Monday, May 20, 2019

Plan now for life after the Basic Payment Scheme

March 5, 2019 by  
Filed under News & Business

Farmers should prepare for a radical overhaul in government support for agriculture, says William Tongue.

Brexit or no Brexit, the trend in direct support is downwards for farm business. Within the EU the CAP budget is due to decrease by around 15% in the next budget period from 2021-2027 – and the UK plans to phase out direct support completely over the same period.

What this means for level playing fields and trade in world markets is still anyone’s guess. But a reduction in direct support by the planned phasing out basic payment scheme is one strong likelihood that farm businesses need to plan for.

The government makes much of the potential for productivity gains. But it is perhaps arrogant to assume that producers do not already do their best to optimise yields and livestock production to maximise their margins.

Arable yields have certainly risen, and a further 0.5t/ha over a seven-year period is perhaps not unrealistic. But production comes at a cost and it is margin that counts, not yield.

At the end of the day, support is already decoupled from production and future profitability of growing crops and rearing livestock will depend entirely on changes to the trading environment, for both inputs and outputs.

Therefore the action needed is for businesses to replace BPS from other means, i.e. alternative ways of making income from the assets they hold. The word diversification often conjures images of holiday lets and liveries but there is so much more to it:

1.  Diversification of skills

Often it is the people within the farm business who hold a skill or a passion and the key is unlocking it. Whether it be ironwork in the workshop, promoting and selling added value products or managing land for others, turning ones hand to new things will mean dilution of time available for existing enterprises. Ultimately people do things they enjoy well.

2. Diversification of property assets

The opportunities to use land, yards and buildings for different income sources are wide ranging, from letting buildings or containers through to alternative agricultural opportunities that have managed margins and therefore some insulation from trade deals – bed and breakfasting pigs and, in the right locality, broiler poultry are two good examples.

Care needs to be taken to understand the full cost of debt repayment where bank-funded investment is required, in order to ensure the proposal delivers positive and meaningful net cash returns.

At some point and in some form there will be opportunities to earn money from providing public goods. A new Environmental Land Management scheme (ELMs) is on the radar. But the potential to compete or conflict with field based production does give cause for concern.

3. Diversification of capital

The hard truth is that capital tied up in land delivers, typically, a one per cent return (income yield). There are other easily available asset classes that can beat this hands down, albeit with different risks, different taxation issues which may affect family wealth, and different skill sets required for management.

But the fact that 30ha of outlying land, sold and reinvested, could replace the BPS income on over 200ha of the core farm can’t be ignored. Better still, if cash is not the issue then leveraging the farm balance sheet to invest in off-farm assets such as commercial property can deliver a range of wins – improved returns, more liquid assets, diversified income sources etc.

Ultimately, expanding the business to generate a substantial additional income is a tough challenge and not for the fainted hearted, however opportunities abound particularly close to chimney pots.

But if expansion is not an option, then a realistic future view of the business must be taken. Is it a diverse and successful rural business, primary source of the proprietors income? Or is it a residential and countryside amenity proposition – in which case how is it funded?

William Tongue is a partner and business consultant at the Kettering office of Berrys. For details, visit www.berrys.uk.com.

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