September 11th 1999

Time to make changes to the quota regime

THE Irish milk quota market is more "social" than commercial". ln the "social" market, temporary leasing and restructuring operate within a nationally set maximum price through co-ops.

Milk quota is targeted in priority to smaller milk producers.

ln the "commercial" market, supply and demand dictate prices in farmer-to-farmer land and quota sales or leases. Through the years, a number of "social" restrictions have been introduced into the commercial market.

The land and quota link, ring fencing in disadvantaged areas, and claw back are the main ones.

Overall, the main objectives of the "social" schemes and restrictions are to maximise the amounts of milk quota available for smaller and medium-size producers, reduce its price, and prevent it from draining away from disadvantaged areas.

When it comes to managing quotas, however, we do have a dilemma.

Attached to land, quotas have acquired a significant monetary value, and are treated as capital assets by the legal system in lreland and therefore taxed accordingly by the Revenue Commissioners.

However, they are considered as nothing more than licenses to produce by the European institutions, including the European Courts.

Problems with current systems

There are a number of problems with the current regime. These include:

• Unavailability of milk quota frustrating producers of all sizes.
• Young people leaving the industry for lack of opportunities to develop.
• Too many holdings with small, unviable milk quotas.
• In some co-ops, insufficient individual temporary leasing and restructuring allocations.
• Reliance of active producers on leasing (private or through co-op) creates uncertainty.
• "Social" allocations of quota take no account of farmers' dependency on dairying - quota size is the main criterion.
• Medium-size producers almost unable to develop: "too small" to compete on the commercial market; "too big" to have a priority category status.
• Claw back freezing farm development (even if it helps feed the co-op schemes).
• Leasing for unlimited periods allows two incomes from one milk quota, which adds unnecessary cost to industry.
• Cost of quota increased by cost of unwanted land; tax status of quota and the need in most cases to pay for 20% claw back.

Reform proposals on the table

The proposals outlined below reflect issues already agreed by the IFA National Dairy Committee, as well as discussions at local Dairy Committees. These proposals are as yet at discussion stages.

1. Break land/quota link

The land and quota link could be broken, with measures to ensure that no "free for all" develops, and to protect farmers with low purchasing power, including farmers in disadvantaged areas.

2. Temporary Leasing

Temporary leasing could be retained to lease the unused portion of active producers' quotas, for hardship cases (on a case by case basis), and for the lease of entire quotas for less then 3 years.

Allocation to priority categories should continue, although these may need to be redefined.

3. Permanent Transfers (2 options)

It is proposed that permanent transfers only (i.e. sales) of milk quota without land would be allowed, with two main options being discussed as to how these may take place; namely a restructuring-type system, or private sales with a tiered claw back.

(a) Restructuring:

All quotas could be pooled for sales through a restructuring - type system.

The quota could be allocated at a capped price to defined priority categories, with priority to producers having made regular use of the temporary leasing scheme, and special provisions for new and recent entrants.

A number of options could be built into this scheme. The selling price could be tiered, so as to cross-subsidise cheaper prices for smaller producers with higher prices for larger producers.

The scheme could also be run nationally to allow producers to all co-ops have an equal chance to acquire milk quota, although this may need to be completed with some form of regional ring-fencing, to avoid milk quota being drained from some areas.

Whatever the options, the restructuring system would have to give some access to quota to larger producers - perhaps by way of a percentage of the pool for each category.

The greatest advantage of this system is that it would allow complete control on price and allocation of quota.

As all available quota would be directed through it, it would have plentiful supplies, but also high demand, and therefore probably lower individual allocations than the "free" market could provide.

(b) Private sales of milk quota with tiered claw back

Alternatively, we could provide for private farmer-to-farmer sales without land with a tiered claw back. Smaller producers would be allowed purchase milk quota up to a ceiling without claw back, and a progressively increasing level of claw back would apply to medium and larger producers.

For example, if zero claw back were allowed up to 50,000 gals, a 35,000 gal producer could be allowed buy up to 15,000 gals without claw back, while a 45,000 gal producer can only buy 5,000 gals without claw back and will have to incur a higher clawback for any extra quota purchased.

In this scenario, genuine incorporated farms and bona fide partnerships should be exempt from claw back, the latter up to the threshold for each partner.

This system's main advantage is that it maintains some degree of commercial market, but allows small producers to compete.

However, unless the claw back levels at medium/larger quota size are set quite high, there remains a risk that small producers will be outbid. Also, this system allows little or no real control on price, or on who gets the quota.

4. Review tax treatment of milk quota purchases

Milk producers currently must purchase milk quota out of after tax money.

Allowing a producer to offset the purchase of quota against tax can only be done by reversing the current tax treatment of milk quota, which means the seller would have to pay full income tax on the proceeds of the sale.

We would suggest that an exemption be sought for the first »30,000 of the proceeds of the sale in the first two years of the scheme.

This would help increase the availability of milk quota for producers, and speed up the restructuring of the industry.

5. Existing leases

Many producers have developed their enterprise based on land and quota leases they are now very dependent on. ln fact, some producers' enterprises are entirely based on leased quota. These producers must be catered for.

Existing lessees should be able to buy out their leased milk quota without land and without claw back, provided both parties to the lease are agreeable.

6. Allocation of the 2.86%

The 32 m gallons of extra milk quota obtained in the CAP Reform deal will be allocated over two years from next April.

It is already agreed that the quota should be allocated only to active producers on a "use it or lose it" basis. Also, a portion (say 10%) should be allocated to the Quota Appeals Tribunal for hardship cases.

Any allocation formula decided upon must bear in mind the fact that this quota will not receive any compensation for milk price cuts arising out of CAP Reform after 2005.

Beyond this, there are two broad options to allocate the quota, across the board to all dairy farmers or focused on identified categories.

The first option could involve giving a set percentage increase or a flat number of gallons to each dairy.

The latter would give a greater percentage increase to smaller producers than to larger ones. lt would be simple to administer, but the 800 to 900 gallons each producer would get would make little difference to any of them.

The second option of focusing the quota could be of significant benefit to a smaller number of priority producers.

Focusing could mean using existing priority categories, or adding new criteria such as past purchases of milk quota, age, other on-farm or off-farm income, education etc.

Complex points systems incorporating a number of criteria have also been proposed.

The argument for targeting quota beyond quota size is very compelling, on the grounds of equity alone.

It does, however, require difficult and potentially divisive decisions to be made on issues such as the treatment of off-farm incomes.