Category: Policy & Business

Rents

The latest agricultural rents data shows quite a mixed picture.  Some sectors have experienced a rise in ‘full’ Agricultural Holdings Act (AHA) rents whilst at the same time seeing a fall in FBT rents; for other sectors it is vice versa.  The table below shows a summary of the last three years.  Defra’s Farm Rents publication uses data from the Farm Business Survey.  Due to the time taken to collect the data, it is somewhat historic.  The figures just published are for the 2020/21 year, March to February, (shown as ‘2020’ in the table below).  The full statistical notice can be found at https://www.gov.uk/government/statistics/farm-rents.

The overall average annual rent for AHA tenancies in 2020 has risen by 5% compared with 2019.  Average Farm Business Tenancy (FBTs) rents, after an annual decline in 2019, have also risen, up by 8% to £239 per Ha.  Cereals farms on AHA Tenancies recorded a 10% rent increase, whilst FBT rents declined marginally.  Although only a small decrease this year, it can be seen this is the second year in a row that Cereal FBT rents have fallen.  However, they still remain 16% higher than AHA rents.  The only other farm type to experience a rise in AHA rents in 2020 compared to 2019 is Lowland Cattle & Sheep, again after a drop in 2019.  However, Lowland cattle and sheep farms have also seen a significant (30%) increase in FBT rents after a large decline in 2019, perhaps reflecting better conditions in the livestock sector.  Dairy farm rents show  a decline in AHA rents but continue to see steady increases in FBT rents, perhaps a reflection of progressive farms keen to expand in the sector.

As written previously, data on rents can fluctuate annually and one year’s information should not really be taken in isolation.  In general, rents have been on an upward trend, but looking to the future it would be expected that, as the BPS is phased-out, then overall rents will fall.  

Land Values

Also a little historic is the RICS/RAU Farmland Market Directory of Land Sales.  As previously reported, the RICS/RAU Farmland Market Survey has been discontinued.  However the Farmland Market Directory of Land Sales provides a Weighted Average – comparable with the figures in the previous Farmland Market Survey.  The Weighted Average Value excludes those sales which have been identified as having a residential value of more than 50% and a regional adjustment is also made.  The most recent values are for the first half of 2021.  This shows the Weighted Average value per hectare was £27,191 per hectare (£11,004 per acre).  This compares with £25,674 per hectare (£10,390 per acre) for the full year 2020.  The table below shows the last six surveys.

As can be seen land values have remained robust even through the uncertainties of Brexit and Covid.  Demand remains strong, with rollover money and lifestyle buyers helping to drive the market.

Defra has released further information on the Sustainable Farming Incentive (SFI) for 2022.  It is now expected to open for applications in June and then remain open with no closing date.  This is to allow those interested to apply at a time to suit.  However, Defra has stated that, if it is necessary to close applications, it will give six weeks notice.  The information is included in a ‘collection’ of webpages which can be found at https://www.gov.uk/government/collections/sustainable-farming-incentive-guidance.  Below is a summary of the key points:

• Agreements will be for three years.  Initially it will only be open those businesses which are eligible for the BPS – the business (SBI) must have at least 5 Ha of eligible land and 5 or more BPS entitlements on 16th May 2022 – but there is no requirement to have made a claim.
• The applicant must have ‘management’ control of the land for three years e.g. own the land or a tenancy
• Payment will be made quarterly in arrears i.e. the first payment will be made three months after the agreement commences
• The Standards will not include funding for capital items in 2022.  But it is possible to apply for existing funding for capital items for parcels included in an agreement, such as Countryside Stewardship capital grants
• In the future, SFI will include capital items funding to help complete the actions in the standards
• Applications will be online via the Rural Payments Service.  Prospective applicants are encouraged to ensure their digital maps are up-to-date, including land cover (certain land covers will be eligible for each standard) and available area.  With the application window opening after BPS, in most cases these should already have been checked
• Certain changes can be requested to an agreement.  It will be possible to upgrade an agreement annually to:
  • add more Standards as they become available
  • add more land, including land coming out of Countryside Stewardship
  • increase Levels within Standards already in an SFI agreement
  • it will not be possible to reduce the Levels or land area, except under very limited and specific circumstances
  • it will not usually be possible to transfer an SFI agreement to another person
• You do not need to have an SFI Standards agreement to be eligible to apply for the SFI Annual Health and Welfare Review.

Below is a summary of payments.  The Moorland Standard payment has been increased, fairly significantly, since the previous announcements.  Those with common land entered into an SFI agreement will receive an additional £6.15 per Ha.  Payments for the other standards, remain the same:

In response to rocketing prices of fertiliser, Defra has announced a number of steps to help farmers with their nutrient management.

Urea

The planned ban on the use of urea fertiliser has been scrapped.  Instead, an industry-run voluntary scheme will aim to reduce the ammonia emissions from solid urea fertiliser, commencing in 2023.  This will be delivered through the Red Tractor farm assurance scheme and FACTS advisers.  This is an alternative approach to the Options included in the Defra Consultation (see our article https://abcbooks.co.uk/ban-on-urea-fertiliser/) and will mean scheme members can:

Farming Rules for Water

Defra has released ‘revised and improved’ statutory guidance on applying the Farming Rules for Water.  The de facto ban on autumn manure spreading, based on how the rules were being enforced, has been removed.  However, farmers will need to demonstrate that what they are doing does not pose a risk of diffuse pollution – and the guidance is somewhat complex.

The Farming Rules for Water (formally the Reduction and Prevention of Agricultural Diffuse Pollution (England) Regulations 2018) have not been amended.  Instead, the new guidance tells the Environment Agency about criteria that they should consider when assessing if enforcement action should be taken under the regulations.  It also provides some clarity for farmers as to how to manage the use of slurry and other manures during autumn and winter including;

• the planning of applications,
• assessing the crop and soil needs,
• assessment of significant risk of agricultural pollution
• spreading time periods

The new guidance can be found at https://www.gov.uk/government/publications/applying-the-farming-rules-for-water/applying-the-farming-rules-for-water.

Slurry Storage

The final Defra announcement on the issue of nutrients was a confirmation that grants for slurry stores will be available in England.  As we wrote in the February Bulletin, this will come under the Farming Investment Fund.  The announcement didn’t provide much further detail (this is expected over the next few months).  However, from what we have learned, the following rules are likely to apply for Slurry Infrastructure Grants;

• grant funding will be at 50% rates with grants from £25K to £250K (thus project sizes of £50K to £0.5m)
• initially they will only apply to dairy, beef and pig farms already on a slurry-based system – i.e. those operating a FYM system will not be eligible to get grants to ‘convert’ to slurry
• grants will fund projects that create up to 6 month’s storage.  If additional capacity beyond 6 months is constructed, this element will not be grant-funded
• the scheme will fund replacement, reconstruction and additions to storage.  However, once the work is completed all slurry storage on the farm must be compliant with the Silage, Slurry and Agricultural Fuel Oil (SSAFO) regulations.  Effectively, pre-1991 ‘grandfather’ rights on old stores will be removed for those applying for grants
• stores will need to be covered.  Grants may be available for covering existing stores, but this could depend on the type/quality of existing storage
• all types of storage will potentially be eligible including earth-bank, lined lagoons (as long as they can be covered)
• a manure management plan (to work out volumes of slurry) will be required – potentially signed-off by the Environment Agency.  There will also need to be a Nutrient Management Plan to show how the stored slurry will be used
• the grant will be competitive, with a scoring system used.  Farms in certain locations (priority catchments, close to protected sites etc.) will be favoured.

These are subject to change before the final scheme is launched.  However, farmers (and their advisors) may wish to start preparing ahead of this by doing such things as applying for planning permission, securing quotes for work and discussing funding.  

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.