Valuation: Special Properties & Purposes

Phil Askham, Leslie Blake

• Publisher: Estates Gazette
• Year: 2014
• ISBN:
  9781135323332
• Edition: 1
• Topic: Droit
• Subtopic: Droit des biens

Each topic treated represents an area of specialism in its own right. This book helps fill the gap between the extremes of neglect and detailed consideration in existing texts by providing an authoritative and yet accessible treatment of several complex and technical subjects. Each chapter has been written by an acknowledged expert in the field with extensive practical experience, and where appropriate is supported by comprehensive case studies and worked examples. What this book emphatically will not do, is turn anyone into an expert in the specialist and even arcane worlds of the plant and machinery valuer or the valuation of milk quotas. What it will do, however, is give some indication of the problems and pitfalls associated with these fields.

Chapter 1
Milk Quotas

Financial crisis is never lurking very far from the Common Agricultural Policy (CAP) of the European Union (EU). Its cause in the early 1980s was milk. Half the CAP budget was absorbed supporting milk and milk products. Several non-marketing and herd conversion schemes had failed to tackle the problem, price control was unacceptable politically and demand for milk and milk products was falling. Something had to be done. Production controls – quotas – were until the last minute rejected as a solution. But in late-March 1984 milk quotas were chosen as the solution to the European milk crisis. Milk quotas were introduced on 2 April 1984.

At first little was known about the detailed implications of milk quota, and dairy farmers found themselves facing an uncertain future. Would they have enough quota? How could more quota be acquired (could it be acquired)? Could quota be sold? Who ‘owned’ quota and how is it categorised legally? What about investment plans, and the position of new and retiring tenants? These questions dogged farmers and their advisers for several years after quota was introduced – indeed there are still aspects which lack a definitive answer today.

This chapter discusses the importance of milk quota to the practising valuer. It explains the history, legal status and statutory framework for milk quota, before considering the impact of quota on the sale and transfer of farmland. The impact of quota on valuations for other purposes is also considered. Finally some of the more specialised valuations which can be required in connection with milk quota are introduced with reference to further sources of information for the valuer who may wish to extend his or her expertise in this area.

Importance of milk quota to practising valuers

Any valuer who is called upon to value land which may have been used for dairy farming, or who is concerned with a valuation of the assets of a dairy farming business, should be aware that milk quota can be a very valuable asset. Even a modest dairy farm of 80 cows may be using milk quota worth £100, 000 (500, 000 litres of quota at 20p/litre). Entitlement to this asset may need to be apportioned between areas of land, and between landlord and tenant. But its availability can have a significant effect on the valuation of quota-bearing land for many different purposes, for example sale or taxation. Its availability can be a vital consideration in future planning: business restructuring, farm diversification, land rationalisation or compulsory purchase for example. Therefore, even the general practitioner who may only occasionally encounter rural valuation work should be aware of the implications of milk quota.

Legal and administrative framework

Milk quota works by setting a national limit for milk production. The national limit is shared between milk producers. This is the dairy farmer’s milk quota. If national milk production exceeds the national limit, a penalty is payable by dairy farmers who have exceeded their quota. The penalty is called the Milk Supplementary Levy. It is used to fund the storage and disposal of surplus milk through various EU schemes for this purpose.

The framework for the regulation of milk quotas originates in European law. The current regulations are:

• Council Regulation (EEC) No. 3950/92 (as amended), which establishes an additional levy on milk and milk products.
• Commission Regulation (EEC) No. 1392/2001, which sets out detailed rules on the levy.

European regulations must be converted into national law in each member state, and the relevant regulations in the UK currently are in the following statutory instruments (Sis):

• SI 2002 No 457 The Dairy Produce Quota Regulations 2002 (England)
• SI 2002 No 88 The Dairy Produce Quota Regulations 2002 (Northern Ireland)
• SI 2002 No 110 The Dairy Produce Quota Regulations 2002 (Scotland)
• SI 2002 No 897 (W103) The Dairy Produce Quota Regulations 2002 (Wales).

In addition, valuers also need to be aware of the provisions in the Agriculture Act 1986 which govern the entitlement of some tenants under the Agricultural Holdings Act to compensation at the end of their tenancies. The Act is supplemented by SI 1992 No 1225 the Milk Quota (Calculation of Standard Quota) (Amendment) Order 1992.

Despite this regulatory framework, it has proved hard to define the nature of a milk quota in English law. Most commentators have settled on the right which it gives a dairy farmer to market milk without incurring a levy. It might be noted in passing that milk quota is fundamentally different from the other livestock quotas which came into being as a result of the 1992 reforms to the Common Agricultural Policy. The later quotas entitle farmers with sheep or suckler cow quotas to claim an annual subsidy payment from the Common Agricultural Policy (in practice by claiming from the UK’s Rural Payments Agency).

Early administration of milk quotas

In early 1984, national quotas (also known as reference quantities) were allocated to member states and the member states allocated individual quotas to producers. In practice, not all of the national quota was allocated to individual producers because some was held back to form a national reserve. The initial allocation of quota to producers was based on their previous level of milk production. Quota is broadly divided into two types:

• Wholesale quota, is held by the majority of dairy farmers, and applies to milk which is sold to approved wholesale purchasers. The initial allocation of wholesale quota in April 1984 was based on 1983 production, less the 9% retention for the national reserve of quota.
• Direct Sales quota applies to milk and milk products which are marketed direct to the public. The initial allocation of this quota was based on 1982 production, less the allocation to the national reserve.

Quota, whether wholesale or direct, covers milk and milk products. Milk products include butter, cheese, yoghurt and ice cream. The quota covers all milk and milk products which leave the holding. Direct sales quota can be redesignated as wholesale quota, and wholesale quota can be redesignated as Direct Sales quota.

Farmers were able to appeal against their original allocation of quota, typically because their production had been lower than normal during the ‘reference year’ on which their allocation of quota was based, or because they were in the middle of an expansion programme. A successful appeal led to an award of additional quota from the national reserve. Another three categories of farmer were able to benefit from the later award of ‘special quota’, which is also known as SLOM quota. SLOM quota was awarded to farmers who were not in production in 1984 because they were participating in some of the earlier non-marketing or herd conversion schemes (SLOM is an acronym for the Dutch scheme). There were three allocations of SLOM quota in 1989, 1991 and 1993 to farmers who had participated in the various schemes that had attempted to curb milk production before 1984. The first and third allocations (SLOM 1 and SLOM 2) are now regarded as ordinary quota. Originally farmers were not allowed to transfer or lease out SLOM quota but those restrictions no longer apply. Nevertheless SLOM quota is still shown separately in official quota records.

Milk quota refers to annual milk production in the ‘quota year’ which runs from 1 April to 31 March. The original allocations of quota were expressed solely in litres. Farmers began to realise that they could earn greater profits within their quota by improving milk quality. This was achieved by raising butterfat levels (through feeding and breeding policies). This frustrated the intention of quotas to reduce the production of milk and milk products, as products like cream, butter and cheese are made from the butterfat in milk and surpluses in these products began to grow again. So Butterfat bases were added to wholesale milk quota in the 1987/88 quota year. For most producers the butterfat base was based on the average fat content of their milk in the 1985/86 year. Deliveries of wholesale milk are adjusted for quota purposes by reference to their butterfat base. Milk which is richer than the national average butterfat base is increased in volume for quota purposes, while milk which is weaker is reduced in volume. The national average butterfat base in May 2002 was 3.97%, and the current formula adjusts milk volume by 0.18% for every 0.01% variation in butterfat from the national base. This can mean that a farmer who has kept slightly within quota, but has exceeded his or her butterfat base, may nevertheless incur the milk supplementary levy because the adjusted milk volume exceeds his or her quota. Conversely a farmer who exceeds quota with weak milk may find himself within quota when the adjustment has been made.

It can be seen that an understanding of milk quota is crucial to the modern dairy farmer. It is understood that milk quotas will be in place until at least March 2008, although the other aspects of the CAP dairy regime are to be reviewed soon. Changes may include a levy on larger dairy farmers to pay for supporting the milk markets, a process known in CAP jargon as ‘degressivity’. The ability to transfer quota, permanently or temporarily, is clearly important if any flexibility is to be retained in the dairy farming industry.

Transferring milk quota

The general principle of quota ownership is that is attached to a holding, not a producer. Generally therefore milk quota will go to the new occupier if a holding changes hands. However, quota and the holding on which it is held are not inseparable. Quota can be transferred permanently or temporarily, with or without a transfer of land.

Permanent transfer with land

Sale of land ‘used for milk production’

The most straightforward way to transfer quota to another producer is to sell the land with which it is associated to that producer, with the agreement of all interested parties (landlords of other land with an interest in the quota, mortgagees and so on) and to notify the Rural Payments Agency.

Lease land ‘used for milk production’

A lease is agreed under which the purchaser of the quota rents land from the vendor. The tenant/quota-buyer occupies the land, but does not use it for milk production. Instead he or she uses the quota to produce milk from another part of his or her holding (either by intensifying milk production on the other part or by using other land which has not previously been used for milk production). The lease must be at least 10 months long in England or Wales, only eight months in Scotland, but 12 months in Northern Ireland. This process is sometimes called ‘massaging’ quota from one piece of land to another, and can sometimes involve various contracting arrangements between the buyer and seller concerning the occupation of the land subject to the lease. Specialist advice and a carefully drafted agreement are vital in the latter area, as quota may move many hundreds of miles under these arrangements and the practical difficulties for the purchaser in personally occupying the leased land would be formidable.

All parties with an interest in land from which quota is being massaged must agree to the transfer. This might include the landlord of the farm from which quota is being transferred, who will have a particular interest in his or her own entitlement to the quota and may be concerned at the implications of the subletting used to effect the transfer. The operative date of the quota transfer is the date on which the lease commences and the transfer must be registered with the government’s Rural Payments Agency.

‘Land used for milk production’

It can now be seen that the nature of ‘land used for milk production’ is central to the ownership and transfer of milk quota. This important phrase was not defined in the original quota legislation, and it was left to the courts to interpret its meaning. The leading case is Puncknowle Farms Ltd v Kane [1985] 2 EGLR 8, decided in the Queen’s Bench Division of the High Court. In the light of Puncknowle, areas used for milk production are:

• Forage areas used for grazing and conservation (of hay, silage etc) and arable areas used to grow corn and straw which is fed to the dairy herd.
• Buildings and yards which house or service the dairy herd.
• The dairy herd includes: dairy cows, dry cows, followers (heifers) intended as herd replacements and dairy bulls.

Disputes over areas used for milk production are settled by arbitration. Arrangements are set out in the Dairy Produce Quota Regulations, including a duty on the President of the RICS to appoint an arbitrator when requested to do so. The arbitrator’s duty under the Quota Regulations is to base the apportionment on areas used for milk production in the last five years in which production took place.

An example may help to illustrate the apportionment.

Areas used for milk production: example of apportionment

Nathaniel has been the tenant of Blackthorn Farm since 1978 when he established his dairy farming business in his own name. In 1980 he bought the freehold interest in nearby grazing land at Whitethorn, where he keeps heifers and dry cows. In 1984 he was allocated 650, 000 litres of quota and quota now stands at 800, 000 litres due to subsequent purchases (and allowing for subsequent cuts in the original allocations of quota throughout the 1980s and early 1990s).

Areas used for milk production at Blackthorn are as follows:

• Yard and buildings: 0.5 ha
• Grazing land: 59.5 ha

Areas used for milk production at Whitethorn are as follows:

• Two fields totalling 20 ha

The total area used for milk production is therefore 80 ha and a very simple apportionment would equate to 10, 000 litres per ha. Blackthorn would therefore carry 600, 000 litres of quota and Whitethorn 200, 000 litres. However, the landlord of Blackthorn may well take the view that the land there should attract proportionately more of the quota, because the main dairy herd is there as well as the milking parlour, cow housing and so on. The European Court of Justice case of Posthumus v Oosterwoud (Case ...