Moving away from direct payments

Following on from the Health and Harmony consultation and the publication of the Agriculture Bill, on 13th September DEFRA (Department for Environment Food & Rural Affairs) published a report on the financial impact of abolishing direct payments (DP). The document, which brings together data from several surveys, makes gloomy reading. Some of the key statistics for 2014-5 to 2016-17 are:

  • Direct payments comprised 9% of total farm revenue (21% for less-favoured areas)
  • Average Farm Business Income (FBI), which roughly equates to accounting profit, was £37,000
  • Direct payments comprised 61% of FBI (83% for tenants)
  • In the Northeast, DP was 98% of FBI
  • 42% of farms would have made a loss before DP
  • Loss-making farms would need to reduce total costs by 10% to break even (plus whatever they need to live on).

Suggestions to improve profitability

The report makes a number of suggestions for ways in which farms can improve profitability as DP income is reduced. These include:

  1. Significant cost reductions
  2. Rent reductions
  3. Diversification
  4. Productivity improvements such as better breeding programmes

However, it ignores 4 obvious logic flaws:

1. Cost reductions

Roughly half of a farm’s costs are fixed and half are variable. Since variable costs are output related and often beyond the farmer’s control, most of this reduction would need to come from fixed costs. Wages costs comprise a sixth of fixed cost, so effectively a 10% reduction in overall cost would involve a 25% reduction in property, machinery and general costs, just to break even. To secure a minimum wage for the proprietor the reduction would be nearer 50% and this will apply to 42% of all farms, with a much higher proportion is some areas.

2. Rent reductions

Calculations within the report based on investment returns indicate that rent levels will halve in the absence of DP. These calculations ignore the practical factors that most tenants have a deep and multi-generational link to the holding and are unlikely to relinquish it willingly – not least because it includes the family home – so may well continue paying current rents until they are forced into bankruptcy. Conversely, other farms may look to expand their acreage to spread fixed costs, even if it means paying a rent in excess of the theoretical investment value.

3. Diversification projects

There is a limited market for diversification projects. Some of the most common, such as holiday accommodation, may become less profitable if more farms move in that direction. Such projects also require significant capital investment and may not be possible for tenants.

4. Productivity improvements

Most productivity improvements require investment which up until now has been relatively easy to obtain. But if the withdrawal of DP reduces both profits and land values, banks may be less enthusiastic about lending to the sector, and any such lending is likely to come at a higher price.

The solution to the issue will probably be provided, at least in part, by the introduction of  Environmental Land Management (ELM) systems which will deliver environmental benefits in return for payment. It seems likely that most farms will be able to enter land into such systems, but it would have been helpful if the report at least gave some indication of the income stream which an average system might give to an average farm. In the absence of such information, the paper is bleak but incomplete.