A mixed sense of relief and exhaustion has descended on the nation.
After three years of government inactivity on almost everything except Brexit - the conclusion of an election and the passing of the EU withdrawal agreement - the government does now appear, at last, to be ploughing ahead with the real job of policy making and delivery.
There is now so much going on that it is difficult to keep pace. From a farming perspective there are some huge changes around the corner and I am not sure these are fully comprehended by many of the players involved. Here is a rundown of five key issues:
1. CAP Subsidy removal
Having dominated British farming for 48 years the Common Agricultural Policy (CAP) will be gone from 1 January 2021.
The Government have made it quite clear that they have no intention of continuing with the same, area- based subsidy approach. Indeed, they have no intention of providing direct financial assistance to farmers simply for the sake of supporting farming.
So, the current Basic Payment Scheme will be removed. The current proposal is to do this in a way that removes it from the largest farmers fastest and from everybody over a period of seven years. After 2027, no farmer will be paid this sort of direct aid.
The current proposals to “de-link” the remaining payments from the need to occupy land or carry out any farming activity would mean that the transition could be felt incredibly quickly giving rise to some fast and potentially messy restructuring in some sectors.
The impact
The impact of subsidy removal will vary hugely depending on the sector. Intensive production of poultry, pigs or salads and field vegetables are largely immune to this because the area-based subsidy represents a very small proportion of output and profit.
However, the more extensive sectors are more affected. Producers of combinable crops, where BPS represents a large proportion of profits, are exposed to the need for a quick response and restructuring to find production and business efficiencies.
2. Environmental Stewardship
The Government are pushing forward with the development of a home-grown environmental stewardship scheme to pay land managers (not necessarily farmers) for carrying out activities that reduce their impact on the environment and improve habitats.
There are a number of objectives for the new “Environmental Land Management (ELM) scheme, but the real drivers are the need to address climate change, carbon capture and the preservation of the nation’s “Natural Capital”. The government’s new mantra is “public money for public goods”.
The impact
The new scheme has been presented by many as a replacement for the existing Basic Payment Scheme and an opportunity for farmers to replace their lost direct subsidy income. I am afraid this is not an accurate portrayal of the system and most farm incomes will fall, with or without ELMs.
Details of the scheme are yet to be agreed and DEFRA are under pressure to make sure there is wide take-up of the new scheme. Nevertheless, it is difficult for government to justify broad payments to farmers from public funds at a level that is above the basic need to replace lost income or cover the costs incurred in complying with the scheme. This does not include replacement of subsidies that may have previously been paid. So, you can see that the new scheme is potentially a beefed-up replacement of the existing, EU regulated, Countryside Stewardship scheme.
Whilst it may be a valuable income stream from marginal farmland, particularly if adopted on a large scale, it is unlikely to go anywhere near replacing the level of income currently received under BPS.
3. Business Structures and land occupation
The removal and potential de-linking of direct aid will impact directly on farming profitability and create a need for restructuring and consolidation in some sectors.
This is likely to result in changes to land occupation arrangements as some businesses grow and others contract.
In the UK we now have a great variety of structures under which land is farmed and ways in which financial rewards accrue to farmers and landowners. This freedom to construct appropriate business structures provides opportunity and robustness in our farming industry.
Arrangements might include Farm Business Tenancies or arrangements where the farming and landowning objectives are more aligned, such as contract farming, share faming, partnerships or other joint ventures.
The impact
I expect we will see an increase in the variety of structures used as the industry aligns itself with a more direct link between production and ultimate farm incomes.
4. Trade
This is currently the key issue facing government. In particular, the issue of future trade arrangements with the remaining members of the EU.
Obviously, trade negotiations will take place across all part of our economy, of which food and agriculture is a relatively small proportion, so it is important for these sectors to make their voices heard in the debate.
There are some key issues for the agriculture and food supply chains such as the tariffs that may applied between nations and the recognised standards that can be agreed.
The Government’s intention to be a “champion of free trade” might reasonably lead us to expect a zero tariff regime. This, quite patently, is not the case, much to the disappointment of market-led economists. Nevertheless, the aim is clearly for significant tariff reductions and free trade agreements with the EU and US in particular.
The area most hotly debated in agriculture and food is the protection of UK farm production standards. The Government’s intention is for the UK to apply the highest standards to domestic operations but is under pressure to accept imports from other nations with, potentially, lower standards and hence able to compete at lower prices. The UK will have some difficulty in protecting these standards whilst, at the same time, meeting their World Trade Organisation (WTO) obligations.
The impact
A reduction in the import costs and other barriers to trade would result in a general reduction in prices.
We must not forget, however, that trade is a two-way street and our agricultural businesses will need to understand how new export markets may be made available for them. This will need to be strongly led by the Government, making serious moves to develop trade relations on behalf of the food and farming sectors.
4. Productivity & Resilience
We are already seeing an increase in the numbers of farmers and landowners turning their attention to more diversified, non-agricultural forms of income.
Some of these relate to capital projects (often providing a one-off injection of cash to a business) and others providing new regular income streams.
Nevertheless, in the absence of direct support, income from farming and agricultural land will depend directly on productivity. By this we mean maximising production per unit of input - whether that input is fertilisers and sprays, or labour and machinery.
Agriculture in the UK has lagged behind many parts of the world in improving productivity and the blame for some of this has been the protection afforded by the BPS.
We know through analysis of farming results that the biggest influencer of farming productivity is the quality of management. There are a number of characteristics of good managers, which I will not go into here but, suffice it to say, the key to future farming productivity and business resilience will be to have the right people on the right land with the right infrastructure (crop storage and handling, drainage, irrigation, access etc).
Understanding this core principle should be the basis on which restructuring decisions are made and are particularly relevant in a multi-occupancy land holding / estate situation. Concentrating on this enables you to make focussed investment decisions, maximise earning capacity and potentially release poorer quality assets for alternative uses.
It is undoubtedly a daunting prospect for many, but there will be plenty of opportunities for progressive, entrepreneurial and well-resourced farming businesses over the coming few years.
If you would like to know more about how you can improve farm productivity and resilience, or about any of the points above, please contact us.
