What’s an entitlement worth now?

As farmers look to settle conacre bills for 2017, and possibly agree new arrangements for 2018, a number have asked if we could clarify what value should now be put on entitlements that were initially traded when a new CAP regime came into play in 2015.

Up to that point landowners were in the system, and despite letting their land out in conacre, were able to claim an area-based payment worth €78.33/ha. When adjustments were made, it usually worked out at just over £20 per acre.

New rules

In 2015, when new rules around active farmers came into force, a significant number of these landowners dropped out, with some deciding to pass their entitlement on to the conacre tenant.

From that year onwards, CAP is on a new path, with all payments moving to a flat rate of around €330/ha by 2021. Entitlements above the average are reducing each year, while low value entitlements are going in the opposite direction.

That leaves two scenarios to consider:

Before exploring the options, it is important to point out that CAP money is for active farmers, not landowners. Therefore, farmers should not feel under an obligation to give any of their direct payments away to others, especially given that a landowner was in no position to claim going forward.

But, in reality, deals were done as farmers sought to secure land over the five years to 2019. Some agreed to pay an additional £20 on top of conacre price (in effect continue giving the landowner their historic area-based payment). Others are paying more, including some who agreed to give the landowner all of the additional money drawn down on the land over the next five years.

Calculations

Shown in Table 1 is the value of an entitlement with an initial starting point of €78.33 (the area-based payment). In 2014, a total of 9.22% was taken off all entitlement values, in a new process of permanently deducting modulation money. That left this basic area entitlement worth just over £22 per acre in 2014.

In 2015, and assuming that this entitlement has been taken on by an active farmer, the first step of seven occurred towards a flat-rate payment. At the prevailing exchange rate at the time, the entitlement was worth £31.53 per acre, rising to just under £50 per acre in 2016.

This year, with the exchange rate again favourable, the entitlement is worth the equivalent of £65.60 per acre.

This is higher than originally expected, given that most calculations were probably initially done at an exchange rate of €1 = £0.80. That would leave the entitlement worth just over £58 now.

If we assume that the €1 = £0.80 rate was to continue to 2021, the entitlement would generate an additional £12 per acre each year from this point forward.

Scenario two

In the second scenario, another hectare has been added, but no entitlement was traded ahead of the 2015 claim. Instead of starting with an entitlement worth an initial €71.11 in 2015 (before the first step to a flat rate is applied), the starting point for this entitlement in 2015 is zero.

Once the first step of seven is applied, this hectare of clean land generated the equivalent of £14.64 per acre in 2015, rising to £32.56 per acre in 2016 and £53.72 per acre this year. The calculations are the same, irrespective of the value of other entitlements held.

Both calculations assume that flat-rate payments will be in place by 2021. But the current CAP reform period ends in 2019, and is set to coincide with Brexit. What happens to payments in 2020 and 2021 is not yet clear.