Yesterday the Department of Food the Environment and Rural Affairs (DEFRA) announced a consultation on paying UK farmers to give up their farms, or at least to give up their Basic Payment annuity. The Government has pledged to honour UK farmers’ Basic Payment Scheme, where payments are based on land size, until 2027. These annuities are paid by DEFRA but follow EU’s Common Agricultural Policy (CAP) Pillar I payment guidelines[i]. These payments are not evenly distributed. Member states can give larger payments for the first thirty hectares of farming land or impose discounts on farms over 4,000 hectares and additional discounts for farms over 10,000 hectares. Pillar 1 payments also allow higher payments for farms on Less Favoured Areas (LFA), as well as additional payments for farmers under 30 years of age; for using climate or environmentally friendly farming practices; including maintaining grasslands, hedges, copes, and buffer strips; planting nitrogen fixing crops on at least 5% of arable land on farms over 15 hectares; and for crop diversification, known as the three-crop rule.
The EU’s Pillar 2 payments, known as Agri-environment payments in the UK, are multiannual payments to fund specific projects that meet at least four of the EU’s priorities: agricultural knowledge transfer; improving competitiveness and farm viability; promoting risk management; restoring and preserving ecosystems; promoting resource efficiency and the shift to low carbon agricultural production; and poverty reduction and economic development in rural areas. The type of payment is determined by each member state to suit its environment.
The UK intends to continue these Agri-environmental payments but wants to discontinue the Basic Payments. DEFRA is hoping to speed up this process by repurchasing these Basic Payment annuities. The lump sum payments received will allow farmers to repay any outstanding debts and retire from the farming business. The government hopes farmers will sell or pass on their farms, stripped of their annual subsidies, to the next generation of farmers. It is also likely that these farms will be bought by professional agricultural companies and amalgamated into more productive unit sizes. According to DEFRA’s Farm Business Income statistics, at least a fifth of all UK farms are presently making a loss, even after subsidies.
Of course, not all UK farms make a loss, many are highly profitable. Exploring this further, we must look at farm sector, farm size and taxation of farmland. Combined, they explain what is wrong and what is right with UK farming, and why we should not be protecting the UK’s unprofitable farms from international competition. They may not really be commercial farms at all.
Some farm sectors are more profitable than others
The profitability of UK farming varies enormously by sector. with dairy farms the most profitable and lowland grazing land the least profitable. Each year DEFRA publishes Farm Business Income by type of farm, England. Contained in this document is a useful breakdown of Farm Business Income which is divided into four categories: Agricultural Income; Income from diverse sources such as renting buildings or running retail operations; Basic Payment subsidies; and Agri-environment subsidies. The Chart for 2019/2020 appears below:
From this table we can see that both Lowland and Less Favoured Area Grazing made a loss on their agricultural income last year, as did Mixed farming. This could have been a bad year. Agricultural income is very dependant on commodity prices and if farmers don’t hedge their prices or insure their crop, their income will vary enormously from year to year.
However, if we go through all of these DEFRA reports over the past seven years, we find the same pattern. Every year, grazing and mixed farming have lost money on their agricultural business. It is hard to justify protecting UK graziers from imports from Australia when UK graziers are routinely loss-making – unlike the dairy, poultry, pig, and general cropping farms.
This information comes from DEFRA’s annual Farm Business Survey, which covers farms in all regions with a standard output of at least €25,000 and covers approximately 56,521 farm businesses. For owner occupiers, Farm Business Income represents the financial return to all unpaid labour (farmers and spouses, non-principal partners and their spouses and family workers) and on all their capital invested in the farm business, including land and buildings. For corporate businesses it represents the financial return on the shareholders capital invested in the farm business.
Diversified Income and income distribution
However, it is perfectly legitimate for farmers to maximize their returns by diversifying their incomes. Diversified income includes rental of buildings, retail income, and value-added production. Diversified income is usually less variable than farmers’ commodity-based income. The combination of agricultural income and diversified income over the last seven years is shown in the table below. Again, it is the UK’s grazing farms that are making a loss, year after year, with one exception for Lowland farms in 2017/18.
It is disappointing the grazing farms have not developed diversified income as other sectors have. Although many may be too remote for a retail operation, one would hope that they could have developed an income stream from renting holiday accommodation or wind turbines.
But not every farm is loss-making. And hopefully not every farm is loss-making every year. Farm income varies enormously not just by sector but within each sector. However, using the DEFRA data again we can see that a greater proportion of farms in some sectors make a loss. In other sectors, a large proportion of farms routinely make an FBI of over £75,000.
In 2019/20, 12% of all UK farms had a negative FBI, after including both Basic Payment and agri-environment government subsidies. Incredibly, a third of Lowland grazing farms made an FBI loss last year, as did one-fifth of Less Favoured Area grazing farms.
This could have been a one-off situation due to low prices for their cattle and sheep or poor weather. However, if we review the last seven years, we find that the percentage of lowland grazing farms making a loss has averaged at 24% and ranged from 16% to 33% of farms. Similarly, on average 24% of LFA grazing farms made a loss over the last seven years, ranging from 19% to 33% of farms. These two farming sectors routinely have the greatest proportion of loss-making farms even though LFA farms receive higher Basic Payment subsidies per hectare due to their poor-quality land.
Some sectors are more profitable than others
At the other end of the profitability scale, dairy farms, specialist poultry and general cropping have the greatest proportion of farms making over £75,000 from FBI. The average proportion of farms in these sectors making more than £75,000 over the last seven years is 42% of dairy farms, 32% of specialist poultry farms and 29% of general cropping farms. The dairy farm proportion has never been lower than 25% and has been as high as 63%. This result is unsurprising. All three of these sectors are capital intensive, highly automated, require specialist machinery and tend to require employment of outside staff. They are generally run as large-scale businesses rather than as family farms, sometimes with professional managerial staff as well.
Dairy, poultry, and general crop farming suit the UK and allow it to play to its strengths: they do not require large amounts of land; in the case of perishable dairy products and fresh chicken meat, they benefit from the UK’s small size and short distances to retail markets; they are both capital intensive and labour intensive – both readily available in the UK. Over five million EU nationals have applied for settled status in the UK so the feared exodus of farm workers after Brexit failed to materialise.
Dairy, poultry and general cropping are the type of farms that the UK should be encouraging – not just to supply domestic markets, but to export their non-perishable products internationally. I would also include specialist pig farming and horticulture in this category. Both are regularly profitable from their agriculture and diversified income, and horticulture receives very little government assistance.
Farm Size and comparative advantage
This brings us to the other side of the coin – the farming sector where the UK would appear to have no comparative advantage: grazing. Yes, the UK did develop many of the world’s best beef breeds but meat production, outside of wagyu beef, is now focused on economies of scale.
Cattle and sheep farmed for their meat or wool do not require the daily labour of dairy cows although there are intensive times during shearing, dipping, branding or drenching. In a country with a temperate climate, there is less anxiety about lambing in freezing temperature as there can be in parts of the UK. Nor do farmers in temperate climates need expensive of barns to house their animals in winter. And in the case of beef: the meat improves with age, so it does not need to be close to its eventual retail market.
Although the government is planning to pay out all farmers to retire, I would like to suggest that they concentrate on one sector of the industry – grazing and look for ways that UK grazing farms can be converted to more profitable sectors or amalgamate their farms so that they can compete with farms in Australia, the US, Brazil, Uruguay, Argentina and even India.
To back this up, it is worth looking at DEFRA’s table of farm sizes in the UK.
From this table we can see that, of the UK’s 219,000 commercial farms, almost half of them, 103,000, are less than 20 hectares and account for 705,000 hectares of land, giving an average size is just 6.8 hectares. About half of the UK’s croppable area is also under 20 hectares, with an average size of 6.4 hectares, but depending on the crop, this could still be a profitable farm size. Only 41,000 farms in the UK are over 100 hectares and they account for 13,277,000 hectares of land. That is an average size of only 323 hectares. To put this in perspective the average farm in Australia is 4,100 hectares.
Fear of competition is unfounded
That should not make UK farmers fear competition from Australia. Australia has a natural advantage in grazing land and the majority of Australian farmland is used for grazing. This actually makes Australia the perfect symbiotic agricultural trading partner for the UK. The UK benefits from economies of scale in food and drink manufacturing due to its larger population and short distances to retail markets. This is perfect for value added food and drink manufacturing such as the enterprising UK farmer who vertically integrated his potato farm by making Vodka, other farmers make artisan potato crisps and obviously, the UK’s whisky industry is adds considerable value to the UK’s barley production.
Meanwhile Australian cereal crops that benefit from large tracks of land, have an opposite season to the UK so are not in direct competition. Nor do they increase the supply, and suppress the price received by UK farmers as other northern hemisphere production does.
Australian beef farmers can produce beef at a lower cost than the UK simply due to their greater economies of scale. They have larger farms, due to lower land costs and greater land availability. While the difference in manpower needed to run a herd of thousand animals is not much greater than for a herd of one hundred animals.
UK food manufacturers would be better off working with the world’s major food producers rather than allowing the UK Government to force them to prop up the UK’s failing grazing farms. The failing grazing farms need to restructure or move on, or of course live on their own dime. Only a novel idea in farming.
The UK’s unprofitable farms may not go out of business this year, but their demise is only a matter of time unless they change their products, mechanise, or consolidate their farms. This type of restructuring has happened in every other industry in the UK and in the rest of the world, primarily because every other industry lost its government subsidies. It is time for farming to follow suit.
Restructuring will not be the demise of the UK farm, but its salvation. We have already seen that there are highly profitable sectors in UK agriculture and highly profitable farms in each sector, so there is no evidence that these profitable farms would be driven out of business without subsidies nor that they require protection from import competition. Most of them have been competing with imported EU products for fifty years.
Australian products will not be in competition with the UK’s most profitable farming sectors: Dairy, Poultry, General Cropping, pigs, or horticulture. In fact, for these sectors Australia could become a new market for UK products. But this won’t happen if the government doesn’t stand up to failing farms that would have gone out of business years ago if it were not for the enforced generosity of UK taxpayers.
Inheritance taxes and decoupled subsidies
Which bring us to the UK tax system. There is the possibility that DEFRA’s figures have been skewed by the UK’s tax system. At the moment, farmland is not subject to inheritance tax. This has encouraged many wealthy people to become ‘farmers’ in a small and insignificant way. Being HRT free was meant to help farmers pass their farms to the next generation of farmers, not to the next generation of High-Net-Worth individuals. It would be interesting to know what proportion of the loss-making grazing farms in the UK are owned simply as a HRT tax shelter, where the owner’s income is not dependant on maximising their farms income.
Buying inheritance tax free farmland is just another investment for many of the UK’s or indeed the world’s wealthy. For the most part, they do not have the drive and certainly don’t have the financial necessity to maximise their return from their farming investments.
If the Government pays farm owners subsidies simply for their environmental good deeds, then even more UK farms could become unproductive or at least uncompetitive. The second part of DEFRA’s proposal is to de-couple subsidies from farmland and instead reward farmers/land owners for sustainable food production and environmental improvements.
I don’t have a problem with sustainable food production. Sustainable food would be a unique selling point and may even create a new luxury good export industry, like high value scotch whisky and gin. However, without a local supply or an alternative supplier of agricultural products, such as Australia, this would leave UK consumers as a captive market for the EU’s mass-produced farm products. Or maybe the lab-grown meat-like substance industry.
It may seem counter intuitive but: increased market competition; the removal of all subsidies; and the removal of tax haven status for farmland; would produce a much more vibrant agricultural sector than prolonging import protection. Both Australian and New Zealand farmers are proof that this can be done and that is works.
[i] During the EU 2014 – 2020 budgetary period, UK farms have received on average CAP Pillar I payments equivalent to €224 per hectare per annum and Pillar II payments equivalent to €21 per hectare per annum. These payments are not evenly applied. As farm sizes vary enormously in the UK, so do the size of farmers subsidies.