Monday, November 28, 2016

The possibilities of a bond scheme

If the basic payment is withdrawn overnight in 2020 after Brexit or becomes a limited payment confined to marginal upland farms, the effect on farming could be catastrophic. For many farms, probably the majority, it is the difference between running at a profit and making a loss.

Some sort of transitional arrangement is needed. It could be a phased reduction in payments, or it could be a government backed bond which could either be sold to invest in the farm business or would generate an income from interest for a period of time.

I have been sceptical about such schemes in earlier postings because of the current low interest rate environment and that does remain a challenge. However, writing in Agra Europe distinguished agricultural economist Stefan Tangermann has revived the idea with his usual eloquent advocacy.

A time limited annuity scheme would offer a soft landing, and would be far preferable to a phased removal of the existing system of support that is still linked to land and farmers. As Stefan says in his article, if these entitlements are 'in the form of a bond-type entitlement document that is saleable on the capital market' this would give farmers confidence that the 'future stream of payments is irrevocably determined'.

With the current state of financial markets, however, it is open to question whether there would be a robust market for this "bond". Most recipients would, I suspect, simply collect their annual compensation payments, rather than exchanging the entitlement for a cash sum for investment purposes.

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