Wednesday 11th of November saw arguably one of the most significant pieces of legislation pass into law that will shape the future of agricultural policy for the next 25 years. The Agriculture Bill has taken nearly a year to progress through Parliament to emerge in its current form. This new legislation aims to reward farmers for providing “public goods” including better air and water quality, enhancing wildlife, and improving soils.
Measures to reduce the effect of climate change will also be a key part of future agricultural policy. Alongside this, the legislation indicates that farmers will be encouraged to boost productivity and become more efficient with developing paths for retiring farmers to leave as well as new entrants to enter the industry. Over the last couple of years, we have read about the Bill and its aims in many articles like this, however, we now must ask the question what does this mean for farmers and what can they do to prepare for the changes to come?
We have known for some time that direct payments will start to reduce from the 2021 Basic Payment Scheme (BPS) year with the last payment being received in 2017. The average farmer relies heavily on these payments to maintain their profitability and in some cases is the difference between a profitable business and a loss-making one. This will be worrying for many farmers however during this transitional period farmers will be able to apply for alternative measures of support to improve productivity and they will have access to the new Environmental Land Management scheme that will reward farmers for what they do.
As we only have the framework at present it will be some time to assess the financial impact of the new measures against the clear removal of the BPS monies. It is encouraging to see that existing Rural Development Scheme agreements like the Environmental and Countryside Stewardship schemes will be supported, however, it’s disappointing that there is still a lack of detail on how lump sum payments for retiring farmers might work. There is also a lot of work to be done to improve transparency and fairness in the supply chain, but the Act does grant powers to improve this area.
Following successful lobbying, food security is now included alongside measures for trade however it is important to note that the Government did not commit to ensuring that future trade agreements included an obligation for imports to meet health, welfare, and environmental standards which may further fuel the national debate on this subject. More detail is also needed on landlord and tenant issues as much of what was originally proposed did not find its way into the Act. The Act also enables the Government to intervene in markets and bring in new marketing standards, carcass classification, and traceability. As expected, there is a lot of questions still to answer and undoubtedly the devil will be in the detail, however, we now know the direction of travel and farmers can start planning for change.
I am often asked by farmers “what should I be doing to protect my business from the changes on the horizon”? Having a plan is vital. Start by sitting down and thinking about your short, medium, and long-term business objectives. Understanding where you’ve been is as important as planning for where you are going. Analyse your past financial performance over the last few years and benchmark that performance against similar farms. This will help to identify where improvements can be made. You can’t just look back though; you must also look forward by preparing an annual farm budget and cash flow forecast so you can successfully plan ahead. Forecast budgeting is a vital tool in becoming more resilient to change and being able and confident in making the right decisions to achieve the objectives you have set yourself. An important part of any business appraisal is to also look at your assets and how to use them to their optimum. Assets include for example land, buildings, and machinery but don’t forget they also include you and the team around you.
There will be without doubt opportunities for farmers on the back of this new legislation, however, there is a risk that farmers will not start planning early enough to seize them. There is also widespread concern within the industry that the removal of area-based direct payments will result in the majority of farms not being able to cover their production costs and in particular within the grazing livestock sector.
Many farmers use this time of year to reflect on the past twelve months and plan for the year ahead, but they must also use this time to consider how this landmark legislation will impact their businesses for the years to come. Start planning for change now.
Talk to our Farm team today, call us on 0333 920 2220
With the transition to a new agricultural subsidy regime about to get underway, farmers are being urged not to ‘kick the can down the road’ when facing up to the fundamental changes it will usher in.
The current Basic Payment Scheme (BPS) is supported by EU funding and will be phased out by the end of 2027, to be replaced by new policies including the Environmental Land Management Scheme (ELMS). Annual direct BPS payments will start to taper off from next year. However, farm business consultants at George F. White are concerned many farmers are failing to comprehend the scale of the changes and the need to begin preparing their businesses now in order to be ready in time.
“The loss of direct support payments will represent the biggest change in farm finances for almost a century,” said Simon Britton, an equity partner at George F. White.
“It has been on the horizon for the past three years but there is an understandable tendency among farmers to concentrate on the day-to-day jobs, rather than looking ahead, and we fear many have only given this issue a fleeting glance.
“However, the time to plan for 2028 is now: leaving it too late could mean many businesses might be in serious trouble.” He added that because BPS is a direct payment, removing it from the top line of a farm’s accounts also takes the same figure straight from the bottom line, resulting in an immediate hit to profitability with no means of cushioning the effect.
This prognosis may sound a gloomy one, yet both Simon and fellow equity partner Elliot Taylor also believe the new system will provide opportunities for farmers prepared to look for them.
“On average, farm profit for Yorkshire and the Humber in 2018–19 comprised 54 percent BPS money, six percent agri-environment payments, 13 percent from diversification and 27 percent from the actual profit on their agricultural activities,” said Elliot.
“This leaves them very exposed to the loss of direct payments but, by playing to their strengths, by looking at cost savings and productivity enhancements, we believe they can come through this transition and be in a stronger position to take advantage of opportunities provided by the new system.”
George F. White is urging farmers to undertake a detailed business review in order to identify strengths and weaknesses in their farm’s operation, point out threats and opportunities, and help them prepare for the transition to 2028 and beyond.
“The review is all about how best to use their assets,” said Elliot. “We help farmers look at their land, buildings, labour, and importantly, themselves.
“We focus on how to make cumulative marginal gains across their operation and how to identify and exploit new income streams. “Farmers are resilient, they are accustomed to change, but they need support to move forward, which is what we are offering.”
ELMS payments should not be seen as a direct replacement for BPS income, George F. White is at pains to emphasise, and, furthermore, BPS payments will be reduced at a predetermined rate regardless of when a farm business opts to receive ELMS money.
Consequently, they argue, farmers need to start planning over a longer timescale, while banks and landlords are already starting to become more cautious and to take a longer view of prospects.
“Look at things over a longer period,” is Elliot’s advice. “Funding organisations increasingly want to see a three or four-year budget, so farmers need to make themselves ‘bank ready’ and have this information at their fingertips so they can react quickly when an opportunity arises. “If farmers stand still, don’t plan and don’t budget, the likelihood is they will find themselves going backwards.”
“Farmers know their business well,” said Simon. “Change is not as difficult as it might seem, but it is making the decision to take that first step which is often the hardest part of it. We want to help them take that step. “Although we believe farmers need to get out of their comfort zone and need to do it quickly, we also believe that, once they do, it will be surprising how many opportunities are out there.”
To discuss this or any farming-related matter contact your regional office:
For the first time in my life, the UK is not a member of the European Union. As a result, on 15th January 2020 the Government published the second iteration of the Agricultural Bill. In summary the Agricultural Bill sets out a framework of new Agricultural Policies and transition measures for England, Wales and Northern Ireland. The Bill is a crucial cornerstone of the Governments’ future farming and land management policy.
Practically, what does this mean for farmers and land owners?
The Bill clearly sets out that direct subsidy payments (BPS) will be phased out between 2021 to 2027. This means that the current application window to the Basic Payment Scheme will be the last under the current subsidy scheme as we know it. In 2021 reductions in payments will begin. Although there is nothing specifically set out in The Bill, a DEFRA policy statement released in September 2019 clearly sets out the payment bandings and percentage reductions, these operating in a similar way to Income Tax with the reductions only applying to the claim amount within that band. It is likely that further reduction percentages will increase over the transition period until the final payments are made in 2027 scheme year.
Unfortunately, as we know many farming businesses, since the early 90’s, have based their business models on the receipt of IACS, SPS and more recently BPS. To put this into some sort of perspective, according to the FARM BUSINESS SERVICE DATA 2018-2019 the average English cereal farmer relies on BPS income for 58% of their Profit. Within the same survey a less favoured area, grazing livestock farmer relies on 186% of its profit from BPS income, this is a startling figure and would mean the average LFA livestock farmer would be making a significant loss when the BPS payment is phased out in 2027.
The Bill also sets out that it could be possible to roll up a number of future BPS payments and these could be taken as a lump sum. It is clear that the Governments’ intention with this is to assist farmers to either retire, diversify, improve efficiencies or to make it easier for new entrants into the industry.
De-linking is a significant change, payments will be continued to be made to current recipients of BPS, however in the future it is understood that these recipients would no longer have to be actively farming. As I understand it this, coupled with the ability to “roll up” BPS payments, is to accelerate change within the industry and to help free up land and farms that could help existing farmers or new entrants into the industry.
What is the focus of the Bill?
It is understood that there will be new financial assistance powers which will enable payments to be made to farmers for a range of public goods. These payments will be made for such items as providing habitats for wildlife, reducing flood risk, preventing climate change, improving public access and protecting iconic features. In England the Government is in the process of developing the Environmental Land Management Scheme (ELMS), this will be part of the delivery mechanism, working towards the provision of public goods. This scheme is being piloted in a number of areas at the moment and is hoped to be rolled out in 2024, half way through the Agricultural Transition period. If farmers were thinking that this was going to replace the direct subsidy scheme I would suggest that this is not going to be the case at all. The ELMS scheme will be very targeted in what it delivers and I’m assuming will be no-where near the level of financial rewards that current CSS/HLS/BPS schemes deliver to regional farming businesses.
In short the profitability of farming businesses are going to be reduced over the next 7 years. It is important for farmers to understand the impact of what is on the horizon, we have time ahead of us to improve the performance of farming businesses and decrease their reliance on subsidy and in preparation for this we are holding a series of regional talks over the coming months to discuss the Agricultural Bill in more detail and its potential effects on family farming succession.
We are hosting a series of regional seminars which will include discussion on the Agricultural Bill which will run between 24th February and 4th March, for more details visit www.georgefwhite.co.uk/planning-for-change or call your regional office.
Simon Britton, Partner – Head of Farm at George F. White 07866 721146 / email@example.com
Whatever your political persuasion, on Thursday 12th December, the country spoke and it is now clear that the UK will be leaving the European Union on 31st January 2020. It is envisaged that the Withdrawal Agreement Bill will now go through Parliament before Christmas. The UK will now have the task of negotiating a post-Brexit trade deal with the EU by the end of 2020.
Without a doubt, the agricultural industry is about to see the biggest policy revolution in a generation, farmers must ask themselves, is their business currently in a position to remain successful, and ultimately profitable without support from agricultural subsidies. The UK Agricultural Bill proposes that direct subsidy payments, after a two-year transition period, will be phased out over a seven-year period, the biggest reduction happening in the first year.
What does this actually mean for farmers in England? To put this into some sort of perspective, according to the Farm Business Survey Data 2017/18, the average English farmer relies on BPS income for 66% of their profit.
We can see from the statistics above that the majority of farms are hugely reliant on subsidies but we at George F. White believe that with careful business planning and adopting the right strategy, the impact of the removal of agricultural support payments can be reduced. Farmers must have a sound understanding of their businesses, focus on management practices that will help them become a top performer in their sector. Farmers must review their business performance as soon as possible to ensure that they continue to be profitable and ultimately successful.
Unfortunately, we are seeing many farmers “burying their heads in the sand” and not having any real understanding as to how their business are performing and indeed if they are cash positive. Over the last three years we have been working very closely with our clients in order to prepare their businesses for the removal of direct agricultural support payments. Assessing the options for the future is crucially important, the earlier you start planning the better the outcome will be. Regular preparation of budgets, benchmarking businesses annually and comparing key performance indicators at every opportunity is what all businesses should be doing. Assessing and utilising the key assets of the business, including its people, will be extremely important. Furthermore, exploring potential new income streams, improving efficiency, investigating possible diversification opportunities and making the most of Grant opportunities as and when they arrive. It is the time for farmers to stop being just farmers and to become businessmen.
What have we been focusing on with Clients? We have been focusing on improving their performance and ultimately removing their reliance on farm subsidy as a provider of profit. The key areas have been cost control, preparation of budgets, benchmarking, attention to detail, innovation and staff engagement.
We have worked hard on the concept of the aggregation of marginal gains. The changing of 100 thingsby 1% not 1 thing by 100%. As an example, if the average English farmer changed their output by 1% and removed 1% from their overheads the marginal gain in uplift in profit would be approximately 9%.
It is important for farmers to understand the impact of what is on the horizon, we have plenty of time ahead of us to improve the performance of farming businesses and decrease their reliance on subsidy, but they must start now, do not delay!
To discuss the impact of subsidy removal on your rural business contact Simon Britton on 07866 721146 or firstname.lastname@example.org