Coming to terms with CAP reform and leasing of entitlements

From 1 January 2023, the value of every Basic Payment Scheme entitlement will change. Convergence increased from 60% in the last CAP to 85% this time around. There are also new elements, known as eco-scheme and the Complementary Redistributive Income Support for Sustainability (CRISS), that will see deductions of 25% and 10%, respectively, removed from the value of entitlements and ring-fenced to fund these new measures. Payment on both of these measures is also linked to the land rather than the entitlement.

The changes have major implications for the trading of entitlements, particularly where long-term leases are in place. Those trading entitlements need to become accustomed to these changes, as they can have a major effect as described in two case studies below.

Q: I have been leasing out lands and entitlements due to ill health for the last six years to two separate farmers. When my land lease was being drawn up, the farmers who was leasing the lands had surplus entitlements and the most straightforward solution advised was to lease the two separately. I have no issue with the land lease and the farmer is doing an excellent job. I also get on well with the other farmer I lease the entitlements to, but I got a big shock when he told me on delivery of this year’s payment that next year’s payment would be reduced by over 50%. There are 17 entitlements with a value of €278 including greening. I knew there would be change and we agreed that in the lease, but I didn’t realise it would be as much. I have tried following what you have been writing on the subject, but have been in and out to hospital and have missed certain elements.

A: The lease is a simple lease that just states: “Payment for 70% of the value of 17 entitlements with a value of €278 including greening to be paid each year on 1 December. This agreement is subject to any changes resulting from the next CAP reform.”

The farmer tells me there is no obligation for him to pay an eco-scheme payment and that he cannot draw down another part of my entitlement (CRISS) as he is farming more than 30ha. Is this true and how much will I lose if this is the case?

All entitlements, owned or leased, will be subject to change under CAP reform commencing on 1 January 2023. As your lease states that the value of entitlements is subject to any changes resulting from CAP reform, the farmer is correct in what they are telling you.

From 2023 onwards, 25% of your entitlement value will be ring-fenced to fund the eco-scheme measure. In your case this amounts to €69.50 per entitlement. A further €27.80 per entitlement will be deducted to fund the CRISS or frontloading payment. There is also a 3% deduction to fund a Young Farmers Scheme and the remaining value of the entitlement is subject to a further cut to fund a national reserve and then convergence.

Table 1 details a scenario of what happens to payment on 1ha of eligible lands and an entitlement worth €278 in the next CAP.

It is important to point out that there is no link between entitlements and the payment of the eco-scheme and CRISS. These now become land-based payments, and as such, are no longer linked to the entitlement value.

There may be a case where entitlements are being leased with lands to bring these elements into the conversation, but in the case of entitlements alone, there is none. When you remove these, the only element of payment due to you is what is left. This is subject to convergence, as mentioned above and Table 2, outlines the level of payment due. If you go by the agreement of 70% of the entitlement value being drawn by you, the payment you receive reduces from €3,308. 20 to €1,960 in 2023 (70% of €2,800.58).

Q: I am leasing 21.1ha of lands in a 10-year lease with five years completed. The arrangement agreed at the start of the lease was land rent of €150 per acre (€370.65/ha) and the payment of entitlements worth €6,836.40 (€324 entitlement value plus greening). It is not a situation I was happy with, but I am a beef farmer and there were dairy and tillage farmers lining up to take the ground on a similar arrangement. I am farming 36ha of owned lands and therefore believe I cannot claim the frontloading payment. I do not mind the eco-scheme payment as much, as I am getting the land with the entitlements, but I fear I will also be hit with convergence. The issue I have is that the lease states an annual payment of €14,657, as outlined below;

“Payment of €14,657 will be paid each year with the first instalment of 30% of sum agreed paid by 1 May and the remaining 70% paid by 1 November each year. The lessee is obliged to ensure farming activities are carried out to the required standard to receive direct payments associated with the leased lands and it is the responsibility of the lessee to make up any shortfall in payments resulting from penalties applied.”

My question is, if I have any room to manoeuvre, and if not, how badly am I caught subsidising the payment myself?

A: We have spoken with our solicitor and unfortunately, going on what you have told us, you have locked into a payment of a sum of money you are contractually bound to meet. It may still be worth getting legal advice in case there are any other elements of the lease agreement overriding this, but going on this information alone, it is apparent that you will have to pay.

Regarding how much it will cost you, we have run the figures through the Department of Agriculture CAP calculator and these are detailed in Table 3 below. In effect, it is going to cost you at minimum between €1,200 and €1,500 per year to bridge the difference. It is important to note that these are provisional figures and are subject to slight changes.

For example, the eco-scheme payment in the Department’s CAP calculator is taken as €77/ha. This is calculated on a participation rate of 85%, but given the space for nature figures will likely see a much higher participation rate, this could be in the region of €66/ha, which would cost you in the region of another €230 per annum.