Scottish Government

2. Impact of the SBCS on the Viability of the Beef Cattle Sector

5. This chapter aims to evaluate the impacts of the SBCS on the viability of beef enterprises receiving support. Accordingly, it aims to disentangle the financial impact of the support scheme from market factors, e.g. fluctuations in input and output prices, and the impact of other support mechanisms in order to understand the impact of the SBCS on the economics of beef production.

2.1 Financial Importance of SBCS

6. In 2005, 8,446 farm businesses received support under the SBCS; the number dropping slightly to 8,134 in 2006. 446,149 animals received support in 2005 and 437,265 animals in 2006. The total spend on the scheme was £18,985,697 in 2005 and £18,305,953 in 2006.

Table 1.1. Payments for the SBCS

7. The provision of production linked support under the SBCS increases the value of output for beef cow enterprises, which may give farmers the incentive to remain in beef production. The response of farmers to production-linked support, however, depends on the net financial impact of the scheme.

8. Analysis of gross margins first provides an indicator of profitability of beef production at enterprise level. Gross margins are calculated as the difference between the revenue from sale of commodities, including all production linked support, and the variable costs of production. Secondly, net margin analysis allows an assessment of the viability of the enterprise at a farm level by including the fixed costs of production. Hence, whilst gross margins offer an indicator of the short-term influence the SBCS has on production activities, net margins effectively determine the long-term viability of the business and influences the decision to restructure or withdraw from a particular activity.

9. What follows is an assessment of impacts of the SBCS on gross margins and net margins for the main beef production systems operating within the peripheral, i.e. LFA areas of Scotland namely (i) hill suckler cow production, (ii) upland and lowland suckler cows fed on silage diets, and (iii) spring calving cows. Whilst analysis is usually presented in terms of £ per cow, a crucial aspect of the SBCS in preserving cattle in peripheral areas is the £70 per cow that is offered for the first 10 calves. Accordingly, the analysis is applied to an average LFA cattle and sheep farm with an average of 61 suckler cows ( ERSA, 2007).

2.2 Hill Suckler Cows

10. Depending on calving period, support provided to farmers via the SBCS represents between 12 and 19 per cent of total output for typical "hill suckler cow" ¹ enterprises.

Table 2.1: Gross margin estimates for typical hill suckler cow enterprise

Source: Farm Management Handbook (2007)

11. Based on gross margin analysis, hill suckler cow enterprises would suffer a loss of between 32 per cent to 48 per cent in gross margin per cow, dependant on calving system. However, as an illustration of how important this subsidy is to differing herd sizes, Figure 2.1 estimates changes in gross margins and outputs taking February to April calving. Clearly, for smaller herds the £70 premium on the first 10 contributes an extra 30 per cent on output and its removal would reduce gross margins by up to 60 per cent.

Figure 2.1. Changes in SBCS contribution to gross margins and output per herd size, percent

12. Fixed costs on beef cattle farms are difficult to quantify. However, a recent study by Quality Meat Scotland ² estimates fixed costs per cow for the different enterprises receiving support via the SBCS to be between £270 and £450 per cow.

Table 2.2. Gross and net margins for typical hill suckler cow enterprise

Source: Farm Management Handbook ( SAC, 2007)

13. Introducing fixed costs gives a better understanding of the viability of hill suckler cow production within Scotland. With or without the SBCS, hill suckler cow enterprises make large losses ranging from £8,393 to £24,644 on the typical enterprise. This translates to a loss of between £138 to £362 per cow with support from the SBCS, compared to losses of £180 to £404 per cow without support.

14. Clearly, given these figures it seems to indicate that the typical LFA cattle and sheep farm cannot survive in the long-term. This questions the viability of the industry as even the most efficient farms (with low fixed costs) are making a loss in the region of £11,000 with SBCS support. However, long term viability does not seem to be predicated on the SBCS, but through cross-subsidisation of farm enterprises by partial coupling of support from the Single Farm Payment to maintain production ³.

2.3 Upland and lowland Sucklers - mainly Silage Diet

15. The SBCS accounts for between 12 and 20 per cent of total output for a typical "silage based upland and lowground suckler cow" ⁴ enterprises. Without the SBCS, the gross margin for typical silage based upland and lowground suckler cow enterprise will drop by between 24 and 51 per cent depending on calving period. These are significant falls as, at the extreme, gross margins of average February to April calves fall from £5,027 to £2,440 (which equates to a loss of £40 per cow).

Table 2.3. Gross margin estimates for typical upland and lowland suckler cow - silage diets

Source: Farm Management Handbook ( SAC, 2007)

16. Table 2.4. below shows the impact of the SBCS on net margins. Losses to typical enterprises with support from the SBCS range from £94 to £368 per cow, whereas without support these increase to between £136 and £410 per cow. Again, it seems that, whilst SBCS offers a significant contribution to gross margins, the long term viability of typical upland and lowland suckler cow enterprises is questionable even with support provided by the SBCS.

Table 2.4. Gross and net margins for typical upland and lowland suckler cow - silage diets

Source: Farm Management Handbook ( SAC, 2007)

2.4 Spring Calving Cows

17. For typical "spring calving cow" ⁵ enterprises producing finished cattle, support provided to farmers via the SBCS represents around 8 to 9% of total output. Without the SBCS, gross margins on spring calving cow enterprises will drop by between 19 and 23% per cent.

Table 2.5. Gross margin estimates for typical spring calving cow enterprise

Source: Farm Management Handbook ( SAC, 2007)

18. However, the net margins suggest losses which range from £51 to £262 per cow with the SBCS payment, and from £93 to £304 per cow without SBCS.

Table 2.6. Gross and net margins for typical spring calving cow enterprises

Source: Farm Management Handbook ( SAC, 2007)

19. Consequently, again it seems the SBCS has little effect in helping the long-term viability of this sector.

2.5 The Relative Importance of the SBCS

20. Those farmers claiming the SBCS will benefit from a number of other subsidies. Consequently, this section outlines the relative contribution the SBCS makes to overall subsidies. Total payments for the SBCS were £18,985,697 in 2005 and £18,305,954 in 2006.

21. The design and implementation of the SBCS is in order to provide support for maintaining environmental benefits of cattle grazing and quality beef production, particularly in the remote parts of Scotland. The largest number of recipients of support under the SBCS are located in the North West of Scotland (where there are many small farm businesses and crofts), although the distribution of funds under the scheme favours the North East and South West. Table 2.7 gives the distribution of payments under the SBCS by area office.

Table 2.7. Distribution of total spend on recipients under the SBCS by agricultural region, £ and percentage share of total budget

Source: RERAD, Scottish Government)

22. Looking at agricultural regions there is an uneven distribution of total payments made under the SBCS in favour of more intensive beef producing regions. The bulk of the funds have been directed towards North Eastern and Southern parishes. However, whilst this is illustrative of the spread of funding across regions in Scotland, there is a need to look at the distribution of payments across producers. This is shown in Table 2.8. below.

Table 2.8. Distribution of SBCS payments per producer, 2005 and 2006

Source: RERAD (2008)

23. A slightly more even distribution of payments emerges at producer level. However, there is a greater disparity between the North-West and other areas of Scotland. This is better illustrated in Figure 2.2 below, which shows payments on a regional basis.

Figure 2.2. Regional distribution of SBCS payments per producer, average (2005 to 2006), per cent

24. Figure 2.2 shows that 16 per cent of the total budget goes to producers operating within the North-West. The South-East seems to benefit the most, followed by the South-West and North-East. However, it is the North-West of Scotland, the peripheral areas, which provide the main justification for the SBCS, i.e. to maintain cattle production to produce environmental benefits.

2.6 Crofting Counties

25. The crofting parishes cover the main areas of North-Western Scotland. Table 2.9 shows the relative importance of the SBCS when compared to other major subsidies paid to crofting parishes and for all those within Scotland who claim the SBCS. For most of the crofting parishes the SBCS represents only around 5 per cent of public subsidy, the bulk of subsidy coming from the Single Farm Payment, Less Favoured Areas Support Scheme and other schemes such as the Rural Stewardship Scheme. The contribution of the SBCS to total public support is also around 5 per cent for Scotland.

Table 2.9. Average Contribution to Total Public Subsidies of the SBCS within the Crofting Parishes, percentage

26. Table 2.10 shows the average payments by crofting parishes for the years 2005 and 2006 to indicate the distribution of payments within these regions.

Table 2.10. Average numbers of animals claimed, SBCS payment and payments per animal per producer, 2005 to 2006, average numbers and pounds.

27. Average numbers of animals claimed within these parishes range from 17 to 73 in 2005, and 15 to 70 per producer in 2006. Notably, for most parishes the average number of animals claimed has fallen, the average for crofting parishes dropping from 44 animals to 42 per producer. This may reflect falls in the number of producers, or the reductions in activity observed for cattle production within these regions.

28. Average number of animals per producer is reflected in the amount of SBCS claimed across the parishes. Caithness claims the highest at around £3,000 per producer, whereas the average producer in the Zetland crofting parish claims around £850. This is all tied to average subsidy per animal and, to some extent, reflects the importance of the £70 premium on the first 10 animals to producers within these parishes. The average payment per cow in 2005 and 2006 was £45 to £46, respectively, ranging from around £42 per animal in Caithness to around £54 per animal in Zetland.