A clean sheet for the farming industry?
The dramatic turn of events at the end of last week has left the UK in a position few, even most “remain” voters, expected.
The immediate aftermath was dominated by the shockwave through the financial markets as traders who had placed bets the wrong way needed to act hastily to unravel their positions leading to large swings in the currency and equities markets.
These movements have given rise to some immediate opportunities for farming businesses as commodity prices have risen slightly on the back of currency movements although there will clearly be a reaction in the markets for imported inputs. It is rather ironic to note that, if the sterling / euro exchange rate remains at today’s level (£1 = €1.20), the 2016 BPS payments will be 14% higher than 2015.
The Agricultural Horizon
In the longer term, there will clearly be challenges, but we also see opportunities in some sectors.
The general direction of agricultural support seems to be similar whether the UK is in or out of the EU. It is likely, under both scenarios that direct, pillar 1 support will continue to decline in value and that support for the environment, rural development and other pillar 2 issues will continue or possibly increase. For a UK controlled policy, outside the EU, we expect the transition to be rather faster.
This is likely to result in a continued need for greater efficiencies and subsequent restructuring across various sectors of our industry. This will provide opportunities for some to grow stronger, more resilient businesses, but is likely to be a challenge for new entrants to create their own businesses.
Some domestic production which traditionally faces competition from European imports may find internal market conditions improve, depending on the trade deals that are done which may also lead to opportunities for growth.
As far as the land market is concerned, the long-term drivers for investing in farmland are rooted in constant, macro trends (specifically feeding an exponentially growing global population), which should override the short-term consequences of economic uncertainty that this decision has inevitably triggered.
Farmland in the UK remains a very scarce asset, traded in a notoriously illiquid marketplace; a market which does not generally see swift crashes (and the recent 'spike' has taken the best part of a decade to manifest itself). Good quality, productive land remains the ideal 'flight to safety' investment vehicle (with added tax benefits), and in light of the volatility other markets are likely to see, we would suggest this attraction is likely to sustain.
There will be inevitable concern, uncertainty (and probably inertia) in the coming days and weeks but the longer term reasons for investment in commercial farmland remain unaltered and this is something that both sellers and investors should take comfort from.
A new British Agricultural Policy?
After the initial market reactions, UK politics is now preoccupied by leadership issues and a resurrection of the devolution debate but, quite quickly, a reformed UK government will need to embark on negotiations with the EU regarding the exit terms. In a rural context, they will also now need to put in place plans for establishing a new British Agricultural Policy. So what should this look like?
One of the many difficulties in negotiating the form of the European Common Agricultural Policy has been that no-one can really agree what it is for. What are the objectives of the common policy? Despite the seemingly more straightforward domestic debate, it is likely this question will still be the subject of some heated discussion. As a consequence, the UK government will need to use this opportunity to create a cohesive overarching policy for resource allocation and avoid the temptation to break it up into many pieces to address individual and sometimes competing, concerns.
Government will also need to avoid a dash for policy by addressing the detail before understanding and agreeing the broad goals. So, before embarking on yet another discussion about the “three crop rule” we should give some thought to the overriding objectives by considering the objectives previously stated for the CAP:
1. Maintaining Farming Incomes
The financial support provided by the CAP has accounted for an average of 75% of Total Farm Incomes over the last nine or ten years and clearly has a major impact on livelihoods. The policy has been linked, in some parts of the EU, to the maintenance of employment on farms and, although this link has not been established in the UK, there needs to be a recognition of the impact successful farming businesses have on rural employment.
2. Dealing with income volatility
Volatile incomes arise predominately as a result of commodity price variation and weather. The Basic Payment provides a base line of income as a slightly crude method for dealing with income volatility. Risk management must become a more integral part of farming business mentality, but we need to consider ways in which the most vulnerable may be assisted in protecting themselves from severe events.
3. Maintaining production systems in remote and marginal areas
Parts of the UK are highly dependent on financial support and payment for public services. This has been a key driver for elements of the CAP and will remain very relevant in parts of the UK.
4. Innovation and Competitiveness
In the history of the CAP, this has been a relatively recent policy demand but has important public and industry benefits. The recent drive for better targeted research and development and applied technology should continue to be at the forefront of a new policy driven by a properly managed partnership between the science and industry communities.
5. Support for the environment
In policy jargon this is about addressing “market failures” and, in reality means encouraging farmers to do those things for public benefit that would otherwise be prohibitively expensive for an individual business. There is a particular concern among the environmental groups that a policy outside the EU would receive lower priority for resources. However, the government do now have an opportunity to create better targeted measures and to establish a balance between the “carrot” of payments for positive environmental management and the “stick” of regulation.
Above all, it is important for our industry to begin this conversation early. There will be demands from all corners of the economy, both public and private, for increased resources and now is the time for us to make the case with a positive, coherent and collective voice in order to shape our industry’s ambitions for the next 43 years.
Bidwells will remain at the forefront of this discussion, guiding our clients through developments. If you would like to discuss how this might affect your own business please call Jonathan Armitage.