Brexit and the rural economy

A first reaction to the referendum ‘Brexit’ decision from a group of postgraduate students at Harper Adams University who have been studying Land Use and Management this week.

Project Brexit

The 18 students have worked rapidly in small groups this morning to appraise the impact on different sectors of the rural economy, and the actions that land managers, owners and occupiers should now be considering.  Here they are:

Agriculture: the issues here have been well rehearsed.  What will replace the Common Agricultural Policy?  If anything?  On what terms will we trade with the EU, both for sales of our produce and purchase of our inputs?  Is there an opportunity in this to open or develop new markets at home or abroad?  One paradox is that enhanced regulation of our farming and food industry may add to the quality perception of British food once outside the EU.  But our markets may then be open to genetically-modified crops, and it may be possible to accelerate the uptake of GM technology here.

Scale and efficiency look as if they will become even more important and we might expect to see small farms going to the wall and large farms getting larger.  On the margins some land may switch from sheep production to forestry if there are shortfalls in support.

Knowledge for farming may take a hit: early pest and disease intelligence from continental Europe may become less accessible, and investment in research and development may fall without access to EU funding.  If capital values fall, problems may in turn emerge over borrowing ratios and liquidity.

Labour availability may also limit the production of some higher value crops, even in the short term if seasonal workers choose EU destinations with longer term prospects for free movement of labour.

A wider question over the management of the industry as a whole: will the emphasis on compliance with Basic Payment requirements start to fall away, with what consequences for the wider environment of the countryside?

Land and property: Savills shares saw a 20% drop at one point, wiping £824 million off the value of the company.  House builders fared worse.  This points to a slow down in the rate of house construction, exacerbated by the danger of higher input costs and more difficulty in recruitment given the reliance of construction on EU workers.  This in turn knocks on to the demand for development land, and its price.  Farmers may still be in the market for land if they see bargains available on which they could expand, but foreign buyers are likely to hold off and investment buyers may be far less confident of their own positions given the impact on financial services.  Could this be good news for new entrants?  Even if land prices do drop the prospects of access to land by this route remain unrealistic.  A more likely scenario is for the market to go into virtual stasis, and for prices to do no more than tick over in a narrow price band.  The clear message here: only sell now if you have to.  Rather than sell look at short term options like farm business tenancies.

Forestry: much of the return on investment in forestry comes in the form of capital appreciation.  Will land prices wobble?  A weaker pound could push up the cost of the 60% of our timber we import, in turn pushing up prices to the construction industry while stimulating demand for home grown timber  Good news for foresters could be bad news for processors and end users.  Although the UK Forestry Standard has a EU origin it is now embedded in UK legislation.  The UK however has no planting targets but we do know that there will be severe shortages of home grown timber in 50 or 60 years due to a lack of planting now.  Might changes in agricultural policy lead to the abandonment of marginal land sheep farming, making this ground available for afforestation?  It’s hard to see where planting land may come from otherwise.

Forestry disease and pest control may benefit if plant health import regulations can be imposed rigorously.  But this will require significant expenditure on plant health inspectors.  Will this be a priority for future spending?

Renewables, energy and the environment:  Many of our environmental objectives embody wider obligations than the EU alone, for example our membership of the UN, adoption of the Kyoto protocol and the outcomes of the Paris climate talks.  But without pressure from fellow EU members to achieve the UK target of carbon reduction of 80% against 1990 levels by 2050, will there be sufficient pressure on the government here to make sure we stick to these obligations?

CAP Pillar 2 environmental and rural development schemes are bound to be tied up with whatever happens to domestic agricultural and environmental policy.  The directives on bathing waters and birds and habitat are an EU obligation, but if we stick with the European Economic Area we will still be subject to controls on pollution, industry, energy policy, chemical safety rules and rules on product liability.

The internal energy market in the EU may also become more difficult.  More agreements with specific countries are likely to be needed and the overall effect may be to increase the price of new interconnectors.  Increased investment costs will in turn push energy prices up.  This in turn could foster home production of renewable energy, but companies like Siemens may need to reconsider the use of the UK as a production base for the EU.  The departure of major suppliers could in turn lead to price rises on kit putting further pressure on energy prices.

So: one door has closed firmly and for good.  Who knows where the other doors are or what lies behind them?  The outlook is still very substantially speculative beyond the short-term market reactions.  The future belongs to those who will be the most vigilant and opportunistic.

Who wants what this time?

Systemic Solutions at the landscape-water interface was the title of a workshop held at Bristol Aquarium on Monday 10 February 2014, and I was asked to speak about the landowner’s perspective.

Who want what this time? was my opening question.  When dealing with anything in relation to rural land it’s vital to realise that you are rarely starting with a blank sheet.  Are you dealing with the Somerset Levels or the Cambridge Fens, Exmoor or the Peak District, or something in between?  Some of the items that may already be listed on that far-from-blank sheet include: Continue reading “Who wants what this time?”

Prospects for agricultural markets and income in the EU 2013 – 2023

Agricultural income growth will have to rely on restructuring in the next 10 years, rather than growth in commodity prices. This is a key conclusion from the European Commission Report, Prospects for Agricultural Markets and Income in the EU 2013-2023, issued this week.

At farm level, what does this mean for UK farmers?  ‘Firm’ commodity prices are predicted.  This is at least a positive outlook compared with the prospect of falling prices, but it doesn’t offer much prospect for income growth on the farm.  As ever, farmers will continue to be at the mercy of market and natural forces.

But the report does say that ‘restructuring’ will offer opportunities for income growth.  This means yet another long hard look at labour inputs (already well stretched on many farms), continuing attention to detailed management and inputs in order to achieve higher net margins.  There is still a big gap between the best and the rest in farm incomes.  Although the farmers who make up the top 10% every year tends to be a floating population there is nevertheless a great deal that many farmers can do to close this gap.  Fertiliser and fuel inputs also need careful attention given their relationship to the price of crude oil.

If ‘restructuring’ points to the need for new kit, the next year or so may be the best time to buy with capital allowances for Income Tax set at very generous levels until January 2015.

The agricultural economic outlook also means that farmers must continue to look at other options for their assets.  Will the next 10 years see the real emergence of opportunities to profit from natural capital, by getting involved in carbon storage, water management, biodiversity offsetting or any of the other opportunities which are starting to open up in this area?

Key factors identified in the EC report include:

  • Commodity prices stay firm given low productivity growth, growing markets for biofuels and overall global food demand;
  • In the arable sector, biofuels will be the subject of the most dynamic demand factors.  By 2020 biofuel is expected to make up 8.5% of liquid transport fuel, with yield growth expected of 0.6% on average;
  • The maize and wheat area is therefore expected to grow;
  • Isoglucose is expected increasingly to take the place of sugar in processed foods – although no mention is made of the obesity crisis also in the news this week;
  • 2013 saw the lowest meat consumption for eleven years in the EU, at 64.7 kg/head.  It’s expected to be up to 66.1kg by 2023;
  • Beef production is expected to drop, while pigment production is expected to rise from 2014 onwards (but from low levels given the impact of recent welfare reforms);
  • Dairy expansion is expected to be restrained by environmental factors, with prices expected to stay firm but not spectacular;
  • The agricultural workforce is expected to shrink, and to see a widening income gap.

Key risk factors identified in the report include:

  • The success or otherwise of the African Green Revolution;
  • Higher prices for compound feeds;
  • Crude oil prices;
  • Euro/dollar exchange rate;
  • The possibility of a sudden drop in growth coupled with currency depreciation for a major exporting country like Brazil

This highlights a few key indicators that farm businesses should watch carefully.

I was asked yesterday whether farmers should take reports like this seriously.  Not to the extent of reading all 130 plus pages, but the headlines do point to some key issues which are worth following in the next 10 years.

For other coverage of the report, see:

http://www.fwi.co.uk/articles/17/01/2014/142865/eu-forecasts-10-years-of-firm-prices-for-farmers.htm [Farmers Weekly, accessed 18 January 2014]

http://www.euractiv.com/cap/farm-produce-prices-remain-stabl-news-532759 %5BEuropean News website, accessed 17 January 2014]

http://www.globalmeatnews.com/Industry-Markets/EU-economist-predicts-fall-in-meat-consumption [Global meat news, accessed 17 January 2014]

CAP: Agric Fundamentalists v Enviro Fundamentalists – some inconvenient points

Decision week for Defra Secretary Owen Paterson.  He is due to announce the ‘modulation’ rate for England by the end of the week.  Will it be 9% as the NFU wants, or 15% as the RSPB demands?  Modulation is EU-speak for the amount of farming support that is diverted (modulated) into more general rural development and environmental schemes.  So the more money that is modulated, the less the direct farm payments through the Basic Farm Payment which will soon replace the Single Farm Payment.  The BBC provides some of the background here.

Last weekend saw a crescendo of lobbying on the issue, with the RSPB taking out full page national newspaper advertisements and the NFU writing to all MPs.  Some of the mood of the debate is caught in Mark Avery’s Sunday blog: all households will have to pay £400 to support farmers; this is nothing more than a payment for owning land and farming it (whither tenant farmers?).  On the other hand the NFU whinges that German farmers are only subject to modulation rates of 4.5%, French farmers 3% and the proposed Scottish rate is 9.5%.  This will hurt competitiveness, says the NFU, and disadvantage English farmers.

The environment lobby makes much of the ‘value’ that we get for CAP payments.  The more money that goes to Pillar II (EU-speak for the budget that pays for environmental and social goodies), the better. But farmers prefer Pillar I (EU-speak for the budget that pays for direct farm support payments) because that relates directly to the land they farm and how they farm it – and this can be defended strongly on grounds of food security (will you starve or me?).

But of course we are dealing with public policy here, and the reality is more complex that the advocates of Pillar I and II would like us to accept.  The new direct farm payments come with more environmental strings attached – crop diversification and ecological focus areas for example.  And more of the money is moved uphill – where it is desperately needed because much of upland farming is economically marginal at best – at the (moderate) expense of lowland areas.  Whatever Pillar II funding we are left with, will be far more focussed than previously – a better deal on the 35% of rural land which will benefit compared with the previous 70%?  Perhaps so if you are in the lucky areas; perhaps not otherwise – although tougher conditions on the Pillar I funding may make up the difference in some lowland areas.

The RSPB and others have set out their case for the ‘value’ we receive in return for our £400 per household.  This is a compelling and attractive case, immediately attractive to anybody who pays tax.  Given the propensity of Avery and others to dismiss the CAP payments as a mere subsidy on land ownership and farming, I have been pondering what we do get for the money we spend on farm support.

This is an incredibly complex question once you factor in food security and social justice.  To take some dairy figures, our consumption of milk products works out as follows:

Taking our daily consumption of fresh milk, butter, yogurt, cream, dairy desserts we on average consume about 4 litres of raw milk a week.  That’s a little over 200 litres a year.  With an average dairy cow now producing 7,327 litres a year, that means each cow is supporting 36 people.  This typical cow requires 0.5 ha  of land a year, and lives in an average herd of 125 cows.  So the average herd is providing dairy produce for 4,500 people.  At a direct CAP Single Farm payment cost of just over £200/ha, this equates to a cost per consumer supported with dairy products of just under £3.00/year (1).  Doesn’t seem much, but let’s cut the CAP farming support payments altogether.   What happens next?

There is little doubt that the main buyers of milk from farmers have an excellent idea of the costs of production – including the effects of farming subsidies – and set their prices accordingly.   Ergo – exit CAP, enter higher payments from the main buyers.  Despite the hyperbole to the contrary, the main farm produce buyers have no interest in the financial failure of their principal suppliers.  So prices are adjusted accordingly to make it worthwhile – but only just so for better than average producers – to continue to supply milk.  In compensation retail prices increase – for everybody.

So if you are hard up, milk has just gone up and you won’t save much tax if you weren’t paying any or much tax anyway.  But if you are better off milk, yogurt, cheese etc has also gone up, but the CAP isn’t costing you so much through your tax bill.  That’s to say that another element of redistribute taxation has been lost.

Meanwhile at lower rates of modulation fewer farmers are encouraged (forced?) to look at the financial effiency of their operation.  At the recent LEAF conference, Martin Wilksinson (HSBC Head of Agriculture) made the point that many farmers could more than make up their CAP losses with improved technical and financial effiency.  This is one of the real challenges to the farming industry: to move more farmers to the standards of the best.  England was the first region in the UK to move to Single Farm Payments based on the same average payment, away from a payment based on historic payments.  Wales and Scotland have been slower to move in this direction, and there seems a compelling case for England being better prepared for this round of CAP reform as a result.  One fear for the environmental lobby might be the real danger that some of the best lowland farmers may move away from CAP support altogether, joining those sections of the farming industry which have never had it anyway (eg pigs and poultry).

Meanwhile farmers need to promote the value we get from Pillar I payments by stressing any benefits they provide to the rest of the country as consumers and taxpayers.  For example, how many people is your farm feeding?  And at what cost in public support?  Will Santa be coming early for the farming lobby or the environment lobby?

-oOo-

Footnote 1: These calculations were surprisingly hard to source.  The DairyCo website provides daily consumption figures, and the average herd size and milk yield are available from Defra statistics.  DairyCo also provides a diagram showing how the UK’s milk supply is utilised.  My approach was to take the daily consumption of the dairy products listed (a list which is not complete) and work out how much raw milk is needed for each product, eg about 20 litres for 1 kg of butter; 10 litres for 1 kg of cheese.  This ignores some of the complexities of dairy processing, for example milk from which cream has been separated may reappear as another milk product and so on.  Some arithmetic followed based around stocking rates (0.5 ha/cow), total production/consumption figures and lowland Single Farm Payment Rates per hectare in the last year or two.  In short, lots of assumptions; lots of scope for error – but if anybody can highlight any errors or better still existing sources of information like this I would be delighted to know.

 

Jeremy Moody full speech at Harper Adams on CAP Reform

Jeremy Moody spoke to a packed audience of students and staff in the new Weston Lecture Theatre on the subject of CAP Reform on 17 October 2013. This is the full presentation (about 30 minutes with questions).

CAP Reform from Harper Adams on Vimeo.

Jeremy Moody is Secretary and National Adviser to the Central Association of Agricultural Valuers. He is recognised nationally and internationally as one of the leading authorities on the Common Agricultural Policy, in particular its effects in practical farming terms in the United Kingdom. Jeremy is also a member of the group which produced the Future of Farming Review report earlier this year under the chairmanship of former Country Landowners President David Fursden.

Video courtesy of Harper Adams University

Jeremy Moody interviewed on Common Agricultural Policy Reform

Jeremy Moody, National Adviser and Secretary to the Central Association of Agricultural Valuers and a national expert on CAP Reform was interviewed at Harper Adams University on 17 October after speaking to a large audience of students and staff on this topic.

Video courtesy of Harper Adams University