Martin Cassidy BBC Northern Ireland rural affairs correspondent

Devolution may have faltered but Europe is still demanding an answer on how Northern Ireland intends to share out millions of pounds of farm subsidies under a new regionalised common agricultural policy.

It is the biggest issue facing rural communities across the province with �230m a year at stake under what will be a completely new system of subsidies.

It all stems from the Luxembourg CAP reform agreement which resulted from months of deliberation by European farm ministers.

Dairy farmers could recieve a sharp loss in their subsidies

Under whatever system is adopted, there will be winners and losers.

Some farmers could find themselves well off - but only at the expense of others in the farming community.

Under one scenario, sheep farmers would see their subsidy payments increase by over 100%, while dairy farmers and beef finishers would experience a sharp loss.

The Department of Agriculture is aiming to find a formula to minimise shifts in funds from one sector to another.

So the pressure is on to find a workable system for Northern Ireland.

Trade distortion

Minister Ian Pearson hopes to make a decision before Christmas.

The crux of the whole reform process is the move away from subsidy payments on livestock and crops to providing more general income support for farming families.

The department says there are two basic methods of distributing decoupled subsidy payments under the Luxembourg CAP reform agreement.

Entitlements to farmers could be based on the land they declare

The historic model operates by creating entitlements to support payments based on the average level of subsidies claimed in the livestock and arable sectors during the 2000-2002 reference period.

The number of entitlements allocated to each farmer is equal to the average area of land farmed.

The value of each of these entitlements is established by dividing the average amount of subsidy by the number of entitlements awarded.

Special provision is made to include the dairy sector under the new system.

The second way of approaching the cash share-out is based on awarding entitlements to farmers based on the area of eligible land they declare in 2005.

This is called the area based model.

And the figures make interesting reading.

As things stand farmers in the province would receive about �90/acre.

Another possibility would see Northern Ireland sub-divided into three regions on the basis of land quality, lowland farms might qualify for about �115/acre, farms in disadvantaged areas would attract an annual payment of �104/acre while land in severely disadvantaged areas would attract �63/acre.

Legal challenges

But before hill farmers begin rubbing their hands in anticipation of what would amount to a windfall, it seems unlikely that either the government or the commission would agree to such a massive switch of funds to upland farms.

Under such a move sheep and suckler cow producers would win but only at the expense of lowland farmers, and beef finishers particularly.

Fairness is being seen as a guiding principle by the economists charged with re-distributing the CAP pot.

It is clear too that the Department of Agriculture is keen to minimise the potential for legal challenges from farmers who would lose heavily under the new system.

So what looks increasingly likely is some kind of hybrid system which encompasses elements of both the area approach and farmers' track records in terms of the subsidy payments.

Remember the overall pot of money stays more or less the same.

So the idea now is to come up with a model which shares the cash out on area basis yet takes into account the recent history of subsidy claims.

NIO minister Ian Pearson is expected to announce a decision soon

And so the term 'hybrid decoupling' is added to the lexicon of the common agricultural policy.

One such plan is where farms would receive a basic payment of �23/acre based on 50% of the decoupled beef special premium and the associated extensification premium plus 50% of the slaughter premium plus 50% of the de-coupled sheep premium.

The remaining decoupled money would be used to top up payments based on historic subsidy claims.

This scenario would see the average entitlement for farms with suckler cows at �73/acre.

Beef finishers would be entitled to �86/acre, dairy farmers �109/acre and sheep farms �40/acre.

But what about winners and losers?

Well the Department of Agriculture figures suggest that under this model around �10m is removed from beef finishers with the result that farms with suckler cows gain around �2m, dairy enterprises gain �3m and sheep producers an extra �4m.

The Department of Agriculture is now exploring further examples in which the proportions of the various beef chain subsidies recycled to the area based component of the hybrid are set at differing levels.

Minister Ian Pearson still hopes to make a decision before Christmas but may face calls for more time to allow farmers to study the new hybrid decoupling animal.