Farmers find life without subsidies difficult

Farmers, particularly those in England, are find it difficult to adjust to life with reducing subsidies.  

A Farmers Weekly of 500 farmers survey showed farmers across the UK continue to rely heavily on support scheme money, with almost 90% receiving some funding.

On average, BPS revenue accounted for 29.3% of farm incomes in the 12 months up to spring 2023, only slightly down on the 31.7% recorded for the same period a year earlier.   For more than two in five (41%), BPS money made up one-quarter of incomes.  But for 16%, BPS funding still accounted for three-quarters or more of total revenue, a slight increase on the figure for spring 2022 when it stood at 14%.  

Dwindling support levels continue to cause widespread concern.  A growing number of farmers (49% – up from 45% last year) are now “very concerned” about how they will replace lost revenue from support.

Overall, eight out of 10 farmers registered some level of concern.  Concerns ran so deeply that 87.5% said they were uncertain whether their farms would even survive without BPS support.  More than half (55%) forecast it would be difficult to survive and one-quarter went further, saying survival would only be secured with great difficulty.

More than one-third (37%) are looking to an off-farm revenue to bolster incomes.  Almost two-thirds already have a source of off-farm income, with 22% in outside employment while 19% own another business and 15% hold investments unrelated to agriculture.

Regrets? I have a few.

The voting behaviour of UK farmers in the Brexit referendum mirrored that of the population as a whole, but quite a few are now regretting their choice according to a Farmers' Weekly survey of 950 farmers and those in ancillary industries. 

Three-quarters of respondents said that Brexit had been negative for the UK economy and 69 per cent said that it had been very or fairly negative for their own businesses.   If the vote could be held again, there would be an eight per cent swing from leave to remain.   65 per cent said that it made it less likely they would vote Conservative.

Both arable and livestock farmers seemed equally disappointed   Even more negative were those growing vegetables (81 per cent) or keeping pigs  (79 per cent).

A clear majority said that despite pre-Brexit promises of 'a bonfire of red tape' once Britain left the EU, the reverse had been true.   My talks to farmers around the north of England convinced me that some had a very surprising view of the regulations that could be discarded.

The phasing out of the Basic Payment Scheme in England attracted a lot of criticism, it being claimed that farming could not survive without support.    Arguably this shows an industry that had become too reliant on subsidies not tied to outcomes.

Two-thirds of those surveyed thought that the UK was better off when the EU devised policy, ironically a view strongest among those growing non-supported crops such as potatoes, sugar beet and fruit.

New government may row back on farm subsidies

The Truss government is reviewing farm policy and may delay the phase out of the domestic version of the CAP Basic Payment due in 2027.

The NFU has been banging the food security drum, but the Government seems to be more concerned about breaches in the blue wall after two rural constituencies were lost to the Liberal Democrats in by-elections.

The Treasury has always been opposed to the extent of farm subsidies, both because of their cost and the weak relationship with desired policy outcomes.   Delaying their phasing out would cost money, but with the Treasury under new management, fiscal prudence has been effectively abandoned by what is a new Government.

The Government is also reviewing plans to make environmental payments for 'public goods' under the ELMS scheme.  The roll out of this has been slow, but farmers taking part in the pilot were angered by a press report that it could be scrapped.

Conservation groups had already made clear their anger at the threat to environmental rules in the investment zones announced in last Friday's 'mini' budget.  The National Trust commented that scrapping environmental payments would 'squander one of the biggest Brexit opportunities for nature.'

Farmers are also concerned that a reversion to payments based on land area rather than public goods would be more vulnerable to being reversed under a future government.

No final decisions have been taken, but kites are being flown.

Farmers not ready for withdrawal of support

Some 36 per cent of farm income depends on the Basic Payment Scheme, but one in three farmers are yet to start preparing for its withdrawal according to a survey for Farmers Weekly.   79 per cent of farmers have no clear idea how their farm business will survive without it.   Lowland livestock enterprises are particularly reliant on the basic payment.

Just 15 per cent of farmers say they are interested in taking a lump sum to retire from farming.

53 per cent of farm businesses say they have already diversified.   Of these 51 per cent have a renewable energy scheme, including solar panels (76 per cent), biomass boilers (26 per cent), wind power (22 per cent) and anaerobic digestion (7 per cent).

The next most popular diversification is holiday accommodation (24 per cent), followed by offices and workspace (10 per cent), leisure activities (7 per cent) and farm shops, cafés and restaurants (5 per cent).

Farming's brave new world

Defra secretary of state George Eustice has set out government plans for the future of farming after Brexit: https://www.gov.uk/government/speeches/path-to-sustainable-farming

There is a lot of detail to absorb, but the key question is whether farms will be able to stay in profit.

NFU president Minette Batters commented on the agricultural transition roadmap: 'The rate at which direct support reductions will take place, which we understand will not be applied in other parts of the UK, leaves English farmers with significant questions. These payments have been a lifeline for many farmers especially when prices or growing conditions have been volatile and will be very difficult to replace in the first four years of this transition. Can Ministers be sure that new schemes will be available at scale to deliver redirected BPS payments?'

Defra sets out its stall

Defra has provided more details on how direct payments will be phased out in England and how the future Environmental Land Management Scheme will function, although arrangements after 2021 remain unclear: Plans for future greener farming

ELMS will have a three tier entry scheme. As far as the basic payment is concerned, farmers making a claim of more than £150,000 will be subject to a 25 per cent reduction in 2021, while those making a claim of up to £30,000 will be subject to just a five per cent reduction.

I welcome proposals on productivity and research and development. From 2021, new government grants will help farmers to invest in equipment and technology which will help them to increase their productivity and deliver environmental benefits. From 2022, Defra will support research and development projects to help our farming industry benefit from innovation, enabling farmers to produce food more efficiently and sustainably with lower emissions.

As far as smaller investments are concerned, 'Grants will be available for equipment, technology, and small infrastructure investments that will make an immediate difference to farm performance, including investments that help farmers use less inputs, reduce emissions, and cut waste, which will also benefit the environment.' These will be for specific, pre-determined items - in other words the devil is in the detail.

As far as larger investments (sum not specified) are concerned, 'These grants will be for higher-value or more complex investments, with the potential to bring transformational improvements to business performance. Eligible investments could allow for more efficient use of labour, provide opportunities to switch to alternative or more efficient production methods, reduce environmental impact or create opportunities for new business models and alternative ways of selling produce directly to customers.' These will be for priority outcomes, including the use of automation and robotics.

No profit in dairy sector before basic payments

According to consultants Andersons dairy budgets for the 2020/21 milk year show no profit before BPS payments: Dairy budgets

The main factor is a lower milk price, estimated to be down by 0.8p a litre. The firm sees the next decade as one of profound change as subsidies are withdrawn. Milk producers will find accessing the ELMS scheme more challenging than other sectors. Farmers in the sector are least likely to have joined existing stewardship schemes.

Dairy farming in the traditional milk production region of Wisconsin in the United States is also facing big challenges, with farms either going industrial or going bust. The rising cost of labour is one factor: Business has gone sour in America's dairy capital

UK consumers drink just half the milk they did in 1974. Research by market analyst Kantar found that the decline can be linked to reduced consumption of foods such as tea, coffee and breakfast cereals. The uptake of plant-based alternatives is also contributing, although these products still account for 4.6 per cent of the volume of all milk sold in the UK.

Level funding for farmers

HM Treasury has stated that level funding for farmers in the form of direct payments will be made available in 2020: Support confirmed

Level funding does mean a decline in real terms because of inflation, currently running (CPI) at fractionally over 3 per cent. The basket of goods used by farmers as inputs may differ from the CPI rate and indeed from one farm to another.

The NFU welcomed the statement, but remains concerned about future trade policy and imports: NFU response

Quite what form the new ELMS payments will take remains to be seen. I have heard that at least three versions have been discussed within Defra. The key is to develop a scheme that provides genuine incentives for farmers to engage in environmentally friendly behaviour whilst giving a fair deal for taxpayers.

I am still not convinced that sufficient attention is being paid to climate change, although that was a major deficiency of the CAP where attempts to introduce a climate change pillar were (in my view) defeated by the agri-industry lobby.

Blueprint for Britain's farming future

The Royal Society of Arts Food, Farming and Countryside Commission has published a report on the future of agriculture in the UK: Our Future in the Land

The report argues, 'Decades of policy to produce ever cheaper food has created perverse and detrimental consequences. Farm gate prices are low; and whilst food in the supermarkets is getting cheaper, the true cost of that policy is simply passed off elsewhere in society – in a degraded environment, spiraling ill-health and impoverished high streets. The UK has the third cheapest food amongst developed countries, but the highest food insecurity in Europe.'

Among the recommendations are:

• 1. Designing and implementing a ten-year transition plan for sustainable, agroecological farming by 2030
• 2. Backing innovation by farmers to unleash a fourth agricultural revolution
• 3. Making sure every farmer can get trusted, independent advice by training a cadre of peer mentors and farmer support networks
• 4. Boosting cooperation and collaboration by extending support for Producer Organisations to all sectors
• 5. Establishing a National Agroecology Development Bank to accelerate a fair and sustainable transition.

Direct payments to farmers would be retained at one-third of current value. In addition, farmers would be incentivised to follow agroecological principles including planting trees, creating and restoring habitat corridors and natural grassland restoration. The report does not contain any recommendations of the value of these payments for delivering environmental measures. This is always the difficulty with such proposals.

Agriculture and the current political landscape

My presentation to the Geo-Agriculture conference in Beverley this week discussed the political landscape as it related to agriculture. I got it wrong in the preceding year when I forecast an eleventh hour fudged compromise given that EU decision-making was characterised by last minute deals. This would have left many issues unresolved that would have to be addressed during the transition or implementation period, but during that period economic relationships would continue much as before.

Why did I make a false prediction?:

• An exit decision for a member state could not be fudged like a CAP reform
• The member states showed more solidarity than I had anticipated
• MPs were more intransigent than I had thought likely

The Agriculture Bill has been the victim of Brexit chaos. It finished its progress through committee in November 2018 and continues to wait for its Report Stage debate to be scheduled, now over 200 days since it was debated The NFU would like to see more emphasis on food production and food security, help for farmers to better manage risk and periods of poor market returns.

It is important to bear in mind that farm businesses vary considerably and this affects their ability to respond to Brexit. Some of the variations include climate/terrain; soil type; ownership structure: owned, tenanted, mixed (increasingly common).

Resilience enables farmers to withstand unexpected shocks and changing conditions. Farmers are being urged to unite, build resilience and look after one another, but there is a limited record of cooperation in the UK. It can lead to an emphasis on survival rather than adjustment and adaptation.

Farms are reliant on EU subsidies

16 per cent of farm business make a loss, but that is forecast to increase to 42 per cent as basic payments are phased out. Direct payments account for 61 per cent of farm net profits. An accountant who represents 100 agricultural businesses in the Highlands estimates just one would be profitable without subsidy. Average Highland estate receives two-thirds of its income from EU subsidies.

Some farms and sectors are more challenging than others, but enterprises can be well managed in difficult conditions. AHDB/Andersons study found that top-performing farms are generating £50,000 more, on average, than those in the bottom 25 per cent.

Top beef and sheep farms in less favourable areas (LFA) yielded an income of £45,200 a year compared with -£1,600 in the bottom 25 per cent. On lowland grazing systems, the difference between top and bottom was £55,100. The study states, ‘Almost all the determinants of success are down to the individual; the decisions made on the farm and how they are implemented.'

Brexit

Farmers Weekly sentiment tracker for April shows a continuing upturn in how farmers view their prospects (+3.18). There has been a slight improvement in commodity prices. Even though more see input prices rising faster than outputs, the gap is narrowing. There has been a slight improvement in how they think Brexit will affect their business. Overall producers remain more negative than positive about Brexit with half thinking it will be bad for their businesses, compared with 21 per cent who think it will be positive. Index (1.0 negative, 5.0 positive) has increased from 2.51 at the beginning of the year to 2.66.

It is difficult to get good data on how farmers voted in the referendum or what they think now. The Knight Frank rural sentiment survey (N just 200) shows they are deeply divided (as is the country). 26 per cent want a hard ‘no deal’ Brexit; 25 per cent want a second referendum leading to ‘remain’ (would it?); 22 per cent the EU/May deal; 16 per cent soft Brexit customs union;10 per cent other; 2 per cent, 2nd referendum leading to leave.

How are farmers preparing for Brexit? 51 per cent said they were making not making any preparations, which may not be irrational given the prevalent uncertainty. Top changes: Diversification; more land into conservation; make existing business more efficient; plant more trees; buy/sell land (the 'bigger is better' orthodoxy is being challenged, although there are still economies of scale).

As far as diversification is concerned, most low hanging fruit has been taken. It does require different business skills and capital costs can be high. Popular options include farm contracting; tourism; on farm niche food production (ice cream; yoghurt; cheese); farm shops; storage facilities or office space; leisure activities; eventually the farm can be just a context for the business.

We should not forget that the CAP has been a dysfunctional policy. It was not designed with UK agriculture in mind or contemporary problems. Basic payments have been only tenuously linked to outcomes. Policy instruments were poorly designed and often impact farm businesses without securing desired outcomes. It encouraged intensification of agriculture.

New policies in England

In England current land-based payments to farmers will be phased out over a seven-year period starting in 2021. They will be succeeded by public funding for public goods at the core of which will be the Environmental Land Management System (ELMS). Under the new system, farmers and land managers can enter into a contractual agreement with the government to produce environmental land management plans providing outcomes, for which they will be paid.

The National Audit Office has issued a highly critical report. Farmers will have little time to prepare for participation in a three year national pilot of ELMS, which will run from 2021 to 2024, because Defra is not planning to set out the environmental outcomes it will pay for or how much it will pay until April 2020. This is less than a year before the start of the pilot and when their payments will start to be reduced. Defra has consulted with farmers as it designs the Programme, but it has not provided the necessary guidance to enable farmers to plan how to adapt their businesses or how to work collaboratively with other farmers.

Defra has recently scaled back its ambitions for the level of take-up of ELMS during the first year of the three-year national pilot, from 5,000 farmers to 1,250, but is seeking to increase participation as the pilot progresses. It is not clear whether this lower number in the first year of the pilot will provide sufficiently robust evidence across the range of farm types and locations to inform further development of the Programme. This means that Defra only has two years to test how well ELMS will work at scale.

What the NAO is saying in coded language is that preparation is poor and it could blow up in Defra's face. Defra currently has no plans to test its assumptions about the level of take-up of the new system. If take-up is low, Defra will need to find alternative ways to achieve environmental benefits. Farmers that do not participate may leave farming or replace direct payment income by adopting more intensive farming methods that could damage the environment.

Trade effects

Under a no deal scenario, tariffs would apply to UK food exports (I do not think GATT 24 applies). Fresh lamb carcase and barley exports are likely to feel the largest impact given that the UK is a net exporter The sector facing the most challenges in a ‘no deal’ scenario is sheep meat. Tariffs under a ‘no deal’ Brexit would make exports uncompetitive, the sector is very reliant on exports to the EU.

There is concern about terms of trade agreements with third countries (the focus is often on the US, but there are problems elsewhere). Agriculture may be sacrificed for gains in other areas of the economy. There is concern about price competition from countries with lower standards, e.g., on animal welfare. But some countries are simply more price competitive.

The AHDB suggests that critical to doing things better on farms is to minimise overhead costs. Higher outputs account for 10-30 per cent of higher profits in top quartile farm businesses, but lower costs contribute 65-95 per cent. Farmers should set goals and budgets (business plan); benchmark; improve people management; be self-critical and use skills effectively.

It is difficult to say what the future holds. A no deal Brexit would be damaging. Perhaps Boris could deliver a compromise that he could get past the hard line Brexiteers, but the chances aren't good.

As far as the EU are concerned, the negotiated deal is one between the EU and the UK and it won’t be re-opened. Why would a different PM be able to persuade them otherwise? They will not abandon a small peripheral member state like Ireland. They don’t want to encourage others to exit.

A no deal Brexit is not in the EU’s interests, particularly Germany. There is scope for further negotiation on the political arrangements. It might be possible to offer a timetable on the backstop and alternative arrangements. The changing dynamics of the Franco-German relationship is the biggest uncertainty.

In questions, I was asked if I would advise sheep farmers to bail out now, given that production decisions need to be taken well in advance. My advice on balance was to hang in there.

I was asked how the attitude of banks and other finance providers might change. This is something I have researched in the past. The attraction of agriculture for lending is that it has been a stable sector with asset security. This will change to some extent after Brexit, but banks have considerable understanding of the sector and will be able to make informed decisions about future lending.

Warning about government's new farm policy

The National Audit Office has issued a report on the government's new farming policy. Gareth Davies, the head of the NAO comments, 'Defra is moving forward with a policy which is a radical departure from the CAP farm payment regime we have known for forty years. Because it is such a big change, from acreage-based direct payments to an environmental stewardship scheme, we have looked at Defra’s approach to implementing its policy at an early stage.'

'We urge Defra to give itself time and space to fully test and evaluate the policy, and for comprehensive planning, to avoid any unintended consequences for the farming community, our environment or ability to feed ourselves.'

The report notes that 'The government’s new farming policy will be a significant change for farmers in England and the Department for Environment, Food & Rural Affairs (Defra) has a lot to do to prepare for its implementation at a time when its resources are already under immense pressure from its preparations for EU Exit. The National Audit Office warns that government must approach its roll-out carefully to ensure farmers can prepare in the way they need to.'

'The UK farming industry provides over half of the food the UK eats, employs 474,000 people and comprises 217,000 farms. While a member of the EU, the UK takes part in the Common Agricultural Policy (CAP). Under CAP, farmers in England received €2.4 billion in subsidies in 2017. To prepare for exiting the EU, Defra is developing the Future Farming and Countryside Programme (the Programme) to implement a new agricultural policy and regulatory arrangements to replace CAP.'

'The key part of this new programme is the Environmental Land Management System (ELMS). Defra hopes to have 82,500 farmers enrolled on ELMS by 2028. Under CAP, most payments to farmers are based on the amount of land they farm. These direct payments will be gradually phased out over a seven-year period starting in 2021. Under ELMS, farmers will be encouraged to enter into a contract with the government to produce environmental land management plans, and be paid for the environmental outcomes they deliver, often working in collaboration with other farmers. The policy represents a major shift away from traditional farming towards a system that pays public money primarily for delivering environmental benefits.'

'Farmers will have little time to prepare for participation in a three year national pilot of ELMS, which will run from 2021 to 2024, because Defra is not planning to set out the environmental outcomes it will pay for or how much it will pay until April 2020. This is less than a year before the start of the pilot and when their payments will start to be reduced. Defra has consulted with farmers as it designs the Programme, but it has not provided the necessary guidance to enable farmers to plan how to adapt their businesses or how to work collaboratively with other farmers.'

'Defra has recently scaled back its ambitions for the level of take-up of ELMS during the first year of the three-year national pilot, from 5,000 farmers to 1,250, but is seeking to increase participation as the pilot progresses. It is not clear whether this lower number in the first year of the pilot will provide sufficiently robust evidence across the range of farm types and locations to inform further development of the Programme. This means that Defra only has two years to test how well ELMS will work at scale.'

'Defra currently has no plans to test its assumptions about the level of take-up of the new system. If take-up is low, Defra will need to find alternative ways to achieve environmental benefits. Farmers that do not participate may leave farming or replace direct payment income by adopting more intensive farming methods that could damage the environment.'

'The success of the Programme depends on government assumptions about how the farming community will respond to the new policy. Direct payments from the EU currently account for an average of 61% of farms’ net profit. Without these, 42% of farms would have made a loss between March 2014 and February 2017. The Department expects the withdrawal of direct payments to be offset by improved business approaches, new entrants to the sector taking over farms that have ceased to be viable, and productivity gains across the sector. However, there is limited evidence that many farms are equipped to increase their productivity.'

'Defra is starting to specify its digital requirements for the Programme before key decisions have been made about how the new policy will work in practice, increasing the risk that it will need to make significant technology changes late in the Programme. For example, Defra has not yet decided which environmental outcomes will be rewarded or how much farmers will be paid.'

'The NAO recommends that Defra gets a plan in place with realistic timescales, that has sufficient flexibility to allow changes to be made as more is learned about how farmers react to the new farming policy. It should extend participation in its pilots to a wider range of farmers and land managers to test their willingness and ability to participate in ELMS, and determine the level of ELMS take-up it needs to justify investment in its design and development.'