Category: Policy & Business

Farm Business Income

Revised figures from Defra show profits fell across most farm types in 2018/19.  Taken from the Farm Business Survey (FBS), the data shows the Farm Business Income (FBI) for various standard farm types.  FBI can be thought of as equivalent to the ‘Net Profit’ measure widely used in accountancy.  These results relate to England and update the provisional ones released earlier in the year (see March article https://abcbooks.co.uk/farm-business-income-4/).  The FBS works on Feb/March year ends so the period being reported covers harvest 2018 and the 2018 BPS.  The full release can be found at https://www.gov.uk/government/statistics/farm-business-income

In the chart below, the first column for each sector shows the average FBI from 2010/11 to 2014/15.  The next four columns show the FBI for the next four years, broken down into four ‘profit centres’.  The final, light blue column is Andersons estimate for the current 2019/20 year.  As can be seen, only Cereals and General Cropping farms saw an increase in returns in 2018/19 compared to the year before.

There have been some adjustments from the provisional 2018/19 figures released earlier in the year.  The most significant one being General Cropping which now sees a 20% increase (in real terms) compared to 2017/18, as opposed to a 10% decline recorded in the provisional results.  The change is mainly due to better prices for potatoes, peas and field beans.

Dairy farms have seen a larger drop in profits than was recorded in the provisional figures, down by 39% (in real terms) compared to 2017/18, to average £73,700.  This was driven mainly by an increase in feed, labour and machinery costs as a result of the late, wet spring followed by the summer drought.  Revised figures for Grazing Livestock businesses show even bigger declines than initially reported, particularly in LFAs where agri-environment payments, which are an important source of income for these types of farms, fell. 

The chart shows a breakdown of where the profit comes from for the years 2013/14 to 2018/19.  It can be seen for the two Grazing Livestock farm types the return from agriculture is negative, it takes part of the Basic Payment to return these farms to profit.  This is of real concern when looking ahead to the removal of direct support.  Of course, FBI is only an average for the sector.  The range in performance across farms is vast, and the more efficient units are likely to have made a much better return than these average values show.  Unfortunately, the opposite is also true.  We have made some initial estimates of 2019/20 FBI, shown in light blue on the chart.  These show better returns for the Dairy sector, but poorer performance for Cereals and General Cropping reflecting lower crop prices and a difficult potato harvest.

Rural Mobile Coverage

The Government is teaming-up with the mobile phone industry in a £1 billion deal to banish rural not-spots.  The aim is to bring high-quality 4G coverage to 95% of the UK by 2025.  The deal would see EE, O2, Three and Vodafone coming together to create a new organisation to deliver the Shared Rural Network.  The proposal would see the four operators investing £530m in a network of new and existing phone masts they would share to eliminate almost all partial not-spots – areas where there is currently only coverage from at least one but not all operators.  If the operators agree to these ambitions on not-spots, the Government will invest up to £500m to eliminate areas where there is currently no coverage from any operator – ‘total not-spots’.

Scottish Convergence Funding

Fergus Ewing, Scotland’s Rural Economy Secretary has announced the first £80m of the £160m ‘convergence funding’ will be paid in this financial year (before March 2020).  Those that farm in the marginal uplands, hill farms and island areas will receive a proportionally greater share than lowland farms.

Readers will recall that this is the money announced in the Spending Review (see https://abcbooks.co.uk/spending-review-2/).  Scotland has been campaigning for this for many years after only £30m was given to Scotland by the UK Government out of £190m received from the EU under CAP convergence rules for the budget period 2014-2020 (BPS years 2013 to 2019).  The Scottish Government has always argued the money received by the UK was because Scotland’s area payments were below the EU average and therefore Scotland should have received it all.  The UK Government announced in September that the £160m would be paid to address a ‘historic injustice’.  The separate ‘Bew Review’ looked at future allocation of support funding.  This granted an additional £51.4m to Scotland (and £5.2m to Wales) for the two BPS scheme years, 2020 and 2021.  However, with the end of the current Parliament, the ‘funding guarantee to 2022’ lapses, so future payment levels are up for debate.

The first instalment of £80m will be split into two parts.  £65m will be distributed on an area-basis.  The other £15m will go to top-up coupled livestock payments in 2019.  £13m will go to the suckled beef scheme and £2m to upland sheep.

The £65m for area payments will (again) be split.  £52m will be divided based on 2019 BPS areas, with a weighting towards Region 2 and 3 areas.  The current split of BPS funding between Regions 1, 2 and 3 for the 2019 year is 87 : 9 : 4.  The £52m of convergence funding will be split 50 : 35 : 15.  This produces an additional payment of £15.86, £24.09 and £6.28 per Ha respectively in each of the three regions.  The remaining £13m is being earmarked to top-up the 2019 LFASS scheme, where payments would otherwise have dropped to 80% of previous years levels under EU rules (see https://abcbooks.co.uk/lfass-2/).  The NFUS had been lobbying for the convergence money to be spread equally across all sectors of Scottish agriculture. 

Farmers will not have to apply for any of this money – it will simply be paid as a result of 2019 claims.  It is interesting to note that, although the convergence money relates to the 2013 to 2019 scheme years, this first tranche is all going to 2019 claimants.  The Scottish Government states that this is to enable the money to be distributed quickly.  However, the cynical might think that the Scottish payments system is so unreliable that it is impossible to make back payments to historic claimants.  Those that farmed in the period 2013-2018 might feel a little hard done by. 

The second £80m tranche of convergence money will be paid by March 2021.  The Scottish Government has not stated how this is to be distributed as yet.  However, there are strong hints that a large part of it will be used to offset the drop in 2020 LFASS payments to 40%.

Countryside Productivity Small Grants Scheme

Defra has confirmed all eligible applications to the second round of the Countryside Productivity Small Grants Scheme (CPSGS) have been approved.  Offers are expected to be sent out by the RPA as from 28th October and successful applicants will have until the end of May 2020 to buy the equipment and submit their claim.  This claim deadline has been extended to try and avoid the problems with late delivery of items which occurred in the first round.  Applicants are being encouraged to contact suppliers early to ensure their equipment can be delivered within this timescale.  Offers need to be accepted by 10th November through the CPSGS online acceptance portal.  More than 3,600 farmers applied to the second round of the CPSGS, with total funding reaching £22m compared with £15m in the first round of the scheme.  A final round is expected to open in autumn 2020.  The CPSGS provides grants of between £3,000 and £12,000 towards equipment to improve the productivity of their holding.  There is a set list of eligible items and a fixed level of grant is paid for each one, keeping the scheme simple to apply for.

 

Dutch Farmer Protests

Dutch farmers have been protesting throughout October against new environmental restrictions that the Government of the Netherlands is proposing.  The initial cause of the protests were new regulations on nitrogen emissions, which would require a reduction in intensive livestock production in particular.  However, the demonstrations have grown to encompass a wider range of issues, such a fuel taxes, pesticides use, and a general sense that farming is being blamed for all environmental ills whilst its contribution to the Dutch economy is under-appreciated.  Farmers have blocked major routes with tractors and protested in the capital of the Netherlands, The Hague.   Protests have since spread to many German cities, with the same grievances to the fore – increasingly restrictive legislation and being made the scapegoat for environmental issues.

Brexit: Withdrawal Agreement Bill

Having concluded negotiations with the EU on a revised Brexit Deal last week (see accompanying article), on 22nd October, Boris Johnson attempted to progress his Withdrawal Agreement Bill (WAB) through the remaining stages of the Parliamentary approval process. This involved two key votes;

  1. Second Reading Debate: to approve the General Principles of the Bill to enable it to progress to more detailed scrutiny.
  2. Programme Motion: which provides a timetable to progress the bill through the Committee, Report and Final Third Reading stages. It is only when the WAB passes the Third Reading (final vote by MPs) that it becomes law.

The Government won the first vote by 329 votes to 299, assisted by several Labour MPs from Leave-voting constituencies.  However, it lost the Programme Motion vote by 308 votes to 322.  The PM reacted by “pausing” the Brexit process to speak with EU leaders to get their thoughts on whether the EU would offer the UK another extension which the PM was forced to seek as a result of the Benn Act.  With the EU yet to formally respond, the Brexit process is now in limbo.  The Government has reiterated its desire to achieve Brexit by 31st October, but that is unlikely.

The EU is likely to offer an extension, but its duration is still being debated.  Some are advising an extension until 31st January 2020 (in accordance with the Benn Act) whilst others, notably the French, are mooting a much shorter (15-day) extension to exert pressure on the UK to make-up its mind.  Taking account of these diverging approaches, the most probable path is that the EU offers another ‘flextension’ which can extend to 31st January but can be brought forward if the WAB is ratified before then.  This would leave plenty of time for a General Election to take place.  Labour is dragging its heels on this, as it claims it wants to remove the threat of a No-Deal Brexit.  In reality, a No-Deal could conceivably take place at the end of a Transition Period (currently end-2020) if there was no agreement on the Future Relationship.

Revised Brexit Deal – Impact Assessment

On 21st October, in conjunction with the WAB, the Government released a 69-page impact assessment.  It indicates a cost of £167.1 million with the bulk of the cost (£145m) relating to the setting up of an Independent Monitoring Agency on citizens’ rights.  What was most notable about this assessment was the extent to which agri-food regulations relating to the Ireland / Northern Ireland Protocol were not costed in the analysis.  With over £5.8 billion in trade between NI and GB, based on 2015 estimates, this seems a rather large omission and calls into question the validity of the assessment.

The document also outlined the maximum extent of regulatory (sanitary and phytosanitary (SPS)) checks for agri-food goods going from GB to Northern Ireland.  Documentary and identity checks will apply to 100% of shipments whilst the maximum level of physical checks would be 20% for red-meat and dairy whilst poultry products would have a 50% check rate.  Live animal physical check rates are estimated at 5.5%.  The extent to which maximum check rates would apply would depend on the extent to which GB diverges from EU regulations in the future and whether a more favourable check rate could be negotiated as part of the future trading relationship negotiations.  Canada, via the CETA accord, enjoys a 10% physical check rate for beef.  That should also be doable for the UK. 

For NI to GB trade, there remains some debate as to whether some customs-related regulation would apply.  Whilst it will be much lower than for GB to NI trade, as SPS checks will not apply, there could still theoretically be a requirement for some form of “exit declarations” to be made.  It may take some time for clarity to emerge on this issue.

From a business perspective, some clarity has emerged this month with respect to the shape that the new Brexit Deal with the EU would take.  The direction of the eventual Future Relationship (comprehensive Free-Trade Agreement) is now becoming clear.  Whilst some might continue to argue that this would leave the UK economy worse-off, the real impediment to business now is the continued deferment of a decision on Brexit.  With the avoidance of a No-Deal Brexit, the next-worst outcome is fast-becoming a ‘No-Decision on Brexit’ which is continuing to stall investment. 

Brexit Deal Reached

On 17th October, UK and EU negotiators agreed a new Withdrawal Agreement for the UK’s exit from the EU.  Many thought that such a revised agreement was not possible in the time available and, on first appearances, it is an impressive feat; however, the Deal reached is quite similar to the Northern Ireland-only Backstop arrangement proposed by the EU back in March 2018.  Below are some key points from an agri-food perspective;

  • Financial settlement (‘Divorce Bill’ (£39bn)) and the protection of citizens’ rights provisions: these are unchanged from the previous ‘Theresa May’ Withdrawal Agreement.
  • Ireland/Northern Ireland protocol: which has been subject to intense debate has been changed so that a customs and regulatory border between Northern Ireland and Great Britain has been created.
    •  Customs: this has resulted in the UK-wide backstop put forward by Theresa May being ditched, meaning that Great Britain is outside the Single Market and Customs Union but Northern Ireland is not.  That said, Northern Ireland remains part of the UK Customs Territory.  It will still be able to avail of lower tariffs that the UK introduces post-Brexit, although businesses will initially have to pay the higher EU tariff (if applicable) on imports into Northern Ireland and the difference (EU tariff – UK tariff) could be reclaimed at a later stage.. This is provided that the goods in question remain in NI and State Aid limits are not broken (see point below).  Personal goods (e.g. food carried in personal luggage at airports) would be exempt from duties being imposed between GB and NI.
    • Single Market Regulations: as reported in our 3rd October article (click here), a regulatory border would be imposed down the Irish Sea (between GB and NI) for agricultural and industrial goods.  This means that NI would continued to follow the EU rules in areas such as sanitary and phytosanitary (SPS) regulations whilst creating scope for GB to diverge in future. 
  • Northern Ireland consent mechanism: has been introduced which would give the Stormont Assembly the opportunity to approve the arrangements four years after they come into force (currently envisaged at the end of the transition period in December 2020) and each four years thereafter.  The vote would be based on a simple majority, but if future votes (say in a further four years after) had the support of both Nationalist and Unionist communities, then NI would follow EU rules for a further 8 years.  If consent was not forthcoming, a two-year ‘cooling-off’ period would be initiated to try and find a solution.  If the Assembly was not functioning, current arrangements would roll-over.  This arrangement is still likely to create some problems for long-term business planning (e.g. it may be difficult to do a five-year plan), but as it is based on a simple majority, rather than a veto by one community, it arguably is more stable than the previous UK Government proposals.
  • Labelling: Article 7 of the legal text mentions that a “UK (NI)” label would be used for Northern Irish goods placed on the European Union market where there is a legal requirement to do so.  This will be important from an agri-food perspective for products such as meat and dairy.
  • State Aid: the UK authorities can provide support to agricultural production and trade in agricultural products in Northern Ireland up to a “determined maximum overall level of support” as long as such support is compliant with the WTO Agreement on Agriculture.  This maximum support level will be determined by the Joint Committee overseeing the Ireland/Northern Ireland Protocol and would consider future UK agricultural policy as well as support expenditure to NI agriculture under the CAP during the 2014-2020 period. In practice, this provision seeks to ensure a level playing-field between Northern Ireland agriculture and that in the Irish Republic. However, it should also be worth noting that any tariff differences on agricultural products between the UK and the EU which can be reclaimed by Northern Ireland businesses might also be considered when setting what funding would be available, as this would be a form of Government support.  This has not been confirmed at this early stage but needs to be borne in mind. 
  • Level Playing Field (LPF): this was subject to much concern on the EU side over the fear that in the future, a UK Government which is free from the Brussels’ regulatory orbit would undermine EU regulations to gain a competitive advantage.  The LPF provisions in the previous May Deal (e.g. labour market rules) have been removed to a significant degree.  That said, the Political Declaration still contains a note that if the UK wants to secure a comprehensive Free-Trade Agreement with the EU in the future, it will still need to adhere to strong regulatory standards.

What Happens Next?

In some ways, getting a political-level deal with the EU was the easy bit.  Boris Johnson now has to convince Parliament to approve the Deal.  This is looking like a very tall order, especially as the DUP will not be supporting the New Withdrawal Agreement as they see it as a betrayal.  In the (perhaps unlikely) event that Parliament approves the Deal, the UK would depart the EU on 31st October and enter into a Transition Period where, aside from the UK being officially outside of the EU, very little changes.  The Transition is still due to end in December 2020, although there appears to be scope in the New Withdrawal Agreement for this to be extended.  Such an extension might be needed, as negotiating a FTA with the EU (and getting it ratified) in little more than a year is a very tall order.

If Parliamentary approval is not granted on the 19th October, the Benn Act provisions kick-in and the Government would be obliged to request an extension of EU membership (until 31st January).  This would make a General Election inevitable (it’s probably inevitable in any case) and the PM would play very strongly on the fact that he secured a Deal but the Parliament would not back him.  Given the UK’s first-past-the-post system and the general public’s dismay and fatigue with Brexit, the momentum appears to be with the PM, whether he gets approval for the Deal tomorrow or requires a General Election to do so.  At least, there finally appears to be some clarity with the Brexit process and the 19th October will be pivotal.  Industry needs to get back to focusing on the day-to-day issues and the major challenges facing the economy.  We will be providing further analysis in the near future as the situation becomes clearer.

Queen’s Speech and Ag Bill

With the end of the Parliamentary session on 8th October the Agricultural Bill ‘fell’ as it had not been passed.  The Queen’s Speech which was delivered on 14th October 2019, included the (new) Agriculture Bill which the government intends to introduce for the next Parliamentary Session.  It is expected the Bill will look very similar to that from the previous session.

Although not contained in the Bill itself (only a Policy Statement), it seems that the plans for future farm support have not changed either.  There has been pressure, particularly from the NFU, to delay the implementation of the Agricultural Transition period by a year (to 2022), due to the lack of progress of the Bill, which was original presented to Parliament a year ago.  During the Transition, direct payments in England will be phased out by 2028 and the new Environmental Land Management (ELM) Scheme will be rolled out.

The Queen’s Speech also included the introduction of a new Environment Bill.  Partly, this is to put in place a governance framework to replace that previously undertaken by the EU.  But it will also be the first time environmental principles will have been enshrined in UK law, ensuring there is a ‘cleaner, greener and more resilient country’ for the next generation.  The Bill will include, a system of longer-term environmental targets and a specific focus on air and water quality, biodiversity and natural resources.  In addition, to strengthen environmental accountability, the Environment Bill will establish a new public body; the Office for Environmental Protection (OEP) will monitor progress in improving the natural environment.  Through its complaints and enforcement mechanisms it will replace the role of the European Commission taking ‘a proportionate approach to managing compliance issues relating to environmental law’.  The bill should also bring forward a legal basis for Conservation Covenants, which we have previously written about in the Bulletin.

Payment by Results AES

Promising results have been reported from pilot studies assessing a Payment by Results (PBR) agri-environment scheme.  The Results Based Agri-Environment Payment Scheme (RBAPS) has been piloted in two areas in England between 2016 and 2018.  It has been delivered by Natural England (NE) in partnership with the Yorkshire Dales National Park Authority (YDNPA) and co-financed by the European Commission. The pilots were held in Wensleydale on species rich meadows and grassland for breeding waders and also in Norfolk/Suffolk, delivering plots of winter bird food and flower-rich mixes for pollinators.

During the pilots, farmers had complete flexibility on how to manage their land, but the annual scheme payment was linked to their level of success in delivering the biodiversity outcomes.  The results show, the environmental performance of all the results-based measures was better than their equivalent control sites.  The winter bird food plots performed the best with the scores for the results based approach 43% higher than the conventional scheme control plots during both years of the pilot.  The survey found farmers were more motivated to carry out different management practices to improve the biodiversity results and they were paying greater attention to their result-based sites, carefully considering how to produce results and secure a higher payment rate.  However, with such a short duration of the project, it has not been possible to ascertain whether this initial motivation will wane over time.

In contrast to the conventional action-based agri-environment schemes (AES), that include specific prescriptions for farmers to follow which are expected to result in a desired environmental outcome, in the results-based approach, the value of payment is directly linked to the level of environmental outcomes achieved.  Experience from the pilot is being fed into the development of post-Brexit environmental land management policies in England.  The study identified five particular challenges to ‘mainstreaming’ the approach;

• The time taken to undertake self-assessment of results by participants, especially if the timing of assessments coincided with peak agricultural activity on the farm
• One of the main challenges is the need for extensive training and advice, particularly in the early stages so that farmers develop the necessary skills and confidence
• The resources necessary to verify the results.  During the pilot, all of the results were independently assessed annually, but this would not be possible if the scheme was rolled out nationally, due to the sheer number of assessments required.  However, the pilot did show a high level of self-assessment accuracy, and some measures may not require annual assessment.
• Being able to manage the budget when there is the potential variability in performance.  But the pilot suggests, even in challenging growing seasons, average performance levels emerge and these could be used for budgeting.
• The development and testing of a much wider range of result measures which will require considerable technical expertise and a lot of time for testing.

Defra has agreed to continue to fund the project, which also looked at how accurately farmers could self-assess their own results, tested the cost-effectiveness of a RBAPS and explored participants and stakeholder attitudes, for a further two years.  This will inform future policy development.  The full report can be found at: http://publications.naturalengland.org.uk/publication/6331879051755520

US Impose Tariffs

The US is introducing retaliatory tariffs on a whole raft of products imported from the EU, including food.  The full list includes items from airplanes to bed linen (details can be seen at https://www.easy-serveur17.com/eucolait2403/optimis/soft/userfiles/files/EU_Large_Civil_Aircraft_Final_Product_List.pdf ).  But, significantly for European farming, it also covers dairy products, frozen and processed pig meats and Scotch malt whisky.  For dairy exports, cheese is likely to be the most heavily affected in the UK.  Tariffs here have been set at 25% ad valorum (25% of the value of that particular product).  Last year around 4% of the UK’s total cheese export went to the US, almost all of this would have been hit by the new tariffs.  All of the UK’s butter exports to the US will be subject to the new tariffs, but the US accounted for less than 1% of UK butter exports last year.

For UK pig producers, exports of frozen pork is likely to be the most impacted.  Historically, the UK has not exported processed pork meat products to the US.  However, last year about 11% (11,200t) of the UK’s total frozen pork exports went to the US.  All of this would be subject to the 25% ad valorum tariff.  But whether there will be any significant impact is difficult to tell because the US imports more of a premium product; the average price of UK frozen exports to the US is £3,402 per tonne compared to £1,232 per tonne to the rest of the world.  US consumers for the products in question are driven more by quality than price.

But for the Scotch malt whisky sector the tariffs (at 25%) could have more of an impact.  Scotch whisky exports to the US in 2018 reach £1bn and represented 22% of whisky exports by value.

The tariffs come into effect from 18th October.  They have been imposed on the EU after the WTO ruled the EU gave illegal subsidies to the airplane manufacturer Airbus.  This gave the company an unfair advantage over its rivals, including the US company Boeing.  The WTO has therefore allowed the US up to $7.5 billion in additional tariffs, to recuperate the estimated loss as a result of the Airbus-Boeing dispute.