Evaluation of less favoured area support scheme

Executive Summary

E1. In anticipation of the transition from Less Favoured Areas ( LFAs) to Areas of Natural Constraint ( ANCs), the Scottish Government ( SG) commissioned a desk-based evaluation of the Less Favoured Area Support Scheme ( LFASS). The aim was to establish how LFASS currently meets the goals of the Rural Development Regulation ( RDR) and ANC working guiding principles, and to review the evidence and provide proposals for the development of the new ANC scheme.

Land Abandonment

E2. Agricultural abandonment of land has potential implications for commodity production, rural communities and environmental conditions. Although the pattern is uneven, agricultural census data and LFASS payment data indicate that abandonment has occurred in recent years, predominantly on poorer quality land and in more remote areas, both at field level and whole farm level.

E3. This is despite on-going and increased support and reflects a number of factors, including market pressures, the decoupled nature of most payments and broader socio-economic changes. In some cases, abandonment may be temporary, in others more permanent. Moreover, whilst some instances of abandonment may generate additional environmental or recreational benefits, widespread abandonment is generally viewed as undesirable.

Payment distributions

E4. Reflecting the historical headage basis for livestock support payments, per ha payment rates for both LFASS and the Single Farm Payment ( SFP) have been higher on better quality land within the LFA than on poorer quality land. Although this remains the case, payment rates on poorer land have risen as a result of changes to LFASS and through the introduction of the new Pillar I Basic Payment Scheme ( BPS). Consequently, total funding to more remote areas with poorer quality land has increased and will continue to do so as the BPS is phased in (provided that land is actually claimed). Funding to better quality land in more accessible areas within the LFA will, generally, decrease (unless it was lightly stocked historically).

E5. Although the three-region model adopted for the BPS limits the degree of redistribution, the switch away from the historical SFP means that more extensive LFA cattle and sheep farms (in any region) will gain funding at the expense of more intensive LFA and non- LFA farms. Within each BPS region, the area-based nature of payments means that larger farms will receive higher total payments.

Sustainable Farming Systems

E6. Excluding support payments, the net margins for livestock grazing enterprises across the LFA (and elsewhere) are typically negative. Moreover, gross margins are also often negative. This reflects underlying challenges to achieving profitability everywhere, but also variation across farms in terms of size and skills - lower quartile performers are markedly less efficient than upper quartile performers (indicating scope to improve through management and/or structural adjustments).

E7. Hence, many LFA farm enterprises would not be sustainable in the absence of support payments - including LFASS but also other Pillar II schemes and, especially, Pillar I payments. However, care should to be taken to distinguish between individual enterprises and their host farm businesses/households which may have multiple sources of income. Size also matters in that small-scale enterprises can contribute only modestly (via revenues or area payments) to total income, even if run efficiently.

Income Foregone and Additional Costs

E8. Concepts of income foregone and additional costs arising from operating in an LFA are intuitively appealing. Indeed, the absence of certain farming activities from the LFA reflects the relative profitability of different enterprises. However, this means that types of activities observed within an LFA have evolved endogenously to suit their circumstances. As such, their cost structure cannot be easily compared with activities elsewhere that have evolved under different circumstances - they are different enterprises.

E9. For example, whilst it is apparent that transportation distances and limited scope for producing fodder and straw locally can raise the unit costs of some inputs, the effect is not only on those unit costs but also on the type of management system adopted in terms of the intensity and mix of inputs deployed and of outputs generated. Consequently, systems may have different cost structures, but (reflecting the principle of equi-marginal returns) profitability may be more similar if expressed in terms of net (rather than gross) margins and if consideration is given to different denominators. For example, per animal, per ha, per labour unit or per £ of capital investment.

Conclusions

E10. The advent of ANCs is forcing many of the questions raised by previous debates about LFA policy to be revisited and presents an opportunity to address a number of unresolved concerns. However, broader rural development objectives and SG National Performance Framework outcomes, plus overarching EU objectives such as economic growth, social cohesion and climate change, all now have greater prominence. As such, any future LFA-type policy should be shaped less by previous policies and more by intervention logic and commitment to delivering against clear and justifiable objectives.

E11. Unfortunately, decoupled payments are at best a weak and blunt tool for influencing land management in ways likely to deliver on the stated policy objectives. Specifically, by imposing only weak conditionality on how land is managed, LFA/ ANC policy has little leverage on the occurrence or intensity of management activities or their knock-on effects with respect to production, retaining jobs and skills or delivering environmental benefits. Moreover, a focus on biophysical constraints alone is insufficient to calculate the "appropriate level of support" through additional cost/income foregone calculations. Notwithstanding EU-level endorsement of ANCs, their underlying logic is itself also not compelling if considered in a broader context.

E12. Consequently, given budget limits and ANC rules, although various design options for designations and payment rates can be constructed, none are likely to deliver satisfactorily on policy aims nor to avoid significant redistribution from existing support patterns. Ultimately, if the European Commission's rules around ANCs do not permit the degree of targeting and conditionality required to address specific policy objectives and redistribution is unavoidable anyway, it may be that other policy instruments available under both Pillars of the CAP would be more suitable and that at least a proportion of funding currently directed through LFASS could be better deployed in other ways. Sustainable rural development is unlikely to be secured through denial of the pressures for structural adjustments and continuation of the existing approach.