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5.3.2 AXIS 2 Improving the environment and the countryside

5.3.2.1 Measures targeting the sustainable use of agricultural land

Common to certain measures

5.3.2.1.2 Payments to farmers in areas with handicaps, other than mountainous areas

Article 36(a)(ii): Relevant provisions on payment and designation of LFAs (Articles 13(a), 14(1) and the first two indents of Article 14(2), 15, 17 to 20, 51(3), and 55(4) and the part of Annex 1 which specifies the amount under Article 15(3) of Council Regulation ( EC) No 1257/1999), will remain in force until the end of December 2009.

Measure code (212)

This section sets out arrangements for an interim scheme for the period 2007-2009, prior to a new scheme in 2010. The requirement in Regulation 1698/2005, to redefine parts of the less favoured areas has been postponed, and following an EU review, further proposals will be announced in 2008, for implementation in 2010.

Rationale for Intervention

Virtually all Scotland's Less-Favoured Areas ( LFAs) - which comprises 85% of its agricultural land - is classed as Severely Disadvantaged. The LFA stretches from the very south of the country to the Shetland Isles in the far north and the Western Isles in the extreme west. Some 13,000 farms and crofts normally apply for compensatory allowances each year. The diversity of farm size is extreme, and the land within Scotland's less favoured areas is of variable quality.

Land management in these areas faces particularly difficult physical and climatic conditions and access to suppliers and markets is hindered by remoteness. The Scottish Executive recognises that active management of this land is necessary for the delivery of environmental, economic and community outcomes set out in the Strategic Plan. Key priorities are maintaining traditional agricultural landscapes and sustainable farming systems, through high nature value farming and crofting, and sustaining high standards in animal health and welfare.

The Scottish Executive commissioned a study to examine the evidence for developing the post-2010 scheme in Scotland. A copy of this report has been made available to the Commission to help inform thinking on LFA support post-2010.

Objectives

The objective of this measure is to compensate land managers in LFAs for the particular disadvantages that they face, and thereby sustain farming and crofting in these areas and the associated economic, social and environmental benefits that are dependent on continued land management in these areas.

Scope and actions

Recognising that substantial changes in the regulations relating to Less-Favoured Area support ( LFASS) are likely to take effect from 1 January 2010, Scotland will operate an interim scheme during 2007, 2008 and 2009. This interim LFASS scheme will be based on the current model, but (to avoid any link with production) will use the historic payments* made in 2006 as the basis for calculating payments in 2007, 2008 and 2009. The key features of the interim scheme are that:

• it is historically based, derived from data used in the calculation of 2006 LFASS payments*;
• payments are payable to the occupier of the land who must be actively farming; and,
• applicants must respect cross-compliance, maintaining the land in Good Agricultural and Environmental Condition ( GAEC).

The interim scheme will use 2006 as a reference year to determine payments. For example, a farm business receiving £2,000 for 100 hectares in 2006 would receive £2,000 in 2007, 2008 and 2009 provided that those 100 hectares remain eligible. During this interim period, there will be no change in the basis for designating land for LFA support.

It should be noted that as there was a supplementary payment in 2006, the above only refers to the initial payment.

Eligible land

Since farming activity in the less favoured areas is mainly associated with the grazing and the management of livestock, and LFASS is an area-based scheme, land eligible for LFASS will be:

Scottish LFA forage hectares with an LFASS grazing category value attributed for the purposes of or prior to the LFASS 2006 scheme payment, as declared by the applicant in a SAF, and used to support a continuous agricultural activity for at least 183 days in the same calendar year.

Final Beneficiaries

Farmers and Crofters in the Less Favoured Areas.

Cross compliance, including Good Agricultural and Environmental Condition

In order to satisfy the requirements of Regulation 1698/2005, applicants will need to maintain the land in Good Agricultural and Environmental Condition ( GAEC) and respect other elements of cross-compliance, as defined in Council Regulation ( EC) No 1782/2003. This includes requirements that land is neither undergrazed or overgrazed.

Assessing farming activity and avoiding overcompensation

To ensure that payments are only made to those who are farming the land, observing cross-compliance measures and to avoid over-compensation we will use a risk-based inspection process to assess activity. We will select inspections based on risk analysis criteria for land. This will identify, for example, farms where there appears to have been a significant reduction in activity. Inspectors will make professional judgements on the level of activity based on over and under grazing guidelines used for assessing cross-compliance. Where (subject to any appeal) it is determined that there is land that is not being actively farmed, that there are cross-compliance breaches or that there is potential over-compensation, the LFASS payment will be reduced or cancelled. This approach is intended to ensure that the requirements of the scheme are met, without introducing administrative burdens relating to the verification of animal numbers or linking LFASS payments to levels of production.

General Eligibility Criteria

Farmers and crofters wishing to receive support under these arrangements will be expected to meet certain eligibility criteria. These are as follows:

• Producers must be at least 16 years of age;
• Producers must farm at least 3 hectares of eligible land in the Scottish Less Favoured Area ( LFA);
• Eligible land is land which lies within the Scottish LFAs and is Scottish LFA forage hectares with an LFASS grazing category value, as declared by the applicant in a SAF, and used to support a continuous agricultural activity for at least 183 days in the same calendar year
• Payments will only be made to applicants who are actively farming eligible land (see paragraph above).
• In accordance with Article 14(2) of Regulation 1257/1999, farmers must undertake to farm in the less favoured areas for 5 years from the first payment of a compensatory allowance.
• Producers must meet the requirements of Cross-Compliance, as defined in Council Regulation ( EC) No 1782/2003, including maintaining the land in Good Agricultural and Environmental Condition ( GAEC) in order to be eligible to receive payment. Any breach of these requirements will lead to a loss of all or part of the LFASS payment.
• New applicants must undertake to farm at least 3 ha of LFA land for at least 5 years from the date of their first LFASS payment. In addition, they will have to have declared eligible LFA land which generated an LFASS 2006 payment.
• Producers must allow the Scottish Executive and EC institutions, their staff or representatives, access to land, animals, and records at any reasonable time for the purpose of establishing compliance with the terms of the scheme. Producers will also be required to co-operate with such inspections.

Historic payments

There are 3 zones within the LFAs. The first, "very fragile" area, which attracts the highest payment, covers all islands. Next are "fragile" areas within the Highlands & Islands Area (excluding the islands), or within other areas recognised as having high transport costs (which attracts the next highest payment); the final "standard" zone, which is all remaining land in the LFA, attracts the lowest payment. A further refinement was to vary payments to reflect the greater vulnerability of producers with poorer quality land, paying a higher rate on the more disadvantaged land.

Payment rates for the Less Favoured Areas Support Scheme ( LFASS) have been calculated to compensate farmers' additional costs and income foregone related to the handicap for agricultural production in areas designated as less favoured for agricultural production.

Additional costs and income foregone related to natural handicap results in lower "gross margin" per hectare on LFA compared to non- LFA land. Therefore income foregone and additional costs related to LFA handicap are calculated as differences between gross margin per hectare on non- LFA land and gross margin per hectare on LFA land.

Calculating average gross margin per hectare

The calculation of average gross margin per hectare on LFA and non- LFA land uses hill and lowground suckler cow and ewe enterprises gross margin figures from the 2005/06 Scottish Agricultural College Farm Management Handbook ( SACFMH). Non- LFA production is represented by lowground enterprises and LFA production by hill enterprises. LFA land is split into two, 'More Disadvantaged' and 'Less Disadvantaged' land, using grazing categories determined in 2003 on the basis of 2001 stocking densities. The two LFA categories are defined below:

Source: LFASS 2005 Explanatory Notes, Scottish Executive
Note: lu/ha refers to livestock units per hectare

The calculation of gross margin per hectare assumes an average stocking density of 0.2lu/ha on 'More Disadvantaged' land and 0.6lu/ha on 'Less Disadvantaged' land.

To convert suckler cows and ewes to livestock units (lu) in order calculate average livestock units per hectare on LFA land and eventually average gross margin per hectare, guidelines for LFASS 2005 have been followed. These equate one suckler cow to 1lu and one ewe to 0.15lu. The average gross margin per hectare for each of the land categories is calculated as the sum of weighted gross margin per hectare for suckler cow and ewe enterprises using the share of suckler cow and ewe livestock units in total livestock units in the LFA and non- LFA, which have been calculated from the 2006 June Agricultural and Horticultural Census.

Gross Margin Loss

The gross margin loss per hectare as a result of LFA handicap (which is equivalent to income foregone and additional costs due to LFA handicap) is calculated as the difference between average gross margin per hectare on non- LFA and LFA land. The calculated average gross margin loss per hectare on "More Disadvantaged" and "Less Disadvantaged" LFA land relative to non- LFA land is presented below together with suggested payment rates.

The setting of payment rates recognises the different transport costs faced by farmers across the LFA and the varying degrees of natural handicap affecting Scottish LFA. It takes into account:

• the fragility markers introduced under the 2004 scheme; and,
• grazing categories grouped into 'More Disadvantaged' (category 'A' and 'B') and 'Less Disadvantaged' (category 'C' and 'D').

Proposed payment rates for all the land categories fall below the average gross margin loss per hectare calculated for 'More Disadvantaged' and 'Less Disadvantage' LFA land. The proposed payment rates therefore do not over-compensate for LFA handicap.

Minimum payment

In recognition of the inevitable costs associated with running even the smallest of farms, especially in outlying areas, a minimum payment of £385 will be available to all LFASS recipients. Businesses will receive either £385 or their calculated LFA payment, whichever is the greater.

Estimated Expenditure, Sources of Funding and Financial Circuit - 2007 to 2013

The total estimated expenditure for the LFA support measure is shown in the financial tables shown in Chapter 7 of the Plan.

In order to be clear about how the various parts of the LFA support scheme will be financed, SEERAD confirms that, in conformity with Articles 14-15 of Regulation 1257/1999, co-finance funding is to be used for all elements of LFA support.

On the question of the financial circuit to be used, the Scottish Executive will indent for the EAFRD contribution on a monthly basis similar to the procedures that already apply to existing agri-environmental and farm woodland schemes

Duration of the Scheme

The Interim Scheme will run from 1 January 2007 to 31 December 2009.

Total Public Expenditure Cost for Measure 212: 623.4 M Euro
Total EU contribution for Measure 212: 167.8 M Euro

Quantifiable Indicators/Targets

To encourage more sustainable agricultural activity on 13,500 farm businesses in Scotland's remote hills.

Maintain at least 95% of agricultural land in the Scottish LFA in productive use over the Spending Review period, except where the land is converted to other sustainable uses. A baseline figure has been established to monitor this quantifiable indicator. (This indicator is considered to be more accurate indicator of activity than the first, since business amalgamations could reduce the overall number of farm businesses.)

N/A = Not applicable for this measure
# All impact indicators will be estimated based on output and result indicators. Quantitative data will be supplemented by qualitative judgement on change. Biodiversity: As measured by farmland bird species population, complemented by additional data on other species. High nature value farmland: Indicator is not developed. The alternative indicator to be used is % of land cover under farmland, woodland, urban, other. Water Quality: Gross nutrient balances will be measured at a sample of farms. Supplemented by information on nitrates and phosphates. Climate change: Increases in production of renewable energy will be supplemented where appropriate with information on net carbon savings.

5.3.2.1.4 Agri-Environment Payments

Agri-environment agreements will be undertaken for a minimum of 5 years and where necessary up to a maximum of 7 years. Agreement holders will undertake to fulfil their obligations for the full term of an agreement. Where the agreement holder is unable to meet the terms of the agreement for the full period they may be liable to recovery of payments.

Compliance with article 27 of Commission Regulation ( EC) No 1974/2006

Where agri-environment commitments relate to grassland management, agreement holders will be required to comply with the following conditions:

• Grassland management shall continue;
• The whole of the grazed area per livestock unit shall be maintained, avoiding both overgrazing and under-utilisation;
• Livestock density shall be defined taking into account all grazing livestock kept on the farm or, in the case of a commitment to limit nutrient leaching, all animals kept on the farm which are relevant to the commitment in question.

Land Set aside under Article 54 or 107 of regulation ( EC) 1782/2003

The only agri-environment payments available on set aside land are organic aid payments. The management requirements go beyond the requirements set out in Article 3(1) of Regulation 1782/2003.

Payment Rates for Agri-environment Scheme

Payment rates for measures under agri-environment scheme are set in light of calculations of income foregone and additional costs incurred by farmers/land managers in complying with options. Payment rates have been set in accordance with Article 27(8) of Commission Regulation 1974 of 2006.

Expertise

The personnel involved in calculating payment rates for the agri-environment scheme were selected from the Scottish Executive, Scottish Natural Heritage and Forestry Commission on the basis of their qualification and experience in areas of agriculture, farm business and environment. The majority of the team of advisers have been involved in the preparation of agri-environment scheme payment rates for a number of years and therefore have considerable experience. Their individual expertise and specialisms were matched wherever possible to the agri-environment option categories to ensure their expertise could be used to maximum effect. All payment rates were submitted and checked by Scottish Executive economic advisers to ensure they complied with agreed standard guidelines.

The calculation of payment rates for the Scottish Executive agri-environment schemes are fully supported by detailed information on the basis of all the figures used. Thus all the figures in the summarised partial budgets can be traced back to the elements, such as farming systems, enterprise performance and costs. This data has been made available to the independent verifiers and is available to the Commission on request.

Source of figures

Most figures included in the payment rates calculations were obtained from the Farm Management Handbook 2005/06 (26 ^th Edition) which is published by the Scottish Agricultural College, and the 2006/07 Organic Farm Management Handbook (7 ^th Edition) published by University of Wales, Aberystwyth Organic Advisory Services. Where data could not be obtained from these sources assistance was sought from Scottish Executive agricultural officers to estimate relevant cost and production figures from the areas they operate.

Regionalisation

The agri-environment payment rates and underlying calculations are not regionalised, i.e. - varied payments are not applied to the same option in different regions of Scotland. The majority of the options, however, are targeted at particular land use types and the farming systems and performance (based on the effect of variations in soil, topography and climate) underlying the income foregone calculation reflect farming practice in these areas.

Fixed Costs

Costs associated with machinery or installations needed for specific commitments which may be supported under Article 41 of Commission Regulation No. 1698/2005 are excluded from the calculation of payment rates for management options. Standard cost payment rates have been prepared to cover fixed costs associated with machinery and installations. The standard cost payment rates are set as averages of the estimated costs of labour, plants, machinery and materials to do the work or create the item to the minimum specification provided in this document. The standard costs are fixed and not subject to negotiation. Payments may be based on a percentage of Standard Costs of agreed capital item.

Evidence to support the consistency and plausibility of the calculations

In accordance with the requirements of Article 48(2) of Commission Regulation 1974 of 2006 an independent organisation ADASUK Ltd was engaged to check the methodology used and calculations for payments of the options drawn up by the Scottish Executive.

The verification of payment rates by ADASUK Ltd focussed on the following:

• assessing the accuracy of the calculations;
• ensuring that all relevant cost elements have been included in each calculation;
• checking that the principles used in the Scottish Executive's 2005 payment rates review had been followed;
• agree the final figure for payment in the calculations.

The report on the verification of payment rates calculation prepared by Mr Mark Temple of ADASUK Ltd is available to the Commission on request. While the report endorses the approaches taken by the Scottish Executive in calculating payment rates for the agri-environment scheme, some payments were judged to be slightly high and some slightly low. The report made it clear, however, that there was no systematic bias in the calculations and that they were content with the approach taken.

The rates set in the programme will be the maximum intervention rates for these measures and in many cases the actual amount paid for these activities will be less than these rates.

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