Tag Archive: ELMS
Elliot Taylor, Partner and Farm Business Consultant at George F. White, looks at the perfect storm brewing within the UK agricultural sector:
Even though the Pandemic has dominated our lives over the last 18 months; farming has continued as normal, dealing with the usual day to day pressures of changeable weather conditions and fluctuating prices. This year has been no different. We have seen one of the wettest months on record and one of the driest months on record. Arable crops, most livestock, and milk prices have been well above the five-year average, and amongst it all, we have a new agricultural policy, the Agriculture Act, to get our minds around. If we consider 71% of the land in the UK is used for agriculture, that’s 15 million acres, there is not one square inch of that land the new Agriculture Act will not affect in some way.
The headline aims of the new policy is to cut carbon emissions, create more space for biodiversity and wildlife, and improve animal welfare, whilst maintaining a sustainable and profitable farming industry for the long term. The driver for this major shift in policy direction is the UK’s target of reducing carbon emissions to net-zero by 2050. Farmers are now told they must provide ‘public goods’ and in return, they will be rewarded for doing so. So, how do farmers do this, how do they become more environmentally friendly, more sustainable whilst remaining viable, not just over the next seven years during the transitional period where direct support will be removed, but for the long term as well?
Farmers must take stock and look carefully at their businesses now. They must also look at how best to use the assets that they have at their disposal. I will discuss more about assets in a moment, but before I do I want to focus on one of the principal elements of the new agricultural policy, the removal of direct support. This will be the first year we’ll see a reduction in farmers’ Basic Payment, and in four years’ time the average payment will be more than half the amount received in 2020. So, what do we need to do now, on a practical level, to make farming businesses more resilient to this change? Farmers must start by analysing the past performance of their businesses and benchmark that performance to identify areas where improvements can be made. Benchmarking can be a powerful tool to spot strengths and weaknesses in your business. Farmers must also make time to sit down and set some key short, medium, and long-term business objectives. It’s important to start and develop a rolling 10-year plan for your business and update that plan on an annual basis. If you are not doing so already, it’s also important to prepare an annual farm budget. A detailed and realistic budget is one of the most important tools for guiding your business forward. It will predict future levels of profitability but more importantly, it will indicate how much cash you will have available for reinvestment during the year. Budgeting will also give you confidence in making the right decisions to achieve the objectives you have set yourself in your 10-year plan. Farmers must also invest time in looking at current and future environmental schemes that best fit their farm. Think about how these schemes will affect your business financially and consider this on a net margin per acre basis. Farmers must also think about how to make their businesses more efficient. Farmers should access productivity grants to improve business efficiency when available, but it’s important not to let the ‘tail wag the dog’, only make an investment into new equipment if it’s well thought out, costed and part of your 10-year plan. Attention to detail is vital, not just at an enterprise level but at a whole farm business level, and finally, talk to other farmers, attend discussion groups and industry events to help adopt best practice where possible.
All farm businesses will be impacted in some way and some farms will struggle as Basic Payment reduces and is eventually removed. A typical grazing livestock farm’s average profit last year was in the region of £29,000. Their Basic Payment receipt was around £31,000. This is a sobering statistic however it demonstrates how important it is to look at your business now and start planning for change.
Look at your assets
I mentioned before, it’s also important to look at the assets on your farm. When we think of farming assets we think of land, machinery, stock, maybe even yourself and of course the team around you. However, it’s also important to consider the natural assets or the natural capital you have available on the farm. So, what is natural capital? Basically, it’s the elements on your farm that benefit people and will provide the ‘public good’ that I referred to earlier. Natural capital can include, providing clean water, growing carbon-capturing plants, delivering healthy soils, or benefiting and enhancing the wider landscape. Farmers need to start to understand the value of these assets, both to their farming businesses and to the wider public.
Farmers need to think about their soils and how to improve them. They need to think about how to manage water on their farms. They need to consider how to increase biodiversity and enhance habitats and be paid for doing so. They need to think about providing opportunities for public access on their farms through structured educational visits for example. Also thinking about providing recreational activities, and the opportunities this may bring, for an on-farm diversification project will be important. Further to this, thinking about how to protect and maintain the historic environment and enhancing the wider landscape will be an important part of this exercise.
Farmers need to determine what natural assets they have, what benefits they produce, what they are worth and what they cost to maintain. This will help give a true value of all assets at their disposal. If the value is low in some of these areas, farmers can start to investigate how to improve the value going forward. The current Countryside Stewardship (CS) is a good place to start to enhance natural capital on your farm and I would strongly encourage all farmers to look at it. The Environmental Land Management Schemes (ELMs), the new system to support environmental actions, will be based on a natural capital valuation approach unlike the CS where the payment rates are based on income foregone.
The Environmental Land Management Schemes
One scheme available through the ELMs with the aim to provide ‘public good’ is the Sustainable Farming Incentive or SFI. The SFI is currently at the pilot stage, however, it will be rolled out sooner than anticipated to only Basic Payment Scheme (BPS) recipients in 2022. Following next year’s rollout, the SFI will then be fully launched from 2024. The SFI currently includes a set of land management actions or Standards. The pilot scheme has eight of these Standards covering areas such as arable, woodland, grassland and water. Each standard has three levels, an introductory, an intermediate, and an advanced level. Farmers are paid for completing each Standard at a particular level as well as being paid to take part in learning activities. When the SFI is launched next year, the scheme will be simplified and there will only be two main Standards. These will be the Arable and Horticultural Soils Standard and Improved Grassland Soils Standard, with the aim to improve soil health. Payment rates for this Standard will range from £26 to £70 per ha. There will also be a Moorland and Rough Grazing Standard with the objective to protect habitats and features in the uplands. Payment rates for this Standard are yet to be confirmed however further details are expected in November. It is likely that more Standards will accompany the two already launched as the scheme is rolled out. It is also likely that the SFI scheme will pay agreement holders either quarterly or monthly which differs from the annual payment experienced through the existing schemes currently available. Capital items will remain accessible through the recently released Capital Grants Scheme.
Also, within the ELMs, there are several other targeted schemes that will be rolled out between now and 2024. These include larger-scale nature and landscape projects within the Local Nature Recovery and the Landscape Recovery Schemes, as well as support being available for the creation of woodland through the England Woodland Creation Offer. The new UK farming policy also includes provisions to improve animal welfare through an Animal Health & Welfare Pathway which will fund an annual vet visit providing diagnostic testing and advice with payments of up to £775 per year for participating farmers. Further capital funding was also announced as part of the Agricultural Transition Plan with the aim to reduce pollution from farming through the Slurry Investment Scheme (SIS). The SIS is expected to provide grant funding for new covered slurry stores and other equipment and is expected to be launched in 2022.
Lump Sum Exit Scheme
It’s not just the ELMs going through consultation at present, the way farmers could be encouraged to leave farming is also being designed through a period of public consultation. The Lump Sum Exit Scheme or the “golden handshake” as some people are calling it, is in its consultation process which closes on 11th August. What key points can we take from the consultation document? The scheme will start in 2022 for those who wish to retire or leave farming. Farmers who enter the scheme will need to give up their land and not claim any further BPS. This will mean a tenant will be required to give up their tenancy and an owner-occupier will need to either sell their farm or rent all their land out on a Farm Business Tenancy for at least five years. One proposal suggested is to use a reference period amount to calculate a lump sum based on what farmers would have received from their BPS until the end of the transitional period with a proposed payment cap of £100,000. An example of a lump sum calculation could be £40,000 (reference amount) x 2.35 = £94,000 total lump sum. It is also important to note that the treatment of the lump sum in the eyes of the HMRC is still being discussed.
Prosperity and productivity
There will also be other funding through, what Defra are calling, prosperity and productivity funding, to help support farmers during the removal of the BPS. The Farming Investment Fund will help to improve productivity whilst benefiting the environment by providing grants for equipment, technology and infrastructure. There will be further funding available for Research and Development schemes to support innovation in agriculture. There will also be a fund to help new starters into farming through the New Entrant Support Scheme. The New Entrant Support Scheme will replace the current Young and New Farmer Scheme delivered through the BPS.
The Perfect Storm
We are truly at a pivotal point in UK agriculture, in fact, you could say it’s like a ‘Perfect Storm’. The removal of direct support; a push to provide public goods; uncertainty over trade deals; farmers being encouraged to exit the industry; the next generation being encouraged to start farming but struggling to find funding; a plethora of new schemes to understand and the possible changes on the horizon to inheritance tax and reform of capital gains tax legislation will all put pressure on farmers to make the right decisions to move their businesses successfully forward. We can learn a lot from the past, but we need to embrace the future. Some people think farmers never change, in my view, farmers have always embraced change and do it well. Farmers are a bit like chameleons, they’re pretty good at adapting to the changing environment around them.
Farmers must continue to be open-minded, embrace new technology, analyse business performance, budget, assess the assets at their disposal including determining the value of the natural capital on their farms, fully investigate opportunities for new income streams and plan well for the changes to come.
This transition period will offer a significant opportunity to farmers. Doing nothing is not an option.
If you would like to speak to Elliot Taylor, the author of this article, please contact him direct on 07590 445301 or call our Rural team 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:
Northumberland, Cumbria & Borders – 01665 603231
County Durham – 01833 690390
Yorkshire – 01677 425301
The proposed Environmental Land Management scheme (ELM) will not bridge the gap left by the withdrawal of the Basic Payment Scheme (BPS) and farmers are sleepwalking into disaster, advisers have warned.
Simon Britton, Head of Farm Business Consultancy at George F. White, said the three-tier system recently outlined by Defra was reminiscent of the environmental stewardship triad introduced in 2005, of base-level BPS, entry-level stewardship (ELS) and higher-level stewardship (HLS). However, he believes even the higher echelons of ELM will not be a substitute for the direct payment. On a whole-farm basis, currently ELS works out at about £30/ha, with HLS ranging from £74-£124/ha, based on George F. White’s clients.
Based on these figures, the bottom tier of ELM could be about £12-£49/ha, which would not be a replacement for the £222/ha that lowland farms were broadly getting for BPS.
“ELM is not going to be a magic silver bullet,” says Simon. “Time, money and effort will need to be spent on works in order to get this money. You’ve got to be eligible for it and want to go into it and it doesn’t even start until 2025, so we’ll already be well through the transition period.”
See the tables below showing Defra’s proposed percentage reductions for BPS during the transition period and George F. White’s analysis of what the accumulative effect will be on farm businesses.
|BPS Income Bands
||Proposed percentage reduction in 2021
|Up to £30,000
|£30,000 to £50,000
|£50,000 to £100,000
|Profit and Loss
|Total value of BPS payments at current rate with no reduction 2021-2027
|Projected BPS income 2021-2027 after assumed reductions
|Difference between income at current rate and income at reduced rate
|Table shows confirmed percentage decrease by payment rate for 2021 and then a George F. White prediction of gradual decrease to 2027. The percentage decrease is based on a tiered reduction system, similar to how income tax is applied. These figures do not include any potential agri-environment income.
The agricultural subsidy transition period is due to end in 2028, with BPS being phased out from 2021. Reduction percentages for 2021 have been announced and range from 5% for BPS claims up to £30,000, to 25% for claims of £150,000 plus.
Our table predicts how much farmers could expect to receive if the payments declined gradually for the following seven years, and the overall loss compared with receiving the full payment. This does not take into account any additional payments through the phasing in of ELM income. On this basis, a £30,000 claimant will see an accumulative reduction in support income of £118,832 over the transition period, while a £160,000 claimant will record a difference of £691,350.
Many agricultural businesses are heavily reliant on BPS support, and the latest Defra farm business survey shows that even with a five-figure annual subsidy payment an overall loss was recorded. “It doesn’t matter how you skin the cat on the way down, the accumulation is significant,” he said. “All farmers are going to need to be businessmen to get through the next 10 years.”
The average age of farmers means they have spent the majority of their working life building a business based on subsidy support.
“There is a massive amount of business planning work to come, which will include restructuring and succession. Farmers are sleepwalking into this and if we don’t manage this, this is going to be a big problem.”
If you would like to discuss the above in more detail please contact:
01677 458202 / 07866 721146
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