Category: Policy & Business

Agflation Update

Farm costs continue to rise.  Andersons ‘Agflation’ index shows input prices continuing to rise by around 20% compared to the same month a year earlier.  Whilst this is down slightly on the increases seen in the summer, it is still well above historical averages.

Earlier in the year, as input costs increased, then output values were also showing big gains.  However, over the past couple of months the sale prices of farm commodities have shown far less growth.  Whilst some products, such as milk, have continued on an upwards trajectory, this has been largely offset by declines in other areas notably combinable crops.  With costs continuing to increase but sale prices flatlining, this puts farm margins under pressure.   Both the agflation and agricultural output indicies relate to the entire farming industry.  The prospects for individual sectors will depend on how specific costs and prices are moving.

To recap, our agflation index uses Defra Agricultural Price Indices for agricultural inputs and weights each category of input (e.g. animal feed) by the overall spend by UK farmers.  We fill in some gaps not covered by the Defra series and also provide some up-to-date estimates for the latest months (the official figures work some months in arrears).   The same methodology is used for agricultural outputs.

The chart above also shows CPI along with the specific food inflation measure.  It can be seen that food is one the elements driving general inflation in the economy.  It is not necessarily the case that higher commodity prices are driving food-price inflation – the cost of the raw materials is often a very small part of the cost of food.  It is other elements in the food chain such as electricity, fuel and labour that are pushing up costs.  Food comprises a larger proportion of the spending of those on the lowest incomes.  Therefore, effective inflation for those people will be even higher than the headline CPI rate.

 

RPA Strikes

Staff at the Rural Payments Agency (RPA) have voted to take strike action during dates in December and January.  91% of members of the Public and Commercial Services Union voted to strike, on a 73% turnout.  The Union has said the initial phase of strike action will cover the Customer Service Centre as it ‘will have a significant impact on employers’ operations and Government’.  The Union therefore asked its members in the Customer Service Centre to strike from 13th-16th and 19th-23rd December and again from 3rd-6th and 9th-13th January 2023 (basically from 13th December to 13th January when weekends and Christmas closures are taken into account).  The Union says this will have a ‘major impact on the employers’ ability to administer the work of the RPA at a critical time of the year’.

In response the RPA has said it has ‘tested plans’ which will enable it to continue to pay farmers their BPS money if the strikes take place. We have already reported on BPS progress, with the majority of payments already made (see previous article).  Those with outstanding RPA queries with regards to BPS and other agreements such as Countryside Stewardship are advised to reply to these within a timely manner.

 

Nutrient Management: Wales

The Welsh Government has opened a consultation on introducing a licensing scheme which will allow higher levels of nitrogen applications in certified circumstances.  The current nutrient measures are set out in the Water Resources (Control of Agricultural Pollution) (Wales) Regulations 2021.  Under these, there is a limit of 170kg of Nitrogen per hectare per annum from livestock manures across a holding.  The proposals in the consultation would allow this limit to be exceeded, up to a maximum of 250kg of nitrogen per hectare per year, subject to crop requirement and conditions to protect the environment.  The proposed licence scheme will commence from April 2023 and run until 2025.  For more information on the consultation and ways to respond go to https://gov.wales/nutrient-management-managing-application-livestock-manures-sustainably

Levelling Up Policy

The Government has made some changes to Planning policy in England which will have an effect on rural areas.  They have occurred as the Levelling Up and Regeneration Bill goes through the Parliamentary process and are a result of lobbying by groups of disaffected Conservative MPs.  Firstly, on housing, the proposed mandatory house building targets for Local Authorities are to be made ‘advisory’.  There will be increased protection for the Green Belt and areas such as National Parks and AONBs.  This is a reversal of the ‘growth’ agenda.  It is widely acknowledged that more housing is needed (especially in the South of England) to deal with shortages and provide homes in areas with strong economies.  But, of course, few people, including MPs, want those extra homes in their Constituencies.  This change in policy can be seen as a win for the ‘Nimby’ tendency.  Landowners who were hoping to develop land may now have slightly less chance of doing so. 

The other policy change relates to onshore wind.  Oddly, this moves policy in a pro-growth / less protection direction.  Since 2016 there has been a de facto moratorium on the development of new onshore wind farms.  The power to decide on whether Planning would be granted to a wind farm was given to Local Authorities, but subject to there being no local objections and the area having been identified as suitable for wind in the Local Plan.  These hurdles have proven too difficult and little development has taken place.  The rules will be amended so that the proposed wind farm area does not need to have been pre-identified, and the development has overall ‘local support’.  Rules on how such local support would need to be demonstrated will be produced.  For landowners, this is unlikely to herald a ‘gold rush’ as developers race to build new wind-farms – the rules remain restrictive.  However, they do represent a loosening and there may be increased opportunities to benefit from this renewable technology.     

English BPS Payments

As at the 6th December the RPA reported that it had made 2022 BPS payments to 95.3% of farmers.  This is a top-up for most claimants with a 50% advance paid in the summer.  Since the payment window opened on the 1st December the RPA says it has made 102,000 payments in total across BPS, CS and ES.

Renewable Heat Support

The Scottish Government has announced improved grants for renewable heating.  Under the Home Energy Scotland scheme there is a £7,500 grant available towards the cost of installing a heat pump.  Those in rural areas can get an extra £1,500.  There are also grants worth up to £7,500 for energy efficiency works.  Previously, it was necessary to take a loan out under the scheme, but now the grant is paid direct to homeowners.  More details can be found at -https://www.homeenergyscotland.org/funding/grants-loans/

New Entrant Support Pilot

A pilot scheme has been launched to help support new entrants to farming.  A New Entrant Support Scheme was one of the elements promised under the Agricultural Transition.  Defra has been consulting with the industry and is now trialing one element of this – incubation.  This aims to support young businesses through the early stage of development.

Defra are looking for around 200 businesses to take part in the Pilot.  Applications are open now and the scheme will run through to spring 2023.  Activities will take place in the evenings and weekend.  Four organisations have been chosen to run the scheme – Harper Adams University, the School for Social Entreprenuers, the Landworkers Alliance and Shared Assets.

For more details see – https://defrafarming.blog.gov.uk/2022/11/24/new-entrant-support-scheme-apply-for-the-pilot/

The findings from this Pilot will inform the full New Entrants Scheme which will be developed next year.

 

 

ELM Review

It has now been confirmed that an amended Countryside Stewardship will form the second strand of Environmental Land Management (ELM).  Speaking at a CLA conference, the Defra Secretary, Therese Coffey, announced the results of the ‘review’ of the Agricultural Transition, set up by her predecessor, Ranil Jayawardena.  Despite the loud protests from many lobby groups, policy direction in England has not altered.

The biggest change is that the proposed Nature Recovery Scheme, due to be fully-launched in 2024 will not now happen.  Instead, this strand of ELM will be covered by an enhanced Countryside Stewardship (CS) scheme.  It was decided that it was lower risk to amend the existing scheme than to build a new one from scratch.  Ms Coffey pointed out that over 30,000 farmers are now in CS – a 94% increase in 3 years – therefore ‘something must be working’.

The Sustainable Farming Incentive (SFI) is to continue with more Standards building on the initial phase.  However, details were lacking on whether there had been any changes to the timetable Defra had previously set out for the introduction of further Standards.  The plans for Landscape Recovery are also unchanged with the full scheme launching in 2024 following the 22 Pilots announced this year.  A further announcement on payment rates under all of the new ELM schemes is planned for ‘early in the New Year’.

Farm Business Income

Updated English Farm Business Income (FBI) figures for 2021/22 were published by Defra at the beginning of November.  These update the previous ‘forecasts’ that were published earlier in the year and we reported on in the march Bulletin.  The data highlight sharp increases for cropping, dairy, and poultry.  There were modest increases for grazing livestock, while the pig sector struggles are clearly highlighted.

FBI can be thought of the equivalent of the ‘Net profit’ measure widely used in accountancy.  The latest data covers all year ends from March 2021 to February 2022. Given the events of 24th February 2022, this offers a view of business performance up to the illegal invasion of Ukraine.  As with the previous year’s results, the new figures highlight some significant revisions from the initial forecasts.  The largest revision, more than £100,000 per farm, is for poultry.  This is due to far higher than estimated egg and poultry meat prices (during 2021 and early 2022 remember, not in recent months).

The strong FBI figures for the majority of enterprises reflects a period of strong inflation in agricultural outputs relative to ‘agflation’, the weighted index of inputs.  Agflation overtook the outputs index for the first time in 20 months, in September 2021.

The challenges for the pig industry have been well documented and cannot be overstated.  Were it not for diversification, the FBI figure for the pig industry would have been negative.  And, of course, low or negative profitability has continued into the current year for pig businesses.

Looking ahead in other sectors, 2022/23 is likely to have been another positive year for cereal, cropping, and dairy businesses.  With the 2022/23 figures, which will not be forecast by Defra until April 2023, reflecting harvest 2022, they will report on another period where inputs were relatively low compared with output prices.  For livestock businesses, many of whom will have bought feed and fertiliser, post-Ukraine invasion, profits are likely to be lower than 2021/22.  That said, 2022/23 will show a greater range in performance, given the different buying and selling strategies of the various sectors, as well as the businesses within them.

Trade Update

After a relatively quiet few months on the trade policy front, recent weeks have seen a resurrection of previous debates around the future long-term relationship that the UK should have with the EU as well as the impact of new trade deals that the UK is in the process of concluding.

Talk of a Swiss-Style Relationship

Following the Chancellor’s Autumn Statement, rumours emerged from Government circles of a change in approach towards the long-term relationship that the UK would have with the EU.  This would see it move towards something more akin to Swiss-style relationship.  This would mean accepting free movement, contributions to the EU budget, dynamic alignment with EU regulations for goods, and European Court of Justice (ECJ) oversight in return for being part of the Single Market.  Whilst some welcomed this, others claimed it was a betrayal of Brexit.

What many failed to acknowledge was that the EU is dissatisfied with how its relationship with Switzerland is structured as it requires more than 100 bilateral deals to replicate Single Market requirements and which constantly need to be renegotiated.  It is unlikely to want to replicate this with the UK.  In any event, the UK Government later denied that it was seeking to move to a Swiss-style relationship.

That said, and from an agri-food perspective, there is merit at looking at elements of the EU-Switzerland relationship and replicating aspects that make sense for both parties.  In previous articles, we have advocated a Swiss-style Sanitary and Phytosanitary (SPS) agreement with the EU, whereby the EU would permit frictionless access for UK agri-food goods in return for the UK dynamically aligning with EU regulations.  Whilst previous Tory administrations (i.e. under PMs Johnson and Truss) dismissed this approach, it would appear that the Sunak administration is at least considering it.

Such an SPS agreement would greatly assist UK exports to the EU, its biggest trading partner and it would also overcome key hurdles in the ongoing NI Protocol negotiations, which have shown some tentative signs of progress recently.  Whilst it would mean the UK mirroring EU laws, it would still leave scope, albeit more limited, for the UK to negotiate separate trade deals and trading arrangements, as the Swiss have done with the US.  The UK could also give notice (e.g. of one year) if it wanted to discontinue this arrangement. 

Overall, the talk of using existing templates in framing the future UK-EU relationship is becoming unhelpful.  The sooner a bespoke UK-style relationship emerges the better.  This could incorporate key aspects of other templates, but it will need to respect key EU principles, meaning that further negotiation is needed.  It will also need to incorporate the closer relationship that NI will have with the EU, as it is de-facto part of the Single Market for goods by virtue of the NI Protocol.

Eustice Attack on Recent Trade Deals

On 14th November, during a House of Commons debate on the Trade (Australia and New Zealand) Bill, the former Defra Secretary George Eustice severely criticised the UK Government’s negotiating strategy for both trade deals.  He singled out the then Trade Secretary, Liz Truss, for particular criticism, especially for imposing an arbitrary target of concluding negotiations with Australia ahead of the 2021 G7 summit.  He thought that this severely weakened the UK’s bargaining power.  Mr Eustice recalled that there were ‘deep arguments and differences in cabinet’, which were mirrored by friction between Defra and the Department for International Trade (DIT) during the negotiations.  He also claimed that the ‘Australia trade deal is not actually a very good deal for the UK’ and that he tried his best when Defra Secretary to address its shortcomings.  Specifically, he claimed that there was no need to give Australia (and New Zealand) unlimited access over the longer term for sensitive sectors such as beef and lamb.

From a farming perspective, it is all well and good to criticise the deal.  But during his time in Government, Mr Eustice defended it – his comments, therefore, offer scant consolation to farmers who perceive these deals to be a significant threat.  Both the Australian and New Zealand agreements will increase the competitive pressure on UK agriculture, particularly in grazing livestock.  However, recent studies looking at the impact of these trade deals projected that the impact may be lower than some fear.  That said, being the first new trade deals that the UK has negotiated from scratch since leaving the EU, they create an important precedent, and the cumulative impact of multiple trade deals can have a more significant impact. 

The UK-Australia trade deal was ratified by the Australian Parliament on 22nd November.  The Trade (Australia and New Zealand) Bill is making its way through Westminster.  It is currently at the Report Stage, where amendments can still be made to the Bill, before a final third reading and subsequent vote on the Bill in the House of Commons – the date of which has yet to be announced.  The House of Lords will also have to vote on the final Bill and they could delay it for up to a year before it would receive Royal Assent (assuming it is passed by the House of Commons).