Elliot Taylor, Partner and Farm Business Consultant at George F. White, looks at the perfect storm brewing within the UK agricultural sector:
Even though the Pandemic has dominated our lives over the last 18 months; farming has continued as normal, dealing with the usual day to day pressures of changeable weather conditions and fluctuating prices. This year has been no different. We have seen one of the wettest months on record and one of the driest months on record. Arable crops, most livestock, and milk prices have been well above the five-year average, and amongst it all, we have a new agricultural policy, the Agriculture Act, to get our minds around. If we consider 71% of the land in the UK is used for agriculture, that’s 15 million acres, there is not one square inch of that land the new Agriculture Act will not affect in some way.
The headline aims of the new policy is to cut carbon emissions, create more space for biodiversity and wildlife, and improve animal welfare, whilst maintaining a sustainable and profitable farming industry for the long term. The driver for this major shift in policy direction is the UK’s target of reducing carbon emissions to net-zero by 2050. Farmers are now told they must provide ‘public goods’ and in return, they will be rewarded for doing so. So, how do farmers do this, how do they become more environmentally friendly, more sustainable whilst remaining viable, not just over the next seven years during the transitional period where direct support will be removed, but for the long term as well?
Farmers must take stock and look carefully at their businesses now. They must also look at how best to use the assets that they have at their disposal. I will discuss more about assets in a moment, but before I do I want to focus on one of the principal elements of the new agricultural policy, the removal of direct support. This will be the first year we’ll see a reduction in farmers’ Basic Payment, and in four years’ time the average payment will be more than half the amount received in 2020. So, what do we need to do now, on a practical level, to make farming businesses more resilient to this change? Farmers must start by analysing the past performance of their businesses and benchmark that performance to identify areas where improvements can be made. Benchmarking can be a powerful tool to spot strengths and weaknesses in your business. Farmers must also make time to sit down and set some key short, medium, and long-term business objectives. It’s important to start and develop a rolling 10-year plan for your business and update that plan on an annual basis. If you are not doing so already, it’s also important to prepare an annual farm budget. A detailed and realistic budget is one of the most important tools for guiding your business forward. It will predict future levels of profitability but more importantly, it will indicate how much cash you will have available for reinvestment during the year. Budgeting will also give you confidence in making the right decisions to achieve the objectives you have set yourself in your 10-year plan. Farmers must also invest time in looking at current and future environmental schemes that best fit their farm. Think about how these schemes will affect your business financially and consider this on a net margin per acre basis. Farmers must also think about how to make their businesses more efficient. Farmers should access productivity grants to improve business efficiency when available, but it’s important not to let the ‘tail wag the dog’, only make an investment into new equipment if it’s well thought out, costed and part of your 10-year plan. Attention to detail is vital, not just at an enterprise level but at a whole farm business level, and finally, talk to other farmers, attend discussion groups and industry events to help adopt best practice where possible.
All farm businesses will be impacted in some way and some farms will struggle as Basic Payment reduces and is eventually removed. A typical grazing livestock farm’s average profit last year was in the region of £29,000. Their Basic Payment receipt was around £31,000. This is a sobering statistic however it demonstrates how important it is to look at your business now and start planning for change.
Look at your assets
I mentioned before, it’s also important to look at the assets on your farm. When we think of farming assets we think of land, machinery, stock, maybe even yourself and of course the team around you. However, it’s also important to consider the natural assets or the natural capital you have available on the farm. So, what is natural capital? Basically, it’s the elements on your farm that benefit people and will provide the ‘public good’ that I referred to earlier. Natural capital can include, providing clean water, growing carbon-capturing plants, delivering healthy soils, or benefiting and enhancing the wider landscape. Farmers need to start to understand the value of these assets, both to their farming businesses and to the wider public.
Farmers need to think about their soils and how to improve them. They need to think about how to manage water on their farms. They need to consider how to increase biodiversity and enhance habitats and be paid for doing so. They need to think about providing opportunities for public access on their farms through structured educational visits for example. Also thinking about providing recreational activities, and the opportunities this may bring, for an on-farm diversification project will be important. Further to this, thinking about how to protect and maintain the historic environment and enhancing the wider landscape will be an important part of this exercise.
Farmers need to determine what natural assets they have, what benefits they produce, what they are worth and what they cost to maintain. This will help give a true value of all assets at their disposal. If the value is low in some of these areas, farmers can start to investigate how to improve the value going forward. The current Countryside Stewardship (CS) is a good place to start to enhance natural capital on your farm and I would strongly encourage all farmers to look at it. The Environmental Land Management Schemes (ELMs), the new system to support environmental actions, will be based on a natural capital valuation approach unlike the CS where the payment rates are based on income foregone.
The Environmental Land Management Schemes
One scheme available through the ELMs with the aim to provide ‘public good’ is the Sustainable Farming Incentive or SFI. The SFI is currently at the pilot stage, however, it will be rolled out sooner than anticipated to only Basic Payment Scheme (BPS) recipients in 2022. Following next year’s rollout, the SFI will then be fully launched from 2024. The SFI currently includes a set of land management actions or Standards. The pilot scheme has eight of these Standards covering areas such as arable, woodland, grassland and water. Each standard has three levels, an introductory, an intermediate, and an advanced level. Farmers are paid for completing each Standard at a particular level as well as being paid to take part in learning activities. When the SFI is launched next year, the scheme will be simplified and there will only be two main Standards. These will be the Arable and Horticultural Soils Standard and Improved Grassland Soils Standard, with the aim to improve soil health. Payment rates for this Standard will range from £26 to £70 per ha. There will also be a Moorland and Rough Grazing Standard with the objective to protect habitats and features in the uplands. Payment rates for this Standard are yet to be confirmed however further details are expected in November. It is likely that more Standards will accompany the two already launched as the scheme is rolled out. It is also likely that the SFI scheme will pay agreement holders either quarterly or monthly which differs from the annual payment experienced through the existing schemes currently available. Capital items will remain accessible through the recently released Capital Grants Scheme.
Also, within the ELMs, there are several other targeted schemes that will be rolled out between now and 2024. These include larger-scale nature and landscape projects within the Local Nature Recovery and the Landscape Recovery Schemes, as well as support being available for the creation of woodland through the England Woodland Creation Offer. The new UK farming policy also includes provisions to improve animal welfare through an Animal Health & Welfare Pathway which will fund an annual vet visit providing diagnostic testing and advice with payments of up to £775 per year for participating farmers. Further capital funding was also announced as part of the Agricultural Transition Plan with the aim to reduce pollution from farming through the Slurry Investment Scheme (SIS). The SIS is expected to provide grant funding for new covered slurry stores and other equipment and is expected to be launched in 2022.
Lump Sum Exit Scheme
It’s not just the ELMs going through consultation at present, the way farmers could be encouraged to leave farming is also being designed through a period of public consultation. The Lump Sum Exit Scheme or the “golden handshake” as some people are calling it, is in its consultation process which closes on 11th August. What key points can we take from the consultation document? The scheme will start in 2022 for those who wish to retire or leave farming. Farmers who enter the scheme will need to give up their land and not claim any further BPS. This will mean a tenant will be required to give up their tenancy and an owner-occupier will need to either sell their farm or rent all their land out on a Farm Business Tenancy for at least five years. One proposal suggested is to use a reference period amount to calculate a lump sum based on what farmers would have received from their BPS until the end of the transitional period with a proposed payment cap of £100,000. An example of a lump sum calculation could be £40,000 (reference amount) x 2.35 = £94,000 total lump sum. It is also important to note that the treatment of the lump sum in the eyes of the HMRC is still being discussed.
Prosperity and productivity
There will also be other funding through, what Defra are calling, prosperity and productivity funding, to help support farmers during the removal of the BPS. The Farming Investment Fund will help to improve productivity whilst benefiting the environment by providing grants for equipment, technology and infrastructure. There will be further funding available for Research and Development schemes to support innovation in agriculture. There will also be a fund to help new starters into farming through the New Entrant Support Scheme. The New Entrant Support Scheme will replace the current Young and New Farmer Scheme delivered through the BPS.
The Perfect Storm
We are truly at a pivotal point in UK agriculture, in fact, you could say it’s like a ‘Perfect Storm’. The removal of direct support; a push to provide public goods; uncertainty over trade deals; farmers being encouraged to exit the industry; the next generation being encouraged to start farming but struggling to find funding; a plethora of new schemes to understand and the possible changes on the horizon to inheritance tax and reform of capital gains tax legislation will all put pressure on farmers to make the right decisions to move their businesses successfully forward. We can learn a lot from the past, but we need to embrace the future. Some people think farmers never change, in my view, farmers have always embraced change and do it well. Farmers are a bit like chameleons, they’re pretty good at adapting to the changing environment around them.
Farmers must continue to be open-minded, embrace new technology, analyse business performance, budget, assess the assets at their disposal including determining the value of the natural capital on their farms, fully investigate opportunities for new income streams and plan well for the changes to come.
This transition period will offer a significant opportunity to farmers. Doing nothing is not an option.
If you would like to speak to Elliot Taylor, the author of this article, please contact him direct on 07590 445301 or call our Rural team on 0333 920 2220.