Category: Policy & Business

Total Factor Productivity (TFP) of the UK agricultural industry is estimated to have increased by 3.4% between 2021 and 2022.   TFP measures how well inputs are converted into outputs and thus gives an indication of the efficiency and competitiveness of the farming industry.  It is one of the measures that Defra looks at closely, as it tries to improve the performance of UK agriculture. 

Rather than an improvement in the level of output, the main driver for the increase in TFP was a decrease in the volume of inputs.  This offset a very slight decrease in the volume of all outputs; less than 0.1%.  The volume of all inputs decreased by -3.3%; this is as a result of a decline across all input items in the accounts except for veterinary expenses and labour which saw small increases.  The inputs which saw the largest percentage decreases were fertilisers (-12.8%), seeds (-12.0%) and animal feed (-6.7%).

Looking in a little more detail at output, total crop output increased by 1.7%, whilst total livestock output decreased by the same amount.  The notable changes in crop output were an increase in OSR (38.8%) and barley (11.5%).  In contrast, there were decreases in sugar beet (-18.3%) and vegetables and horticultural products (-4.9%).  Total output of livestock from meat was down by -0.8%; this was mainly due to a decline in output from pigs (-3.1%) and poultry (-3.3%) with both cattle and sheep output increasing on the year by 0.7% and 3.1% respectively.  Output from other livestock products was -3.2%, with milk output lower by -0.8% but the main driver was eggs, down by -21.4% on the year.

Getting TFP, and other productivity measures, improving is one of the key policy goals of Government over the next few years.  Despite annual variability, the long-term trend is still one of slow but overall improvement in TFP.  Since the time series began in 1973, TFP has increased by 67.3% driven by an increase in volume of all outputs by 37.9% and a decrease in the volume of all inputs by 17.6%.

For more details see https://www.gov.uk/government/statistics/total-factor-productivity-of-the-agricultural-industry?utm_medium=email&utm_campaign=govuk-notifications-topic&utm_source=4ef2b4b7-a6c7-4a22-b159-a7d383e472cf&utm_content=daily

Defra has responded to the Review of tenancy legislation in England and Wales undertaken by Baroness Kate Rock.  As reported in our October Bulletin (see https://abcbooks.co.uk/tenancy-review/), the Rock Review made 74 recommendations.  These were broadly in two areas – immediate changes to help tenant farmers access the new ELM schemes, and longer-term changes to drive a healthy tenanted sector.  Overall, the Government’s response does not herald major reform to the tenancy landscape, with most changes being enacted rather small-scale and any larger ones put-off

The full response (in two separate documents) runs to almost 100 pages.  This can be found at – https://www.gov.uk/government/publications/rock-review-on-agricultural-tenancies-government-response .

Some of the key points on the short-term issues are;

• Defra has not accepted the Review’s recommendation that Tenants should be able to enter ELM schemes without Landlords consent.  Whilst in the short-term SFI this has been allowed, Defra states that there will be a variety of different schemes and timescales involved and there will be some scenarios where Landlords approval would still make sense – especially where land use change is permanent.  The Department aims to specify which agri-environmental options will need consent
• Defra finds little evidence that land is being taken back in hand from Tenants for Landlords to enter it into land management agreements, although this will continued be monitored
• Defra will look at the issue of agreements being transferred between Tenants or between tenant and Landlord.  It will also look into joint Tenant/Landlord ELM agreements.  This will be done through the ELM co-design process and also through the new Farm Tenancy Forum (see below)
• joint applications between Landlords and Tenants for capital grants would also be explored
• the role of tenancies in facilitating new entrants to the sector will be incorporated in the forthcoming New Entrants Support Scheme
• there was a recognition that Tenants have specific problems accessing private environmental markets.  The response sets out Defra’s current approach and there is a commitment to consider the let sector in future policy-making.

In terms of some of the longer-term policies to develop a thriving let sector, the response set out;

• a new Farm Tenancy Forum (FTF) will be put in place.  This will effectively replace the existing TRIG group and provide advice to Government on the tenanted sector.  The Rock Review recommended that a Tenant Farm Commissioner be created and this will be the subject of a call-for-evidence later in the year
• in terms of trying to incentivise longer-term lettings, the Review recommended changes to the taxation system.  This included restriction full Agricultural Property Relief for Inheritance Tax to lettings of eight years or more.  As Defra is not responsible for tax policy it has not directly responded to this.  There is a Treasury consultation currently underway on changes to the tax system – see our March article on the Budget
• a new (voluntary) Code of Practice is to be drawn up to set out expected standards and practical steps to take to improve Landlord and Tenant relationships.  This will also apply to professional advisors.  The FTF will monitor how effective the Code is
• Defra will work with the FTF to see if there are specific issues with FBTs not allowing Tenants the flexibility to diversify.  This issue was looked at in 2019 but it is recognised that the situation may have evolved since then

Overall, Defra believes that there is no immediate requirement for legislative change in the tenanted sector – there will be no Tenancy reform in 2023, or for the foreseeable future.  Instead the Department seems more inclined to see how the let sector deals with the Agricultural Transition and whether the non-legislative measures set out above deal with some of the issues highlighted by the Rock Review.

According to the latest Defra statistics UK farming made record profits in 2022.  The latest figures for Total Income From Farming (TIFF) show that returns increased by 11% in real terms compared to 2021, which itself was an exceptional year.  This takes profits to £7,940m – the only years where the real-terms figure has been higher than this was in 1995 and a period in the mid-1970’s.  The chart below shows the recent history of TIFF.

TIFF is the aggregate profit from all UK farming and horticultural businesses for the calendar year.  It shows the return to all entrepreneurs for their management, labour and capital invested.  In simplistic terms, it is the profit of ‘UK Agriculture Plc’.

Our forecasts had TIFF for 2022 falling compared to 2021 – by around 15%.  This was mainly based on higher costs.  Defra’s figures for the year do show ‘Intermediate Consumption’ (broadly, variable costs) increasing by 14% in real terms, but this was more than offset by increases in crop output (up 16% in real terms) and livestock output (up 11%).  Not all parts of UK agriculture had a good year in 2022 and it seemed probable that lower profits in sectors such as poultry, pigs, potatoes, fruit and vegetables would have diluted the effect of the high profits in combinable crops, dairy and grazing livestock.  This does not seem to be the case, with the Defra data showing almost all sectors having equivalent or higher output in 2022 compared to 2021.  Whilst output is not profit, this is, in itself, slightly surprising.  

This data is an ‘estimate’ for 2022.  There are often quite large revisions in the figures.  For example the 2021 TIFF has been increased considerably compared to when the data was first published last year.  At that point, TIFF for the year was put at £5,998m.  It has subsequently been raised to £6,811m – a change of +13%.  We did state at the time that we would not be surprised to see an upwards revision in the 2021 figures.   In the same way, we might expect a downwards revision of the 2022 TIFF – the figures look a little too good at present

The chart above includes a line showing the contribution of direct support (BPS plus agri-environment scheme payments) to farm incomes.  This continues to contribute a sizeable proportion of farm profits although it is on a downwards trajectory as funding is frozen in nominal terms and so falls on a real-terms basis.

On the chart is our estimate of TIFF for the current, 2023, year.  A sizeable drop is forecast – down by circa 40%.   Whilst this looks a very big number, it only puts TIFF back into its historic range – albeit at the lower end of recent years.  With TIFF being essentially profit; the ‘top slice’ between costs and incomes, there can be quite big changes from year-to-year, with swings in input and output prices.  We have seen prices in two of the big sectors, combinable crops and dairy, move sharply downwards in 2023 (see later Friesian farm article for an illustration of profits in the dairy sector).  Whilst costs have dropped from their high-points, this is unlikely to be enough to prevent a squeeze in profitability.  There may be some slight improvement for the 2024 calendar year.

The full Defra TIFF data can be found at – https://www.gov.uk/government/statistics/total-income-from-farming-in-the-uk/total-income-from-farming-in-the-uk-in-2022

Balance Sheet

Alongside the TIFF figures, Defra has also published an updated Balance Sheet for the industry.  This shows the Net Worth of farming at the end of 2022 as being £322.0bn.  This is a 5% decrease on the 2021 figure in real terms and is largely driven by a fall in the value of land assets.  This seems slightly odd when land prices through last year were firm.  However, it may well be a case of increases in land values not keeping up with the level of inflation.  As with the TIFF figures, there was a sizeable upwards revision in the 2021 data compared with the original figures released last year.

 

Defra is consulting on reforms to the wine regulations in England and Wales.  With the UK leaving the EU, the Government states that it wants to simplify the more than 400 pages of rules that apply to the sector.  It sees scope for further growth of the wine sector in this country.  There has been a significant increase in the area planted to vines over the past few years and this land use is likely to grow further with the effects of climate change.  The consultation can be found at –https://consult.defra.gov.uk/alcoholic-drinks-geographical-indications-team/consultation-wine-reform/ and runs until the 21st July.

Australia and New Zealand Trade Deals

The UK’s trade deals with Australia and New Zealand will come into force from midnight on 31st May. These are the first trade deals negotiated from scratch by the UK Government since leaving the EU and their application will result in increased competition over time particularly for the UK’s beef, sheepmeat and dairy sectors.

Whilst there will be an immediate elimination of 99% of tariffs on goods imported from these countries upon entry into force upon, for sensitive products, limits will be applied (via Tariff Rate Quotas (TRQs)) in the years following application, as a prelude to unlimited access (from Year 16 for beef and sheepmeat and from Year 6 for dairy products).  These limits are set out in the Table below. Pork, poultry and eggs are not included so the UK Global Tariff will continue to apply.

Combined Tariff-Free Access to the UK due to Australian & NZ Trade Agreements

Sources: HMRC / UK Government / Andersons
Estimates denoted in thousand tonnes (Kt) terms are rounded. Pig and poultry meat imports not deemed sensitive and will have unlimited access from Year 1 of application, but imports from Australia and NZ likely to be negligible.
# This is access granted under the UK’s current WTO Schedule and relates to TRQ specifically allocated to Australia and NZ. * Based on annual averages during 2019 to 2021.

As we have reported previously, some studies looking at the impact of these trade deals have suggested that their effects will not be as pronounced as initially had feared.  This is partly because both countries are heavily focused on the Asia-Pacific region where there has been strong demand of late. Notably, for several products (e.g. lamb), these countries already have significant TRQs with the UK, and have not been near to fulfilling these quotas of late.  That said, there is an expectation that both countries, especially Australia will make a concerted effort to increase their exports of beef and sheepmeat to the UK on the back of the trade deal’s implementation.  There have been increasing tensions between Australia and China on geopolitical issues and the UK will be seen by Australia as a good diversification opportunity.

The other concern for UK farming is the extent to which these trade deals will create precedents for future agreements with the likes of the US as well as an enhanced trade deal with Canada.  Whilst talks with the US have stalled, the progress surrounding the recent Windsor Framework agreement concerning Northern Ireland is likely to create the scope for US-UK trade talks to resume at some point.

Farm to Fork Summit

The Government has tried to allay these concerns during the recent Farm to Fork (Food) Summit (see accompanying article) when the Prime Minister set-out six key principles to help ensure that agriculture is at the heart of British trade policy:

• Putting agriculture up-front in terms of assessing the impact of future trade deals
• Protecting sensitive sectors through permanent quotas
• Prioritising new export opportunities for UK food and drink
• Protecting UK food standards with commitments on there being no chlorine-washed chicken or hormone-treated beef being placed on the UK market at any stage.
• Upholding UK production standards in terms of the environment, animal welfare and food
• Removing market access barriers for UK food and drink exports in new trade agreements

Across the industry there are conflicting views on the extent to which these principles will be adhered to when future trade deals are about to be finalised.  Many are sceptical, particularly on the permanent quotas issue, based on what happened during the Australia and New Zealand negotiations.

The AHDB has produced a ‘watchlist’ of issues for farmers to look out for when they are considering carbon payment schemes.  The information can be found at – https://ahdb.org.uk/news/schemes-in-the-carbon-market-what-to-look-out-for

The next round of the Landscape Recovery (LR) scheme is now open for applications.  Funding of £15m will be available to support up to 25 projects.  The first round of LR last year saw 22 projects funded – initially it was proposed that 15 agreements would be offered, but with 51 applications made, the round was expanded.  As its name suggests, the scheme supports ‘landscape-scale’ change – i.e. projects over significant areas.  Natural England will be looking for areas of over 500 Ha to be committed (but with no upper limit on area).  Projects are likely to be long term, up to 20 years, given the type of nature recovery being looked for.  There is a strong presumption for private finance to be draw in alongside public funding.  Applications close at midday on 21st September 2023.  More details can be found at www.gov.uk/government/publications/landscape-recovery-more-information-on-how-the-scheme-will-work/landscape-recovery-round-2  .   If the scheme is over-subscribed (which seems likely) the projects offering the most environmental benefits will be chosen.  Defra has committed to opening another round of LR in 2024 and is looking to run annual rounds in the years thereafter – subject to funding being available.

 

The Government is consulting on changing the Planning rules to tighten up the rules on short-term lets; such as AirBnB.  This comes after concern that the social fabric of certain coastal and rural tourist hotspots is being damaged by the volume of homes being let out to holiday-makers.  The Welsh Government has already proposed similar plans.  The consultation from the Department for Levelling-Up, Housing and Communities (DLUHC) proposes a new Planning Use Class (‘C5’) for dwellings being used for short-term lets.  Permitted Development Rights would be introduced at the same time that would allow houses to move between permanent residencies and short-term lets – therefore, for many, there would be little practical effect from the new rules.  However, the Permitted Development Rights could be suspended where a particular local issue is identified with second homes.  In these cases, Planning Permission would be required if a dwelling is going to be used to a short-term let.  It appears that properties already being offered as holiday accommodation will not be affected – it is only newly created short-term lets that would be affected.  There is also a separate consultation on how short-term lets should be registered (so that the scale of the problem can be gauged).  The legislative changes are expected to be enacted later this year.  More details can be found at – https://www.gov.uk/government/news/new-holiday-let-rules-to-protect-local-people-and-support-tourism.   Whilst not having a large impact on most farms and rural businesses, these new rules may make farm diversification slightly harder in the most ‘touristy’ areas.

 

The Bank of England raised UK Base Rates by a further 0.25% on the 11th May.  This brings them up to 4.5%.  It is the twelfth meeting in a row where rates have been increased as the Bank tries to control stubbornly high inflation.  Expert opinion is divided as to whether this will be the end of rises or whether at least one more 0.25% increase will be seen by the summer.   

The Prime Minister, Rishi Sunak, held a ‘food summit’ on the 16th May.  This fulfilled a promised made in the summer when he was campaigning for the Conservative Party leadership.  The ‘Farm to Fork’ meeting brought together representatives from all parts of the food supply chain, with the aim of boosting growth, driving innovation, improving sustainability and increasing resilience.

Prior to the summit, the Government announced a package of measures to help the food and farming sectors.  These include;

• confirmation that 45,000 visas will be available under the SAW scheme in 2024 (the same as in 2023)
• a commitment in an open letter to British farmers that their interests will be protected in future trade deals (although welcome, there is likely to be a degree of scepticism in the industry following how little the industry’s concern’s were listened to when the previous deals with Australia and New Zealand were negotiated).  The open letter can be seen at – https://www.gov.uk/government/publications/prime-ministers-open-letter-to-british-farmers-15-may-2022
• more Government funding to promote exports, including five new Agri-food attaches, additional exposure at trade shows, and extra money for the GREAT Food & Drink campaign (see https://greatcampaign.com/campaigns/see-food-differently/).  There will also be specific funds for seafood and dairy exporters
• up to £30m is promised to help develop precision breeding techniques and build on the opportunities presented by the recent Precision Breeding Act
• following reviews into fairness of contracts in the dairy and pigmeat sectors, similar reviews will be undertaken in the horticulture and egg sectors
• a commitment that the Grocery Code Adjudicator will remain independent and not be subsumed into the Competitions and Markets Authority
• a replacement for the Producer Organisation (PO) scheme in the horticulture sector when the current EU ‘legacy’ scheme ends in 2026.  There is no indication of what the replacement will look like in detail.  It is fairly clear that it will not be a roll-over of what is currently in place as it is stated that the new scheme will be better tailored to the needs of UK growers and will be ‘more inclusive’ – especially for glasshouse growers  
• a call for evidence later in the year on how red-tape (presumably Planning regulations) can be cut to help the conversion of farm buildings to diversification activities.  There is also a commitment to reform the Planning regime to make the building of glasshouses easier
• accelerating work on making water infrastructure more resilient to ensure agriculture has access to the supplies it needs

Full details of the package can be found at – https://www.gov.uk/government/news/government-backs-british-farmers-with-new-package-of-support.

In terms of the summit itself, no further concrete actions have, as yet, emerged from it.  Around 60-70 representatives of the food chain attended the event at 10 Downing Street, although the full list of delegates has not been made available.  There has generally been a positive response to the meeting – but perhaps more due to the fact that it was happening at all, rather than any outcomes from it.  The NFU has called for it to become an annual event, but the Government has, so far, not responded to this.