Sustainable and integrated farming and crofting activity in the hills and uplands of Scotland: blueprint - report

9. Changes to existing support schemes

The HUCG submitted a paper to Scottish Government in early March 2021 which outlines several proposals for consideration and, where possible, for immediate action by government. The group believes that addressing the issues identified within that paper will be an important step towards paving the way for a future support structure that is both fair towards genuinely active producers and ensures high value for public money.

The proposals capture current support payment issues that have been discussed during HUCG meetings and in some occasions been highlighted by the industry for several years, and the suggested changes have been deemed 'easy win' options to achieve immediate improvements within the agricultural support system by better targeting support payments at those businesses that are delivering desirable outcomes.

The group recognises that some of the above changes may require legislative changes but believes that it is imperative that any issues associated with the delivery of current agricultural support are resolved as soon as possible so that the introduction of a new support system can build on a robust, working and fair (legislative) delivery framework without underlying problems.

A recap of these initial findings and proposals is provided below as they form part of the HUCG's wider review and recommendations for consideration by Scottish Government.

9.1. Linking agricultural support payments to agricultural activity

The HUCG notes that various aspects of the past and current agricultural support schemes have resulted in payments being delivered on the basis of what businesses 'have' or 'had' rather than what they 'do'. This has caused issues with support payments not always being targeted at agricultural activity, thereby resulting in poor value and limited public benefit for taxpayer's money.

The following initial observations in particular should be addressed where possible but at the very least considered when designing the future agricultural support system as these have been deemed simple but effective changes. This must be done with due consideration to what constitutes agricultural activity across different types of production systems and within different areas of Scotland where production outputs and productivity as a whole can vary significantly and be enhanced or restricted as a result of environmental factors that are typically out with the control of farming and crofting businesses.

• The concept of entitlements to trigger access to direct or any other agricultural payments should be discontinued
• The concept of delivering payments on the basis of the total area farmed should be discontinued in its current form and adjusted to deliver support payments on achieving appropriate productive activity, environmental and climate benefits; future support will likely have to be calculated and delivered as environmental payments on a 'per hectare' basis so that it is not deemed a 'production payment', but the calculation must be linked to the delivery of quantifiable activity, environmental and climate outcomes
• The ability for landowners to receive agricultural support payments on land that is not being farmed or crofted in their own right, and the resulting inability of a grazier to access LFASS, should be stopped; support payments should only be paid to individuals or businesses taking the production risk and carrying out appropriate agricultural activity
• In order to recognise that collaboration between landowners and tenants can deliver benefits for both, consideration should be given to designing a payment structure which offers separate access to:
• Support payments for the tenant for delivering outcomes resulting from production-based activities and management efficiencies
• Capital grant funding for the landowner for carrying out capital works aimed at environmental/biodiversity enhancement, provided appropriate agricultural activity is taking place by a tenant
• Agricultural support payments should be targeting agricultural activity aimed at food production, and should therefore not be accessible for alternative land uses or towards the production of crops not intended for the food chain.

Crops and land uses that should be deemed ineligible for the purpose of receiving agricultural support payments could, for instance, include:

• Commercial forestry and woodland such as tree nurseries, commercial plantations and Christmas trees
• Flowers and other ornamental plants
• Crops grown for use as bio-fuels
• Land where there is agricultural use but the main purpose is not food production, e.g. green areas on construction and development sites, amenity parks, military and airport areas, and around public roads and public transport areas
• The concept of using historic reference years to calculate agricultural payments as happened with LFASS and the Beef Efficiency Scheme should be discontinued and not repeated in future schemes; payment calculations must be based on the most recent activity carried out by a business
• The ability for businesses to access agricultural support payments by leasing somebody else's livestock should be stopped
• Any individual or business should be eligible to receive agricultural support payments provided they:
• Submit the relevant forms to declare their agricultural activity and comply with cross-compliance and other scheme requirements
• Own or rent land, and have the necessary documentation to provide evidence of ownership or a tenure or lease contract if needed
• Carry out meaningful agricultural activity which is aimed at food production whilst fulfilling environmental, climate and wider benefits in line with cross-compliance, baseline conditionality elements and future scheme outcomes

9.2. Less Favoured Area Support Scheme (LFASS)

Pillar 2 support via the LFASS is a vital mechanism to support those farming and crofting businesses operating in the most challenging environments and areas of Scotland in order to ensure that they can run viable production systems and contribute towards domestic food production whilst delivering a range of wider socio-economic and environmental benefits.

LFASS attempts to capture farm-specific activity levels to a certain degree by basing payments in parts on livestock numbers and enterprise mixes for different businesses. However, LFASS is still largely based on historic livestock and enterprise data going as far back as 2001 when grazing categories were first approved.

Many farming and crofting businesses have grown or reduced their operations since then through a change of the enterprises they manage or via drop or increase in livestock numbers, in some cases as a result of the initial LFASS distribution along with decoupling payments.

This has resulted in many businesses which historically managed higher livestock numbers getting overcompensated whilst other units that have since grown are not receiving full support payment levels to reflect their higher production and activity levels.

Public funding provided to businesses that are no longer sufficiently active are unlikely to be (fully) reinvested into the business and may be lost to the agricultural industry, along with the wider benefits provided to rural communities and subsidiary industries which depend on the movement of monies into and through the farming sector.

On the other hand, underfunding of businesses that have since grown means that these businesses are immediately at a competitive disadvantage to other farming businesses as their ability to invest in their operation is more limited compared to their fully supported counterparts. This means that their ability to progress and improve their performance in order to achieve climate and environmental efficiencies can be (severely) restricted.

The HUCG recognises that although LFASS will be replaced or updated during the agricultural transition period, its concept of providing a 'disadvantage payment' is likely to continue being the main mechanism for delivering payments to disadvantaged businesses over the next 3 to 4 years.

In order to target LFASS more fairly by linking payments to actual and recent livestock activity over the next four years to cover the transition period, the group proposes that the following points be considered:

• The delivery mechanism of LFASS over the next four years to cover the agricultural transition period should be re-based using the 2018 payment structure to ensure that fragility markers and enterprise mixes for cattle multiplier purposes are honoured and fully reinstated for LFASS payments going forward. Cattle grazing delivers distinct environmental benefits due to their less selective browsing habit which helps to maintain vegetation in suitable condition. From an environmental habitat maintenance point of view, it is therefore important to provide adequate support in recognition of the environmental importance of cattle across Scotland's landscape, and the retention of the cattle multiplier helps to provide this essential support
• Payment levels should no longer be based on a historic reference year. Instead, they should be calculated annually using a rolling 3-year average and starting with the most recent historic average of 3 years up to and including 2020 for the scheme year 2021. This will ensure that businesses receive support that reflects their most recent level of activity. Anomaly cases such as new entrants need to be captured from year one of their business activity so that they have the same comparative access to support payments. Where activity/productivity suddenly increases or drops by significant percentage as a result of a business scaling back or growing operations, a rolling 3-year average may not fairly target adequate support and may therefore have to be temporarily replaced by annual assessment
• Linking LFASS payment levels more closely to recent business activity will ensure that support is better and more fairly targeted at those farmers and crofters carrying out actual production activities. This is a vital first step in transitioning from a historic and area-based agricultural support system towards an outcome- and activity-based future delivery mechanism for agricultural support payments. Such an approach will require for outcomes to be clearly defined and, where possible, quantifiable with regards to meeting emissions reductions and biodiversity enhancement targets which will likely need to sit alongside yet to be determined baseline scheme conditionality elements. This will ensure that only those who actively engage with and deliver as part of a scheme will be able to access future support payments
• The HUCG expects a sizeable amount of LFASS monies to be freed up as a result of the re-basing and stresses that this sum must remain part of the LFASS budget. Consideration should be given to possibly recycle the freed up monies or at least a large proportion of these to smaller and otherwise more disadvantaged businesses
• The HUCG has discussed the concept of capping total LFASS payments per business. Whilst the group does not yet have a final position with regards to absolute capping, it supports and recommends the concept of front-loading to better target the most disadvantaged producers such as smaller and peripheral units
• Further consideration should be given to opening up access to LFASS to graziers that are currently unable to access LFASS funding because the landowner claims area-based direct support payments

9.3. Scottish Upland Sheep Support Scheme (SUSSS)

The SUSSS was introduced with the intention to better target support towards maintaining sheep flocks on some of the most disadvantaged and environmentally challenging farmland in Scotland.

The current SUSSS provides voluntary coupled support for up to one homebred ewe hogg per four hectares of Region 3 ground so long as businesses have at least 80 per cent Region 3 and no more than 200 hectares of Region 1 land.

This concept of linking eligible hogg numbers to land area rather than flock size has meant that payment levels in relation to the actual flock size of an eligible business and its relative productive activity can be somewhat skewed by the total land area at the disposal of eligible businesses, higher or lower lambing percentages which are often significantly influenced by environmental and predation factors out with the farmer's or crofter's control, and by eligible businesses being able to retain a much larger proportion of their homebred ewe hoggs as part of the scheme than would otherwise be the case for replacement purposes.

This has resulted in farmers and crofters on some of the poorest Region 3 areas of Scotland and those businesses typically facing greater production limitations as a result of difficult environmental conditions and higher predation levels receiving comparatively lower SUSSS payments regardless of their flock size, sheep husbandry and general flock management.

The HUCG therefore proposes that eligible ewe hogg numbers for SUSSS should be restricted to 20 per cent of the total number of breeding ewes that eligible businesses own. This will ensure that support is targeted fairly across all types and sizes of Region 3 farms and crofts by linking the SUSSS to the activity level determined by the size of the flock and not production advantages resulting from business size and location.

Restricting SUSSS eligible ewe hogg numbers will reduce the number of any surplus ewe hoggs which are currently retained by many Region 3 businesses in addition to their usual replacement hoggs in an attempt to simply maximise SUSSS payments. This will free up a large number of surplus ewe hoggs that can be sold in autumn after weaning as breeding or store animals without affecting SUSSS payment rates, thereby enabling Region 3 farmers and crofters to reduce the level of stock carried throughout the year which in turn will drive down overall enterprise emissions for these businesses.

Whilst this would help to reduce enterprise emissions of eligible businesses, the proposed changes would also help to reduce lifetime emissions of ewe hoggs that are eligible under SUSSS but are not required as replacement hoggs due to being a surplus to the business. Surplus hoggs sold store are transferred onto finishing units where the key driver is to finish these animals as efficiently as possible in order to reduce input wastage and the associated costs. In many cases this means that these hoggs will be finished and ready to enter the food chain much earlier than would otherwise be the case if they were to be retained by the breeder until the end of the SUSSS retention period (1^st April) before being sold to a finisher. Allowing these surplus animals to move through the system and into the food chain without retention period restrictions ultimately reduces their lifetime emissions which in turn helps to reduce total emissions from the Scottish hill sheep sector.

Consideration should also be given to front-loading SUSSS payments for the first 20 ewe hoggs in order to support smaller producers who deliver important socio-economic benefits for rural communities.

9.4. Continuation of the Scottish Suckler Beef Support Scheme (SSBSS)

The SSBSS, or beef calf scheme, delivers annual voluntary coupled support for every declared beef calf born onto a Scottish holding with at least 75% beef genetics and retained on that same holding for at least 30 days. A higher payment rate per head is paid on calves born onto holdings that are located on islands in recognition of the higher costs associated with inputs and transportation.

The HUCG appreciates that the future continuation of the SSBSS is already being considered and discussed by the Suckler Beef Climate Scheme Programme Board, and although no final decisions have been made at this stage, the HUCG supports plans to retain this scheme or at least its support payment mechanism and concept.

The SSBSS is currently the only direct support mechanism that provides an incentive to improve productive efficiencies by encouraging eligible businesses to maximise the reproductive performance of their suckler beef herd without offering payment levels that might encourage production increases. The latter is evident by the continuously decrease in the national suckler cow herd size.

Improved production efficiencies deliver clear climate benefits by generating better outputs from given resources and inputs such as a live calf from a suckler beef cow, and the SSBSS should therefore be continued, ideally as a 'bolt-on' to the future main delivery mechanism for direct income support in order to ensure that there is a common base of minimum requirements that must be met for claiming any type of agricultural support payments.

9.5. Future scheme context

The HUCG notes that the Suckler Beef Climate Scheme provides the first step in rolling out a future support structure which targets good agricultural activity within the context of climate and environmental outcomes and which will be developed and opened up to eventually encompass all of Scottish agriculture.

The HUCG also notes that that the SBCG Programme Board proposes a transition period during which the current support system consisting of several different support mechanisms will be gradually replaced with one common agricultural scheme structure going forward.

Such a gradual transition from the existing policy environment to a Scotland-specific future support framework offers an elegant means of providing stability to the industry through the continuation of existing support income whilst the gradual introduction of a new scheme will offer the opportunity for producers to familiarise themselves with the concept and requirements of the scheme before it will become the main mechanism of agricultural support.

The HUCG supports this general direction and wishes to put the following recommendations forward to ensure that LFA businesses are given the opportunity to participate and that:

• The main scheme being proposed by the SBCG Programme Board should be open to all producers across non-LFA and LFA regions without differentiating between these areas
• The overarching outcomes of a future main scheme must be designed in such a way that is not discriminatory towards specific (more extensive) production systems or producers facing more environmental and climatic challenges
• A possible payment structure could involve a maximum payment that could be claimed per hectare and which consists of an agricultural activity payment and an environmental payment. The scheme should include a basic requirement to carry out appropriate agricultural activity to trigger an activity-based income support payment as a proportion of the total direct payment that businesses can claim per hectare. The activity requirement could be triggered through active crop production or via productive livestock. Thereafter, the remainder of the potential total payment that can be claimed is conditional on the claimant achieving environmental outcomes. If some outcomes are achieved but not to the required extent deemed satisfactory to trigger the full environmental payment, then the environmental payment proportion should be scaled back rather than cancelled in recognition of there being some delivery of environmental benefits. The environmental outcomes will likely need to be designed in such a way that they offer flexibility to businesses with different production system. This is important to reflect and recognise that different production systems naturally have different opportunities to improve their environmental footprint. Businesses should be given the opportunity to choose to what extent they can deliver green credentials for each of the following broad categories. The total level of commitment or achievement of outcomes arising from all of the below categories (possibly evaluated via scoring system) should then be reflected via payment received up to a maximum payment per hectare:
• Climate benefits arising from improved production-based efficiencies
• Climate benefits arising from improved farmland and permanent habitat management
• Biodiversity benefits from improved farmland and permanent habitat management
• (Wider environmental, ecosystem and natural capital benefits including water quality and flood management)
• In addition to a main scheme, continued income support for producers in disadvantaged areas of Scotland will still be needed to ensure that good agricultural activity and the many wider and public benefits from sustainable upland and hill farming remain viable
• LFASS should therefore be continued during the agricultural transition period but should be updated to include basic changes to payment calculation and allocation in order to better target activity
• After the end of the transition period, LFASS should be replaced by a successor scheme to continue a delivery mechanism of disadvantage payments for genuinely disadvantaged businesses but in such a way that these payments are delivered in recognition of the significant additional environmental and biodiversity opportunities that can be realised by such businesses. Consideration should therefore be given to designing a new scheme as an HNV support mechanism, but care must be taken to ensure that the scheme continues to target disadvantaged businesses

9.6. LFASS transition uplift

The HUCG aims to align its proposals as closely as possible with the approach currently being considered by the Suckler Beef Climate Scheme (SBCS) Programme Board so as to ensure commonality and standardisation of a future agricultural support scheme. The group supports the concept of a multi-annual phased scheme roll-out using the 'Just' Transition Period and proposes that a similar or identical approach should be taken with regards to implementing a future LFASS successor scheme.

In principle, LFASS as a support mechanism for farming and crofting businesses in disadvantaged regions of Scotland should be continued throughout the agricultural transition period so as to maintain stability over the next four years.

The transition from the current LFASS to a successor scheme should however be initiated at an early stage by re-basing LFASS using up-to-date livestock numbers and reinstating the fragility marker and cattle multiplier as per separate paper submitted by the HUCG on interim proposals for immediate action and as summarised further above. This will ensure that the scheme targets active food production from climate and environmentally friendly and sustainable farming and crofting practices and delivers payments to active businesses to enable them to invest in the adoption of best practice and carry out management changes to (further) improve their green credentials.

As part of the transition period, it is proposed that LFASS recipients will also have to adhere to newly introduced scheme conditionality elements which are aimed at the delivery of climate change mitigation and environmental enhancement outcomes from and alongside continued agricultural activity aimed at food production. These requirements could or should be ramped up over time throughout the transition period to progress to a more results-based and outcome-focused successor scheme.

Recognising that increased scheme conditionality will come at a direct and indirect cost to participating businesses, it is proposed that an uplift payment should be offered to businesses in 2022 and 2023 to help cover the initial cost of the added scheme requirements and to incentivise participation in the updated scheme.

Any LFA businesses are eligible for the enhanced payment provided they fulfill all scheme requirements and carry out any stipulated activities.

The uplift payment should be delivered as degressive LFASS top-up by offering a larger proportion of the annual payment to the smallest producers and a proportionately smaller uplift to larger recipients. A total cap should be put on the uplift. Such a degressive approach ensures that the uplift can be delivered fairly and in such a way that it is sufficiently attractive to smaller farms and crofts whilst avoiding overcompensation to larger businesses.

The delivery of such an uplift payment over and above the existing LFASS support payments for the first two years will require additional funding. Re-basing LFASS will free up some of the budget that is currently being delivered on inactivity. It is proposed that this money should be used towards the uplift payment, together with the LFA share of the Bew budget.

It is worth noting that although some additional pump-priming will be needed during the agricultural transition period by using some extra monies from Bew and the Agricultural Transformation Fund to aid with the transition to low carbon and low biodiversity impact farming, the longer-term aim is not to obtain more public funding but to have to deliver more outcomes and activities for existing budget and payments. The farming and crofting industry is keen to contribute towards environment and climate benefits and recognises that public funding streams will be a key defining factor in achieving public benefits on a voluntary basis by giving businesses the choice as to whether they wish to participate.

Having said that, the HUCG also recognises that Scottish Government has committed to binding targets. Therefore, depending on scheme uptake and (insufficient) progress made within the industry to meet climate change and biodiversity targets, regulation should be considered as a means to capture every business including those not participating within an agricultural support scheme if targets cannot be met through voluntary options. This would mean that everybody is ultimately doing the same but those that have chosen to enrol in a scheme early on benefit from early participation through the ability to access funding to aid with any management changes and the adoption of best practice.

9.7. Further comments

The HUCG stresses that it has not been able to finalise a detailed set of recommendations with regards to the proposed baseline requirements and specific management options and outcomes that could be introduced as part of LFASS during the transition period and thereafter through its successor scheme.

It is also yet to finish its review of how a future agricultural support structure could be designed, and whether the LFASS successor scheme should sit alongside a main scheme or form a non-competitive but conditional bolt-on element sitting above the main scheme.

The above comments on a potential scheme context and LFASS transition ideally require further discussion within the HUCG so that all avenues and potential unintended consequences can be considered within the context of policy and scheme administration opportunities and limitations.

The HUCG therefore recommends that consideration is given by a new post-election administration to continuing the HUCG's work so that the group can finalise a full and detailed review of the topics covered within its remit.