What will the sector look like in a decade
The industry has existed, for a long time, in a bubble of quasi-government protection. A quid pro quo has existed whereby subsidies have been paid for occupying farmland, in exchange for commodity prices being below cost of production. The New Zealand farming industry provides a useful test case for how a withdrawal of support can lead to more efficient business models, albeit at a potential environmental cost.
Subsidies can distort the market, artificially supporting inefficient businesses. The impact of the policies enacted by the Labour Government will be that businesses fail. In a decade, some family farms currently operating may no longer be in business, but others are likely to be flourishing. However, this is a process which has been ongoing, in reality, for over a century. This represents a speeding up of the process, but the overall trend will remain the same, with a centralisation and economisation of the sector.
Businesses which have focussed on profitable and efficient operations, based around solid understanding of gross margins and marginal costs, are best placed to survive, and thrive. Businesses failing, whilst a tragedy in the particular, has benefits in the majority, creating opportunities and exciting new ventures. The farming sector, like almost all British industries, would be in a better condition if it was more innovative and productive.
The obvious trade-off for this, for the government, is that they must not increase the regulatory burden on farming businesses. If government wishes to reduce support and increase the tax burden, then businesses must be allowed to innovate. The recent announcements on allowing gene editing research to continue at pace is very welcome, and there does seem to be an acknowledgment from Department for Environment Food and Rural Affairs that innovation will play a part in improving productivity.
How to create a resilient farming mentality
The sector must now appreciate that we are operating in a very different world to that before 2016. If the transition away from direct subsidies since Brexit did not trigger the industry upheaval expected, then the Autumn Budget certainly will do.
Farm businesses need to make sure they take a holistic, review-based approach to their enterprises. The questions farm businesses should be asking themselves are:
- What is the core purpose of the business? Whilst this must have a financial element, it can also be about family history or maintaining a way of life.
- Where do you want to be in a decade? Businesses need a goal for the future, if they want to succeed. An end point is crucial to defining a plan.
- What is the strategic plan for the business? Actions should be considered based on the purpose and goals. This might be further economising gross margins or moving to selling direct to the consumer.
- How can this plan be realised? Farmers need to define the necessary steps to achieve success, understanding the strengths, and weaknesses, of their business.
Many farm businesses will have to make a decision in coming years as to what core markets they wish to operate in. Broadly, this is to either aim to compete in global commodity markets utilising economies of scale and driving down costs of production or diversifying into selling direct to consumers establishing a position within more niche local sectors. There is a solid future for farm businesses even if the industry begins to look very different in the coming years.
