Tag Archive: agriculture

Public Goods: How are you going to future proof your farming business?

We have all now had an opportunity to read and process Michael Gove’s proposal for the future of agricultural support payments, public money for public goods… James Thompson, Graduate Surveyor at George F. White, discusses what it all actually means and the decisions that farmers must make to maintain profitability.

Firstly, what are public goods?

By definition, a public good is a ‘non-excludable and non-competitive’ good. A common example, used outside of agriculture, is street lighting. Having street lighting is not competitive nor is it excludable to a single consumer; when I consume that good, it doesn’t stop anyone else from consuming it at the same time.

Public Goods

DEFRA will be looking to fund the public goods under the following categories:

  1. Enhancing the environment
  2. Farming in remote areas and rural resilience
  3. Public access to countryside
  4. Improving the productivity and competitiveness of farming
  5. Animal and plant health and animal welfare

The proposed Agricultural Bill, which will shape the UK’s future Agricultural Policy, indicates that, the current Basic Payment Scheme (BPS) will be phased out and replaced by the above funding streams. It is therefore imperative that, individual businesses establish how exposed they are to the loss of the farm subsidies. As an example, according to The Farm Business Survey, the average farming business in the North East makes £71/ac profit.  This is includes £97/ac support from BPS and Ag Environmental Schemes. Farming business need to build business resilience over the transition period, reducing their reliance on support payments and understanding how best to access “public money for public goods”.

Exploring the options

Based on the five categories of funding for public goods, there is a decision to me made; a focus on delivering actual public goods (categories one to three) or in improving efficiency and competitiveness of agri-products (categories three and four).

Firstly, let’s focus delivering actual public goods. We state that these are ‘actual’ public goods as they are truly non excludable or competitive; we all enjoy the British countryside, whether that be breathing in the fresh air or enjoying family walks and activities in the outdoors.

It is likely that the replacement of current environmental schemes could be highly geared towards protecting soil, improving water quality or even the management of carbon; this could result in more productive land being withdrawn from food production enterprises. It is also entirely possible that funding for open access to the countryside (unavailable in previous environmental schemes) could be reinstated into the new Environmental Land Management schemes (ELM’s) and could be lucrative.

Secondly, you may choose to focus on improving efficiency and competitiveness, for example, improving animal health and welfare or reducing nitrogen and chemical use. In addition to this, with an aim to increase competitiveness of farm businesses, the government has already committed £30 million to the Countryside Productivity Small Grants scheme with emphasis to increase opportunities that high tech and precision farming equipment can deliver. We expect the next round of this scheme to be launched next spring and it is suggested a number of new options will be available to farmers.

There are crucial decisions to be made, but that will be entirely dependent on your business health and its financial exposure to current support payment, resulting in the magnitude of change required to provide a resilient future income to you and your family. That being said, and having conducted research on this topic, many farm businesses in the North East and Yorkshire believe that the best way to safeguard against a decrease in subsidy payments is to improve business efficiency, learn from top performing farms and explore new income streams including diversification.

I will leave you with a question to ponder: Having defined and discussed public goods – does food security constitute as a public good? Consequently, should food production be supported by government funding?

If you would like to understand in more detail how exposed your farming business is to the ceasing of direct subsidy’s payments, then contact your local Farm Consultanct:

Farmers Are Too Reliant on Subsidies as Brexit Looms

With just over six months to go until we officially leave the European Union (EU), Simon Britton, Partner at George F. White, highlighted just how reliant farmers across the North are on EU subsidy payments.

Farmers

Our decision to leave the EU has exposed the farming industry’s over dependence on subsidies. According to the Farm Business Income (FBI) Survey, the average profit for a farming business in Yorkshire & Humber over the last 5 years was £103 per acre, farmers received £73 per acre, over the same period, in subsidies. In the North East, farm profits over the last 5 years have averaged £57 per acre, with farmers receiving £80 per acre from subsidies. Many farming businesses are dependent on subsidy; however, it is not clear that these businesses understand to what extent their dependence relies on EU payments.

To highlight these issues, George F. White hosted a panel debate at the Great Yorkshire Show. The purpose of the debate, in which key speakers, including Geoff Hall, Regional Director at Lloyds Bank, John Lund, a livestock farmer, Tom Bayston, an arable farmer and owner of Park Lodge Shooting School, as well Miles Crossley and Simon Britton from George F. White, was to discuss how farmers can prepare for the long-lasting changes Brexit will create, focusing on changes to subsidy, increased commodity and currency volatility and shortages of labour.

Mr George Eustice, the Minister of State for Agriculture, Fisheries and Food recently described his vision for post Brexit Agricultural Policy within the UK as ‘a change in mind set for farmers.’ The Minister said that he saw new policy as ‘rewarding and incentivising farmers for what they do and not subsidising them for income lost’. He indicated that  the government will seek to support farmers, not based on the amount of land farmers own, but to reward them for helping the environment, water quality and to changes in husbandry, ultimately making more productive working practices.

DEFRA has set out its thoughts on a new Environmental Land Management Scheme (ELM) where farms and landowners will effectively quote a ‘price’ for the work based on a set ‘price list’. It is understood that those plans offering the best in value to the tax payer will be accepted.

Although we understand that farm subsidies are protected until 2022, my advice to farmers would be to utilise this time frame in order to fundamentally understand their business by preparing management accounts which will highlight farm income streams and to what degree their businesses are reliant on grants and subsidies. We can see from the previously mentioned statistics that the majority of farms in the North East and Yorkshire & Humber are hugely reliant on farm subsidy support. These farmers need to make changes to de-risk their businesses and ultimately future proof them, so they can operate with reduced funding support.

If you would like to start understanding and de-risking your business and its reliance on farm subsidies please contact Simon Britton simonbritton@georgefwhite.co.uk or 07866 721146.

Getting the Right Value

We sat down with Andrew Entwistle, partner at George F. White, to discuss the importance of getting a correct valuation on an asset.

I am firm believer that any business or individual cannot make a rational or informed decision without knowing the value of an asset, or the cost consequences of a particular action. In fact, understanding value is the under pinning basis on which professionals advise their clients on a particular course of action.

Value

We have seen, over the last six years, the introduction of Automated Valuation Models (AVMs), particularly into the residential sector. Will we ever see AVM’s being used to value agricultural assets and farmland? I doubt such models could ever achieve even a modest degree of accuracy for farmland. Simply put, rural assets are too diverse for a computer to handle, particularly in the market that we are in. With low supply, demand can be high yet market conditions are showing a distinct patchiness with hot spots where land prices greatly exceed expectations, contrasting with similar quality land in low demand areas struggling to sell at below average guide prices.

I have the perception that most people consider valuations are only needed for either selling or when a bank wishes to take some security for a mortgage. There are many other good reasons to get a written valuation which are often overlooked, or simply guessed at.

The frequent scenario I come across is the case when a farmer dies. In the course of obtaining probate estimates of value are submitted, particularly in the case when Agricultural Property Relief or Business Property Relief applies and there is no inheritance tax to pay. A death forms an important tax point on the value of a farm and subsequently used as a base for future events such as calculating capital gains tax. More often than not, agricultural value is underestimated or simply not recorded.

Dealing with capital gains tax cases, another important relief that is often overlooked in Principle Private Residence Relief, where a main dwelling house can be free of Capital Gains Tax including up to 0.5 Ha of gardens, grounds, and outbuildings. A formal valuation at this point should have some analysis which attaches value to the garden and grounds from the rest of the farm that can minimise a Capital Gains Tax bill.

Another misunderstood concept I come across is Hope Value, where clients attach large values to land on the basis it will developed in the future. Market Value is the standard definition that is used for bank security purposes and reflects the price that the market will pay for an asset at a specific point in time. Research carried out by George F. White shows that developers are unlikely to pay significant sums over existing use value if the land has not got planning consent. A client will view the value of their land with Hope Value differently, taking into the “worth” of the development opportunity in the future them. The “worth” and “Market Value” of land is often significantly different.

Different valuation purposes often have different bases of value, for example tax valuations are have subtlety different valuation base to security valuations that in certain circumstances can give rise to very different values. In the case of matrimonial valuations Market value may not be an appropriate as it would not reflect the existence of a special purchaser.

So will a professional Valuer ever be replaced by an Automated Valuation Model? Only if an AVM can talk to clients and understand their objectives, decide the correct valuation base to use, and work as a team with an accountant and solicitor. I can’t see that happening in my lifetime.

The importance of cash flow for business resilience

Louis Fell, Partner at George F. White, discusses the importance of cash flow for business resilience.

“Across Yorkshire, we have such a diverse range of rural businesses, many of which have developed on the back of their particular soil type or the land and/or property asset available to them. Funding is often key in order to grow and expand, and a sound understanding of the business and management is a fundamental factor when looking at those successful rural businesses.

Cash flow

Agriculture is generally heavily dependent on working capital; sowing a grain to sale could be upwards of 12 months and it’s not surprising to see OSR sown before harvesting the previous year’s OSR crop for instance. Take suckler cows, the time and cost involved in buying a heifer and taking her through to calving, and then selling in the fat market, is extremely long and high cost. You have to be certain that the return warrants such risk and capital outlay.

Those businesses that are successful are able to manage their cash flow accordingly. They know what working capital they need and what funds will be available in the future months and years in order to fund further expansion and growth. I’m not saying that everyone needs cash flows, some just don’t want to, but for me, they are a great tool in understanding what funds are available in the future. They help you understand, at an early stage, the implications of any blips (say a price drop of 10 per cent or a delay in BPS by four months), and can help you make informed decisions on expansion and growth. There are many instances where people have taken land under FBT’s but have simply run out of cash to farm it, forcing major restructuring.

Cash flows are also an important tool in bringing the banks along with you. Bankers are generally happy when they see there is management of cash flow; good accounts are also important, but having a handle on the flow of funds in the future is a key to making that relationship work, and in most circumstances, enable you to access more funding.

Another key message at present from George F. White is to make use of EU funding whilst it’s still around. You may have seen a sudden spate of grants being made available such as, the new Countryside Productivity Grant, Forestry Grants, LEADER, Rural Growth Programme etc. all of which are seeking to get the money spent before it disappears. They are a great way to help push forward a project or to grow and expand your business and provide help with the capital cost; yes, sometimes the paperwork and application process is a hassle, but if it contributes 40 per cent towards the capital and gets it off the ground it’s definitely worth the effort and time delay. We advise to forward plan, as firstly the process can take up to six months and secondly to work out the working capital requirement.”

For more information regarding cash flows and business management, call Louis Fell on 07966 924345 or louisfell@georgefwhite.co.uk.

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