Does Brexit spell Armageddon for UK farming?
For more than a generation, UK agricultural policy has been bound to and ruled by Europe. Whatever shape Brexit takes, and after the end of the current subsidy regime in 2020, we will be looking at something very different.
What will that mean for UK agriculture?
On the basis of hoping for the best and preparing for the worst, the changes could be anywhere between fundamental and cataclysmic.
Attention is often focused on the current version of the Common Agricultural Policy (CAP). However, it should not be forgotten that UK agriculture has been the recipient of income support in some form since the 1940’s. This includes:
- Passing through deficiency payments
- Price guarantees
- Import controls
- Intervention payments
- Latterly acreage based environmentally linked subsidies
Reduction of TIFF
If looking at Total Income from Farming (TIFF), published annually by DEFRA, UK agriculture generated net income in 2015 of some £4 billion. This represents net income for farm businesses after paying employee wages and external rent, but before any wages for proprietors or deemed rent on land farmed in hand. TIFF 2015 is fairly low compared to recent years, but it comes at the end of a run of record-breaking harvests.
If agricultural support were reduced to zero, TIFF would fall to £1.2bn. At that level, it would represent an income of £28 per acre to cover the owners own labour, deemed rent on owned land and return on capital. If adding back rent into the calculation, TIFF before rent but without subsidy equates to £40 per acre.
Even at the highest level in the last 4 years TIFF adjusted on this basis would represent £81 per acre. Market rents, on average, are rather more than £81 per acre. To put it another way: in the best year between 2012 and 2015, and without subsidy, the average tenant farmer would work for nothing and not quite generate enough money to pay his rent.
Of course, these figures are averages and it is well known that farms in the top quartile will outperform the average, often by a large margin. However, not all farms are equal, and not all results are determined by the abilities of the owner. Size, geography, geology, capitalisation, family circumstances, weather and luck all play a part. Even if the best farmers took on the worst land they would not be able to bring it up to “average”.
Agricultural life post-EEC
One would hope that when the government starts putting together a new regime for post-EEC agriculture, they might take account of the TIFF figures. They could set up an environmentally linked system which broadly reflects the need for farmers to receive a measure of financial support in return for providing the landscape, food security, quality and traceability which the UK public demand.
However, agriculture will be competing with other sectors post Brexit, so such support is by no means certain. The NHS, motor manufacturers and the financial services sector will all be looking for help and may come higher up the list of public sympathy (and voter power).
So the agricultural industry does now need to start “thinking the unthinkable” – what does an unsupported sector mean:
- Increased conflict between landlord and tenant
- A shift in the point at which land becomes “marginal” for farming purposes
- A real risk that the UK will become more dependent on imported food which will come from parts of the world where food production and hygiene standards are lower than they are in the UK – and cost structures are such that the UK cannot compete
- A reduction in the number of farms as less efficient units are pushed out of business, combined with an increase in the size of the average farm
- Downward pressure on agricultural inputs and services, probably leading to a reduction in the number of service suppliers as their customer numbers and margins fall
- Severe downward pressure on land prices as the underpinning of the subsidy payment is removed and there is less money available for investment
- A downgrading of the sector from a banking perspective on the back of both lower profitability and uncertainty on capital values
- A general knock-on effect on the rural economy where agriculture and individual farm spending is an important element
Preparation for the future
What can farm businesses do now to prepare for these changes, to survive through to the next generation? There is a window of 2-3 years until the end of the current CAP regime, and this may now be the time to act. The profitability shortfall from subsidy loss would be huge, but if even some of it can be clawed back in efficiency savings, currency movements might help close the gap.
Below are some tips for farmers:
- Look at buying and selling better. Use the time and resources to minimise risk and react swiftly to market movements. Similarly, co-operative buying of inputs means taking advantage of specialists who will both look for the best deal and use their collective buying power to drive down prices and secure discounts.
- Concentrate on farming a holding of the right size. Bigger is not always better and an off-lying block of difficult land at a high rent might actually be costing money rather than spreading fixed costs. A smaller compact farm with lower overheads might release capital, improve efficiency and cut losses, leaving someone else to lose money and wear out their machinery on the off-lying block.
- Share resources with neighbours. This doesn’t just mean formal machinery rings: it could also mean individual items of machinery, labour, storage or even management resource. Many businesses have traditionally operated on a basis of having spare labour, horsepower and buildings to cover all eventualities but in the new world which is facing agriculture, these are luxuries which may have to go.
- Drive down overheads. After sorting out the direct costs and crop marketing, look at the overheads. Insurance, machinery repairs, fuel, even telephones and office costs can all be pruned, and even if the reductions are only modest individually they all mount up – and of course next year the negotiations resume from a lower base.
The one thing which will not help the business survive is to ignore the upcoming changes and hope the problem will go away. At best we may come out with a soft and agriculture-friendly Brexit, but the UK support regime will no longer be linked to Brussels, and will no longer reflect the budgetary importance that it has since the 1970’s. Those farms best place to survive will be the ones who start grasping the nettle of efficiency savings now.
If you would like further advice regarding your agriculture property or business, please contact our Rural Business tax team on 01903 234094.