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Planning to combat Brexit Uncertainty

Brexit will bring changes to many sectors of the UK economy and, undoubtedly, with that change will come opportunity for those that are prepared and some significant risks for those that aren’t.

Just how much change and opportunity occur will depend on what type of Brexit the UK finally opts for. It seems we are no clearer in knowing that answer even at this late stage in the process.

A no-deal Brexit will inevitably mean more calamity and crisis for the agricultural industry; at least in the short to medium term. It will require us  to reset to World Trade Organisation (WTO) rules, which will produce uncertainty over tariffs in both timing and outcome, and could, we fear, be centred around a cheap food policy that would undermine the high animal welfare, environmental and food standards that our farming industry is required to work under. Mr Gove has stated publicly he won’t allow this to happen – let us hope he is in office and we can hold him to that.

This could result in tariff-free access to the UK market and leave the UK restricted and unable to export to the EU, our biggest overseas market.

Theresa May’s deal would effectively include a customs union for a transitionary period, which would be better news for agriculture, as this should minimise trade disruption.

 

“Agriculture, at farm level, will face significant challenge in adapting away from CAP support”

Whichever route the UK takes, Agriculture, at farm level, will face significant challenge in moving away from CAP support. That support has been worth £3.1bn across the UK out of a total net farm income of circa £4.1bn, so its removal amounts to a major loss.

This support has allowed many farm businesses and associated food and commodity production to be economically sustainable at pretty low prices – indeed at, or below direct costs of production in many cases.

 

“The new Agricultural Bill focuses much more on natural capital and the environment”

The new Agricultural Bill focuses much more on natural capital and the environment, with precious little mention of food production, or the economics of food production.

 

“The impact will be serious on most production-orientated farm businesses”

The impact will be serious on most production-orientated farm businesses and we also believe is likely to put further downward pressure on farmland values over the next one to three years as farm businesses and farming families deal with the impact of the transition on their own businesses. There are clearly counter balances to this pressure on land values, such as market supply, rollover of development gains, low interest rates, wealth buyers, etc., but the outlook is difficult and, on balance, negative during this period of major restructure for the industry that will follow.

 

“Our strong advice to family and large farming businesses alike is to waste no time in carrying out an impact assessment”

As a firm that is heavily embedded in the farming sector and family farming businesses (large and small, tenants and landowners alike) at grass roots level, our strong advice to small and large farming businesses alike is to waste no time in carrying out an impact assessment on farming without BPS payments and using assets to best effect, as well as considering how major diversification projects and capital grants can help support and build the profit and loss account.

For some, this will also be a catalyst to press on with generational change, perhaps the greatest opportunity we have seen since the 1970s and 1980s. 

 

“The Agriculture Bill will bring a transition away from direct support, and farming businesses need to make the most of this transition window”

Looking at all this in more detail, the new Agriculture Bill will bring a transition away from direct support, starting in just two years time. Over this year and next year, BPS will continue at current levels, and farming businesses should make the most of this narrow window to produce an effective five- to ten-year plan that delivers certainty of profitability post BPS withdrawal and meets the needs of those within the business – albeit those within the business may well change.

Looking back, its fair to say that BPS payments and before that IACS income, have probably acted as a comfort blanket for the sector and in some cases (if not the sector in general), have taken focus away from what is actually generating profit. 

It is clear that there will be some difficult conversations ahead for all of us involved in the industry. Not many farmers or landowners are yet thinking about life without BPS. Tenants, especially those on an FBT, are going to be in a particularly difficult place; where often numbers without BPS simply don’t work under current business structures.

 

“Brown&Co has encouraged clients to start looking much harder at whole-cost recording and net margin calculations by enterprise”

Brown&Co has encouraged clients to start looking much harder at whole-cost recording and net margin calculations by enterprise, identifying soils, crops and rotational positions that don’t make money; in fact make significant losses. Operating costs are in some cases as high as direct or variable costs and both have grown massively in the past 10 years (doubled in most cases).

This is a fundamental change. Rather than looking at gross margin replacement when considering the viability of an enterprise, it is net margin that should be the focus to help drive on change and reduction of operating costs (unit number, efficiency of use, etc). Radical rather than subtle change is likely to be the key to success.

 

“We need to embrace, rather than fight, the Gove plan on marginal land”

We need to embrace, rather than fight, the Gove plan on marginal land. Such land might look very different to that which most people would consider being marginal today – for example, land which is only returning a profit because of BPS and cannot be turned around by any of the approaches outlined in this article will come into that category.

Some parts of the country won’t be cropped and stocked as they are now. It is not just poorer soils that come into this category. For example, areas that require high inputs, such as land with resistant blackgrass that does not necessarily produce high yields, may also become unviable – it probably is already; but is masked by BPS. New stewardship, or ELMS and other land uses that provide a direct return with substantially less operating costs, or land use schemes that provide payments for delivery of “eco-system services” by the private sector that are already being piloted around the country may unlock major reductions in operating costs and should be encouraged and looked at as serious alternatives to current production and land use. 

Many arable growers typically spend £500/ha on inputs and near that on operating costs, but not all crops return £1000/ha or more. The trick will be to readjust structure and match inputs to potential and significantly reduce, where appropriate, fixed costs, particularly labour and machinery. 

 

“We believe there are going to be opportunities to draw major environmental schemes together”

Farmers should not be afraid of large schemes – though undoubtedly ELMS will need to work better than past Stewardship schemes and payments for eco-system services will need to be realistic and be paid on time. We believe there are going to be opportunities to draw environmental schemes together, perhaps attracting £350-£500/ha annual payments, particularly for habitat creation. It won’t necessarily be too expensive to establish and manage, and in some cases, may be viable for whole farms where significant cuts in the fixed cost base can be made, rather than trying to scrape together £800-£1000/ha output from production from a much higher traditionally equipped cost base.

In the livestock sector, there is much talk about challenged landscapes, where support payments will continue to be required, perhaps tied to environment land management schemes (ELMS). These areas are no different to land that cannot produce a return from arable crops – operators will need to be remunerated if society wants the land to be managed.

 

“If ELMS-type payments are available it might be easier to manage the land with livestock, which could provide new share farming opportunities for hard working, skilled people”

We see a resurgence in share farming, particularly for ruminant livestock. If we assume there is no net margin earning potential under arable cropping on some soils, and ELMS-type payments are available for managing land to a prescription targeted at environmental benefits, it might be easier and cheaper to manage the land with livestock, which could provide an opportunity for hard working skilled people to run their own businesses as share farmers on a zero-rent basis and who can build scale across multiple holdings. We see a fundamental shift in the balance of land supply and operator/land user demand from a shortage of tenanted land opportunity to an over-supply and shortage of operators/land users/tenants – that is likely to change the price of the opportunity substantially.

There will be share-farming opportunities in the arable sector as well, perhaps replacing contract farming models where there is a more even distribution of risk and reward and focussed on net margin sharing from production. Without BPS, landowner’s returns will reduce substantially.

 

“We will see a different patchwork of farming arrangements”

We will see a different patchwork of farming arrangements, growing the best crops and stock in the best rotational positions across multiple holdings and putting other land into ELMS, which might be rotational or fixed.

 

“As a firm, we spend a lot of time looking at planning opportunities, and there are plenty of them.”

What of other options beyond the core farm business? As a firm, we spend a lot of time looking at planning opportunities and there are plenty of them - to create and grow asset value to either release capital, or develop new income streams. The current planning framework is pretty open to this, especially if ideas for development add or create employment, or satisfy housing needs.

 

“At current land values, most owner occupiers still have a reasonably high value capital base they can borrow against.”

At current land values, most owner occupiers still have a reasonably high value capital base they can borrow against. At today’s relatively low interest rates they can fix those borrowings for the long term. They can create a 10-14% return on debt leveraged investment by building, for example, office space, a nursery, or pig or poultry unit, glamping enterprises, and much more, while increasing the capital value of the business and generating additional net income returns.

 

“Over the past year we have also done a lot of grant work on small niche start-ups, tourism, conversions, adding value to production, creating capital value and capital generation.”

Family and larger agricultural businesses should focus hard on new enterprise opportunities that add to the bottom line and capital grants to ease the cost and transition into them. Over the past year we have also done a lot of grant work on small niche start-ups, tourism, conversions, creating capital value and capital generation. In some cases, it is quite possible they will see their turnover halve, but they will increase their net profit many times over. 

 

“We believe we will see big capital grants becoming available to encourage investment, to increase efficiency and add value.”

Where soils are suitable for irrigation, water storage will become critical. We believe we will see more big capital grants becoming available to encourage investment to increase water storage and efficiency of use in such areas.

 

“The elephant in the room is the price of land and the current operating cost infrastructure.”

Of course, the elephant in the room is the price of land and the current operating cost infrastructure. There are lots of examples where land is still achieving very high values, but on the whole, prices are coming down, and some significantly so. We could see 20% coming off in the next 2-3 years, although actual figures will be very location dependant.

 

“It is not all bleak. At 1.5-2% return, the changes ahead will encourage institutional and wealth capital investment interest, perhaps on a scale not seen for 30 years.”

It is not all bleak. At 1.5-2% return, the changes ahead will encourage institutional and wealth capital investment interest, perhaps on a scale not seen for 30 years. This would provide opportunity for farmers to operate (joint ventures, share farming and under tenancies) perhaps on sale and lease back terms, unlocking capital for further investment in production efficiencies, or for distribution to the wider family. 

 

“Brown & Co has wide-ranging expertise in all rural matters, including farm management consultancy, land and property, planning and architecture. We can and want to help with the transition; ahead of pressure that will come with falling BPS payments from 2021.”

For many farmers, coping with the substantial change that lies ahead will be a major challenge. Brown & Co has wide-ranging expertise in all rural matters, including farm management consultancy, land and property, planning and architecture. We can and want to help with the transition; ahead of pressure that will come with falling BPS payments from 2021, while we have healthy land and property values to help with that transition through investment and restructuring using BPS payments to assist with cash flow and help landlord / tenant changing relationships while there is income to share.

 

We are here to help. Let’s get Fit for the Future together!