The first images that are likely to come to mind among those who are not especially familiar with the Common Agricultural Policy are so-called “grain mountains” and “milk lakes” that were brought to the attention of the British public by the media during the 1990s. These vast stockpiles were the product of oversupply caused partly by guaranteed minimum prices that were specified as part of the policy.
The latest reform of the CAP is already afoot, although the desire to eliminate an oversupply of food is not the reason. Indeed, since the middle of the last decade, the European Union’s surplus of farmed commodities has dwindled to virtually nothing, in part as a result of earlier reforms.
Instead, the main aims of the forthcoming reform measures are to focus on improving food security and environmental protection, with a likely re-orientation of the subsidies that farmers receive through the CAP’s “direct payments” regime. At the same time, the EU agriculture budget is due to be cut and spending on the CAP will be frozen, equating to a real terms cut to the CAP during the period 2014-2020.
Since significant amounts of income from farmland are generated by direct payments, logic suggests that changes to CAP that result in a reduction in this payments regime could have a negative effect on land prices.
But like much connected with the CAP, the real picture may not be that straightforward. Rather, experts suggest a wide range of other factors are likely to act as a counterbalance to the possible effect of reform as the new measures are implemented.
The most recent CAP reforms are mooted in a communication paper published by the EU in November last year, which describes three possible options for the policy’s future. Of these, option two – described as “gradual reform” – is considered the most likely outcome.
Following the publication of the EU’s multi-annual financial framework in June, it has become clear that the current two-pillar structure – comprising direct payments and rural development funding – will remain.
But according to analysis by Smiths Gore, there are several key changes afoot. They include the “greening” of direct payments, meaning payment of a proportion of the direct payment pillar – possibly up to 30% – will be dependent on some form of environmental work undertaken by the farmer.
Additionally, an element of capping payments to larger farms is anticipated. This could disadvantage Britain, where larger farms are more commonplace.
Threat to landowners
Meanwhile, a proposal to limit payments to so-called “active farmers” is on the cards. While no firm definition has yet been determined, Smiths Gore suggests the idea could threaten the land tenure system and could be damaging for landowners such as wildlife trusts, who let their land to farmers.
Analysing the precise effect on land values of this myriad of changes is no simple exercise, particularly since the fine details of the reform proposals have not yet been spelt out. Nonetheless, few agents expect significant upheaval.
“We don’t think it will have an immediate effect on values because it’s just not the most important factor at the moment,” says Jason Beedell, head of research at Smiths Gore.
“The scarcity of supply is much more of an issue, meaning CAP reform tends to get steamrollered.”
The amount of farmland marketed in 2010 was around half the level seen at the start of the 1980s, putting a squeeze on supply and forcing up values. Indeed, rural land prices in England have risen by more than 25% since 2007 and to use the metric system of measurement familiar in Brussels, recently broke through the £20,000 per ha barrier for the first time.
The situation is being exacerbated by increasing numbers of investors treating farmland as an asset, thanks in part to a favourable tax position.
Depending on certain conditions, inheritance tax relief of up to 100% is available through Agricultural Property Relief and Business Property Relief measures, making farmland an “attractive long-term capital tax shelter for many individuals”, says Mike Harrison, rural business specialist at chartered accountant Saffery Champness.
The uplift in values comes in spite of the recent crash that caused values to slump in other sectors of the property market. If the value of farmland can withstand the effects of this, CAP reform is unlikely to derail further growth.
“We think it will be a fairly soft landing, rather than some almighty hit to UK agriculture,” says Andrew Wraith, head of agribusiness at Savills.
“CAP reform is an important area in terms of sentiment but there are so many other factors that have driven up land prices that we don’t expect reform alone to affect things significantly.”
Among those other factors are commodity prices, which remain very strong. This means that as a proportion of a farm’s total income, the value of direct payments is reduced.
“If the commodities market remains strong, a modest move in CAP will be masked. If CAP was a bigger part of a farm’s return, it would be more important,” says Wraith, who farms in East Yorkshire alongside his day job at Savills.
Others suggest that even if commodity prices fall, the effect on land prices is hard to identify – even with the effect of CAP reform thrown into the mix.
Effect on land
Farm support and land prices have never been directly linked,” says Clive Hopkins, head of farms and estates at Knight Frank.
“Land prices went up in 2007 and 2008 when commodity prices weren’t terribly good. Now, commodity prices are high, yields are indifferent and land prices are still incredibly buoyant.”
Hopkins believes that while potential cuts in direct payments could have a regrettable negative effect on individual farms, the overall thrust is likely to be a continued rise upward for land values.
Other factors that are also likely to effect land prices to a potentially greater degree than CAP reform include house price rises, the performance of the stock market and a rise in interest rates.
Another as-yet unfathomable variable is that of planning reform. The movement towards localism could make profitable agricultural redevelopment more difficult, despite the supposed presumption in favour of sustainable development that is outlined in the government’s plan for growth.
A firmer picture of the effect of CAP reform is anticipated towards the end of 2012, when the EU will agree the budget in its December summit. Until then, Beedell believes there is much to play for, including the implications of the “greening” of direct payments, the issue of capping and the determination of what constitutes an “active” farmer.
He says: “The budget framework is the end of the beginning, rather than the beginning of the end.”
