Category: Policy & Business

The rise in input prices had already been considerable coming into February.  Between January 2021 and January 2022 the price of UK produced ammonium nitrate was up 145%, urea up 156%, and glyphosate up 307%.  Those price rises reflected a wider direction of inflation in agricultural inputs.

However, following Russia’s invasion of Ukraine, input prices have spiraled upwards further.  The value of ammonium nitrate has exceed £900 per tonne, up from £645 per tonne in January.  The value of tractor fuel has also risen substantially.  In 2021, the price of red diesel average 65.64 pence per litre according to AHDB.  Whilst price discovery for inputs is challenging at the moment, with terms changing frequently, red diesel prices have been quoted by some publications in excess of 130 pence per litre.

The importance of Russia in energy markets, especially natural gas and crude oil, will pose significant challenges for the industries relying on these commodities.  Natural gas is a key input into ammonium nitrate production and fertiliser prices will likely remain elevated as a result.

The high cost of inputs will challenge many businesses over the next 12 months and beyond.  The working capital of farms will be under significant pressure.  While the cost of outputs has risen the level of cash required to operate has also increased rapidly.

The Chancellor, Rishi Sunak, used the Spring Statement on the 23rd March to announce a number of policies designed to mitigate the cost of living crisis.  The Statement came a day after the latest inflation figures were announced.  These showed year-on-year inflation in February (CPI measure) had risen to 6.8%.

Despite much speculation, the 1.25% increases in National Insurance (NI), known as the Health and Social Care Levy, will still be introduced in April as planned.  Instead, the threshold at which NI becomes payable by employees will be raised from the current £9,500 p.a. to £12,570 – the same as Income Tax.  This change will not happen until July however, as it is stated that payroll systems will need to be adjusted.  From April to June the threshold will be the previously announced £9,880.  In addition, the Employers’ Allowance for NI will be increased from £4,000 to £5,000.

In a crowd pleasing measure, the rate of fuel duty has been reduced by 5p per litre.  There was also £500m promised to Local Authorities to help vulnerable families.

In a nod to the energy crisis, and the need to wean the economy off (Russian) fossil fuels, there was a boost for renewables.  Home energy-saving equipment such as solar panels and heat pumps already have a reduced rate of 5%, but this will be cut to zero.

Finally, the Chancellor committed to cutting the basis rate of Income tax to 19% from the present 20% by the end of the current Parliament (2024).

The 5th Woodland Carbon Guarantee auction will take place from midday on Monday 9th May to midday on Sunday 15th May 2022.  Applications to take part in the next auction can be submitted now and need to be made by midnight on Sunday 24th April.  Woodland creation projects accepted into the Woodland Carbon Guarantee scheme have the option to sell WCUs to the government every 5 or 10 years up to 2055/56. The government will buy the WCUs for an agreed guaranteed price that is index-linked for the life of the contract. However, you can still choose to sell the carbon credits on the open market at any time.  In order to apply, applicants must first register their project with the Woodland Carbon Code (WCC).  The WCC verifies and records the amount of carbon a project will capture and have available to sell in the future.  More information on the Woodland Carbon Guarantee scheme can be found at https://www.gov.uk/guidance/woodland-carbon-guarantee#full-publication-update-history

Defra has launched a Green Paper and associated consultation on the mechanisms to drive nature recovery in England.  It covers a number of areas.  Firstly, the system of designations around nature (such as SSSIs) and whether this can be simplified and improved.  Secondly, how the ’30 by 30’ commitment to protect 30% of the areas of England by 2030 is to be delivered.  Thirdly, the improvement of wildlife legislation and, lastly, the roles and responsibilities of the various Defra Agencies that are responsible for nature.  The consultation can be found at – https://consult.defra.gov.uk/nature-recovery-green-paper/nature-recovery-green-paper/ and runs to 11th May.

 

The Bank of England increased the Base Rate by a further 0.25% on the 17th March.  This takes the cost of borrowing from 0.5% to 0.75%.  This is a response to increasing inflation.  The Bank is tasked with keeping inflation at 2% but, according the the Bank’s own forecast, increases in prices will hit 8% this spring.  The rise in interest rates is meant to bring inflation back towards the target over the medium term.  Many forecasters believe that there will be two further 0.25% rises before the end of 2022, taking rates to 1.25%.  It is not only UK monetary policy that is having to react to rising inflation.  This month also saw the US Treasury raise its interest rates for the first time since 2018, from 0.25% to 0.5%.

Under the Environment Act, the Government has to set binding environmental targets for England.  Defra is currently undertaking a consultation on this.  Some of the targets will have a significant effect on agriculture over the coming years.  Examples include;

• to improve water quality, there should be a reduction in nitrogen, phosphorus and sediment pollution from agriculture by at least 40% by 2037 against a 2018 baseline
• the woodland area should increase from 14.5% of England to 17.5% by 2050
•  the decline in species abundance should be halted by 2030 and then improved by 10% by 2042 compared to 2030
•  over 500,000 hectares of wildlife-rich habitats outside of protected sites to be created or restored by 2042, compared to a baseline of 2022

It can clearly be seen how these types of targets will lead directly through into policy in areas such as ELMs, woodland creation and slurry storage and management.  The consultation can be found at – https://consult.defra.gov.uk/natural-environment-policy/consultation-on-environmental-targets/supporting_documents/Environment%20Targets%20Public%20Consultation.pdf.  Responses are required by the 11th May.

Defra has released its forecasts for Farm Business Income (FBI) for 2021/22.  Taken from the English Farm Business Survey (FBS), the data shows FBI for various standard farm types.  The FBS works on February/March year ends so the period being reported covers harvest 2021 and the 2021 BPS – including the first year of deductions under the Agricultural Transition.  FBI can be thought of as equivalent to the ‘Net Profit’ measure widely used in accountancy.  The full release can be found at https://www.gov.uk/government/statistics/farm-business-income/farm-business-income-in-england-202122-forecast.

In the chart below, the first column for each sector shows the average FBI from 2012/13 to 2016/17.  The next four columns show the FBI for the subsequent four years, broken down into four ‘profit centres’.  The final, light blue column is Defra’s forecast for the current 2021/22 year; the data to split down into the profit centres is not yet available.  As the chart shows, except for specialist pigs and poultry farms, average FBI is expected to increase for 2021/22.  Higher prices for key outputs, such as cereals, meat and milk is expected to result in a rise in output, but this will be offset to some extent by higher costs, particularly for feed and fertiliser.   Compared to 2020, the average BPS is expected to decline by about 9% across all farm types, as we enter the first year of progressive reductions.

Source:Defra

General cropping and cereals farms are both forecast to see strong rises compared with 2020/21, 70% and 51% respectively, driven by better yields and higher prices.  Even though input costs are forecast to rise by 18% on cereals farms and 12% on general cropping (mainly due to fertiliser costs more than doubling) output is expected to more than offset this.

As the chart shows, dairy farms perform well and have been pretty consistent over the last three years.  The current forecast sees further (and larger) improvement, a 21% rise compared with last year.  Milk and dairy products are expected to improve by 9% year-on-year, although production is forecast to be lower, strong prices are expected to more than compensate for this.

Grazing livestock farm incomes are forecast to make marginal increases.  This is perhaps somewhat surprising given current buoyant livestock prices, but higher crop costs and building depreciation is increasing inputs.  As can be seen for the two grazing livestock farm types, the return from agriculture is consistently negative; it takes part (or all) of the Basic Payment to return these farms to profit.  This is of real concern when looking ahead to the removal of direct support.  This year the Basic Payment is predicted to fall by around 6% on lowland and 9% on LFA grazing livestock farms.

Both specialist pigs and poultry are forecast to see big decreases in their FBI; down 73% and 51% respectively.  This is as a result of input costs rising considerably more than output.  We have written extensively about how Brexit and Covid has impacted negatively on pig prices, but this has been exacerbated by high feed costs.  For pig farms, feed costs, (which typically make up around 50%-60% of all their costs) are expected to rise by about 22% and on poultry farms will be 19% higher.

It’s difficult to know where farm incomes are heading.  Cereals and oilseed prices were already high due to tight supplies. Fertiliser is almost now a by product of CO2 production due to sky-high energy prices and red diesel has increased sharply. But this has all now been exacerbated by the war in Ukraine.  This will now remove large stocks from the 2021 harvest when carryover was expected to be low anyway.  May feed wheat prices are circa £300 per tonne and rapeseed £740 per tonne.  Both the Ukraine and Russian harvests will more than likely be disrupted for this year and possibly next.  Closer to home fuel and fertiliser prices are likely to shape next year’s harvest.

Our article on 4th March (see https://abcbooks.co.uk/rpa-log-in/) reported on problems Agents were having when trying to access Clients’ BPS accounts on Rural Payments.  It seems following the RPA’s downtime on Wednesday the issue has now been resolved.  Agents who do not have ‘full permissions’ should now be able to log-on as previously.  However, it does look like those who do hold ‘full permissions’ for the account will still be asked to check the details, but this is not now denying access to the account.  Whether this is just a short term fix is not clear.  It is possible the situation will arise again, but hopefully with some prior notice and not just before the system’s busiest time of the year.

Defra has released its latest information from the Farmer Opinion Tracker.  This asks farmers for their views on issues such as business planning, relationships with farming organisations (including Defra), new schemes, and the future of farming.  The survey first commenced in autumn 2019 and is usually undertaken in April and October, with these results coming from the October 2021 survey.

Worryingly, when asked if they understood Defra’s vision for farming the percentage of respondents which said ‘no’ but would be interested to know more was the highest since the Tracker began, at 36%; up from 29% in April 2021 and also 29% in autumn 2019.  Those who said ‘yes’ had increased from 5% to 7%, but those who ‘roughly knew’ had declined from 62% in April to 54% in the latest survey.  In addition, when asked if they had the information they required for business planning the percentage that had ‘all the information’ or ‘most of the information’ had declined from 40% in April to 37% in October.

One of the biggest changes since the survey began just three years ago, is the proportion of holdings that responded saying they needed to make changes to their business in the ‘next 3-5 years’, up from 52% in 2019 to 64% in October 2021 (perhaps an indication that now we have entered the Agricultural Transition, the loss of BPS is starting to ‘concentrate the minds’ of many).   Of these, the majority (53%) said they intended to stay in farming, but diversify into non-farming areas.  However, 9% said they planned to either retire or pass on the farm to the next generation with a further 3% saying they would be leaving for ‘other reasons’.

Farmers on 80% of holdings said that Defra paying for environmental outcomes was currently ‘very important’ (47%) or ‘moderately important’ (33%) to their holding, with the proportion believing it to be ‘very important’ increasing to 67% in the future.

A lack of optimism and confidence in the future of the industry is indicated by just 1% of all respondents being ‘very confident’ that changes to the schemes and regulations will lead to a successful future in farming, with the majority (68%) ‘not confident at all’.  Another worrying outcome was that 2/3rds of all farms were ‘not confident’ in Defra and Defra Agencies’ abilities to work together to deliver changes to schemes or regulations.  With only 3% ‘very confident’ and 33% ‘somewhat confident’ that their relationship with Defra will develop positively in the future, down from 4% and 42% respectively in April.  Just 36% felt ‘very positive’ (4%) or ‘somewhat positive’ (32%) about the future of farming.  The full survey can be found at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1056800/Opinion_Tracker_Oct_2021_24feb22.odt

 

It has been confirmed that Young Farmers and New Entrants will not be able to apply for entitlements from the National Reserve in England this year, except in respect of land which was leased, bought, or gifted prior to 17th May 2021.  Confirmation comes as the Direct Payments to Farmers (Allocation of Payment Entitlements from the National Reserve) (England) Regulations 2022 SI 200 come into force.  With De-linking of entitlements expected to take place 2024 this is just another step in drawing the BPS to a close.