Host

Philippa Lamb 

Guests 

• David Missen, consultant, Larking Gowen 
• Roseanne Bennett, partner, Greaves West & Ayre 

Transcript

Philippa Lamb: Hello and welcome to the In Focus Podcast, where we’re looking at how changes to British farming could negatively affect the UK’s broader economic resilience. By the end of 2027, following Brexit, British farmers will stop benefiting from the EU Common Agricultural Policy. Now, that policy paid subsidies largely regardless of land use but now, instead, farmers will need a transition to new schemes established by the UK’s devolved administrations.  

These schemes, which aim to strengthen sustainability, require farmers to meet environmental objectives in areas such as hedge management, rewilding and tree planting. But critics are worried that those incentives will undermine output and the sector’s ability to respond effectively to market shocks. As we know, the Russian invasion of Ukraine has raised serious questions about food security.  

So can the UK really afford such a drastic rethink on food production? To tell us more about this, we’re joined by two experts. David Missen is a consultant at Norfolk accountants Larking Gowen and Roseanne Bennett is a partner at Greaves West & Ayre, based in Northumberland and East Lothian. Not everyone listening is going to be familiar with the farming sector. Can you briefly set out for us a sense of the size of the sector and the players in it? 

David Missen: It’s a word that’s overused, but this is a unique sector. It covers something like 80% of the UK land mass. There are in England, which is the easiest one to look at, about 100,000 farmers or farm holdings, but when you boil it down to get to the ones which are providing a living, there are about 40,000. And that 40,000 are farming about 90% of the whole farmed area. So there are two thirds, if you like, on quite small holdings; they’ve perhaps got another job, or perhaps the land’s been let out. But they’ve still got the holding. But there are only about 40,000 active farmers and they are farming, on average, about 525 acres each.  

PL: And this is still mostly family managed? 

DM: That’s the second identifying factor about farming. For such a big physical part of the UK economy, it is run primarily by family farming partnerships. There are a few big players, particularly at the front end of the vegetable and fruit markets. But if you took the average farming enterprise, it would be about 500 acres with probably one or maybe two generations and one employee.  

That is the other thing – something like two thirds of those involved in the farming industry are owners; they’re either self-employed, or directors of farming companies.  

PL: And the production cycle is the other thing that makes it unique?  

DM: Absolutely. If you look at the moment, as you drive around, where farms are now starting to come through the floods, you’ll see crops are in the fields. They would have been planted in August; perhaps they will grow through until next July when they’ll be harvested, but they may not be sold until the following January or February. So you’ve got something like a 15- to 18-month production cycle.  

A farming business has a working capital of about 150% of its turnover. And Roseanne will probably explain or elaborate on this, but on the livestock side, it’s similar.  

PL: So I suppose my question then will be how profitable are most of these holdings?  

Roseanne Bennett: It depends, I suppose. What we’ve seen is a huge volatility in these agricultural businesses. If we go back to 2022, the arable farms were making huge profits. But then when we go into 2023, there are huge losses. There are peaks and troughs, and it’s a really difficult business to manage. And because the cycle is so long, as David was saying, when you plant that grain in the ground, you don’t actually know what you’re going to sell it for. Some people will hedge it and sell some of it forward. But you are in the dark, really.  

PL: So you’re dependent on commodity prices? 

DM: Commodity prices, weather, disease, international factors. It’s not defined by UK prices, it’s defined by world prices.  

PL: And is it fair to say the bulk of profit has come from subsidies, so far?  

DM: I think if you look at the bottom line profit, yes, it is the biggest single component. It’s a smaller part of the turnover. But you have to incur the costs anyway. So yes, there are some horrendous figures for what might happen when the subsidies are fully withdrawn, based on a lowish run of profits in the past 10 years or so. 

PL: And that goes with arable and livestock farming? 

RB: Yes, I think if you look at people’s bottom lines, if you remove the basic payments support pre-2022, where we had extraordinary commodity prices, you would be making a loss. So it has filled a huge gap.  

PL: So subsidies are crucial foundation of the entire sector, but they’re changing, as I said, now we’re no longer part of Europe. What are the key differences?  

DM: Can we just go back a little stage here? Subsidies have been within the UK farming sector since about 1947. Postwar, the NFU and the government sat down and decided they really didn’t want to be short of food again. So there have been different types of subsidy. We had deficiency payments, just after the war, where they decided jointly between the two sides what a farm should be making, and then the government made up the deficiency. People actually took in their corn sales invoices and got a payment. We then moved into intervention, where the government bought grain in the markets to keep the prices up, so farmers had an income from it.  

We then went into the EU, and we had intervention in the early years there, that moved on to flat-rate payments. They hadn’t discovered that intervention led to wine lakes and butter mountains; they then backed off a bit. And at the tail end of the EU subsidies were a mixture of area-based payments, where people received a subsidy just for farming the land in accordance with reasonably good environmental standards; and there were also some add-on environmental subsidies that came on top of it.  

What we are seeing now is that structure being phased out over a seven-year period; we’re halfway through that now. It’s being replaced by wholly environmental subsidies. Looking at the sort of things we’ve got, there’s nectar flower mix, so planting grass for butterflies, basically; skylark plots, overwintered stubble; lapwing plots; flower-rich margins; wild bird food.  

PL: So these are the commercial choices that farmers would be rewarded for with subsidies? 

DM: It’s a very nuanced picture because in some areas, on very poor land, it is probably economically better to grow wildflowers or bird cover than to try and get an arable crop. I should have mentioned, I actually farm myself in a small way, and almost the first thing we did was to get the yield readings, work out where it was really not worth growing a crop and use that area to grow environmental crops. We could do that under the old system; under the new system, that is all you can do.  

PL: So it’s entirely driven by the sustainable objectives?  

DM: Pretty much, yes.  

RB: In the past, you had a payment per acre, regardless of what you’d done, but now you have to do something from an environmental point of view. This is what it’s about now – public goods for a public benefit. It’s not about food production, per se. It’s more about soil – improved soil is an outcome; improved water is the outcome; rather than producing more food.  

PL: So food production is not seen as the public good in this context? 

RB: No, in the English policy, it’s not. If you look at the Scottish policy, food security is mentioned, but in the English policy, we are going away from that because it’s the public benefit, making it sustainable, more environmental.  

PL: And as you say, these are devolved matters, so Scotland and Wales will have their own systems. But take-up has been very slow, hasn’t it? Farmers have not been keen? 

DM: When the prime minister spoke to the NFU last week, he mentioned that almost 50% of farmers had taken new contracts. Well, reversing that means over 50% are still relying on the fallback of the old contracts. Now, we have had a couple of good years, as I think Roseanne said earlier. So that has maybe taken the pressure off. But it is quite alarming that so few have actually taken up these new schemes.  

PL: So what are their reservations? Why aren’t they taking them up?  

RB: When the schemes first came out, the payment rates were quite low, and the information surrounding them was quite vague. I think there’s been a lot of work done, so the payment rates are a lot clearer. And I’m seeing more interest from my clients in the uptake of it.  

DM: Because they are being driven now, by further falling prices. Another thing we should have explained earlier on is that the livestock and the arable sectors almost work against each other. So if arable prices go low, animal feed is cheap, and profits are higher on livestock. Conversely, if arable prices are high, livestock is squeezed. We have seen at the moment that livestock is on a bit of a roll –the sheep and cattle prices are quite good. But arable prices are down to way below where they were pre-Ukraine. So different sectors are suffering in different ways.  

But the gist is, I think, that over the last three or four years, there has been proper money and good profits made in some parts, but not always the same parts at the same time. And that has therefore taken away the imperative to do something about these falling subsidies.  

RB: I think there’s the realisation by farmers that the basic payment scheme is going and they’re actually seeing their payments going down. So they are saying, what are we going to do to fill that gap?  

PL: So there’s been understandable caution while farmers got their heads around it – and perhaps a bit of a communication issue and some tweaking to be done. But is your general sense that farmers will sign up in greater numbers?  

RB: Yes, that I would say definitely. I don’t think they’ll have a choice.  

PL: And just to be clear, do you feel these schemes work well, for farmers financially?  

RB: Do I think the way in terms of it takes some of the risk out of their business because you can guarantee your payment for things that you are doing? 

RB: I think it’ll make some farmers who are struggling actually think, is it better using more of these schemes, taking more out of production? Because it reduces the risk for their business – they’re not open to the weather, to crop failure. And labour shortages on farms are a key area. So if you are struggling with labour, and you can put some more of your land into schemes, is that possibly what they’re going to do? I think they will become more popular.  

PL: So what are the other objectives of the scheme? I think one was to make sure that larger landowners weren’t favoured over smaller holders?  

RB: I think that was the hope, that you were delinking what you received to the land you actually had. But the outcome will be no different. Because if you own a lot of land, you will naturally have more hedges. So you have more ability to claim. 

DM: There is a danger as well that some of the larger landowners, particularly where they’ve got tenants, and a tenancy comes up, may think, why do I need to re-let this land? I can actually take it all in hand, put it down to grass and flowers, and not have to worry with a tenant in future.  

PL: So will we see more consolidation? And will we see smaller farmers dropping out of farming altogether? 

DM: Possibly. Consolidation has been going on, but it’s been much more slow than people think. And the number of farms has dropped 1% in the last five years – it’s not significant. But then we’ve had some quite good years recently. 

RB: Something you might also see is, especially with livestock farmers who are renting, say, the next-door farm to make their unit more viable, that person might decide to put their farm into schemes. So the landowner might say actually, I don’t want your sheep on my land anymore.  

DM: Generally, though, for the 40,000 farmers, half of those own their own land and the other half is a mixture of tenancies. And I don’t see them selling – it is the last thing any farmer wants to do, because they have generation after generation sitting on their shoulder watching them. They don’t want to be the one to sell up on their watch.  

PL: Looking ahead a few years, once this transition is complete, what outcomes do you see for farming and, indeed, for food production?  

DM: Well, food production will be lower. I come back to my own example – we’ve already taken out the very marginal land because there were some bits that really weren’t worth cultivating. There’s one field left, which next year is going into a mixture of grass and wildflowers. Now, as a short-term measure, that’s fine. It’s a three-year contract, and at the end of it, if the wheat price has gone up, we can put it back into wheat and it will have had a nice rest. But the consequence is that it must reduce the food productivity of the country.  

And while some of these three-year schemes are just putting it into grass, so you can easily take it out, others – such as the Welsh tree planting – are almost irreversible. Once you’ve planted a field full of trees, it’s quite difficult to get rid of them. Or indeed there’s the rewilding, where you just let scrub take over. So I can’t see any way that they’re not going to reduce the food-producing capability of the country.  

RB: I think we’re already naturally seeing a reduction, especially in the beef and sheep industry, in terms of numbers of livestock. And I think that will continue, because you have an ancient demographic of farmers and the people who work with livestock – there aren’t as many of them. So I think that’s just a natural reduction, a decline. Because a lot of the schemes are seen as promoting low-input grass, which means they’ll carry less stock; I think you’ll naturally see a reduction in the herds and flocks as we go into the schemes. 

PL: Are trade agreements with overseas countries playing into that as well? 

DM: I think they’re more a perception than reality at the moment because it still costs quite a lot of money to get sheep here from New Zealand. But they are certainly creating an air of uncertainty. Farmers are looking over their shoulders and saying, well, these agreements are coming, so is it worth investing in new buildings, new machinery, when we know we’re going to be overcome by countries that can produce meat more cheaply than we can? 

PL: And that’s significant, that wariness about investing. Because, as you say, there’s such a long production cycle and these decisions can’t be rewritten on a whim.  

DM: There is another angle to this, which is welfare. Because our livestock welfare standards are world beating at the moment, the concern is that the shopper is not actually quite so bothered as to where their meat comes from and how well it’s been looked after. They do tend to go on price. So there is a crisis where we’re sucking in not only cheaper imports, but of a lower quality.  

PL: The other question here is about how farming would respond to a market shock under these circumstances. For example, an expansion of Russian aggression or some event that we hadn’t actually thought about yet, like another pandemic. That’s going to be difficult with that such a of lack of agility? 

DM: Farming is an oil tanker to turn around. You cannot, as I say, dig up a forest and put it back to arable quickly. It happened in the war – it took two or three years for the war agriculture committees to actually get UK production out from the slump of the 30s and into the productivity it was running on by 1947. 

PL: It does feel quite counterintuitive, doesn’t it, to potentially reduce food production and resilience at a time of global instability and indeed, as you say, volatile commodity prices. I’m wondering quite how we’ve arrived in this place. Am I right in thinking these schemes were conceived before the Russian invasion? 

DM: Yes, 2018. 

PL: So before the pandemic as well. So is it that these things were just not thought through perhaps quite as well as they should have been? 

DM: I think they were produced at a time when we had plenty of cheap food worldwide, so we knew we could import whatever we needed. There is a growing green lobby wanting to improve the environment, and the government was elected on the basis of leaving our soil, water and air in better condition than when they came into office. 

PL: Which is obviously an objective everyone would get behind, including farmers? 

RB: Yes. But it does feel at times that we’re just exporting the issue, aren’t we? We’re reducing the food production in this country, we’re shifting it across to other countries. So more of our meat is going to come from Brazil, which is less sustainable if they want to bring down the Amazon rainforest to produce it. 

DM: You’ve just taken my line! But you could also look at the sugar industry. We’ve got probably the most efficient sugar beet production in Europe, certainly. But we cannot compete with somebody who’s chopping down rainforest and burning it to grow sugarcane in South America.  

PL: So what’s the answer? Sustainability can’t be postponed for ever. 

DM: No. But we seem to be running way ahead of the rest of the world on this one, where we are setting examples, but we are relying on the kindness of others to provide our food if things get sticky.  

RB: And if you look at what’s happening in Europe, there have been a lot of demonstrations in Europe because they’re wanting to become more green in farming but they’ve actually stepped back on some of the green initiatives they wanted to put in place because the farmers just were not happy.  

DM: It’s the same thing as here – but the European farmers are a little bit more vocal than British farmers.  

PL: And their objections are about profitability?  

RB: Yes. And there were initiatives to reduce the use of insecticide and pesticides to make it more environmentally friendly. But they’ve had to step back on some of those things. And they still get direct payments in Europe – I don’t think there’s any sign that they will cease direct payments, so we are at the forefront of something completely different.  

PL: So what needs to happen here there? Because from what you’re saying, it’s unlikely we’re going to see much change in the English and Welsh systems, is it? Or will we? Because the Scottish system hasn’t been announced yet – is that right?  

RB: They’ve announced the broad framework for it, but not the payments, what people are going to receive or an actual scheme yet. But you will still see direct payments in Scotland, they have said that they want to be more aligned with what’s happening in Europe.  

PL: So they might not be quite so driven by sustainability, then? 

RB: From what they’re saying the indications are that there will be direct payments per land, like we have now. I think England and Wales are taking it to another extreme. 

PL: What needs to happen? 

DM: The government or DEFRA need to get farmers back on side, and they need to actively encourage them to produce food. There has to be an option in here somewhere to encourage efficient production of food. That is the one thing that’s absent, though – there is nothing in here to say, “Grow food.” Don’t get me wrong, I think people are very happy to grow other things. They’re happy to grow other things on the marginal land, they’re happy to be paid to keep their hedges looking nice and thicken up, and maybe plant new hedges. They’re happy to be able to look after their ponds and little bits of wildlife. In the first version of the new scheme, that was pretty much what it covered. They looked their outcomes rather than methods, and said you need to provide so much tall nesting cover, so many rough places. And of course, most farms had those. So it was quite easy. You could look around, say yes, we’ve got that; we need to do a little bit of this, but we can get most of our subsidy money without doing anything very different from what we are doing now.  

PL: So what happened to that scheme?  

DM: I don’t know. But it was a shame because that was a good scheme. I think we’re on version three of the Sustainable Farming Incentive now, which has moved away from that. And it’s very much focused on actions rather than results.  

PL: It’s interesting, because even someone like myself, not involved in the sector, heard former President of the NFU Minette Batters talking about food sustainability and the dangers that we’re running into for a considerable period of time. This is not new criticism. And yet, here we are – how has that happened?  

RB: I think if you look at the government, they think this is a good thing. And they think this will make farming more sustainable. But if you’re dealing with volatile commodity prices, and you’ve got these attractive payment rates to put your food into non-productive land, you will do it. And yet they still think people will be productive. Some farmers will be, but those farmers who have possibly got shortage of labour, working capital requirements – this takes out some of the risk in their business. So I think it’ll drive behaviours that maybe the government wasn’t expecting. 

DM: I’m sure it will. I think they may be more productive on smaller acreages, because that is what will happen – some of the marginal land will just go out of production altogether and into environmental schemes. And what is being lost in food production from marginal land won’t be made up for by greater productivity on the better land. I think that is the consequence.  

PL: And is this the route we’re on now? Is there no means of changing it at this stage?  

DM: Not unless world commodity prices get a lot higher – and that will turn it. With wheat at £155 a tonne or whatever is at the moment, it is actually better to grow wildflowers. Harvest your butterflies. If wheat goes up to £250 or £260 pounds a tonne, we won’t worry about the butterflies and we’ll crop out the less well-yielding land.  

PL: But as you know, commodity prices come up and go down.  

RB: We’ve seen this in the past where farmers could have set-aside and they got paid for it. You could choose – it was optional – and it depended on what was happening with the price of commodities; they might not have set-aside if they didn’t have to. Farmers will do what makes the money – they are businesses after all.  

DM: And they are very good at it. A few years ago, there was a drought in the West Country where most of the livestock are. And East Anglia had quite a lot of surplus straw, which is normally just chopped up and ploughed in. And within weeks all that straw had been bailed up and put on wagons down to the West Country. Farms that had not had a baler on them for decades were harvesting straw, because there was an opportunity there, and they leapt into it and took it. So they are very adept at turning a penny where they can.  

PL: Your final piece of advice then. Roseanne, what’s your advice to farmers?  

RB: In terms of farmers, I think they do need to look at these schemes. Their basic payment is going, so what I would say is look at not just the headline payment rates, but consider what’s best for your business, because you will be signing up for three years. Even if commodity prices go up in two years, you can’t just come out of the scheme quickly. You need to consider what you’re doing. But I don’t think they can be ignored anymore.  

DM: I would build onto that and say they actually need to do a business plan. Farmers by and large are notoriously bad at doing business plans. Any other business has a plan for the next three years, five years, 10 years – they know where they’re going. I can hardly think of a single farmer who has that written down. It’s in their in their head – but as you know, if it’s not written down, it’s not a plan.  

PL: And, David, your advice for government?  

DM: Listen to what farmers are saying. They’re really not trying to lift your leg on this one. There is a desperate need to maintain food security.  

PL: David and Roseanne, thank you so much. I think many of our listeners would not have been familiar with those questions and it’s been really fascinating to hear about them. If you’d like to dig into this subject or you work in the sector, why not join ICAEW’s farming and rural business community for events and newsletters covering practical technical and strategic issues. Membership is open to all – you don’t have to be an ICAEW member, and you can find out more in the show notes attached to the episode.  

We’ll be back in late April. Meantime, the Insights series sharing news and developments from all corners of accountancy and ICAEW will be with you early next month. Finally, ICAEW has launched a new podcast for everyone working in the tax sector. If you are a tax professional or you’d like to refresh your tax knowledge, The Tax Track has specialist analysis from the ICAEW Tax Faculty, and you can listen on any podcast app or indeed at icaew.com/podcasts.