Scottish Government

Appendix 2 - Task 1, Assessment of the Economic Case for SRC and SRF on Poorer Agricultural Land

1. Methodology

This economic appraisal uses two approaches. Discounted Cash Flows ( DCFs) are used to convert the net income stream over a 16 year life into the equivalent value of a lump sum received today. This allows the performance of enterprises, each with widely differing patterns of annual cost and income, to be compared. The lump sum, the Net Present Value ( NPV) is converted to an "equivalent annual value" to allow an easier comparison with enterprises which have an annual production cycle. Some studies use a life for SRC of 20 to 25 years ( SAC 2000), but most assume a shorter economic life of around 16 years, to cover 4 or 5 cropping cycles. In this study a 16 year life has been selected, partly to provide consistency with the most recent study on SRC for the Scottish Government ( SAC 2007), and partly to reflect the shorter productive life which could be expected on poorer land. A discounting rate of 3.5% has been selected to match Treasury "Green Book" requirements. The DCFs for SRC and SRF assume that the land will be returned to its previous condition at the end of the 16 year period i.e. there is a cost in year 16 for ripping up and breaking down the root balls. Discounted Cash Flows have been prepared for SRC, SRF and Upland Sheep. All assume the establishment of a 10 ha (approximately 25 acre) block of willow or short rotation woodland. The sheep DCF therefore looks at the margin foregone as a result of taking 10 ha of poorer land out of sheep production on a typical upland farm. Agricultural costs and output values have been exceptionally volatile over the last 2 years. The basis of the figures used in this appraisal is our best estimate for 2009.

To take the economic appraisal a step further, the impact of the introduction of SRC on to a number of real farms was investigated. The financial impact was assessed using Partial Budgets which, drawing on the results of the earlier DCFs, present the impact on annual profit for each case farm. The aim of the case study methodology is to allow a wider discussion on how SRC could fit into real farm systems on poorer quality land.

2. Discounted Cash Flow Investment Appraisal

2.1 Short Rotation Coppice

Assumptions

• 16 year life for the SRC crop after which the land is ripped and heavy disced to chop the root balls, possibly then followed by a forage crop to allow further breakdown before ploughing and reseeding.
• A 4 year cropping cycle, therefore 4 harvests over the 16 year life. Lowland production, on better quality land, would enable 5 harvests over this time period, but it is assumed that the poorer land and/or upland locations would require a longer recovery and growth period between each harvest.
• Yield assumptions in other studies vary widely. The most recent SAC study for the Scottish Government assumed a yield on former arable land of 8 oven dried tonnes (odt) per hectare per annum (120 odt tonnes over the 15 productive years). Hard data on yield effects on poorer land has been exceptionally difficult to find. In a Welsh study on SRC versus upland sheep (Heaton 1999), an upland SRC yield of 8 odt was considered possible. However, it has also been pointed out to us that SRC cultivars have been bred for high yield in arable situations (Ray 2008). Their yield potential on poorer land may therefore be significantly less than traditional upland tree species.
• In this study a yield in the first cycle of 6 odt is assumed (over the 3 productive years following the first establishment year) and then 7 odt thereafter, giving a total output of 102 odt (15% below the SAC model for SRC on arable land). This provides an estimate of the average economic return to be expected on the land identified as being suitable for SRB in Scotland. Marginal land may only be able to support an average yield of 4 odt/ha. Yield will undoubtedly be even more site specific than in the lowlands as exposure, soil fertility and drainage, and the length of the growing season will have major yield impacts. Yields of 7 odt and 4 odt may both be correct, in different upland/marginal land situations. The economic returns from these yield variations provides a sensitivity analysis, which includes the impact of a 4 odt/ha yield.
• The woodchip price used in the appraisal was £31/odt. This is a "farm-gate" price and is based on the market values available in Scotland in recent years through Scottish Biofuels, working with Tullis Russell at Glenrothes, and Renewable Fuels Ltd with EONUK, Lockerbie. The major assumption in this price is that the user will cover the transport costs from the farm to the biomass power plant. This in turn assumes the user is relatively close to the farm, which may be unrealistic in the Scottish uplands. As part of the sensitivity analysis the price per odt rquired to make SRB economically viable was assessed.
• An establishment grant was assumed. This follows the SRDP (Scottish Rural Development Programme) scheme; 50% of actual total establishment cost in the LFA, up to a maximum of £770 per hectare.
• An allowance for fencing has been included - not full rabbit fencing, but the improvement of existing fences.
• Costs are based on the recent SAC study, "Willow for Wales" (Valentine 2007) actual cost averages (based on field trials across Wales), Defra (Cambridge/ SAC 2005 and SAC 2002) studies and a NAWAD study ( SAC 2000) on alternative agriculture sectors which included assessment of SRC in the uplands. All have been adjusted for current prices. Key items are as follows.

Table 1. Selected SRC growing costs

Investment Appraisal

Based on the above assumptions, SRC produces a positive NPV of just over £400 per hectare (Table 2), which equates to an annual margin of around £33 per hectare. The SAC study on SRC on arable land showed an NPV of £1,529 over 16 years, £116 per hectare per annum. The difference is largely due to a greater yield, a more frequent harvest and hence earlier positive cashflows, income from the energy crop supplement (which no longer exists) and a greater establishment grant rate (£1,000 per ha).

Table 2 Estimated Cashflow for SRC on Poorer Quality Land (£/Ha)

2.2 Short Rotation Forestry

Assumptions

• Data from an LTS International (2006) study gives yield estimates for a 20 year SRF cropping cycle, for which the average for Alder, Ash, Birch and Sycamore is 122 odt per hectare, equating to 6.1 odt per ha per annum. However, to provide a fair comparison with SRC we must estimate yield over 16 years. Reducing the SRF cropping cycle by 4 years is likely to have a disproportionately high impact on total yield. We have assumed a 30% reduction to 85.4 odt per ha in total, equating to 5.3 odt per ha per annum. These are for good land, so for the purposes of the appraisal for poorer land, the yield has been reduced a further 20% to 4 odt per ha per annum, 64 odt total.
• To provide a straight comparison with SRC a price of £31 per odt has been used. However, there would be an argument that SRF will have a lower moisture content when harvested and hence a higher value to the end user, perhaps justifying a higher net price to the farmer. A break-even price is calculated in the sensitivity section later.
• This is not a coppiced crop. A dense stand (2 x 2m spacing) is established and then harvested after 16 years, with no thinning in the intervening years.
• The potential grant support for SRF is unclear as it falls between SRC and Forestry. For this appraisal it is assumed that SRF qualifies for no support. The break-even level of establishment grant to allow the crop to compete with sheep is calculated in the sensitivity analysis section toward the end of this Appendix.
• Many of the establishment costs are similar to SRC. However, the major difference is due to the wider plant spacing (4,500 as opposed to 15,000 per ha). Planting cost is greater as the individual tree seedlings may cost around 30p, compared with 4p for willow plants. Weed control, following the LTS model, relies on plastic mulch, which is very expensive (£900 per ha laid), but essential due to the wider plant spacing and slower growth. Fencing cost is higher to reduce vermin damage, though we have assumed that the chosen sites already have some fencing which can be improved. Harvesting costs are difficult to estimate, but are assumed to involve the use of a conventional forest harvester and forwarder. Gathering and stacking could be done more laboriously with a good farm loader and farm labour. A chipping cost is not included, but this might be essential for biomass plants. It is assumed that fertiliser is not applied during the growth of the trees. However, at reinstatement 5 t of lime and 125 kg of 25:15:5 are applied per ha to at least partially return the land to its previous nutrient status. Costs of reinstatement are expected to be much greater because cultivations have to cope with fewer, larger root balls.

Investment Appraisal

Based on these assumptions SRF makes a loss of almost £2,500 per ha over its 16 year life - a loss of £206 per ha per year (Table 3). The high establishment cost (greater than total income) and complete lack of income for 16 years makes it very difficult for this option to compete with other land uses, even on poor land. SRF has the disadvantages of forestry (a long wait for any income, high harvesting costs) without its benefits (low value of any alternative uses of that land, long enough cycle to build yield, high establishment grants). It needs a big increase in yield or establishment grant (see sensitivity analysis later) to make up for these problems.

Table 3 Estimated Cashflow for SRF on Poorer Quality Land (£/Ha)

2.3 Upland Sheep

Assumptions

• The aim of this appraisal is to estimate the profit which could have been made from a hectare of upland grassland (Macaulay grade 4), which has now been turned over to SRC. As with all of the appraisals, while the result is shown on a per ha basis, the costing is based on 10 ha used for SRB or sheep.
• The upland sheep margin is based on a farm carrying a Blackface ewe flock, crossing with Bluefaced Leicester rams, to produce Scotch Mule ewe lambs for sale to sheep producers "lower down the hill", and store lambs for lowground finishers.
• The figures are based on a farm with 600 ewes. Putting 10 ha into SRC reduces the flock to 520, as approximately one hectare of in-bye is required to support 8 ewes, in terms of grazing at critical periods of the production cycle (tupping, lambing, weaning) and to produce winter feed (mainly big bale silage).
• The implications of a reduction in the flock by 80 head, are a cut in output of lambs, wool and cast ewes, a saving in input costs such as purchased Blackface gimmers (young breeding females), feed, veterinary and medication costs, fertiliser, silage contractors, and a small saving in fixed costs (fuel, machinery repairs, property maintenance). However, the saving in fixed costs is minimal, because the farm still has 520 ewes and all the existing work routines and activities will still be required.
• There is no loss of Single Farm Payment as a result of turning over 10 ha to SRC, as long as it is classed as an eligible land use. However, to qualify for LFASS (Less Favoured Area Support Scheme) payment the land must be classed as forage. SRC is not listed as one of the IACS land use codes compatible with LFASS. The only woodland code which is compatible is WDG (grazed open woodland).
• The cashflow is based on the following output and cost assumptions.

Table 4. Upland Sheep Margin Calculation (£ per hectare)

Investment Appraisal

The small annual net margin of £61 per hectare from upland sheep production results in a NPV of over £700 (Table 5). The net cash flow, before discounting and ignoring establishment cost, from SRC is actually greater than from sheep. However, it comes later and needs a major initial investment, while the sheep and their infrastructure are already in place and are generating annual returns.

Table 5: Estimated Cashflow for Sheep on Poorer Quality Land (£/Ha)

3. Farm Case Studies

3.1 Farm Case 1. Hill Sheep and Cattle. Central Grampians. SRC on upland improved grassland.

Farm Description

This is a 345 ha (860) acre tenanted unit farmed by a father and son. 160 ha are in-bye of relatively good quality - all improved grazing with around two thirds ploughable. 184 ha is unimproved hill and rough grazing - heather on the highest ground, grasses and rushes on the lower hill ground.

The farm buildings sit in the centre of the improved land at an altitude of 1200 feet. The farm faces South East with the hill rising to 2000 feet to the North West of the steading. The farm is very exposed to the South and East, less so to the West and relatively sheltered to the North due to the hill and a belt of conifer woodland. To the South the farm is bounded by a burn which regularly floods the very small area of flat land. The best of the soils are relatively dry sandy loams, but generally shallow and stony. These dry soils do allow access to tractors during the winter and the successful grazing of forage crops by sheep. Out-wintering cattle would be much more difficult. While the farm is exposed, the area is well wooded with natural birch woodland to the South West of the farm and conifer plantation on the higher North West boundary.

On the 160 ha of in-bye, the farm produces 32 ha of silage (one cut). 50 acres is ploughed annually, with 14 ha sown to forage crops (swedes and kale) and 15 acres direct grass reseeds. Fertiliser inputs are low; clover supports grass growth and ample dung is available for the forage land.

The main enterprise is a closed flock of 700 Blackface ewes and gimmers (2 year old female replacements). 200 home-bred ewe lambs (one year old female replacements) are away-wintered each year. Around 40 pure-bred Blackface ram lambs are sold annually. Unusually for a hill farm the remaining lambs are all finished, partly on rented autumn grazings on lowground farms and then on the crops of swedes and kale from December onwards. Most ewes are bred to Blackface rams, but the bottom 150 are put to Texel rams. The ewes scan at approximately 150% (1.5 embryos per ewe). From New Year onwards they are fed supplementary feed from a snacker (this drops feed on the ground in small quantities across the field). Lambing is outdoors, starting 20 April.

The cattle enterprise is based on 60 spring-calving Limousin cross cows. Calves are sold store between 9 and 11 months of age and some heifers are sold for breeding. Cow winter feeding is based on silage and draff (distillery by-product). A purchased creep feed is fed to calves. All bedding straw is purchased.

The farm has a good set of buildings for housing cattle. There is a silage pit and some space for feed storage. However, there are no large storage sheds or large concrete yards or hard standings for bulk woodchips. Access to the farm is difficult. The farm is at the end of a long track, at one point crossing a burn by way of a small bridge, and is prone to blockage by drifting snow. There is space for turning a lorry at the farm, but the access is only suitable for an 8 wheeler, not for an artic.

The farm has a better than average complement of machinery, with one high horse-power tractor, a good loader and a large silage cart suitable for handling woodchips. Labour is very tight at some times of year, specifically lambing and during the autumn when the farm is selling rams and store cattle, moving lambs to grazings, housing cattle and preparing for tupping (breeding). There are no slack times, but mid-winter is the least demanding.

Impact of Short Rotation Coppice

Proposal

The aim is to use the introduction of SRC to provide multiple benefits and to fit in with the farm system. Assume the introduction of 10 hectares (25 acres) of SRC in four or five strips down the boundaries of in-bye fields. Each block will exceed the 2 hectare minimum size for SRDP grant eligibility. Layout and location is based on the degree of shelter advantage provided (especially for spring lambing) as well as land suitability, ease of access for machinery, potential for vermin damage and environmental enhancement. New fencing is limited to one side of each block.

Farm Impact

The removal of a chunk of the best in-bye land on a hill unit must mean a reduction in stocking. Given the existing system, the most likely response would be to cut the grass area and ewe numbers, but to retain the production of swedes and kale for finishing lambs, as the alternative - reducing forage crops and switching to selling store lambs - would result in a significant penalty for pure Blackfaces.

Of the 160 ha (400 acres) in-bye approximately 50 ha (120 acres) is required for cattle and 12.5 ha (30 acres) for forage crops. The remaining 100 ha (250 acres) and the hill carries 700 ewes (and their lambs to weaning), a stocking rate on in-bye of 7 ewes per ha (2.8 per acre). The loss of 10 ha (25 acres) equates to a flock reduction of around 70 ewes.

Table 6. Net impact on lamb numbers

Financial Impact

The following Partial Budget estimates the impact on annual profits of the change described above, by comparing the annual gains and the annual losses which result from the change.

Table 7. Impact of SRC on farm budget

These figures suggest that, for this farm, the reduction in annual farm profit as a result of establishing 10 ha (25 acres) of SRC is £914.

Overview and Sensitivity

Pros

• The establishment of belts of SRC could have greater benefits for the micro-climate and hence for lamb survival, grass growth and stock performance than is estimated above. It would only require the survival of an extra 17 finished lambs to wipe out the loss.
• Longer term fixed price contracts may be available for wood chip, but are not available for sheep.
• The outcome is sensitive to the lamb price, which is currently relatively high due to a decline in sheep numbers worldwide. A drop in finished prices to £40 per head would wipe out the advantage of the status quo.
• The environmental benefits of belts of SRC are not included. If this were part of the environmental provision of the SRDP, this might help make the crop attractive.
• Imminent reforms to the LFA scheme across Europe might further decouple this payment from the type of production carried out on the land.

Cons

• It would take a substantial increase in yield (to around 11 odt per ha per annum) or chip price (to around £48 per odt) to make the SRC crop compete with the status quo on this farm.
• Transport to the end user, not costed above, could be a drawback in this situation.
• Damage to drains would be a major concern on wetter upland farms.
• Many upland and hill farms lack crop experience, machinery and buildings for handling bulky materials.

3.2 Farm Case 2. Lowground Livestock and Crops. East Coast. SRC on lowland wetland.

Farm Description

This is a 73 ha (180 acre), non LFA, part-time farm in a lowland area of eastern Scotland. The farmer has a full-time job off the farm, and works the farm in his free time and using contractors. The farming is based around a closed flock of 400 breeding ewes with all lambs finished. In addition around 80 ewe lambs are retained and bred each year. The ewes scan at around 190%. Lambing is mainly outdoors with triplets and thinner ewes indoors. 24 ha of spring barley are grown for the malting market. 4 ha of swedes are grown for finishing lambs and wintering ewes and around 4 ha of hay are also produced. Some autumn grazing is rented on neighbouring farms.

All the crop work, including planting swedes and baling hay, is done by a contractor organised through the machinery ring. Any other major tasks such as new fencing and drainage repairs and ditching are also organised through the ring. The farmer has very little machinery; one medium sized tractor with a loader, a couple of trailers, a hay tedder and a quad bike. However, neighbouring farms and contractors have ample machinery capacity and are keen for work. The farm buildings consist of old byres used for stock handling and storage and a new general purpose store/grain shed. Access is good with ample turning space for all types of lorry and the farm is not far from major North-South roads.

Most of the farmland is medium quality arable, class 3.2, sandy loam, stony in places. However, one end of the farm is naturally poorly drained due to an impervious sub-soil. 8 ha (20 acres) are very wet with 50% rush coverage and around 30% not passable with a tractor in winter. This area was drained at one time, but the old clay tiles no longer work and substantial investment would be required to get the land back into the arable rotation which operates over the rest of the farm. Until recently half of this land received wetland management payments under the Countryside Premium Scheme. This involved the exclusion of stock from the wettest areas of these fields during the summer, using a temporary electric fence, in return for a payment totalling around £600. The second 5 year term of this scheme has just come to an end and the farmer is considering what to do with the land. He could most easily apply for a continuation of this type of scheme through the SRDP. However, summer stock exclusion has not been judged to be an environmental success as the rushes have become progressively thicker, removing the open wet areas favoured by birds and rarer plants. The farmer is also concerned that the very wet area is expanding and that the site is a source of liver fluke. The parts of the wet fields not covered by the scheme are grazed throughout the summer, and the entire area is grazed in late autumn and occasionally through the winter.

The area has a number of small Forestry Commission plantations, mainly for amenity use. Most of the farm faces South West, but the wet fields at the far end of the farm, which lie beyond a small burn, have a slight northward facing incline, and are shaded to the South by a mature conifer plantation. The highest point on the farm is 440 feet, and the wet land is at around 200 feet.

Impact of Short Rotation Coppice

Proposal

Dig three open ditches, draining to the burn, across the wet areas to catch all the old drains and remove the worst of the water from the site. Chop, spray and plough in rushes. Plant the entire 8 ha in SRC. The farmer expects that a combination of ditching, moisture removal by the crop and the use of 4 WD tractors and dual wheels, will make the site workable. The ditching and rush removal will take place over a summer, but will not impact significantly on use of the land for grazing.

Farm Impact

The ewes and ewe lambs are stocked at 12 ewes per ha over the summer grazing area. The conversion of the 8 ha to SRC is judged to remove 4 ha of actual grazing land, requiring a cut in breeding sheep numbers of around 48 head or the renting in of 4 ha of good grazing land. In this case the farmer is already leasing autumn grazing from a near neighbour and believes that he can secure the extra 4 ha required for the whole season.

Financial Impact

The following Partial Budget estimates the impact on annual profits of the change described above, by comparing the annual gains and the annual losses which result from the change.

Table 8. Partial budget for farm case 2

These figures suggest that, for this farm, the reduction in annual farm profit as a result of establishing 8 ha (20 acres) of SRC is £674.

Overview and Sensitivity

Pros

• Yields in this lowland situation, especially on the drier 4 ha of the 8 planted ha, could be well above those assumed in the poor land model. Also harvest cycles might be shorter (every 3 years rather than every 4). It would require a 20% yield improvement to make the crop attractive.
• The economics might look better if only the wet areas, once ditched, were planted, leaving the drier areas for grazing. It is the wet area which has little opportunity cost.
• Expertise built up in this sort of situation might allow the crop to expand on to better land on the farm in future.
• Logistically this is a better situation for SRC than in the uplands - there is ample machinery capacity at hand and road links are better.
• The periodic nature of the work required on the crop fits well with a part-time farming situation, better indeed than do sheep.
• On-farm use, for example for heating the farmhouse and grain drying, may be worth considering.

Cons

• Reverting to an environmental scheme is much simpler
• The lower establishment grant rate in the non LFA (40% as opposed to 50%), has a major impact on the SRC margin.
• There is a major risk in this type of wetland situation; the ditching may not dry out the land sufficiently and the crop may not be harvestable in especially wet years. Machinery costs may also be much higher than budgeted and the land might not carry a large self-propelled harvester.
• This site may be seriously depleted in nutrients and may be very acidic. Input costs might therefore be underestimated.
• If the ditching and rush removal returns the land to a workable condition, the farmers first instinct may be to return it to good quality grazing rather than invest a lot of money in a risky and little known crop.
• The destruction of a fairly rare wetland area in the Scottish lowlands may have a major local environmental impact.

4. Conclusions

4.1 Investment Appraisal Results Summary

Table 9. Comparison of SRC, SRF and Upland Sheep Investment Appraisal Results

In a comparison with SRC and SRF, Upland Sheep are more profitable. The figures suggest sheep give double the return achievable from a good upland SRC crop. There are perhaps two critical points in this result. Firstly, sheep returns may be small, but they are annual. That gives a huge investment appraisal benefit compared to a crop which takes 4 years to give a sale and then needs another 3 year gap before the next sale. Secondly, this appraisal compares putting 10 ha of SRC or SRF on upland grazing land against leaving it as sheep pasture. The SRC or SRF is established from scratch (with all the costs this implies), while the loss of 70 sheep is only a marginal change (with a loss of output, some saving in input costs, but virtually no saving in fixed costs). It could be argued that this is an unfair comparison, but it is a true comparison because it reflects the actual decision making process faced by an upland farmer.

4.2 Sensitivity Analysis

The major factors which determine the relative returns from Short Rotation Coppice, Forestry and Upland Sheep are chip yields and prices, establishment costs (and hence the level of establishment grant available), the impact of the LFA scheme, and lamb prices. The life over which the options are appraised is also important, especially as SRF may take longer than the 16 year life used here to reach its peak yield. The sensitivity of relative returns from each of the three options is explored in the two tables which follow.

Table 10. Impact on EAV (£ per ha per annum) of small changes in some key cashflow items.

Table 11. Changes in yield, prices and grant rate to allow SRC and SRF to compete with upland sheep

To reflect the concern that SRF will not have reached its peak annual yield potential by year 16, all the options have also been appraised over 20 years. This is the life for SRF which is used in the LTS report. In this sensitivity analysis all grant and subsidy (including LFASS) has been removed from all options to allow a straight economic comparison. This shift to a 20 year appraisal increases SRF yield to around 97 odt/Ha compared to only 64 odt over a 16 year life. Yields are still discounted by 20% to reflect the poor quality sites and this is reflected in the yield of 97 odt. Plastic mulch costs have been removed and replaced with herbicide weed control and there is a marginal increase in harvesting cost due to higher yields. For the 20 year comparison it is assumed that the SRC is grubbed up at the end of year 16 as costed in the original appraisal, there is a one year grass establishment and then 3 years of sheep production. The Upland sheep option is simply extended for another 4 years. Results are as follows.

The extra 4 years of SRF growth has a major impact on its yield and overall cashflow. The size of the negative return is greatly reduced (from -£2,499 to -£1,584) and the annual deficit (the EAV figure above) is almost halved. The unsubsidised gap between SRF and sheep is greatly narrowed, though it is still around £2,000 per Ha. Basically that size of subsidy, for example an establishment grant, would be required to allow SRF to compete with upland sheep, assuming no direct LFA subsidies for sheep (or assuming a uniform LFA subsidy is available for both).

4.3 Conclusions

• Sheep margins may be low, but it is very difficult for SRC and SRF to compete. The introduction of an area of SRC on to an upland farm only results in a marginal reduction in the scale of the sheep enterprise, which reduces the farm Gross Margin without the benefit of significantly reducing fixed costs. Switching the whole farm to SRC could be financially much more positive, though it is less likely to be considered.
• SRF has major disadvantages. The high establishment cost and complete lack of income for 15 years makes it very difficult for this option to compete with other land uses, even on poor land. SRF has the disadvantages of forestry (a long wait for any income, high harvesting costs) without its benefits (low value of any alternative uses of that land, long enough cycle to build yield, high establishment grants, no reinstatement cost). If our assumptions are correct, it needs a massive increase in yield (+ 380%), or chip price (£119/odt) or the creation of a 110% establishment grant (£3,350 per ha) to make up for these problems.
• SRC on poorer land generates a positive margin, but it falls well short of SRC on arable land due to fewer harvests, lower total yield, a slower and significantly lower yield establishment phase and possibly higher fencing costs. The lower SRC establishment grant (50% in the LFA, up to £770/ha maximum) under the SRDP compared to the previous position under woodland grants (up to £1,000 per hectare) has a major impact on viability. The competitiveness of SRC is very sensitive to establishment costs. Where poor land needs extra preparation for a crop of SRC (for example in the lowland wetland case), this makes the crop even less attractive.
• However, it would take fairly modest increases in SRC yield (15%) for it to compete with upland sheep, though our poorer land model may overestimate potential yields (at a yield of only 4 odt/ha, SRC would be heading toward the same competitive position as SRF). A fairly small reduction in lamb prices would also tip the balance toward SRC, though in a period of lower lamb prices some sheep costs would also tend to fall e.g. the purchase price of replacement gimmers. It is also worth noting that the LFA scheme has a major impact because it does not allow land in SRC to be classed as forage, and so results in a reduction in payments. If the LFA scheme effect is removed, then SRC (at a 7 odt/ha yield level) competes with upland sheep. The Single Farm Payment is not affected by the decision to plant SRC.
• The wider benefits of SRC may be very important for its viability in poorer land situations. In the upland farm case study it requires a fairly modest improvement in lamb survival due to better shelter (beyond that budgeted in the example) to make SRC competitive. Likewise fairly modest environmental payments might swing the economic balance in its favour. Around £1,000 would make it worthwhile for the case study upland farm to at least consider establishing 10 hectares of SRC. This would be a payment of only £100 per hectare. However, the more emphasis which goes on SRC as a shelter belt/ environmental tool/ carbon sink, the less effort which may go into its role as a crop (resulting in slower agronomic improvement).

5. The Support Regime

The support regime has a major impact on the viability of the SRC option. Main details of the relevant support mechanisms are described below.

Agricultural Support

The shift to a fully decoupled support regime in Scotland, under the 2005 CAP Mid Term Review, has made much of agricultural support irrelevant for the decision to grow SRC or graze livestock. This assumes that SRC is classed as a crop which is an eligible land use and can therefore support Single Farm Payment ( SFP) entitlements. Every farmers' SFP is allocated as a number of entitlements, and each entitlement must be supported by a hectare of eligible land which is occupied by the farmer and must be entered on the annual IACS (Integrated Administration and Control System) form submitted each 15 May. The IACS form records the uses of all the land farmed by the business.

The SFP replaced all the previous "coupled" headage and area payments. The only coupled support which remains is the Scottish Beef Calf Scheme ( SBCS). This was one of the options available under the CAP Mid Term Review reforms and is funded by the Beef National Envelope. 10% of the historic beef payments received by all of Scotland's farmers is skimmed off to create a fund which is reallocated to Scottish born beef calves on a headage basis. Farmers producing beef calves submit claims for this payment throughout the year. This calf payment only exists in Scotland (out of the UK countries). If SRC displaces beef cows, then the farm will receive less SBCS payment.

The LFASS (Less Favoured Area Support Scheme) also works against the establishment of SRC in LFA areas. This support used to be paid on a headage basis, but has been paid on an areas basis for a number of years. The basis of the payment, however, reflects the historic stocking rates on the unit, including the balance of cattle and sheep (higher cattle stocking rates resulted in higher payments). It is paid on forage hectares in the Scottish Less Favoured Areas. SRC is not forage, so its establishment will reduce the total payment. The forage area is recorded on the annual IACS form. It should be noted that the LFA scheme across Europe is being reviewed and the UK consultation on its future is underway at the time of writing. The general thrust of the EU proposals is to push the scheme more toward compensation for a tightly defined set of natural disadvantage criteria. In the meantime, farmers LFASS payments have basically been frozen at previous levels.

Support for SRB

Under the old Scottish Forestry Grants Scheme, SRC was eligible for an establishment grant of £1,000 per hectare. This scheme closed in December 2006, but continued for new applications through Scottish Biofuels and Renewable Fuels Ltd up until spring 2007. This allowed the schemes operated by these two contractors to continue until the new grants under the SRDP were approved by Brussels and made available to applicants.

The establishment grant available under the SRDP is significantly lower (40% of actual establishment costs in non LFA, 50% in LFA). There is also a grant limit based on a maximum total establishment cost of £1,540 per ha. This allows for a maximum grant in the non LFA of £616/ha and in the LFA of £770/ha. Minimum blocks of 2 ha must be planted at a density of at least 10,000 willow or poplar plants per ha, and applicants must have evidence of a supply contract from an end user.

The support which might be available for SRF is unclear. It does not fit the criteria, such as plant density, for SRC support, yet does not fit typical forestry criteria and standard costs. If it were to be eligible for typical forestry levels of grant support this would have an important impact on its viability.

Gaps in knowledge

• Actual yields in poorer land situations. Lots of estimates, desk studies, but virtually no field scale trials. Yield will be much more site specific and variable in poorer land areas. How does it perform on sites which are waterlogged at some times of year and dry in others?
• All aspects of SRF
• Chip price and especially impact of higher moisture contents from uplands/ wetlands and distance from main users.
• Is it an environmental benefit?
• Shelter and micro-climate benefits for agriculture