Category: Policy & Business

Big Uplift in 2020 Profits

The 2020 year was not as bad for farm profitability as first estimated.  Defra has released revised figures for Total Income from Farming (TIFF) for the year.  These show that total aggregate profits for the farming sector in 2020 were £5.121bn (real terms, 2020 prices).  This is just an 8% drop compared to the 2019 returns.  TIFF is the aggregate profit from all UK farming businesses for the calendar year.  It shows the return to all entrepreneurs for their management, labour and capital invested.

When Defra made its ‘first estimate’ of 2020 profitability back in May, it had a year-on-year drop of 20% compared to 2019 (see https://abcbooks.co.uk/farm-profits-3/).   The large revision is largely put down to two factors.  Firstly, farm diversification was not as badly affected by Covid in 2020 as first estimated.  Secondly, the volume of seeds, fertilisers and sprays used in the year was lower than first thought.  This will be linked to the lower planted areas for harvest 2020 and more spring cropping.

Whilst this revision is quite large, it is not a huge surprise.  The figures coming out of the Farm Business Survey (see last month’s article) had already suggested that the 2020 year was not as bad financially as many had feared.  This is also borne out in individual farm accounts.  

We had been forecasting that 2021 TIFF would be higher than 2020.  This is still the case, although the uplift in last year’s figures means the ‘rebound’ will be less pronounced.  Even so, it seems quite possible that aggregate UK farm profits for this year could be back at the £6bn level which has tended to be at the upper end of the range in recent years.  With the large cost increases seen in recent months, it seems likely that 2022 will drop back again.

At this time of year Defra usually provide their initial forecast of TIFF for the year.  However, the first official figures for 2021 profitability will not be published until January or February.  For more information on the farm income figures see – https://www.gov.uk/government/statistics/total-income-from-farming-in-the-uk

Farm Productivity

At the same time as the TIFF data was released, updated figures on UK agricultural productivity were produced.  The series is Total Factor Productivity (TFP), this measures how well farming converts physical inputs into outputs and gives an indication of the efficiency and competitiveness.  TFP dropped 4.5% between 2019 and 2020.  This is largely attributed to the effects of the weather in autumn 2019 through to spring 2020.  Like the TIFF the figures have actually improved since the initial estimates (the drop had been 6.7% previously).

For more details see – https://www.gov.uk/government/statistics/total-factor-productivity-of-the-agricultural-industry

The Scottish Government has announced that rates of Income Tax will remain unchanged for the 2022/23 tax year.  Whilst the thresholds for the 19% Starter and 20% Basic rates will be increased by CPI to £12,570 and £14,372 respectively, the thresholds for the Higher and Top rate bands will be frozen at £43,662 and £150,000.  This effectively brings a bigger proportion of income into the higher tax bands.  In terms of other taxes where the Scottish Government has autonomy to set levels, the Business Rate multiplier will rise marginally to 49.8p.  There will be rate reliefs for the first three months of 2022/23 for retail, leisure and hospitality businesses.  The Land and Buildings Transaction Tax (aka Stamp Duty) rates remain unaltered.  Landfill tax rates increase to £98.60 per tonne or £3.15 per tonne for inert waste.

The cross-compliance guidance for the 2022 scheme year has been published.  It can be found at https://www.gov.uk/guidance/guide-to-cross-compliance-in-england-2022.  In summary, there have been no changes for the coming year so the rules remain the same as in the past couple of years.   The Welsh Government has also published its cross-compliance rules for 2022 (see https://gov.wales/sites/default/files/publications/2021-12/cross-compliance-verifiable-standards-2022.pdf).  Again, these effectively show no change from 2021.

The latest round of the Countryside Stewardship Facilitation Fund opened on 13th December.  It will close to applications on 19th January with Agreements running from 1st June 2022 for three years.  The funding is for a person or organisation (the facilitator) to help a group of farmers, foresters or land managers to work together to provide environmental benefit at landscape scale.  This aims to achieve greater environmental improvements than individual holdings could make on their own.  Members of the Group can already be in an agri-environment scheme and, from 2022, can enter ELM (if eligible).  It is the Facilitators job to ;

• develop cooperation between members
• interpret the Countryside Stewardship Statements of Priorities and agree which Priorities the Group members will take forward.
• provide guidance to members in submitting applications and endorsing these to show they are consistent with the Group’s objectives.

The Facilitator will also have to have the relevant skills (or them buy-in) to support members to deliver the CS Priorities.  Furthermore they will need to show what the Group is doing differently through working together rather than individually and the difference this is making to the delivery of CS Priorities.  The scheme is competitive and only those offering the best value for money will be selected.  Full details can be found via  https://www.gov.uk/guidance/countryside-stewardship-facilitation-fund-2022-scheme-manual

Last month, the Irish Government published its Climate Action Plan.  This is designed to achieve a 51% reduction in greenhouse gas (GHG) emissions across the Irish economy by 2030 and achieve net-zero emissions by 2050. The key points from an agricultural perspective are;

• Agricultural emissions reduction target: Irish agriculture is tasked with reducing its footprint by 22-30% in 2030 versus the 2018 base of 22.03 million tonnes (MT) of CO2 equivalent. This equates to a 4-6Mt reduction in annual emissions. This target is to be achieved via;
  • GHG-efficient farming practices: increased uptake of innovative practices to help to improve animal breeding (genetics) to assist with earlier finishing of cattle (reduce average slaughter age of prime animals from 27 to 24 months by 2030).  Targets to reduce crude protein in animal diets (0.7Mt reduction) and increased organic farming.  Reduced fertiliser usage is also a key target, particularly chemical nitrogen (325-350Kt by 2030), coupled with greater utilisation of clover and multi-species swards.  There will also be a research programme to bring new technologies and feed additives on stream to aid efforts. Notably, there is not a specific target to reduce livestock numbers which had been a major concern for farmers.
  • Diversification of farming activities: includes exploring the development of a carbon farming model and increasing organic farming.   There is €260 million ear-marked under the CAP Pillar II spending for an organic farming scheme.  This aims to switch an extra 275,000 ha to organics by 2030.  Current organic area is 76,000 ha and by 2030 this would increase to 350,000 ha under the plans and reduce farming’s carbon footprint by an estimated 0.3Mt.
  • Biomethane business opportunities: exploring the possibility of increasing biomethane production from sustainable feedstocks such as waste and agriculture. This is part of a wider effort to inject 1.6TWh of biomethane into the gas grid by 2030 which is intended to result in a 0.1-0.2MtCO2e abatement of emissions in agriculture.
• Land Use, Land Use Change and Forestry (LULUCF): has a 37-58% emissions reduction target range by 2030. Here the focus is on re-afforestation, rewetting of peatlands and more efficient grassland management. Specific objectives include;
  • Forestry: by 2030, achieve a planting rate of 8,000 ha/year to increase carbon sequestration. A new forestry programme will be prepared for launch in 2023.
  • Deforestation: limit to less than 900 ha/year by 2030.
  • Peatlands and wetlands: by 2030, rehabilitate 65,000 ha of peatlands and reduce management intensity of 80,000 ha of drained organic soils. The latter target could potentially affect grass production and will be aided by a shift to organic farming.
  • Grassland (mineral): improve the management of 450,000 ha of (mineral) grasslands to increase carbon sequestration.
  • Cover crops: increase the area under cover crops to 50,000 ha.
• Other targets: of relevance to agriculture include;
  • Renewable electricity: increase renewables’ proportion of electricity production to 80% by 2030. An extra 8GW of electricity from onshore wind and an extra 1.5-2.5 GW from solar PV is also targeted. This will include a small-scale generation scheme for farmers, businesses and communities to generate their own electricity and to feed surpluses back into the grid.
  • Zero emission gas storage: to include greater utilisation of biogas/biomethane as well as green hydrogen. This includes ambitions to blend zero-emission gas into fuel use in buildings and industry.
  • Biofuel blend rates: bioethanol blend rate will increase to 10% by 2030 to reduce petrol car emissions. Biodiesel blend rate to reach 20% in the same period.

Whilst many farmers are concerned about how the Climate Action Plan is going to affect their businesses, there was some relief that a specified reduction in livestock numbers was not included. That said, many believe that significant advancements will be required in areas such as genetics, feed additives etc. for the 22-30% target to be attainable. With the eye-watering price hikes in chemical fertiliser, projected to be 120-200% higher in Ireland in 2022 versus 2021, many see this as being the biggest driver of decreasing usage in the short-term.

The move towards organics is in line with targets elsewhere in the EU. However, whilst organics might help in terms of emissions, the gains are projected to be relatively small and many are concerned that there is insufficient demand for premium-priced organic produce and these premia will erode with significant supply increases.

More information is available via:  https://www.gov.ie/en/publication/6223e-climate-action-plan-2021/

The RPA paid 97% of BPS claimants on the first day of the window (1.2% more than last year).  In addition, 59% of Environmental Stewardship and 54% of Countryside Stewardship annual revenue claims have also been made.  In total just over 97,500 payments have been made totalling £1.725bn in the first few days of the payment window, making it the best performance by the RPA so far.  This is the first year of the Agricultural Transition and all payments will have been reduced by 5%, with larger payments receiving a higher deduction.  With regards to environmental payments, a reminder these are all paid in one tranche now.

Defra has announced more details on how the Sustainable Farming Incentive (SFI) will operate in 2022 and the years after.

Standards and Rates

As previously outlined, the SFI 2022 will contain four Standards  – Arable & Horticultural Soils, Improved Grassland Soils; Moorland & Rough Grazing and Animal Health and Welfare.  The table below summarises the payment rates and actions required;

There will be no capital payments under SFI2022 but these will be added later.

Scheme Rules

The following general SFI rules will apply to all the 2022 Standards and any additional ones added later (see below);

• applicants for the SFI must be current BPS claimants.  This restriction will be dropped in future to let other land managers enter.
• SFI agreements will last for 3 years.  There will be a 12 monthly review of agreements at which point more land can be added, additional standards incorporated or the ambition level within standards raised.  During the 3 year agreement farmers will only be able to reduce ambition levels or coverage in exceptional circumstances – therefore the flexibility in agreements is only one way.
• payment levels will be fixed for the three-year period at the prevailing level when the agreement starts.  They may be adjusted subsequently as more experience of the scheme develops.  Payment will be quarterly in arrears (i.e. more frequent than current schemes).
• the SFI will operate on a land-parcel basis.  Standards can be signed-up for on a field-by-field basis rather than the whole farm having to be entered.  It appears that different fields can have different ambition levels under the same Standard.
• land must be under the ‘management control’ of the applicant.  This is taken to be the the Tenant under let situations.  There will be no requirement for Tenants to gain Landlord’s permission to enter the SFI.  Where a tenancy has less than 2 years to run this land will not be allowed in the SFI.  As a transitional measure, land with 2-3 years remaining on its lease will be allowed in.
• Land already in Countryside Stewardship (or other existing schemes) can also be entered into into the SFI as long as the prescriptions do not overlap or conflict.  This in unlikely for the Soils Standards as they are asking for different actions than CS.  It is also stated that land entered into the SFI can be used for biodiversity offsets or other private agreements.
• Common land will be able to enter the SFI through group agreements.  A ‘single entity’ (e.g. the Commons Association) will be required to submit the application.
• a 10-week application window for the SFI will open in 2022.  The precise timing of this will be given in the New Year (although it is stated it won’t clash with the BPS).  Given the statement from Defra that it would like to ‘make the first SFI payments before the end of the year’ this seems to indicate SFI applications after May.  In future years, probably from 2024 onwards, applications will be possible year-round
• the monitoring of agreements is stated to be ‘simpler, fairer and more proportionate’ than previous EU schemes.

Future SFI

Whilst only indicative at present, Defra has set out when further Standards may be added to the SFI;

• 2023:  Nutrient Management; Integrated Pest Management; Hedgerows.
• 2024:  Agroforestry; Low & No Input Grassland; Moorland & Rough Grazing (all levels); Water Body Buffering; Farmland Biodiversity
• 2025:  Organic; On-farm Woodland; Orchards & Specialist Horticulture; Heritage; Dry Stone Walls

It is possible other Standards will be included as well.  It is notable that in the list above there is no Arable Land Standard or Improved Grassland Standard – both of which were in the Pilot scheme.  Possibly they have been subsumed into ‘Farmland Biodiversity’ or they may have been deemed too unattractive.  

Other Schemes

The announcement on the SFI was made by George Eustice at a speech to the CLA.  At the same time he announced that the payment rates under next year’s Countryside Stewardship (for agreements starting Jan 2023) would be increased.  Details of the payment rates are promised in January.

It was also stated that more details on the Local Nature Recovery (LNR) scheme and the Landscape Recovery Scheme would be provided in ‘the New Year’.  Landscape Recovery Pilots are likely to be offered in 2022 but Local Nature Recovery Pilots may not be seen until 2023.

 

Latest farm income figures released by Defra show a surprising increase.

The figures are for Farm Business Income (FBI).  This effectively shows the profit for an average full-time farm in each of the main sectors of English farming.  The data is for the 2020/21 year (March to Feb) which covers the 2020 harvest, 2020 BPS payments and the first months of the Covid outbreak.

The aggregate farm business profitability figures (Total Income from Farming – TIFF) released in May showed a 15% fall in returns.  Although this was for the calendar year 2020 and the whole of the UK, it might be thought that the FBI figures would show a similar trend.  However, looking at the table below it can be seen that all sectors, apart from General Cropping and Poultry showed higher profits.  And, overall, FBI rose by 5%

The latest figures show significant (upwards) revisions from the first estimates of FBI published in April 2021 (figures in italics).  It seems there was a general under-estimation of output in the first set of data.

This means that the TIFF figure for 2020 could well also be revised upwards.  An update of this is expected shortly, along with the first estimate for farm profits for the 2021 year.  Overall, the emerging data suggests that the 2020 harvest year was not as bad, financially, as many feared.

Farm Business Income represents the financial return to all unpaid labour (farmers and spouses, non-principal partners and their spouses and family workers) and on all their capital invested in the farm business, including land and buildings.

Following a consultation earlier this year, the Scottish Government has published new legislation for the protection of water.  The Water Environment (Controlled Activities)
(Scotland) Amendment Regulations 2021 set out new standards for storage of slurry, silage, manure and digestates.  Furthermore, the legislation also outlines new measures for slurry application.  The key points are summarised below.

Silage storage (not in bags or bales)

• Stores built pre-September 1991, previously covered by grandfather rights, must now meet a new set of standards.  These are lower than the British Standards for new stores, however.
• Where stores built pre-1991 are enlarged, reconstructed or remedial works conducted, they must comply with the British Standards by 1 January 2026.
• Stores built before 1 January 2022 but after 1 September 1991 must comply to the British standards by 1 January 2024.
• Stores which are built, substantially reconstructed, or enlarged after 1 January 2022, must have a 20-year life span, with proper maintenance.
• the Scottish Environment Protection Agency (SEPA) must be notified at least 30 days prior to the start of construction, substantial rebuilt, or enlarged stores or effluent tanks.  Engineers Certificate to be retained for life of store.

Silage making and storage (bags or bales)

• Must not be stored, opened, or unwrapped within ten metres of surface water or opening to a surface water drain.

Slurry storage

• Where slurry is produced on farm by housed animals, storage must be sufficient for the quantity likely to be produced in 26 weeks for pigs and 22 weeks for cattle.
• New measures relating to the design of slurry storage are also introduced.  Including the need to notify SEPA prior to construction.
• Systems constructed pre-1991 must now comply with a set of basic standards to ensure they are fit for purpose and protecting the environment.  Where a pre-1991 system has been enlarged, reconstructed, or remedial work conducted, systems have until 1 January 2026 to comply.
• As with silage storage, systems constructed prior to 1 January 2022 have until 2024 to comply with new standards.
• If new, substantially reconstructed, or enlarged on or after 1 January 2022, a store must have a life expectancy of 20 years.

The rules for liquid digestate storage are largely in line with those for silage and slurry stores.

Slurry and liquid digestate application

• Precision spreading equipment to be used for application from 1 January 2023.  This includes the phasing-out of spreading via splash plate.  There will be a phased introduction by 1 January 2027 in some circumstances.

Organic fertilizer application

• Where organic fertilisers are applied, a risk assessment including a farm map is required.