Policy Drivers of Land Mobility in Irish Agriculture

Cathal Geoghegan Walsh Fellow, Teagasc Rural Economy Development

Programme

Anne KinsellaTeagasc National Farm Survey

Prof. Cathal O’Donoghue, Teagasc Rural Economy and Development Programme

Introduction• Increasing land mobility in Ireland important policy goal in terms

of: • Increasing productivity; • Reaching policy targets; • Growing demand for land following milk quota removal/Young

Farmer top-up.• Less than 1% of agricultural land comes on the market each year.• 84% of agricultural land in Ireland currently farmed by owner of

the land.• Vast majority of rented land accessed through “conacre” (11

month) rental – only 3,500 long term leases.• Growing consensus this is suboptimal in terms of productivity and

sustainability and provides little security for renting farmers.

Introduction

• Teagasc National Farm Survey data• Cattle farming dominant land use (57% of total land area)

• Smaller farms• Older farmers• Dominant across all land types

• Relatively stable land shares over time – dairy share constrained by quota• Farm size increasing over time, especially on the better soil types• However, farms also becoming more fragmented – may be problem for

dairy expansion• Static land market over time

• Tiny amount of land bought/sold• Amount of land being rented increasing slowly but still very low by

European standards

Land Mobility Policy in Ireland

• Shift from centralised, top-down system to market-driven, bottom-up approach• Land Commission acted as important tool in the implementation of a

countrywide land structural reform programme in early years of Irish Free State (1920’s/30’s)

• Leasing of land, excluding 11 month lettings, was subject to the express permission of the Land Commission – fear of one landlord class replacing another

• Landholders were reluctant to seek permission to lease out their land for longer than 11 months, for fear of having their land taken over by the Land Commission, who had the power to acquire land compulsorily.

• As policy attention has switched to the usage rather than the ownership of land, land access has become an increasingly important issue.

• Introduction of measures to increase the leasing of land over longer periods of time than 11 months. These measures have focused on tax incentives designed to stimulate greater activity in the rental market.

Land Mobility Policy Drivers – Tax Policy

• Introduction of measures from mid-1980s to increase the leasing of land over longer periods of time than 11 months.

• These measures have focused on tax incentives designed to stimulate greater activity in the rental market.

• Income tax exemptions for leased land and entitlements• Landowners can lease land and entitlements free of income tax

up to certain income limits

• 5 - 6 year lease = up to €18,000 rental income per year • 7 - 9 year lease = up to €22,500 rental income per year • 10 – 14 year lease = up to €30,000 rental income per year • 15+ year lease = up to €40,000 rental income per year

Land Mobility Policy Drivers - Agricultural Supports Policy

• Subsidies capitalised into land prices and rents (Goodwin et al., 2005; O’Neill & Hanrahan, 2012)

• Policy uncertainty can impact farmers’ land use behaviour (Douarin et al., 2007; Raggi et al., 2013)

• CAP reforms – new Basic Payment System (BPS) from 2015 provides example of how policy uncertainty affects land use decisions

Land Mobility Policy Drivers - Agricultural Supports Policy

• Farmers in long-term leases of whole farm forced to sell entitlements

• Under the new BPS rules, if a farmer leased out the entirety of his land in 2013 and did not farm himself in that year, he would not be allocated entitlements under the new scheme in 2015.

• Effectively forced farmers in this situation to sell their SPS entitlements before they became void in 2015.

• Penalisation of farmers who has entered long-term lease arrangements by the CAP reforms

Research Questions

• What effect do policy initiatives have on financial drivers of agricultural land availability?

Supply constraints• Do farmers make a better financial return from farming

their land compared with the possible return from leasing out their land?

• What effect do tax incentives to lease land have on income from leasing?

• To what extent can subsidy income be affected by farmers’ land use decisions?

Hypothetical Farm Model

• Heterogeneous nature of farm households and the complexity of the policy instruments involved makes it difficult to capture the direct impact of tax and subsidy policy on farmer behaviour.

• Require a model that simulates policy at the farm level but that can also deal with the complexity of the policy instruments.

• Utilise a hypothetical microsimulation model to compare farm income for a number of hypothetical farms in order to simulate how alternative tax and subsidy policies can influence land mobility choices.

Hypothetical Farm Model

• Hypothetical Dairy, Tillage and Cattle Finishing farms• NFS 2013 Family Farm Income per hectare used as

proxy for income• Dairy - €1,137 per hectare• Tillage - €460 per hectare• Cattle Finishing - €389 per hectare

• Average NFS Cattle Finishing farm 40 hectares in 2013 – this farm size used as proxy to inform potential income on other farming systems

Hypothetical Farm Model

• Same scenarios run for hypothetical Dairy, Tillage and Cattle Finishing farm• All three farms 40 hectares• Same terms and conditions apply to lease agreement and same

tax exemption rules apply • Land rental price of €350 per hectare• Entitlement values:

• Dairy - €300/ha• Tillage - €368/ha• Cattle Finishing – €349/ha

• Farmer married and under 65• Potential income from farming the land is contrasted with potential

income from other land use options

Policy Drivers of Land Access

• Lease out entire 40ha & entitlements vs. farming at current levels• Scenario starts in 2016 to elimainate CAP change complications and lasts

7 years

• Tax breaks only add ~10% to lease income vs. normal taxation

Policy Drivers of Land Access

• 7 year lease option 2013 – 2019• Lessor not eligible for new entitlements under CAP reform so sells SPS

entitlements in 2014 at 1.8 times face value• Only land (40ha) is leased out from 2015 onwards

Policy Drivers of Land Access

• Silage/7 year lease option vs. farming at current levels• 2013 – Farmer cuts silage on 40ha @€75/ha• 2014 – Farmer signs 7 year lease on 39 out of 40 hectares and 39 entitlements• 1 hectare and 1 entitlement retained to meet “active farmer” definition• 39ha and entitlements leased out until 2019

Policy Drivers of Land Access

• Rules within the CAP seriously affect leasing income• Perverse incentives attached to retaining one hectare of land and remaining

an “active” farmer

Sensitivity Analysis• Repeat previous scenario with farms in 75th and 25th percentile

of farm income in NFS • High income tillage/cattle finishing farmers still better off/as well off through leasing as farming

• All modelled low income farmers better off leasing

Conclusions• Policy uncertainty may inhibit land access but substantial rewards

available for those who wish to make their land available. • Begs the question: if (some) farmers can make more money

leasing out their land than farming it, why aren’t leases more popular?• Too little land/rental price too low for tax breaks to make a

difference• Can’t lease out to relatives• Non-pecuniary benefits to farming

• May be general equilibrium effects going forward where increased land prices pushes up land supply until price start to drop again

• Also localised demand effects where land demand may be very specific to a local area, leading to divergent land markets

Thank you for your attention.

Any questions?