Category: Policy & Business

Farm profitability increased by 16% in 2019 compared to the year before, according to Defra forecasts.  The Department has released its early estimate of aggregate industry profit, Total Income from Farming (TIFF) for the year just gone.  The main reason for the change is higher output from the cropping sector (up 11%).  Livestock output increased by 1%.

This forecast is produced by Defra to meet EU requirements.  It is stated that it is based on incomplete data in some areas and there is a history of quite large revisions.  A more accurate figure will be produced in May 2020.

The rise, from £4,644m in 2018 to £5,380m in 2019 at current prices equates to a 14% rise in real terms.  Our estimate was for a more restrained increase of 6% in real terms.

The Government has announced that the 2020 BPS will be fully-funded at 2019 levels.  In addition, it has also reiterated its Election promise to ‘match the current budget available to farmers in every year of this Parliament’.  The current Parliament is due to end in 2024.

The Chancellor, Sajid Javid, has announced that a total of £2.852 billion would be made available (see https://www.gov.uk/government/news/farmers-3-billion-support-confirmed-in-time-for-2020).  Most of this will be used to fund direct payments (the BPS) for the 2020 scheme year, but some will also be used to co-fund Rural Development (RD) schemes.

As set out in our article in November (see https://abcbooks.co.uk/bps-2020/), the UK takes over funding of the 2020 BPS because it is paid out of the 2021 EU budget – under the Brexit Withdrawal Agreement, all EU programmes are due to revert to UK control as from the 2021 budget year.

Actual BPS payments made in the 2019 year are currently unknown.  However, a total of £2.750bn was paid out in 2018; 2019 will be very similar as both the exchange rate and financial discipline were close to the previous year’s figure.  Therefore, the amount pledged for 2020 looks about right, given that some money will go to RD schemes (it’s not that we don’t trust Government announcements – but it’s always best to check . . .).   As also set out in the November article, there is a quirk in the system that still has to be resolved.  Not surprisingly, in a post-Brexit world, the funding announcement was made in Pounds.  But all BPS entitlements are denominated in Euros.  How individual farmers’ payments are to be calculated has not yet been announced.  Based on this announcement, out best-guess is that the conversion rate has effectively been locked at the 2019 level (€1 = £0.89092).  What happens with financial discipline (a 1.4327% deduction in 2019 is unclear).

The announcement on funding after 2020 gives scope for a variety of interpretations.  The Chancellor stated that ‘We will guarantee the current annual budget to farmers in every year of the Parliament’ (our bold).  Does this just mean the current level of direct payment funding (circa £2.75bn)?  Or does it also include agri-environment and hill farming funding (another £0.51bn in 2018)?  It could be argued that these latter payments are not limited to ‘farmers’, so do not fall within the funding guarantee.  Then, there are grant scheme payments under the Rural Development programme – in England, LEADER, Growth Programme, Countryside Productivity etc., and the equivalent programmes in the devolved regions.  It is surprisingly difficult to track the spending under these, but in 2018 it was in the region of £0.18bn.  Is this funding included as well? – we would guess not as they go wider than just ‘farming’.

European funding for regional social and economic development (including rural areas) is due to be replaced from 2021 with the ‘UK Shared Prosperity Fund’ (UKSPF).  There is little detail on this at present, but we would suspect that the funding for capital grants under the various Rural Development Programmes will end up within this.  How much then comes back to rural areas is an open question.  With the Conservative’s electoral gains in English Northern and Midlands towns, there may be a political imperative to put most of the funds into these areas. 

The total funding for BPS 2020 has been divided up among the four devolved regions.  As the respective administrations have freedom over spending, this money could be used for other things – legally it is not ring-fenced for the BPS.  In practice, it seems highly unlikely that this would occur.  The Welsh Government has already stated that it will be using its allocation for 2020 to simply continue with 2019 spending levels.  This includes the 15% ‘Pillar Transfer’ from the BPS to Rural Development which has been in the scheme since its inception.

To summarise, anyone budgeting for 2020 BPS payments is now pretty safe to just roll-forward 2019 payment rates.

The National Living Wage will increase by 6.2% from April.  The minimum rate of pay for those 25 years old and over will rise from the current £8.21 per hour to £8.72.  The uplift is over four times the current rate of inflation and business groups have questioned the added costs being placed on companies.  However, the new Government is keen to be seen to be addressing the problems of the lowest paid in society.

Rates for other age groups under the National Minimum Wage will also see above-inflation rises.  The full set of rates are shown in the table below.  The Government has outlined plans to gradually increase wages for those in the 21-24 age bracket so that they are receiving the Living Wage by 2024.  By this point, it is scheduled to have reached at least £10.50 per hour.

Workers in the farming industry will be entitled to these pay levels, just as all other workers are.  In England, as there is no longer an Agricultural Wages Board, these rates simply apply.  In the devolved regions, where Wage Boards still operate, these minimums will be incorporated into the relevant Wahes Order.

Minimum Wage Rates
£ per hour	Rate from 1st April 2019	Rate from 1st April 2020	% change
National Living Wage (25 & older)	£8.21	£8.72	6.2%
National Minimum Wage (21 – 24)	£7.70	£8.20	6.5%
National Minimum Wage (18 – 20)	£6.15	£6.45	4.9%
MWM (under 18s)	£4.35	£4.55	4.6%
Apprentice Rate (all ages)	£3.90	£4.15	6.4%

 

 

The deadline for applications to the new Woodland Carbon Guarantee (WCaG) scheme has been extended from 10th January to Friday 17th January 2020 (see https://abcbooks.co.uk/50m-incentive-to-plant-trees/ for further information on the scheme).  The first auction will be held from 12 noon on Monday 20th January to 12 noon on Friday 31st January 2020.  There will be up to £10m available through the first auction.

Former MP Zac Goldsmith will remain as Environment Minister.  Mr Goldsmith has been given a life peerage, which means although he lost his seat for Richmond Park in the recent General Election, he has been re-appointed to his old post in Defra.  Goldsmith joined the department back in July 2019 and was swiftly promoted from Parliamentary Under-Secretary of State to Minister of State for Environment and International Development, replacing David Rutley, in September 2019.

Following the General Election on 12^th December 2019 which heralded another Conservative administration the Pound has strengthened to £0.83 to the €1 (or £1 = €1.20).  It has since lost most of these gains as the market worries about the prospect of no or a very limited trade deal at the end of the Transition Period (see other article).

This continues the trend of fluctuating exchange rates seen since the Referendum on EU membership in June 2016.  Following the Brexit vote, Sterling immediately weakened against the Euro as shown in the chart below.   It then traded largely in a range of €1=85p-90p (£1 = €1.11-€1.18) varying, to a large extend, on the latest political developments.  The Pound reached its lowest point in August 2017 at £0.93 and the strongest being the 19^th April 2017 at £0.834.  The second strongest exchange rate against the Euro since April 2017 was recorded after the recent Election result on 13^th December 2019 at £0.835.

Oddly, a broadly similar trend can be seen in 2017, 2018 and 2019, with a weakening of Sterling from the late spring through to the summer and then some recovery thereafter.  Why this should be is not entirely clear. 

But what does this mean for farmers? When the Pound is weak (closer in value to the Euro) imports become dearer and our exports become more competitive (when the Pound is strong the opposite occurs).  To illustrate this, a key UK farming export, lamb can be used.   Assume a standard new season lamb is sold to an EU country at the current average price of 191.7p per kg and it weighs 39kg = £74.76.

Exchange rate A = £0.93 : € 1                               Weak Pound

Exchange rate B= £0.84 : € 1                                Strong Pound

With exchange rate A the lamb would cost an EU country £74.76 /  £0.93 = €80.4 per lamb

Exchange rate B would the lamb would cost an EU country £74.76 / £0.84 = €89.0 per lamb

Although the difference in exchange rate is only £0.09, the lamb would cost a customer in an EU country €8.60 more with Exchange rate B, for the same product.  Thus the Strong Pound seen in exchange rate B is not beneficial to the UK farmer, making our exports to Europe more expensive.   Customers in Europe will look to other suppliers to receive better prices, reduce their demand in the face of higher prices, or negotiate to hold prices in Euro terms, which translates into a reduced Sterling value.

Conversely, a strong Sterling helps UK farmers if they are importing goods from EU countries as they are able to buy more with each of their Pounds.  This is quite important in the horticulture sector, for example, where a lot of plant material is purchased from Europe (notably the Netherlands). 

It is unlikely that volatility in the currency market will reduce during 2020, at least not until the situation around the Future Relationship talks becomes clearer.  If this looks like being resolved satisfactorily, then Sterling is likely to definitively strengthen – perversely, this would then be negative for farming in the short term. 

A reminder that, notwithstanding Brexit, the Countryside Stewardship (CS) scheme will be open for applications in 2020, for a 1st January 2021 agreement start date.  The application window is likely to open sometime in February with a application deadline for Mid-tier and Wildlife offers of 31st July (as per last year).  The scheme itself will be very much like last year’s with no major changes being introduced – any rule changes will be minor tweaks.  There may well be more changes in the pipeline for CS 2021 – especially with the Wildlife offers expanded.

Countries attending the UN Climate Change Summit in Madrid have failed to agree decisive new measures to limit greenhouse gas (GHG) emissions.  The 25th ‘Conference of the Parties’ (COP25) ran two days over schedule but delegates couldn’t agree on new measures to create a global carbon market or more ambitious national plans to cut carbon.  Other countries were not prepared to sign-up to the carbon market rules after the plans were watered-down by Brazil and Australia (rather ironic, given the record-breaking temperatures and wildfires currently being seen in Australia).  It was agreed that all countries will come back with new plans to cut emissions at next year’s summit.  This will be held in Glasgow (possibly putting pressure on the UK Government to take a lead in GHG reductions over the next 12 months).  Around 30,000 delegates are expected to attend COP26 in Scotland.

England

Latest figures from the RPA show 92.4% of claimants in England received their 2019 BPS by Friday 13th December.  According to the agency, 59,600 farmers received payments to a total of £1.2bn on the first day of the payment window.  Claimants are advised to check their payment carefully to make sure it is correct.  If payment is found to be incorrect a ‘Payment Query Form’ should be submitted to the RPA, this can be found at https://www.gov.uk/government/publications/basic-payment-scheme-payment-query-form.

It is usually not easy to check a payment until a Claim Statement has been received, and these arrive some time after payment.   It is reported that some of the first 2019 Claim Statements that have been sent are incorrect – the stated Financial Discipline rate and the payment rates were wrong (although the total payment was correct).  To avoid any further confusion, the RPA has halted the delivery of Claim Statements whilst this issue is resolved.

The RPA is also writing to some claimants regarding their entitlements.  It appears the one-off entitlement reconciliation in 2015 was not properly executed for some businesses and the RPA has now been looking into this.  Readers may recall that, when the BPS was introduced, for the first year (2015) excess entitlements were confiscated if these exceeded the area being claimed.   Letters are now being sent to those who did not have their excess entitlements properly removed in 2015 and to those who may have bought or leased entitlements from such a business.  It is not exactly clear what will happen, particularly to those who have bought or leased in entitlements which should have been confiscated.  The RPA has said 2019 payments have been adjusted accordingly but ‘as you have transferred or leased the affected entitlements into your business, without knowing their past history, we will aim to make sure that you are not unfairly disadvantaged’.  The extent of the problem is not yet known but potentially could be a difficulty ahead of 2020 claims.

The RPA has also announced the commencement of 2019 Countryside Stewardship (CS) and Environmental Stewardship (ES) payments.  To date £77.8m ES and £4.3m CS payments have been made.  Readers will recall these are being made in one full payment this year, between September and June 2020.  It is worth noting that, with the new single payments starting around the same time as BPS payments, there may be a view that the payment timetable will be similar – i.e. most paid by the end of December and almost everyone paid by the end of Jan.  However, Stewardship payments will run on a different timetable.  It is likely to be well into the New Year before many businesses are paid, particularly for CS payments.  

Wales

The Welsh Government has reported over 93.5% of farm businesses received either their full 2019 BPS payment or a BPS Support Scheme payment during the first week of the payment window.  Readers will recall the BPS Support Scheme was put in place so that those who didn’t receive payment on the first day would receive up to 90% of their estimated payment.  The Welsh government has said it has been unable to deliver the same level of BPS day-one payments as achieved in the past as preparing for the possibility of a No-Deal Brexit has been top priority this year.  Therefore, the BPS Support Scheme has been put in place to help businesses manage cash flows, whilst their payment is being processed.

Scottish upland farmers will soon be receiving an advance on their 2019 Less Favoured Area Support Scheme (LFASS) payments.  The Scottish Government is operating a national loan scheme – it is currently writing to farmers and crofters asking if they want to apply for a 95% advance on their payments.  Replies need to be made by the 17th January and then payments will commence shortly thereafter.  Final top-up payments will then be made in the spring.  It is expected that £50m will be paid via the scheme.  Although recipients will welcome the timely payment, 2019 LFASS amounts will only be at 80% of the 2018 level due to a change in EU rules.