Entitlement Trading Guidance Notes
The RPA will revalue the payment rate of all entitlements in the years 2005 - 2011.
Those entitlements with a low historic element (or regional-only rate such as Set Aside Entitlements) will increase in value annually. Those with a high historic element will fall in value annually, while those in an average band of between 280 and 330 euros will remain pretty constant.
Two other factors will obviously affect future payment rates:
1] Milk Quota - Since the dairy premium was due to rise again in 2006, the entitlements established by those farmers in 2005, who held milk quotas on 31 March 2005, will benefit from a higher rate of payment in 2006 than they did in 2005.
2] Sugar Beet Contract - With the advent of Sugar Reform, DEFRA have agreed to increase the payment rate of Normal or Reserve entitlements held by farmers in 2006 who also held a Contracted Tonneage Entitlement (CTE) in 2005. Accordingly, these entitlements will benefit from a higher rate of payment in future.
Since the buyer of an entitlement will benefit from the higher future payment rates associated with the Milk Quotas and/or Sugar Beet CTE held by the vendor in 2005, we concluded that selling entitlements at a multiplication of the Sterling rate of aid was a simplification.
Net Present Value (NPV)
Our database is programmed to calculate the future euro rates of aid for every entitlement entered. To do this we need:
- The 2005 Entitlement Statement,
- The volume of Milk Quota held on 31 March 2005, and
- The Sugar Beet CTE in 2005.
The computer also holds factors for annual exchange rates, modulation and interest (the current base rate) and will therefore predict the Single Payment (after modulation) that will accrue to the holder of that particular entitlement in the years 2007 - 2012.
The Net Present Value is defined as the sum of the projected Single Payments (after modulation) for the years 2008 - 2012 discounted for interest annually.
The Entitlement Rent is defined as the projected Single Payment (after modulation) for the next claim year less six month's interest.
Types of Entitlements
SAS - Set Aside Entitlements obligate the holder to claim the Single Payment against a hectare of fallowed land managed according to the Set Aside Rules, or a hectare of industrial crop. These are the most restrictive of the entitlements. It is incumbent on every applicant holding Set Aside Entitlements at midnight on 15 May annually to Set Aside an area of land equal to their Set Aside Entitlements and manage it according to the Scheme Rules otherwise penalties will apply.
NML - Normal Entitlements which enable the holder to claim the Single Payment against a hectare of cereals, oilseeds, dry peas/beans, sugar beet, grass etc.
NMF - Normal FVP Authorised Entitlements that enable the holder to claim the Single Payment against any eligible land use including Fruit, Vegetables and Potatoes. The FVP is inextricably link to a Normal Entitlement.
SAF - FVP Authorised Set Aside Entitlements. These are rare but have been awarded to applicants who grew more FVP in 2003 or 2004 than the area that they established entitlement on in 2005. The FVP can be removed from an SAF Entitlement and attach to a NML Entitlement.
ERS - English Reserve Entitlements. Awarded where the reference amount of the applicant was enhanced by more than 20% as a result of an award from the National Reserve. All Reserve Entitlements must be claimed every year (rather than every third year in the case of Set Aside and Normal Entitlements) and are not transferable without land until the 2010 Scheme Year.
ERF - FVP Authorised English Reserve Entitlements.
SPE - Special Entitlements. The holder of these entitlements does not have to annually match a hectare of land against each entitlement in order to receive the Single Payment (as with all the other types of entitlement), but instead does have to maintain his production of non-land using enterprises at at least 50% of the average during the period 2000 - 2002.
Sales of Entitlements
We believe that buyers of entitlements are interested in the future income stream that will accrue to them as a result of the purchase and the return on capital that that income represents. We believe that a percentage of the Net Present Value will emerge as the 'norm' as the market matures and predict that the likely band will be between 30% and 50%.
The Net Present Value method of selling entitlements also prevents us from under-selling entitlements that benefit from Dairy Premium or Sugar Premium.
- All Sales of Entitlements are illustrated to both the Seller and the Buyer prior to either party making a binding contract.
- In the contract for the Sale of Entitlements the Seller has to warrant the volume of Milk Quota (if any) and Sugar Beet CTE (if any) that held in 2005.
To view Entitlements for Sale go to Sales.
Lease of Entitlements
The Regulations allow entitlements to be leased with land, but do not allow entitlements to be leased without land. To effect a 'Lease of Entitlements without Land' we conduct a two Permanent Transfers of Entitlements so that the entitlements are on the appropriate holding at midnight on 15 May and then reverse the Transfer at the beginning of June.