It is no secret that British agriculture is facing some of the biggest changes since the post-war years when production was ramped up to ensure our farmers could feed a hungry, battle-weary nation.
Unfavourable trade deals; the biting phase out of BPS; soaring input prices; the necessary but challenging drive for sustainability; labour shortages; unpredictable weather … the list goes on and on.
Add to these a turbulent political landscape, with new (and now ex!) Prime Minister Liz Truss’s views on farming as yet unknown, and the cost-of-living crisis, and it is easy to conclude that agriculture is set for a bumpy ride in both the short and longer term.
So, what are the main challenges facing the industry, and what is likely to be the outcome?
Here, Ian Parker, our agricultural expert, sheds some light on some of the sector’s most challenging issues.
Input Costs
Input costs, particularly fuel, feed, and fertiliser, have been one of the top concerns for British farmers this year. That’s hardly surprising when you consider nitrogen spiked at more than £1,000 per ton.
The roots of the problem are buried in the COVID pandemic when China began to emerge from lockdown. This caused the demand for fertiliser, which was cheap compared to the price of wheat, to increase exponentially, putting pressure on demand.
The pressure was hugely exacerbated in February 2022 when Russia invaded Ukraine, sending prices spiralling to unprecedented levels.
But the war caused another issue that was actually beneficial. It kept the grain prices high, shielding many farmers around the world, including those in the UK, from the worst effects of the fertiliser price.
That is, until the Black Sea agreement.
It is impossible to criticise an arrangement that releases food to millions of people across the world who are on the brink of starvation. Since the deal was signed, more than two million metric tonnes of grain have hit global markets.
But from the farm economics point of view, it is less desirable. It increased grain availability and drove down prices. And with grain prices dropping faster than fertiliser prices, making ends meet could become a real challenge for British farmers.
Sadly, the problem is likely to get worse before it gets better.
As many of you will know, making nitrate fertiliser is one the world’s most energy demanding processes, meaning it is at the constant whim of energy prices.
Russian gas is now so expensive that some fertiliser manufacturers in the UK and Europe are simply stopping production and mothballing sites.
This, sadly, is likely to lead to major disruptions to fertiliser supply and the next round of price hikes at a time when commodity crop prices are falling.
The simple fact is input prices are likely to remain high because the factors that drove them up in the first place haven’t yet gone away.
Phasing out Basic Payments
As if the input cost crisis wasn’t enough of a financial burden, the year-on-year reductions in BPS are now starting to bite.
Many are sceptical about its replacement – Environment Land Management schemes (ELMs) – and its capacity to take up the slack.
There is a fundamental difference in how DEFRA views BPS and ELMs and that is at the heart of the issue. BPS is essentially profit. It is viewed by DEFRA as a payment for the ‘right to occupy land’. Governments are rarely fond of rights payments.
ELMs by contrast is aimed at providing public money for public goods. It is a payment for managing land in a way that improves soil health, increases biodiversity, and reduces carbon emissions. Or better still sequesters carbon from the atmosphere.
But achieving these things costs money and many believe that for every pound farmers get in from ELMs, they will have to spend a pound in achieving its aims. So, whereas overall farm income might sustain, profitability is likely to take a nose dive, which could stifle future investments.
That said, overall farm incomes for most are unlikely to sustain at the same level. The fact is, to achieve the full objectives of ELMs and therefore unlock the highest payments, farmers may well have to jump through hoops. Many may choose to take lesser payments while searching for new markets to diversify into instead.
Invariably this is likely to lead to less food being produced and a time when arguably, we need to incentive farmers to grow more.
Trade Deals
Trade deals are another area of concern, although one that could also offer hope to British farmers if negotiated in the right way.
However, that is going to take so significant political will, and some skilful bartering, and whether Liz Truss’s administration is up for the fight is a question yet to be answered.
Certainly, Ms Truss’s role as Foreign Secretary in brokering the Australian trade deal is unlikely to fill the UK agricultural sector with confidence.
The deal was condemned by the NFU as one-sided and one that heaped more pressure, not less, on farmers in the UK.
NFU President Minette Batters said the deal didn’t enable the control of food imports produced below the legal standards required of British farmers, something that should be a concern for all. After all, what’s the point in introducing measures to drive up sustainability and animal welfare practices, and then buying in cheap imports from producers not governed by the same?
However, a modicum of good news was announced earlier this month. Ms Truss said the Australia deal will be scrutinised by MPs, and that could potentially lead to beneficial changes for British farmers.
Only time will tell. Either way, hopefully the backlash and subsequent scrutinising of the deal will ensure lessons are learned and future deals will genuinely open new, tariff free markets to British agriculture.
Labour Shortages
Labour shortages have had a profound effect on the UK farming and food industry since the Brexit deal, which significantly curtailed the sector’s access to temporary EU workers.
The impact has been exacerbated this year by the war in Ukraine which has stemmed the number of seasonal workers coming here from that region.
In fact, according to a report in the Guardian newspaper from August this year, labour shortages are responsible for £60m of food being left to rot on British farms.
This would be treacherous at any time, but when so many families are struggling to make ends meet and feed their children, it is doubly so.
The government did try to tackle the problem by issuing 38,000 short-term visas to those working in the food production industry. Sadly, however, farming alone requires almost twice as many workers as this.
But, to give her her due, Liz Truss has also made an announcement on this issue. She says she intends to ease the restrictions on foreign labour with a short-term expansion of the seasonal workers scheme, to buy time for the industry to work out a longer-term solution.
Although this comes too late for the £60m of wasted food that could have been enjoyed by British families, it does signal an intention to provide genuine help to British farmers on a critical issue.
Conclusion
So, what does all this mean on the ground?
Well, the landscape is changing, that is for sure. In the short term, farmers are likely to face some pain as the cost-of-living crisis reduces demand for high value products, inputs costs remain high, commodity prices slip back, and the major retailers compete aggressively to provide the best value to the consumer during these financially straitened times.
In the medium turn, greater challenges loom. The changes in payment scheme, meeting sustainability targets, and the drive to produce food of a quality few other countries can, while ramping up efficiencies and turning a profit.
But British farmers are nothing if not resilient, innovative, and entrepreneurial. They will need all that resolve if they are to survive and prosper. But by leveraging advances in technology, adopting new practices that combine food production with environmental improvement, and exhibiting that sheer bloody-minded determination most of them possess, thrive and prosper they will.
All this will be made easier if the political will exists to forge truly beneficial trade deals, and labour shortage issues can genuinely be resolved.
But integral to this survival will be farms being run on more commercial terms than ever before, and it is here a trusted advisor can really add value.
Tax planning, financial reporting, cash flow management, and many other financial management measures will become more important to the future of every farm business in the UK.
That is why, as this new dawn approaches, Whitley Stimpson will be with you every step of the way, to help ensure the future is bright for you, and the generations to come.