CAP: Agric Fundamentalists v Enviro Fundamentalists – some inconvenient points

Decision week for Defra Secretary Owen Paterson.  He is due to announce the ‘modulation’ rate for England by the end of the week.  Will it be 9% as the NFU wants, or 15% as the RSPB demands?  Modulation is EU-speak for the amount of farming support that is diverted (modulated) into more general rural development and environmental schemes.  So the more money that is modulated, the less the direct farm payments through the Basic Farm Payment which will soon replace the Single Farm Payment.  The BBC provides some of the background here.

Last weekend saw a crescendo of lobbying on the issue, with the RSPB taking out full page national newspaper advertisements and the NFU writing to all MPs.  Some of the mood of the debate is caught in Mark Avery’s Sunday blog: all households will have to pay £400 to support farmers; this is nothing more than a payment for owning land and farming it (whither tenant farmers?).  On the other hand the NFU whinges that German farmers are only subject to modulation rates of 4.5%, French farmers 3% and the proposed Scottish rate is 9.5%.  This will hurt competitiveness, says the NFU, and disadvantage English farmers.

The environment lobby makes much of the ‘value’ that we get for CAP payments.  The more money that goes to Pillar II (EU-speak for the budget that pays for environmental and social goodies), the better. But farmers prefer Pillar I (EU-speak for the budget that pays for direct farm support payments) because that relates directly to the land they farm and how they farm it – and this can be defended strongly on grounds of food security (will you starve or me?).

But of course we are dealing with public policy here, and the reality is more complex that the advocates of Pillar I and II would like us to accept.  The new direct farm payments come with more environmental strings attached – crop diversification and ecological focus areas for example.  And more of the money is moved uphill – where it is desperately needed because much of upland farming is economically marginal at best – at the (moderate) expense of lowland areas.  Whatever Pillar II funding we are left with, will be far more focussed than previously – a better deal on the 35% of rural land which will benefit compared with the previous 70%?  Perhaps so if you are in the lucky areas; perhaps not otherwise – although tougher conditions on the Pillar I funding may make up the difference in some lowland areas.

The RSPB and others have set out their case for the ‘value’ we receive in return for our £400 per household.  This is a compelling and attractive case, immediately attractive to anybody who pays tax.  Given the propensity of Avery and others to dismiss the CAP payments as a mere subsidy on land ownership and farming, I have been pondering what we do get for the money we spend on farm support.

This is an incredibly complex question once you factor in food security and social justice.  To take some dairy figures, our consumption of milk products works out as follows:

Taking our daily consumption of fresh milk, butter, yogurt, cream, dairy desserts we on average consume about 4 litres of raw milk a week.  That’s a little over 200 litres a year.  With an average dairy cow now producing 7,327 litres a year, that means each cow is supporting 36 people.  This typical cow requires 0.5 ha  of land a year, and lives in an average herd of 125 cows.  So the average herd is providing dairy produce for 4,500 people.  At a direct CAP Single Farm payment cost of just over £200/ha, this equates to a cost per consumer supported with dairy products of just under £3.00/year (1).  Doesn’t seem much, but let’s cut the CAP farming support payments altogether.   What happens next?

There is little doubt that the main buyers of milk from farmers have an excellent idea of the costs of production – including the effects of farming subsidies – and set their prices accordingly.   Ergo – exit CAP, enter higher payments from the main buyers.  Despite the hyperbole to the contrary, the main farm produce buyers have no interest in the financial failure of their principal suppliers.  So prices are adjusted accordingly to make it worthwhile – but only just so for better than average producers – to continue to supply milk.  In compensation retail prices increase – for everybody.

So if you are hard up, milk has just gone up and you won’t save much tax if you weren’t paying any or much tax anyway.  But if you are better off milk, yogurt, cheese etc has also gone up, but the CAP isn’t costing you so much through your tax bill.  That’s to say that another element of redistribute taxation has been lost.

Meanwhile at lower rates of modulation fewer farmers are encouraged (forced?) to look at the financial effiency of their operation.  At the recent LEAF conference, Martin Wilksinson (HSBC Head of Agriculture) made the point that many farmers could more than make up their CAP losses with improved technical and financial effiency.  This is one of the real challenges to the farming industry: to move more farmers to the standards of the best.  England was the first region in the UK to move to Single Farm Payments based on the same average payment, away from a payment based on historic payments.  Wales and Scotland have been slower to move in this direction, and there seems a compelling case for England being better prepared for this round of CAP reform as a result.  One fear for the environmental lobby might be the real danger that some of the best lowland farmers may move away from CAP support altogether, joining those sections of the farming industry which have never had it anyway (eg pigs and poultry).

Meanwhile farmers need to promote the value we get from Pillar I payments by stressing any benefits they provide to the rest of the country as consumers and taxpayers.  For example, how many people is your farm feeding?  And at what cost in public support?  Will Santa be coming early for the farming lobby or the environment lobby?

-oOo-

Footnote 1: These calculations were surprisingly hard to source.  The DairyCo website provides daily consumption figures, and the average herd size and milk yield are available from Defra statistics.  DairyCo also provides a diagram showing how the UK’s milk supply is utilised.  My approach was to take the daily consumption of the dairy products listed (a list which is not complete) and work out how much raw milk is needed for each product, eg about 20 litres for 1 kg of butter; 10 litres for 1 kg of cheese.  This ignores some of the complexities of dairy processing, for example milk from which cream has been separated may reappear as another milk product and so on.  Some arithmetic followed based around stocking rates (0.5 ha/cow), total production/consumption figures and lowland Single Farm Payment Rates per hectare in the last year or two.  In short, lots of assumptions; lots of scope for error – but if anybody can highlight any errors or better still existing sources of information like this I would be delighted to know.

 

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Dairy farming: why it pays to be in the top third

Farm Benchmarking Data for 2009/10 shows what a difference it makes to overall profit to be in the top of the class.  Dairy farming illustrates this well.

  • Although little different in size, the top dairy farms achieved dairy output of nearly £2,900/ha compared with less than £2,600 for the average;
  • Variable costs were lower too, at less than £1,450 compared with nearly £1,600 for the average;
  • The top farmers did however pay more for labour – over £400/ha compared with less than £300 on the average farms.  This was to some extent offset by the value of unpaid labour on the average farms at nearly £330 compared with about £240 on the top farms.  Perhaps this reflects the use of qualified, professional staff rather than reliance on unpaid family labour irrespective of qualifications and experience elsewhere?
  • Despite higher labour costs in total, the total fixed costs on the top farms were over £60/ha lower than the average farms of nearly £1,700/ha.
  • The cumulative effect of all these differences is where the gap really starts to widen: Net Farm Profit on the average dairy farm of £623/ha compared with over £1,000 on the top third of farms.  And this despite slightly lower milk yields and milk value per cow on the top farms.  The top farms did however achieve a marginally better price per litre for their milk, and worked at a very slightly higher stocking rate (2.3/ha compared with 2.2).
  • This all translated into a return on tenant’s capital for the average dairy farm of 6.1% compared with 20.8% for the top farmers.

This goes to show that success in farming continues to require very close attention to detail, and highlights again the difference between the best and the rest.

For more details of these figures and other farm types see the latest data for Yorkshire, Lancashire and Cheshire published by Askham Bryan College in January 2011: Farming in Yorkshire, Lancashire and Cheshire Benchmarking Data 2009/10.  These data are collected as part of the national Farm Business Survey, and will eventually be aggregated with the data from other regions to produce national farming statistics.

Dairy Farming

In 1983 I qualified as a chartered surveyor, and started working in Cheshire, mainly with dairy farmers.  At that time, a lot of farmers had signed up to development schemes under which they received government investment grants for new buildings, machinery and other farm improvements.

All this was turned on its head in 1984 when, overnight, Milk Quotas were imposed.  Farmers stopped spending on major investments and, by and large, battened down the hatches.  Until then, we had been working with dairy farms from 30 cows upwards.   Most cows were milked through herringbone milking parlours, housed over the winter in cubicle housing and fed about 6 tonnes of silage and 1.5 – 2 tonnes of cake a year.  Typical milk yields from a productive dairy herd were about 6,000 litres of milk pa.  A large herd was anything over 150 cows, and cows typically joined the herd at about 2.5 years old, leaving it about 4 to 5 years later.  Although an acre a cow was often mentioned, most cows actually enjoyed a slightly higher stocking rate than this, about 1.25 acres of grass each.  A few pioneers like Giles Tedstone were producing reasonable yields of milk entirely from grass, with no supplementary feeding.  They were however, generous with the Nitrogen to achieve these levels of production.

The other big legal event of 1984 for dairy farmers was the implementation, after 10 years on the statute book, of the Control of Pollution Regulations 1974.   Suddenly our work switched from advising farmers on new investments and herd expansion/improvement, to how to deal with slurry and silage effluent, in the wake of vigorous enforcement campaigns by the National Rivers Authority or its predecessors (Regional Water Boards?) (now the Environment Agency).  This was a body blow to many farmers.   Milk quota was allocated on historic levels of production, not the levels planned for under ambitious development schemes, and buildings had been erected for which there were now to be no cows.  And on top of all that, investment was now required in waste management schemes which would show no return other than the avoidance of prosecution and fines.

Driving around Cheshire now, it is easy to see the legacy of this period.  Buildings which were thought to be very smart at the time are now looking forlorn, and it is clear that many of the dairy farmers have struggled since then to keep up with the reinvestment requirements of their businesses.  A lot of the cows have simply gone.

But we have also seen the emergence of much larger dairy farms: 400 – 600 – 800 and more cows.  Robotic milking technology, and the return of the large rotary milking parlour – itself a piece of precision engineering undreamt of in 1983.

What are the implications here for the human side of the management of larger dairy herds?  Once upon a time the cowman did all the jobs, with the help of  an assistant and perhaps a relief-milker.  Are we now likely to see the emergence of greater specialisation in the management of the dairy herd, for example the milking team, the health team, the feeding/forage team, the waste team, the data analyst and so on?  We hope to be exploring these questions in the near future.