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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

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. With the agreement of the European Commission we, therefore, propose to introduce an Interim Scheme with limited changes for the period 2007-2009.

Measure code (212)

This section sets out arrangements for an interim scheme (based largely on the previous 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 developed, hopefully in 2008, although this will depend on when the European Commission announce their new proposals, 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. The LFA area in Scotland is quite unique compared to other areas of the UK. For example, in England 1.44m hectares of land is classified as LFA which represents only around 15% of the total agricultural land.

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 for agricultural production 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 in 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. http://www.scotland.gov.uk/Publications/2007/03/21143353/0. One of the key findings of this study is that economic, social and environmental implications cannot be considered in isolation, and future LFA policy needs to combine targeted environmental and socio-economic measures. The findings of this study will also form an important part of our evidence base in developing the scheme post-2010. The focus of the scheme throughout the programming period will be (in accordance with paragraph 33 of the preamble to Council Regulation ( EC) No 1698/2005) "through continued use of agricultural land, to maintaining the countryside, as well as to maintaining and promoting sustainable farming systems". Active management of LFA land is an essential foundation for the delivery of many actions identified under the three themes of the Rural Development Strategy and the objectives of Axis 2 of the RDR, including economic and community goals, as well as uptake of agri-environment measures.

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 active land management in these areas.

It is only through sustaining farming and crofting activity and by retaining land managers in less favoured areas, that there can be effective uptake of agri-environment measures and delivery of environmental benefits associated with active management of land for agricultural production. LFASS has a key role in this respect by maintaining the basic underpinning agricultural and crofting capability that can promote environmental enhancement, including through agri-environmental schemes under the SRDP.

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 largely on the current model. However, to prevent coupling of support with current levels of agricultural production, adjusted areas will be calculated by reference to historic values, namely those applied in 2006. Thus, 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).

*It should be noted that as there was a supplementary payment in 2006, the above only refers to the initial payment. (For example, a farm business receiving €2,920 initial payment for 100 hectares in 2006 would receive €2,920 in 2007, 2008 and 2009 provided that those 100 hectares remain eligible.)

The interim scheme will use 2006 as a reference year to determine the adjusted areas needed to calculate payments. (Given the very diverse range of land quality within Scottish LFAs, areas must be adjusted in order that payments are sufficient to make an effective contribution to compensation for existing handicaps, but also avoid overcompensation.) During this interim period, there will be no change in the basis for designating land for LFA support.

The previous programme included an LFASS measure that used animal numbers as a part of the basis for adjusting areas to calculate payments per hectare, including upward adjustments on land with both cattle and sheep; the aim of this so-called cattle top-up was to encourage beef production and to reward the environmental and social benefit of maintaining cattle in the LFA. This approach is not being continued because it would mean that LFASS payments would fail to respect the principle of decoupling. The study (referred to above, and available at http://www.scotland.gov.uk/Publications/2007/03/21143353/0), also commented on the cattle-top. It stated that, in principle, the weighting should give some incentive to farmers to retain cattle in the uplands and stock at sustainable levels both of which are positive from an environmental perspective, but no evidence of the actual impact of this weighting is available; in addition, it questioned the degree to which it was targeted, noting that the cattle top-up was untargeted so far as its environmental benefits were concerned. The interim scheme for 2007-09 will continue to use the 2006 factors for adjusting areas, in order to reflect the previously determined level of existing handicaps and to respect the principle of decoupling. The impact of these changes on levels of cattle is expected to be low; on the other hand, market considerations may well be a significant factor affecting farmers' decisions. In this context, it is noted that while sheep numbers fell by 3.2 per cent between 2005 and 2006, beef cattle numbers fell by only 1.6 per cent over the same period; this situation will continue to monitored, to provide evidence to support any new or enhanced measures to improve the environmental quality of grazing land in LFAs.

Environmental Benefits

It is essential that the overall environmental benefits of farming in LFAs are maintained and enhanced. As a pre-requisite, LFASS recipients will have to meet the conditions of cross-compliance (as opposed to good farming practice under the previous scheme). In addition, to enhance the environmental benefits of grazing, the programme for 2007-13 includes a number of agri-environment measures specifically designed to secure these benefits. Unlike the linked payment to cattle numbers in LFASS, which was very general in its application, these measures are well targeted. They include the following-

• Summer cattle grazing - to promote varied structure and species composition of grazed land
• Moorland stock disposal, away wintering of sheep and off-wintering of sheep - to promote growth of vegetation by managing grazing
• A further fourteen measures encourage the management of livestock for particular habitats ( e.g. wet grassland, species rich grassland, raised bogs and heath), e.g. by introducing appropriate grazing or by restricting and excluding grazing at critical times of year.

The old LFASS used the ratio of cattle to sheep on a holding as a basis for promoting mixed grazing. However, while mixed grazing systems do help improve biodiversity, other factors such as intensity and timing of grazing are also important. Thus, our proposed range of complementary agri-environment measures is better targeted, encouraging the development of particular grazing regimes suited to particular habitats.

Table: Comparison of scale of old LFASS environmental benefits and new agri-environment benefits in the LFA

Figures for area under new grazing measures cannot be determined until proposals are submitted and approved. Stocking density figures vary considerably across Scotland depending on land quality. The average livestock density in LFAs in 2006 was 0.35 livestock units per hectare. [See also the minimum stocking density requirements set out under Agri-environment payments - Measure Code 214.]

Monitoring and Review

The proposed changes in LFASS, taken in the context of the wider programme, achieve the aim of decoupling support from production and improving the targeting of measures aimed at improving the environmental quality of grazed land. Our target will be to maintain or increase the number of LFA farms with mixed cattle and sheep grazing (2006 baseline = 5931 farms), and also to ensure that wherever possible the grazing regime is best suited to the particular habitat. The impact of these measures in the LFA will be monitored and reviewed by the end of 2009. We will revise the measures if necessary, including if the number holdings with mixed grazing farms drops by more than 20% against the 2006 baseline and in relation to the qualitative elements ( i.e. suitability of particular grazing regimes for particular habitats).

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 agricultural activity for at least 183 days in the same calendar year. No payment will be made where land is abandoned.

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 cross compliance

To ensure that payments are only made to those who are actively farming the land and observing cross compliance measures, to avoid over-compensation and to prevent payments where land is abandoned, a risk-based inspection process will be used to assess activity, selecting inspections based on risk analysis . Where the historic stocking density is below the minimum 0.12 livestock units per hectare or above the maximum 1.4 livestock units per hectare, areas will be adjusted to restrict payments accordingly. The risk analysis criteria will be used to identify inter alia farms where there subsequently appears to have been a significant reduction in agricultural activity. Inspectors will make professional judgements on the level of activity based on positive evidence of ( e.g.) livestock grazing and fodder crop production, and negative evidence of ( e.g.) under grazing and encroachment of scrub or other unwanted vegetation that would degrade the environmental value of the land. 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 on farmers relating to the verification of animal numbers or linking LFASS payments to current levels of agricultural 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 agricultural activity for at least 183 days in the same calendar year. No payments will be made where the land is abandoned;
• 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.

Basis of calculating payments

As in the previous scheme, there are 3 zones within the LFAs. The first, "very fragile" area, which attracts the highest payment, covers all islands. Second, are "fragile" areas, which comprise mainland areas in the Highlands of Scotland. The third "standard" zone, which is all remaining land in the LFA, attracts the lowest payment. In addition, payment rates are varied to reflect the greater vulnerability of producers with poorer quality land, with a higher rate being paid on the more disadvantaged land.

As in the previous scheme, these payment rates 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. The principle behind the payment rates is that additional costs and income foregone relate to natural handicap which 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.

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.

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.

Thus, as in the previous scheme, the setting of payment rates recognises the different handicaps faced by farmers across the 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').

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 proposed payment rates for LFASS:

As shown in the above table, proposed payment rates for all the land categories in LFAs fall below the average gross margin loss per hectare by a significant margin. Thus, the proposed payment rates therefore do not over-compensate for LFA handicap. As a further precaution against overcompensation, land will only be eligible for LFA support if it is actively farmed; there will be provision to withhold or recover the whole or any part of the payment where the land is not actively farmed. No payments will be made where land is abandoned.

Minimum payment

In recognition of the inevitable costs associated with running even the smallest of farms, especially in outlying areas, a minimum payment of €562 will be available to all LFASS recipients. Businesses will receive either €562 or their calculated LFA payment, whichever is the greater. Although there may be a limited number of cases where the minimum payment could exceed the maximum of 200 Euro per hectare, the average amount of all compensatory allowances at the programming level will be well below this threshold, in accordance with Article 15(3) of Council Regulation ( EC) No 1257/1999.

There is no upper limit to aid per farm.

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, the Scottish Executive 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.

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 hectares of land cover under farmland, woodland, urban, other.

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