlements.

He can expect a basic payment reaching only €150 per hectare in 2019 — unless he purchases entitlements.

On the other hand, Michael, on 40 hectares and a 2013 entitlement value of €100/ hectare, can gain by purchasing 40 €200 entitlements at two times their face value.

If he rents and claims 40 additional hectares, for 2014 only, he will pay for the new entitlements in full — and reach annual payment of €250 per hectare in 2019 (however, all projections are based on the current, incomplete CAP reform information).

There are also significant tax implications in buying and selling entitlements.

The buyer gets no deduction for income tax purposes, and income from the purchased entitlements is usually taxed like any other farm income, which will be at 52% for many. A buyer of a €1,000-per-hectare entitlement for €3,000 must pay out of aftertax money, to earn an average annual payment of €750 over six years. If paying high-rate tax on this €3,750, the buyer is left with only €1,800, after paying €3,000.

For sellers, 33% capital gains tax is likely, plus 23% VAT on large sales.

Coveney opts for value of entitlements held in 2014 rather than payments value

Agriculture Minister Simon Coveney yesterday announced his decision that the value of entitlements held by farmers in 2014 will form the basis for calculation of the value of their entitlements in the new Basic Payment Scheme from 2015.

He said this decision completes three ‘reference points’ that will determine eligibility and value in the new scheme, and provides farmers with a clear picture of the transition from the Single Payment Scheme to the Basic Payment Scheme.

The Minister had previously announced that only farm-ers who receive a direct payment in 2013 have an automatic ‘allocation right’ to receive entitlements in 2015, and the number of entitlements to be allocated to a farmer will be based on the lesser of the hectares declared in 2013 and 2015.

Today’s decision further clarifies the value of entitlements in 2015.

The Minister said the decision ensures that reductions applied to farmers’ payments as a result of the ongoing review of land parcels will not be carried forward into the new scheme. He said the decision also significantly reduces demand for land in 2014, and should make it easier for those who traditionally lease in land to continue to do so.

As the calculation will not be based on the ‘payment’ received in 2014, there is less need for farmers to maximise their payment in 2014 by ensuring all their entitlements are covered by an eligible hectare.

The value of all entitlements held by a farmer in 2014 will be taken into account, even where the farmer does not draw down payment on all such entitlements.

The decision also clarifies status of entitlements partially leased out in 2014, where the lessor was also paid in his/her own right in 2013, and therefore has an allocation right.

Value of these entitlements will be attributed to the lessor rather than to the lessee, provided the lessor and lessee enter into a Private Contract Clause (PCC), whereby the lessor may lease out, together with the holding or part of it, the corresponding payment entitlements allocated in 2015. A PCC would recognise a lease under the Single Payment Scheme and carry it forward to the Basic Payment Scheme in 2015.

However, persons who have leased out their entire holding and all entitlements for a period which includes 2013 do not have an automatic ‘allocation right’ and are not eligible to establish entitlements in their own right, nor enter into a PCC to transfer entitlements to the lessee.

The value of such 100% leased entitlements may be lost to both lessor and lessee, unless action is taken.

They may avoid the loss of the value of leased entitlements by entering into a permanent transfer of the leased entitlements in the 2014 scheme year, before May 15. The Department of Agriculture will write to all persons who find themselves in this position, to advise them of their options.

Mr Coveney encouraged farmers to talk to advisers or consultants, to ensure that they understand the new CAP. His Department is providing training sessions for Teagasc and private advisers.

CAP reform 2015 — the knowns and unknowns

This is the Single Payment Scheme’s last year.

Existing entitlements expire on December 31, and a new set of entitlements will be allocated in 2015 to those who are eligible for the new Basic Payment Scheme.

The payment will no longer be a ‘single payment’, but will be a combination from at least two schemes: the Basic Payment Scheme and Greening.

To participate in the Basic Payment Scheme, and related schemes, a person must be an ‘active farmer’ (carries out an agricultural activity, or, at a minimum, maintains their land in ‘good agricultural and environ-mental condition’. For marginal land, each member state must establish ‘minimum activity’ to be carried out by farmers, which is still being negotiated with the Commission).

Ireland will establish a National Reserve, which will allocate entitlements to eligible persons under the Basic Payment Scheme.

Any farmer who received a direct payment in 2013 (Single Payment, Grassland Sheep Scheme, Burren Life Scheme, Beef Data Scheme) is automatically eligible to receive an allocation of entitlements under the Basic Payment Scheme in 2015. Ireland will also allocate entitlements to farmers who never held entitlements under the Single Payment Scheme, either owned or leased, but who were actively farming in 2013.

The number of entitlements allocated to a farmer under the Basic Payment Scheme will be based on the number of eligible hectares the farmer declares for 2013 and 2015, whichever is the lesser.

The value of entitlements allocated to a farmer in 2015 will be based on a percentage of the value held by the farmer in 2014.

Yesterday, it was announced the ‘value’ will be based on the total value of ‘entitlements’ held by a farmer in 2014, rather than value of the ‘payments’ received by a farmer in 2014.

There was also some clarifi-cation of the status of ‘leased entitlements’ (see article on the right).

All entitlements held under the Basic Payment Scheme are subject to convergence, whereby low-value entitlements will be increased, while high-value entitlements will be reduced, over the five years of the scheme (2015-2020).

All entitlements must reach a minimum entitlement value of 60% of the national average entitlement by 2019.

Farmers who qualify as ‘young farmers’ will also receive

a payment under the Young Farmers’ Scheme. A farmer must be aged no more than 40 in the year when he or she first submits an application under the Basic Payment Scheme, must be setting up an agricultural holding for the first time, or have set up such a holding during the five years preceding the first submission of the Basic Payment Scheme application, and have successfully completed a recognised course of education in agriculture that has an award at FETAC level 6, or equivalent.

Application of the Young Farmers’ Scheme to legal entities, such as companies, and to groups of persons, such as partnerships, remains under negotiation with the European Commission.

Original European Commission proposals would exclude them, but Irish negotiators are seeking flexibility.

No decision has yet been taken on the off-farm income limit for National Reserve or Young Farmers’ Scheme applicants.

Under the new regulation, Ireland will also implement coupled support for protein crops. Ireland has a low-protein crop base area, of about 4,000 hectares. IFA National Grain Committee chairman, Liam Dunne, says it is vital that a sufficiently large base area, of up to 20,000ha, is established, on which growers can draw a coupled payment, bearing in mind the new crop-diversification and ecological focus-area requirements.

“Confining the scheme to the historical base area, before it even gets under way, will kill this initiative to increase protein production”.

The 10% reduction, known as modulation, will not apply to the Single Payment Scheme this year — but it will be replaced by a similarly-sized, linear reduction to bring the scheme into line with Ireland’s reduced-payments national ceiling. As with the modulation, this reduction will not apply to farmers whose gross payment claim in 2013 was €5,000 or less.

About 60 Irish farmers who get an annual, single farm payment of more than €150,000 face a cap at that level, of between 5% and 100% of the amount over €150,000 (still under negotiation).

¦ Farmers can contact the recently established 2015 Direct Payments Information Centre in the Department of Agriculture, at 076-1064438, or, to discuss their individual circumstances in detail. The centre’s opening hours are 9.15am-12:30pm and 2pm-5:30pm (5:15pm on Friday).


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