Another change to subsidies ahead
By: Justin Wright Date: 20 August 2017
It has been a busy few weeks for the farming community. Harvest is in full swing and the general feeling is that yields will be in the ‘average to just above average’ range. There has been plenty of press coverage about the advent of ‘mega farms’ and cheap food and, of course, the Environment Secretary’s speech on subsidies.
That speech clearly had a hugely political message, and some might say a ‘popularist’ outlook. Leaders in the sector have come out in force to defend our industry and highlight the huge amount of work already being done for the environment, as well as helping to feed the nation - it is hard to deny that the vast majority of UK farmers already ‘earn’ those subsidies.
Being an agricultural accountant, I naturally start looking further ahead, at what this could mean for our local farmers.
Many of my clients already invest significantly in various environmental schemes to protect the landscape, wildlife and natural beauty of the region. Anecdotally, it could be said that UK farmers already go beyond the requirements set by our European cousins, not all of whom meet their own obligations. Mr Gove is not saying that the overall budget for British farmers of £3.2 bn is going to reduce but, rather that more hoops (which will mean a greater cost) have to be jumped through. There has been a commitment from the government that support will remain at similar levels until 2022, which provides some element of certainty for the next 5 years at least. Farmers’ leaders want the current £3bn to be spent on the environment, more infrastructure to develop farm businesses and, promoting British food - all excellent aims in their own right. If farming businesses are well placed financially and have the necessary assets and aptitude, it could be argued that developing the agri-food supply chain may make the industry more efficient and profitable whilst protecting the core values of the sector.
However, I do have clients who do not fit the profile, they do not have the necessary resources to meet the additional demands that may be placed on them. There are many farms of 100-200 acres in the region which are reliant on subsidies to make ends meet. They will grow wheat, barley and a break crop each year, perhaps be a two generation business with ageing kit and will not be able to afford further direct costs to meet additional obligations. For those businesses, there will be perhaps greater stress in obtaining access to the crucial subsidies they need to sustain the family farm.
And what will happen after 2022? I suspect (no guarantee!) that subsidies will continue in some form, albeit at reducing levels. It is likely that, as the new regime is introduced and new obligations imposed, farms will have to make ‘enforced’ strategic decisions to improve productivity and resilience to risk and volatility. With this new business model, farms will hopefully become more competitive and profitable, with subsidies less crucial to the bottom line… well that’s the idea.
Without subsidies, in the short/medium term, many farms would fail and land prices could potentially crash. We will see a greater emphasis on diversification, opening up new markets and income streams to manage the risks in the core business. There will be a greater desire to review asset efficiency and productivity, asking questions such as: Is the kit paying its way? Is that vacant barn better used elsewhere in the business? Can labour be multi-skilled? Can we do things slightly differently than before?
Undoubtedly, some uncertainty lies ahead and, without the finer detail, it is difficult to put numbers to the expected effect on the average farmer. However, I have crunched some numbers on the 2015 harvest as an example and, without subsidies and diversification income, many farms show a significant loss on normal farming activities. Indications are that the 2016 and 2017 harvest results will show an upward profitability curve, mainly due to BPS income increasing on sterling fluctuations and the increase in crop prices but, the central message is similar.
Farming is going through another period of change and, the hope is that, with change comes opportunity… rather than another case of ‘top-down’ imposition on our region’s farmers.