It has been more than 17 years since the SPS heralded the introduction of payment entitlements as a means of decoupling direct support from production.
While the names of the schemes have changed, the nature of the entitlements has remained the same, except that the small, less intensive farmer receives progressively more and the large, more intensive farmer progressively less.
No doubt the happy beneficiaries and socially-minded commentators will see this progression as all right and proper, but the situation is not as simple as it seems.
There are many very efficient but struggling farmers who face significant income losses in the years to come.
To maintain or increase their income, some farmers buy or sell entitlements,
Here I examine the case of employment eligibility. In a follow-up article I will evaluate the case for sale.
Permissions are sold for a variety of reasons.
The buyer is typically a farmer with available land and no entitlements, or a farmer with low-value entitlements looking to scale up.
According to the terms of the base payment system, the sale of claims without land in 2022 is subject to a “reclaim” of 20% of the number of claims sold.
So if 50 allowances are sold, the buyer gets 40 allowances.
With the clawback no longer applicable in 2023, not many claims are expected to be offered for sale before this year’s application deadline, with a significant increase next year.
It’s also likely that lower value claims will become a more sensible investment.
Currently, higher value claims tend to cost a higher multiple of the payment value.
For example, claims with a payment value close to or below the national average typically cost twice the payment value, while claims with a payment value twice the national average can cost 2½ times the payment value.
The impact of the 20 percent clawback is generally borne by the seller as the buyer only pays for the number of entitlements they end up with.
Position under BISS
The BISS convergence measures require that each entitlement value must reach a minimum level of 85 percent of the national average payment by 2026.
This means that entitlements above the national average will be reduced in 2023-2026 to meet this goal, and entitlements below the national average will be increased.
The net effect of this is that the higher the value of the claims, the greater the hit over the four year period.
Therefore, farmers wishing to purchase entitlements must first determine what they will receive at the end of the four-year period.
To do this, google the government BISS payment calculator and enter your current payment details.
The table gives an idea of how claims with different values are affected. The BISS payment is understood to include the CRISS (Complementary Redistributive Income Support for Sustainability) payments and Eco-Scheme payments.
Without getting too technical, higher eligibility scores will take a serious hit.
For example, claims currently bringing in €450 will be down 29 percent by the time we reach 2026. Claims in the €260-290 range will remain more or less untouched, and lower value claims will increase significantly through 2026.
The economic case
The buyer needs to ask how far they can go in terms of multiples of payment value when buying entitlements, or does it make sense to buy higher value entitlements?
Joe buys 20 entitlements with a current payment value of €450 including greening, each priced at €22,500 or €1,125, a multiple of 2½ times the payment value, reflecting the prevailing rate for entitlements of this value.
These entitlements currently bring in €9,000 per year, but by 2026 the payment will drop to €6,639. Over the four years, the total payment Joe receives from the 20 claims is €28,263 under BISS.
Thus, the entire BISS payment for the first three years is settled by the cost price.
However, taxes must be taken into account as the acquisition of entitlements is not tax-advantaged, while payments received are taxable.
If Joe buys the entitlements in January 2023, it will actually be December 2026 before he gets his money back, and that’s assuming he’s a low-taxpayer.
By December 2026, the BISS program will have reached the end of its projected term and it cannot be said with certainty that these claims will be secure thereafter.
A return for Joe depends on whether the claims have value or return after 2026. It’s probably not such a bad game as he’s more or less certain to get his money back for the first four years.
However, there is no certainty of a return after 2026, so a payment of more than 2½ times the current payment value could not be justified.
Pat buys 20 allowances with a current payment value of €150 each, including greening at a price of €6,000 each, or €300, a multiple of twice the payment value.
These entitlements currently bring in €3,000 per year, but by 2026 the payment will increase to €4,842.
Over the four years, the total payment Pat receives from the 20 claims is €18,936. So the return for the first four years is €12,936.
Despite deducting taxes, Pat has his money back after two years. In all respects this is a good investment.
The higher the payment value of the claims, the greater the multiple of the payment value that the claims achieved when sold.
This may no longer make sense as the higher the payment value under BISS, the greater the cut will be in 2023-2026.
Prospective buyers must consider carefully before deciding to purchase entitlements.
My advice is that such a purchase must generate a reasonable return within the lifetime of the program, as in this rapidly changing world there is absolutely no guarantee that payment will be secured in the future.
Martin O’Sullivan is the author of the ACA Farmers’ Handbook and is an agricultural business and accountant based in Carrick-on-Suir; www.som.ie
https://www.independent.ie/business/farming/agri-business/finance/martin-osullivan-the-economics-of-buying-entitlements-lower-value-will-offer-a-higher-return-41555890.html Martin O’Sullivan: The economics of purchasing entitlements: Lower value provides higher return