Case studies: how CAP reforms will affect you

This week we publish a number of Department of Agriculture case studies on the implication of CAP reforms for farmers. They do not give exact figures and can be complex, but farmers can start to see the Department’s thinking behind the impact in different cases.

Farmer John farming same land

In this case, John will get paid on 30 BPS entitlements in 2015. The value of these will be established by the value of SPS entitlements held in 2014 divided by 30ha.

Farmer John farming same land

In this case, John will get paid on 30 BPS entitlements in 2015. The value of these will be established by the value of SPS entitlements held in 2014 divided by 30ha.

Farmer John has low value entitlements

a. 30 SPS entitlements (value €100 each) and 30ha on the 2013 SPS form;

b. 30 SPS entitlements and 30ha on the 2014 SPS form;

c. 30ha on the 2015 BPS form;

In this case, John’s BPS value will be converged upwards by one third of the difference between his BPS value and 90% of the average payment. This will have an estimated minimum value of €102.60. In addition, the greening payment will apply if the farmer qualifies at a rate of 45.48% of his BPS.

Farmer John has high-value entitlements

In this case, John’s BPS value will be converged downwards; this money will be used to fund those being converged upwards. The exact calculation cannot be completed at the present time.

Loss/addition of rented land

Farmer John has less land on his 2015 BPS form.

John will get paid on 20 BPS entitlements based on a “consolidated” value of a fixed percentage of the 30 SPS entitlements he owned in 2014 and the lower amount of land declared in 2013/2015, which is the 2015 figure in this case.

Farmer John has more land on 2015 BPS form

John will get paid on 30 BPS entitlements based on a fixed percentage of the value of the 30 SPS entitlements he owned in 2014. The lower amount of land declared in 2013/2015 is the 2013 figure in this case.

Land sales and purchases

Farmer John sold some land (sale agreed on 28 February 2014).

If the sale was only for land, a private contract clause (PCC) would not be used. However, if John was to enter a PCC arrangement, he would be allocated 60 entitlements (40 hectares declared by him for 2015 and 20ha covered by PCC). The value of the 60 entitlements would be calculated with reference to the 60 entitlements owned by him in 2014. As per PCC agreement, 20 of these entitlements would be definitively transferred to the buyer. Therefore, John would be left with 40 entitlements and a lower total value than if he did not enter a PCC.

If John does not enter a PCC, allowing the buyer to be allocated entitlements on the sold land, John will be allocated 40 entitlements in 2015. The value will be calculated as a fixed percentage of the value of 60 entitlements divided by 40. In effect, a fixed percentage of the value of the 60 entitlements is “consolidated” into 40 entitlements in 2015.

Farmer John sold some land & entitlements (sale agreed on Feb 28th 2014)

Again presuming that John does not enter a PCC arrangement, he will be allocated 40 entitlements and the value will be calculated as a fixed percentage of the 2014 value of entitlements divided by 40. A PCC in this situation would have a negative effect and therefore it is not advised to enter into one. The buyer already has the value of the entitlements taken into account in his calculations as he owned the entitlements in 2014. However if John was to enter into a PCC the impact would be as follows: The buyer would be allocated entitlements on the land owner pre purchase. The value of these entitlements would take account of the entitlements bought from John (as the sale was executed before the 2014 Scheme Year and the buyer owns them in 2014). As per the PCC John will be allocated 60 entitlements (40 hectares declared by him in 2015 and 20 ha covered by PCC). The value of these entitlements is calculated with reference to the 40 entitlements John owns in 2014 (does not take account of the sold entitlements which are used in the calculation for the buyer). As per the PCC 20 entitlements are then definitively transferred from John to the buyer. John has lost the value of the entitlements he sold but has also lost a portion of the value of entitlements he retained to the buyer having entered into a sale PCC pre 2014.

Farmer John purchases some land & entitlements (sale agreed on Feb 28th 2014)

It is not advised that a PCC is entered into for sales completed before 15th May 2014. As such John will be allocated 60 entitlements and the value of the 80 entitlements owned in 2014 will be “consolidated” onto the 60 allocated in 2015.

SUCCESSION CASE STUDIES

Farmer John is retiring and son James is taking over in 2015

If John gifts the entire holding to James, then James will be eligible for an allocation of 30 entitlements. The value will be calculated with respect to the 2014 value of entitlements owned by John. If James meets the eligibility conditions for the Young Farmers Scheme, he may also qualify for a top-up.

Farmer John is reducing his farm business and his son James is taking over part of the farm in 2015

If John gifts part of the holding to James, then James will step into his shoes in terms of the allocation of entitlements on that part of the holding. The value of the entitlements allocated to James will be calculated with reference to the 2014 value of entitlements owned by John. If the value of James’ entitlements is below the national average and he qualifies as a young farmer/new entrant, he may apply to the national reserve to have the value increased up to the national average. If James meets the eligibility conditions for the Young Farmers Scheme, he may also qualify for a top-up.

Farmer John passed away in February 2014

What happens in this case? Mary is stepping into the shoes of John. As John would have qualified for an allocation of entitlements in 2015, Mary now assumes that right. She may apply for an allocation of 30 entitlements in 2015 on the 30 hectares she inherited. The value will be calculated with reference to the 2014 value of entitlements.

Farmer John passed away in February 2014 and left no will. He is survived by his wife and 3 children (all > 18 years). John submitted 30 SPS entitlements and 30 ha on the 2013 SPS form. Mary, John’s wife wishes to continue farming with agreement of all parties. Mary will submit 30 SPS entitlements and 30 ha on the 2014 SPS form. What happens in this case?

In this scenario Mary has a right to inherit 2/3 of the estate and the 3 children would inherit 1/3 of the estate between them. As such Mary will step into John’s shoes in terms of the 2/3’s she inherits in terms of land and the allocation right on that land. The children step into John’s shoes for the 1/3 they inherit. If the intention is for Mary to continue farming and qualify for allocation on all 30 ha and benefit from the full 2014 value of entitlements the 3 children would need to waive their rights to the 1/3 of the estate (land and entitlements) in favour of Mary.

LAND LEASE AND CONACRE CASES

Farmer John is retiring from farming

John has an automatic right to allocation of entitlements in 2015. If he wishes to be allocated entitlements in 2015, and enter a private contract clause (PCC), he will need to retain a portion of his land of at least one hectare and declare this in 2015. Then he would be able to enter a PCC agreement with the lessee covering entitlements to be allocated on his land and carrying forward a fixed percentage of entitlements owned by him in 2014.

If John does not retain a portion of his holding to declare in 2015, his entitlements will expire on 31 December 2014 and the value will be lost to him and the lessee. He will not be allocated entitlements in 2015 and his land will remain free of entitlements in future.

Farmer John retired from farming in 2009

John does not qualify for an allocation of entitlements in 2015, having not been eligible to receive a payment in 2013. John’s options are to continue with the lease for 2014 and allow the entitlements to expire on 31 December 2014 – where the value will be lost to both John and the lessee. John could sell the entitlements to the lessee before 15 May 2014, who will also have the corresponding land. This sale will allow the lessee to get the benefit of the value of entitlements in the calculation of BPS entitlements to be allocated to him in 2015.

If the daughter is pursuing her agricultural educational qualifications and qualifies as a young farmer in 2016, she will be eligible to apply to the national reserve for an allocation of entitlements on the John’s land. She would also then qualify for the Young Farmers Scheme top-up.

Farmer John is retiring from farming in 2014 and son is taking over in 2015

If John gifts the entire holding to his son then the son will step into John’s shoes and will be eligible for an allocation of 30 entitlements. The value will be calculated with respect to the 2014 value of entitlements owned by John – regardless of the fact they were leased out for that year. If the son meets the eligibility conditions for the Young Farmers Scheme he may also qualify for a top-up for 5 years. They cannot enter a PCC if John intends on leasing the entire holding to the son. To enter into a PCC John would have to retain part of the holding and submit a valid BPS application in 2015.

Farmer John is leasing land (10 yr) from Michael who has leased out his entire holding since 2012

Since Michael was leasing out his entire holding since 2012 he does not qualify for an allocation of entitlements in 2015 in his own right. John declared the leased land in 2013 and therefore qualifies for an allocation of entitlements on that area. However he does not own the 20 entitlements leased with the land and therefore it cannot be taken into account in calculating the value of his entitlements in 2015. Options: John can retain the land for 2015 and be allocated 50 entitlements. A fixed percentage of the value of his owned entitlements will be spread across the 50 entitlements diluting their value further. John will have more entitlements than owned land and will need to retain the higher land profile to draw down full payment under the BPS. The value of leased entitlements is lost to John and Michael.

Michael could opt to sell the entitlements to John before 15th May 2014. Then John would own these entitlements and they can be taken into account when calculating the value of entitlements to be allocated to him. Michael could also opt to sell the entitlements on the open market and continue leasing the land to John.

If Michael was not leasing the entire holding he would qualify for an allocation of entitlements in his own right. Once Michael remains an active farmer in 2015, submitting a BPS application and qualifying for an allocation of entitlements he could enter into a PCC with John in relation to the entitlements to be allocated on the leased land.

Farmer John (lessor) is leasing out some of his land

What happens if John and Michael sign a PCC? What happens if no PCC is signed? Let us presuming that both John and Michael intend to be active farmers in 2015.

With PCC:

The PCC will cover the allocation of 30 entitlements to John calculated with reference to the 30 entitlements he owned in 2014. 20 of these entitlements will be temporarily allocated to Michael via the PCC for the duration of the lease.

With no PCC:

With no PCC Michael will qualify for an allocation of entitlements on the 20 leased hectares. These entitlements will be his and calculated with reference to the value of entitlements he owned (if any) in 2014. A fixed percentage of the value of the 30 entitlements that John owned in 2014 will be “consolidated” onto 10 entitlements relating to the 10 ha he declared in 2015.

At the end of the lease Michael will have 20 surplus entitlements – and the value of his entitlements will have been diluted. John will have 20 naked hectares – and the value of his entitlements will have been increased.

Glossary

SPS Single payment scheme entitlements the existing entitlements farmer have

BPS Basic Payment scheme – what the new scheme is called

BPS Basic Payment scheme entitlements the new entitlements farmer will be issues in 2015

Greening payment – the payment farmers will receive for carrying out the new greening requirements. It will a top of 45.48% on the basic payment and will make up 30% of the overall payment farmers received each year.