Wasting money on young farmers?

This post first appeared in the IIEA EnvironmentNexus blog.

One of the issues on the CAP reform agenda discussed at the last Agricultural Council meeting was whether the proposed young farmers’ payment in Pillar 1 should be a voluntary option for member states or not. The Council is arguing for a voluntary payment. Both the Commission and Parliament argue, on the contrary, that the payment should be mandatory.

Making this a mandatory payment could imply a three- to four-fold increase in CAP expenditure on young farmers. One might assume that such a substantial increase in expenditure would be justified by well-founded evidence of substantial gains in either generational renewal or farm productivity.

In fact, in proposing a general top-up of direct payments for young farmers in Pillar 1 the Commission ignores the advice of its own evaluations of assistance to young farmers. Despite the high profile campaign by CEJA, the European Council of Young Farmers, this payment is the wrong instrument addressing the wrong problem.

Assistance to young farmers both for setting-up costs and initial investments will continue to be available as a Pillar 2 measure. There is no good evidence that providing additional income support for a limited period of time in Pillar 1 is an effective use of funds either to promote generational renewal or to improve farm productivity. Indeed, the motivation, in line with other elements of the Ciolos reform, is to improve the legitimacy of direct payments by linking them to an objective with which most people would agree.

At this stage in the CAP reform discussions, the only way to minimise the waste of public resources is to make the scheme optional and to hope that few member states will make use of it. Thus my appeal to the Parliament is to accept the Council’s position on this issue and to work to improve the age structure of agriculture by focusing on the real constraints to generational renewal.

Current support for young farmers

Since the mid-1980s, EU assistance has been available to young farmers in the form of special aid payments for their first installation as farmers as well as enhanced support for investments for farm improvements.

In current rural development programmes (RDPs), Measure 112 (Setting up of young farmers) has the objectives of facilitating young farmers’ initial establishment and the structural adjustment of their holdings after initial setting up. Beneficiaries have to be less than 40 years of age, set up for the first time as head of an agricultural holding; possess adequate occupational skills and competence; and submit a business plan for the development of their farming activity.

Support may be given in the form of a single premium (which can be paid in up to five instalments) up to a maximum of €40,000, or in the form of an interest rate subsidy, the capitalised value of which may not exceed €40,000. If both forms of support are offered, the maximum could not exceed €55,000 in the early years of this programming period, but the combined ceiling was raised to €70,000 following the CAP Health Check in 2009.

According to this ENRD fact sheet, the measure is programmed in 24 member states (excluding Malta, Netherlands and Slovakia) and in 70 rural development programmes (RDPs) during the current 2007-13 programming period. Around €5 billion in public expenditure (of which €2.9 billion in EAFRD support) was set aside for this measure, which was expected to assist 188,400 beneficiaries.

The synthesis of the RDP mid-term reviews found that fourteen countries offer new entrants to farming a capital grant/single premium. For at least half of these, the premium is not linked to investment. At least five countries offered new entrants both a single premium and an interest rate subsidy – with a combined value of €50,000 – €55,000 per applicant reflecting the maximum that was permitted prior to the CAP Health Check agreement. In addition to the single premium/interest rate subsidy, approximately two thirds of the countries covered offer applicants additional investment support. Some countries provide a higher rate of support if the applicant is female or farms are in a less favoured area.

The mid-term synthesis calculated that the average support per young farmer was around €28,000, well below the maximum level of support allowed. This conclusion has been seized upon by both sides in the current debate. Opponents of the Commission proposal highlight that member states have not been using the existing instruments to assist young farmers to the full, so why add another one? Proponents, with scant regard for the principle of subsidiarity, argue that it is precisely the unwillingness of some member states to prioritise this measure which justifies making it mandatory, so forcing them to spend money on an issue which they obviously do not want to do.

The Commission’s 2011 proposal and amendments

The Commission’s proposals for young farmers in its 2011 draft CAP regulations covered four instruments:

• Business start-up aid for young farmers in Pillar 2
• Higher support rates for young farmers for investments in Pillar 2
• Priority access for new entrants to the national reserve of payment entitlements in Pillar 1
• Top-up direct payment in Pillar 1

Business start-up aid

This instrument (included in Article 20 of the draft rural development regulation) continues the installation aid in the current RD programme. However, the aid would be simplified. It would only be provided as a flat rate payment (thus eliminating the provision for an interest subsidy as an alternative or in addition). This flat-rate payment would be paid in at least two instalments over a period of maximum five years, and the instalments may be degressive. The payment of the last instalment would be made conditional upon the correct implementation of the business plan. The maximum amount of support is retained at €70,000 (albeit this is now all paid as a single premium). Member states shall define the amount of support they provide taking into account the socio-economic situation of the programme area. Both the Council and Parliament have supported this text.

Higher support rates for young farmers for capital investments

In addition, under Article 18 of the draft rural development regulation, the maximum support rates for investment in physical assets can be increased for young farmers. Again, this is a continuation of the similar measure in the current programme. The Council has added an amendment which would allow support to be granted to young farmers to comply with Union standards applying to agricultural production, including occupational safety. Such support may be provided for a maximum of 24 months from the date of setting up. The Parliament has called for investment support for all farmers in order to comply with newly introduced EU standards in the fields of the environment, health, animal welfare and occupational safety.

Priority access to the national reserve for young farmers

When allocating payment entitlements under the single payment scheme, member states have the possibility to assist new entrants (most of whom are likely to be young farmers) by giving them priority access to the national reserve. Young farmers who inherit their farm may also inherit the entitlements (although a retiring farmer could have sold them previously to raise capital for a pension). So this measure benefits young farmers inheriting or buying/renting land without entitlements.

While a majority of member states do use the national reserve for newcomers, there are a few that do not (DK, NL, SE, MT, DE, UK). Young farmers in member states applying the simplified SAPS benefit from a more favourable treatment as they can claim direct support any year provided that they have at their disposal eligible land.

The Commission draft regulation would require member states to use the national reserve to allocate payment entitlements, as a matter of priority, to young farmers who commence their agricultural activity. The European Parliament would extend this priority to all new entrants and not just young farmers. But the Council, as for the top-up payment, wants to leave this as a voluntary option for those member states that want to make use of it.

Top-up payment

The most controversial element in the Commission’s proposal was to include, in addition to the business start-up aid in Pillar 2, a top-up direct payment for young farmers in Pillar 1.

Amount of aid: The Commission proposed a top-up payment equal to 25% of the average value of the payment entitlements held by the young farmer multiplied by the number of entitlements activated, subject to a ceiling on the number of entitlements which could be taken into account. The Commission proposed a maximum ceiling of 25 entitlements or the average size of farm in a member state if this was greater than 25 hectares. The Commission proposal was ambiguous whether the top-up would be calculated with reference only to the basic payment or to other payment entitlements as well, but the Council amendments underline that it should be related to the basic payment only. While the Council has accepted this Commission text, the Parliament has proposed to increase the maximum number of eligible hectares for the top-up aid to 100.

Eligibility for aid: A rather extraordinary feature of the Commission’s proposal was that absolutely no obligations are put on young farmers other than that they should be under 40 years of age. At least in the Pillar 2 scheme, young farmers seeking support are required to show that they possess adequate educational and occupational skills to farm and they must present and complete a business plan to be eligible for this aid.

The Parliament and Council have made half-hearted attempts to restore some measure of sanity in this regard. The Parliament’s amendment would allow member states to determine additional objective and non-discriminatory criteria that young farmers are to fulfil as regards, in particular, appropriate skills, experience and/or training requirements. The Council amendment would permit member states to define similar criteria for young farmers as those set out for the Pillar 2 business start-up aid. But in both cases, it is left up to member states whether or not they want to impose these criteria.

Mandatory or not: Under the Commission’s proposal, it would be mandatory for member states to grant an annual payment to young farmers who are entitled to a payment under the basic payment scheme. The financial provision proposed was that ‘Member States shall use a percentage of the annual national ceiling set out in Annex II which shall not be higher than 2%.’

The Council position would make a young farmer’s top-up an optional element for member states with again the provision that a maximum amount of 2% of a member state’s direct payments ceiling could be used for this purpose.

The Parliament, however, supports the Commission that the top-up should be mandatory and would require 2% of the annual national ceiling to be used for this purpose, with any unused balance going to increase the value of entitlements in the national reserve (note the inconsistency of this latter provision with the idea that entitlements should have a uniform value within a country or region).

My view on this issue is that the Council is right and the Parliament is wrong. Providing a top-up payment to young farmers in Pillar 1, particularly where no obligations are placed on the recipient to possess the requisite farming skills or to pursue a business plan, is simply a waste of public money. To understand why, we need to examine the real constraints to generational renewal in EU farming and the past experience with installation aid for young farmers.

Why are there difficulties in attracting young farmers?

There is no question that Europe’s farmers are ageing and that the proportion of younger farmers has been falling. This is due to a number of factors, among which are:

– High start-up costs in agriculture. Farming requires control over a significant amount of land and capital, so it is not surprising that by far the most common way for young farmers to enter farming is through inheriting these assets. For those aspiring to enter farming without the expectation of an inheritance, entry may have to be postponed until significant resources have been accumulated to acquire the necessary farm assets. And with rising land prices (in real terms) in many EU countries, this bar to entry has also been rising.

– Farmers, like the rest of the population, are living longer. But unlike the rest of the population, a farmer’s place of residence is also his or her place of work. Many older farmers choose to remain in agriculture because they like the lifestyle and have an attachment to a home which may have been in the family for many generations. This is often coupled with a lack of affordable and suitable housing in rural areas for farmers who may want to retire. The consequence is that successors must wait longer to take over the farm. And in some member states, rural areas have become more attractive for elderly people who retire or start a part-time farming activity in agriculture.

– There are many financial incentives for farmers to remain farming, and few to encourage them to leave. This has been exacerbated by the policy of decoupled direct payments since 2005. Under the previous CAP regimes, a farmer would have had to produce in order to receive support. Now, under the Single Payment Scheme, all that is required of a farmer is to comply with cross-compliance conditions which are relatively undemanding. This has allowed many farmers approaching the age of retirement to rationalise their farming activity to a minimum whilst still maintaining their single payment.

– Inadequate pension provision was long identified as a barrier to farmer retirement, because it made it more difficult to retire without liquidating the farm assets to supplement pension income. The rules for pension eligibility can have a significant impact on farm workforce age structures, whereas early retirement schemes have had relatively little effect (Copus et al 2006). But more generous pension arrangements for farmers may also have perverse effects. In Ireland, for example, all farmers are now part of the contributory old age pension system which means they are entitled to a state pension regardless of means or other income. So a farmer over the age of 66 can live in their own home, receive a single farm payment and the state pension – the relevant question to ask is not why they don’t retire but why would you retire?

– In general, the system of agricultural policy support makes it more difficult for new entrants to farming. Higher subsidy payments and output prices lower the farm exit rates in European countries (Breustadt and Glauben 2007). CAP support pushes up land prices and thus adds to the time required for new entrants who are not inheriting to put together the necessary capital. It gives an incentive to older farmers to hold on to their land in order to receive the single farm payment. And, in many countries, new entrants have no right to receive payment entitlements through the national reserve if they do not obtain them through inheritance.

Implications for demographic policy in farming

Reflecting on the ways the cards are stacked against new entrants, it becomes clear that the problem is not mainly a shortage of willing entrants (as argued by Jesús Redigor in this European Parliament paper) but rather the lack of sufficient exits. If farming were really a declining industry, one would see land prices/rents falling in real terms. But real land prices/rents are rising, demonstrating that young farmers and new entrants are competing against current farmers wanting to expand for access to the limited amount of land which becomes available.

This is not to deny that there are good reasons why young people might not seek a career in agriculture. Agricultural employment is falling. Labour income in farming lags well behind incomes in non-agricultural sectors. Poor farm structures in many EU countries mean that the continued viability of many existing farm holdings is doubtful. Poor living conditions in many rural areas may also militate against young people choosing farming as a career. And, for those who are not in a position to inherit, there are high entry barriers.

But while many young people growing up on farms might decide a farming career is not for them, the evidence shows that where reasonable income prospects exist, there is no shortage of potential young entrants. In Ireland, for example, the number of students listing agricultural science as their first choice university course has jumped by 120% over the past five years. To repeat, the generational renewal problem in EU agriculture is the shortage of exits and not a lack of potential new entrants.

This diagnosis carries crucial implications for the design of policies to improve the age structure of farming. The problem is not to provide incentives for more young people to enter farming, but to tackle the obstacles which mean that older farmers are reluctant to exit.

The ineffectiveness of installation aid paid to young farmers under Pillar 2 rural development schemes in encouraging more rapid generational renewal has been documented in numerous ex post evaluations. This conclusion by Carbone and Subioli (2008) who reviewed the effectiveness of this aid in Italy is typical:

These examples confirm that the size of the payment provided by the EU measure for young farmers offers an ineffective incentive to attract young people into the sector, and it is also insufficient to finance an increase in the competitiveness of the existing holdings through the familiar turnover within the farm. In other words, would the holdings be profitable, the turnover would happen anyway, on the contrary, non profitable holdings are doomed to remain such: a payment of few thousand Euros cannot promote a generational turnover (even if it takes place within the family) assuring the survival of the holdings in the long period.

Generational renewal or an investment programme for new entrants?

If the top-up payment in Pillar 1 is unlikely to encourage generational renewal, then perhaps it might be justified because it would encourage additional investment by young farmers. The preamble to the Commission’s draft direct payments regulation noted that “an income support to young farmers commencing their agricultural activities should be established in order to facilitate the initial establishment of young farmers and the structural adjustment of their holdings after the initial setting up (italics added).”

The argument is that young new entrants to farming often find it difficult to raise the capital needed to acquire and develop their new business. Providing support in the critical early stages will make it easier for new entrants to access business development capital. This is precisely the justification for business start-up aid in Pillar 2. Yet evaluations of this scheme in RDPs have been luke-warm at best.

An early ex-post evaluation of installation aid measures published in 2003 summarised the impact of setting up aid for young farmers in most member states. In most EU countries, the available funds had been spread across a large number of beneficiaries and, therefore, resulted in relatively low payments per beneficiary. The report concluded that whilst this met the political objective of being seen to provide support, it lessened the actual impact. The report emphasised that this support needed to be targeted in order to assist those that needed it most and to increase its effectiveness.

More recently, a review of EU rural development instruments commissioned by DG Agriculture and Rural Development classified the effectiveness of installation aid as moderate. It noted that there is debate as to whether help of this specific type (aids based upon age/competence of the recipient) provides something that the market would not, particularly for successors who should be able to use inherited assets to attract loans against a sound business plan.

Business start-up aid can help to overcome the financial barriers that young farmers face in accessing capital, but whether it does this successfully or not depends on the scheme design. Start-up aid needs to be linked to a business plan. As under the UK Fresh Start scheme, aid is likely to be more effective where it is linked to mentoring and monitoring. In order words, assistance to young farmers needs to be managed; providing an additional income subsidy with no reporting obligations or target outcomes is simply a waste of public money.

Given that a business start-up scheme is provided in Pillar 2, why should the Commission want to introduce alongside this a scheme with similar objectives but with much less monitoring in Pillar 1? The Commission’s impact assessment of the proposed young farmer top-up payment throws no light on this. Most of the relevant section was devoted to analysing the budgetary implications of different payment models. There was no attempt to identify or quantify the projected economic or social gains of the measure. The most likely reason is that such gains do not exist.

More effective measure to assist young farmers

It might be argued that using Pillar 1 funds to support young farmers is at least a better use of these funds than leaving them as part of the basic payment where even the minimal benefits of concentrating funds on younger farmers would disappear. Should we not welcome the young farmer top-up in Pillar 1 because it implies the use of Pillar 1 funding for a Pillar 2-type scheme?

This is an example of a second-best argument, that we should defend the introduction of an ineffective scheme because it helps to address the wasteful use of resources caused by an even worse scheme. Untargeted direct payments cannot be justified as part of farm policy (as the Americans have concluded in their Farm Bill debate). Trying to improve their legitimacy, whether by linking them to environmental objectives or young farmers, is simply the wrong direction to go. And it ignores the earlier argument that the Pillar 1 measure is far inferior to the Pillar 2 scheme in terms of its design and targeting.

Encouraging more younger farmers into EU agriculture is an important policy objective. To succeed in this, we need measures which build on a correct policy diagnosis of the demographic problem. I argue that this requires much more attention to addressing barriers to exit from farming than barriers to entry.

The traditional response to this problem has been to introduce early retirement schemes. But, by and large, these were little used by member states and it was hard to show their effectiveness in those member states that did use them. The early retirement measure has been dropped from the Commission’s proposed rural development regulation, although some vestiges remain in the small farmer scheme where it is proposed that those small farmers who permanently transfer their entire holding and the corresponding payment entitlements to another farmer would receive an annual payment equal to 120% of their small farmer payment until 2020.

The poor experience with early retirement schemes highlights the complexity of farm succession and transfer issues, particularly in agricultural sectors characterised by family farms where most new entry occurs through inheritance.

Tackling farm exits requires reviewing incentives for land mobility and tenancy laws, taxation and social welfare arrangements and encouraging earlier succession within farming families through joint ventures, share farming, partnerships or contract operations. It also requires removing the distortions caused by current agricultural policies. Addressing these issues requires more attention to young farmers, not less. But throwing money at the problem, as illustrated by the top-up payment, is simply a substitute for more appropriate action. This should be clear even to young farmers themselves.

Photo credit: West Midlands Area of Young Farmers Clubs

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