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Background
1. The voluntary modulation regulation ( EC No. 378/2007) requires member states to decide on and communicate to the Commission the annual rate of voluntary modulation that will apply for the period 2007-2012.
2. The regulation also requires member states to submit an assessment of the impact of the application of voluntary modulation, "in particular on the economic situation of the farmers concerned, taking into account the need to avoid unjustified unequal treatment between farmers".
3. In accordance with the deadline laid down in EU legislation, the formal communication of voluntary modulation rates in the UK and the associated impact assessment was submitted to the Commission on 12 June 2007. The impact assessment was produced jointly by the UK regions. The main part of the document outlined the impact of voluntary modulation on the UK as a whole, and there were separate sections which focused on the impact at the regional level, including one for Scotland. The UK impact assessment is published on the Defra website. 1
4. This paper reproduces the findings of the impact assessment for Scotland. The paper analyses the impact of, and rationale behind, the decision to use voluntary modulation in Scotland for the Scotland Rural Development Programme ( SRDP) 2007-2013.
5. Voluntary modulation is not new in Scotland, being used already, with rates of 3.5% and 4.5% in 2005 and 2006 respectively. These resources were required to support a variety of agri-environment and forestry measures under the SRDP 2000-2006.
Voluntary Modulation and Co-Financing Rates That Will Apply
6. Table 1 shows the voluntary modulation rates for Scotland for the SRDP 2007-2013. For 2007, there is a 0.5% increase in the rate of voluntary modulation above the current rate. Over the programme, a stepped approach to increasing voluntary modulation is adopted with 5% in 2007, 8% in 2008, 8.5% in 2009 and rising to 9% from 2010 onwards. The rationale behind this stepped approach is that it gives farmers time in the early years of the programme to plan ahead for increased rates in later years.
Table 1: Voluntary Modulation Rates for Scotland 2007-2012
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|
Rate of voluntary modulation | 5% | 8% | 8.5% | 9% | 9% | 9% |
|---|
7. These rates have been chosen to yield the amount of income required to deliver the outcomes desired from the SRDP.
8. The amount of money raised through voluntary modulation depends on two factors: the single farm payment baseline and the rate of voluntary modulation.
9. Table 2 shows the money raised from voluntary modulation in Scotland in both Euros and pounds Sterling. In 2007, a voluntary modulation rate of 5% applied to the single farm baseline yields €32.48m or £22.25m. Total voluntary modulation receipts over the period 2007-2012 are £216.65m. These figures are based on an exchange rate of £1=€1.46.
Table 2 Modulation Yield In Scotland 2007-2012
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | Total |
|---|
Single Farm Payment Baseline (€m) | 649.60 | 652.26 | 653.68 | 652.04 | 652.04 | 655.04 | 3911.65 |
|---|
Rate of voluntary modulation | 5% | 8% | 8.5% | 9% | 9% | 9% | - |
|---|
Yield (€m) | 32.48 | 52.18 | 55.56 | 58.68 | 58.68 | 58.68 | 316.27 |
|---|
Yield (£m) | 22.25 | 35.74 | 38.06 | 40.20 | 40.20 | 40.20 | 216.65 |
|---|
10. The chart overleaf presents information on the income sources for the SRDP. Voluntary modulation receipts of £216.65m amount to 14% of total income. The largest component of income is £1,113.4m of Scottish government Spending ( DEL or departmental expenditure limit). This is equivalent to 71% of total income. The other sources of income are the European Agricultural Fund for Rural Development ( EAFRD) and EU Compulsory Modulation. This means that for every £100 of voluntary modulation raised, the Scottish government provides £523.
Income Sources for the SRDP 2007-2013
11. In terms of expenditure, total expenditure for the SRDP 2007-2013 is estimated to be £1,603.3. Total Scottish government funding is £1,113.4, giving a co-financing rate of 69%.
How Will Voluntary Modulation Funds be Spent in Scotland and What Benefits will be derived?
12. Spending of the rural development budget, including voluntary modulation, will be spread across the Axes in the Rural Development Regulation as follows: 16% of spend will be under Axis 1; 11% under Axis 3; and the majority (70%) under Axis 2.
13. The focus of spending under Axis 2 will contribute to important economic and social outcomes as well as environmental benefits. First, Less Favoured Area payments will maintain land-based activity in upland and remote areas, which are characterised by difficult physical operating conditions and long distances to markets. Second, environmental and landscape improvements under Axis 2 often benefit the wider economy, for example through the creation of productive woodlands and the development of tourism opportunities. A greater proportion of funding is allocated to Axis 2 in order to honour existing commitments - mainly to agri-environment and forestry - and to reflect the critical role of land management in the quality of our countryside and environment and its consequential impact on the economic and social development of rural Scotland. Funding will also be provided to promote standards of animal health and welfare significantly better than those required by law, further improving the reputation and competitiveness of the Scottish livestock industry and helping to protect society, the economy and the environment from the effects of animal diseases.
14. Overall, the money raised through voluntary modulation will be spent on the Scottish Government's five strategic objectives by encouraging:
- a greener Scotland through a combination of measures supporting woodland creation, agri-environment payments (including organic production), tackling climate change by providing support for renewable energy and improving the water environment;
- a wealthier and fairer rural Scotland through providing support to new entrants to farming, assisting the restructuring of agricultural businesses, promoting diversification of farm and forestry businesses and developing micro-enterprises;
- a healthier Scotland through building on Scotland's reputation for producing high quality food and funding measures to increase access to greenspace for leisure and recreation;
- a safer and stronger rural Scotland by supporting co-operation in rural areas, compensating those farming in Scotland's Less Favoured Areas for the permanent disadvantage they face when compared with other areas of Europe and providing recreation and sporting facilities for rural communities; and
- a smarter rural Scotland by providing resources for continuing skills development and modernisation through the use of technology, funding vocational training and promoting the understanding of the environment and countryside.
15. A wide range of economic, social and environmental benefits will therefore be derived from the SRDP. The evidence base for the choice of priorities and measures in the SRDP 2007-2013 are set out in detail in the programme document.
Impact on Farming
16. It is important to explore what impacts increasing rates of voluntary modulation might have on the farming industry. There are two main types of impact (i) impacts on agricultural production and prices and implications for the comparative position of Scottish agriculture and (ii) impact on farm incomes and implications for the economic situation of Scottish farmers. These impacts are now explored.
Impact on production and prices
17. The impact on production and prices in Scotland is sourced from the research into the impact of modulation conducted by FAPRI and the Queen's University of Belfast (referred to earlier). In addition to the UK level findings, a separate report presented the impacts at the Scotland level.
18. The research estimated the impact of modulation on production and prices in the dairy, beef, sheep and arable sectors in Scotland.
19. As with the UK level analysis, the FAPRI research used a voluntary modulation rate of 20%. Given a baseline rate of 5% for compulsory modulation, the analysis thus assumed an aggregate modulation rate of 25%. 2
20. Table 3 summarises the results from the FAPRI research for Scotland. The table clearly shows that a high rate of modulation has negligible impacts on production and prices across all sectors. These findings mirror those for the UK.
Table 3 Impact of Modulation at 25%: Results from FAPRI Research for Scotland
Sector | Impacts of Modulation |
|---|
Dairy | - No discernable impacts on milk production.
- No change in the UK milk producer price.
|
Beef | - Slight negative impact on beef production in Scotland. The sizes of the suckler cow and total cattle herds will reduce by 1%. Consequently, beef production in Scotland will drop by 1%.
|
Sheep | - The number of Scottish ewes will drop by 1% and consequently production will fall by 1%.
- The drop in production will have a negligible negative impact on the producer price for sheepmeat.
|
Arable | - The impacts on wheat, barley, rapeseed and oats production in Scotland are negligible.
- Consequently, prices in the arable sector will remain unchanged.
|
21. These results imply that any increase to the rates of modulation will have no effect on production or the competitive position of Scottish agriculture. Scottish Agriculture will therefore be well placed to compete with other countries in the European Union.
Impact on cash incomes
22. The impact on farm incomes is explored by using data on cash incomes from the Farm Accounts Survey in Scotland (a survey of around 500 farms across different farm types).
23. Cash income is measured as revenue (sales of livestock, livestock products, crops and payments/subsidies) minus expenditure (variable costs, general overheads, fuel, repairs, rent paid, paid labour, etc).
24. A lower single farm payment through modulation reduces revenue and results in a lower cash income.
25. Impacts on cash income are estimated from a 5 year average of cash income between 2000 and 2005. An average over 5 years is used since cash incomes in some sectors fluctuate in particular years due to factors such as weather.
26. Since farmers are already paying 4.5% in voluntary modulation, the analysis focuses on the additional impact on cash income as a result of rates of voluntary modulation in excess of 4.5%.
27. The voluntary modulation rates of 5, 8%, 8.5% and 9% result in increases in voluntary modulation rates of 0.5%, 3.5%, 4% and 4.5% respectively.
28. The purpose of the analysis is to estimate differential impacts associated with different rates of voluntary modulation. Therefore the analysis estimates average annual impacts and does not estimate cumulative impacts over the 2007-2012 period.
29. Additional contributions are estimated by applying the modulation rates to the single farm payment (or subsidies in earlier years). The contribution is then presented as a percentage of cash income.
30. Table 4 shows the additional contributions to the rural development budget that farmers would be making for voluntary modulation rates of 5%, 8%, 8.5% and 9%, over and above the voluntary modulation they pay at present (4.5%).
Table 4 Additional Annual Contributions in Modulation (£ amount and as % of cash income) Compared to Current Situation
Farm Type | 5% Voluntary Modulation Rate | 8% Voluntary Modulation Rate | 8.5% Voluntary Modulation Rate | 9% Voluntary Modulation Rate |
|---|
Additional
Contribution
(£) | Impact
on cash
income | Additional
Contribution
(£) | Impact
on cash
income | Additional
Contribution
(£) | Impact
on cash
income | Additional
Contribution
(€) | Impact
on cash
income |
|---|
LFA Specialist Sheep | 68 | -0.4% | 474 | -3.1% | 541 | -3.5% | 609 | -4.0% |
|---|
LFA Specialist Beef | 143 | -0.5% | 1,000 | -3.5% | 1,143 | -4.0% | 1,286 | -4.5% |
|---|
LFA Cattle and Sheep | 142 | -0.6% | 994 | -4.0% | 1,136 | -4.6% | 1,278 | -5.2% |
|---|
Lowground Cattle and Sheep | 129 | -0.7% | 905 | -4.6% | 1,034 | -5.2% | 1,164 | -5.9% |
|---|
Cereals | 149 | -0.5% | 1,041 | -3.4% | 1,190 | -3.9% | 1,339 | -4.3% |
|---|
General Cropping | 150 | -0.4% | 1,049 | -2.5% | 1,199 | -2.9% | 1,349 | -3.3% |
|---|
Dairy | 113 | -0.2% | 792 | -1.5% | 905 | -1.7% | 1,018 | -1.9% |
|---|
Mixed | 184 | -0.6% | 1,286 | -4.0% | 1,470 | -4.6% | 1,653 | -5.2% |
|---|
Average | 135 | -0.5% | 943 | -3.3% | 1,077 | -3.8% | 1,212 | -4.3% |
|---|
31. The additional annual contribution to modulation receipts for an average farm business is £135 (for a voluntary modulation rate of 5%). This increases to £1,212 for a voluntary modulation rate of 9%. The contributions varies by farm type with LFA specialist sheep farm businesses having the lowest contributions and mixed farm types the highest.
32. As a percentage of cash income, the average reduction in cash income is 0.5% for a rate of 5% (and 4.3% for a rate of 9%, respectively). By farm type, the highest percentage reduction in annual cash income is for lowground cattle and sheep farm businesses (-5.9% for a 9% voluntary modulation rate).
33. At the maximum rate of voluntary modulation (20%), the average additional annual contribution would be £4,175 and the reduction in annual cash income 14.7% (figures not shown in table).
34. Although average cash incomes may be reduced by up to £1,212 per year from 2010 as a result of modulation, if farmers take up measures offered in the programme, such as those aimed at restructuring their businesses, then any reduction in farm incomes should be offset by consequent cost reductions and productivity improvements arising from restructuring.
35. In addition to measures focused at restructuring, other measures in the programme, such as diversification, will provide opportunities for farmers to offset income reductions from voluntary modulation by increasing their income streams, for example by adding value through the food supply chain or offering tourism products and services.
Summary
36. This paper has explored the impact of increased rates of voluntary modulation on the farming industry in Scotland. The conclusions are as follows:
- Increased rates of voluntary modulation will have negligible impacts on prices and production. The competitive position of Scottish agriculture should therefore be unaffected and Scottish Agriculture will therefore remains well placed to compete with other countries in the European Union.
- Rates of voluntary modulation of between 5% and 9% will increase farmers' contributions to the rural development budget on average by between £138 (for 5%) to £1,212 (for 9%) per year.
- As a proportion of cash income, these additional contributions from rates of voluntary modulation of 5% and 9% reduce annual cash incomes by between 0.5% and 4.3% respectively.
- Despite income losses through modulation, farmers have the opportunity to undertake measures in the SRDP for which they will receive payments. Many of these payments will supplement farm incomes.
- Under Axis 1, for example, restructuring measures should result in efficiencies and cost savings thereby increasing farm income.
- Under Axes 1 and 3, other measures such as adding value and diversification will provide farmers with an opportunity to diversify and strengthen their income streams.
- The stepped approach to increasing in voluntary modulation, with lower rates in the earlier years, will allow farmers to plan early on how to adapt to higher rates in later years. This approach should minimise any adverse impacts of voluntary modulation.
Scottish Executive
14 June 2007
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