After the unexpected Brexit result, many people in the farming sector are considering what impact this is going to have on them. Could this be a positive springboard for change, or will it have negative consequences?
My view is that the short term economic impact of Brexit has been largely positive for farming so far. The devaluation of sterling has increased the cost of food imports coming into UK and increased the subsidy income. I suspect the low value of the pound against the Euro will be here for some time. There are so many unknowns with Brexit and we’ll likely see the worldwide financial markets will remain cautious over the UK economy for some time.
Another positive change brought about by Brexit was the drop in interest rates. A quarter percentage point reduction is not going to make huge savings, but those expanding can secure fixed rate borrowing at very low rates. Land has traditionally been a safe asset and for this reason banks are generally supportive of farmers expanding and buying land. I don’t foresee agricultural land dropping in value, despite the poor prices across most sectors.
So has Brexit been good news for farming? Short term yes, but long term the concern is over what level of support will come from the newly re-formed UK Government. The news that the current CAP regime will remain in place until 2020 was expected. To replace the various schemes throughout the UK would be too difficult a task to undertake. The uncertainty is what comes after 2020. In Scotland, I believe a large part of the political divide sees farmers as wealthy landowners. At a UK political level agriculture may be low down the agenda and the reality is farming no longer represents a large part of the UK economy. Contrary to popular opinion I would expect a large reduction in subsidy and it would be a good idea for businesses to plan for that.
As an industry we now have an opportunity to wipe the slate clean and plan for what we want farming subsidies to look like after 2020. An area based system is unlikely to serve the industry well, because:
1) The UK public are unlikely to support an area based subsidy. Generally the public are not aware of how much farmers receive in subsidies or how the CAP system works. I believe the public perception is that other countries in the EU are getting subsidy payments so “our” farmers are entitled to it. As an industry we need to be prepared for more scrutiny and publicity and therefore not blindly lobby for more of the same, or a subsidy system mirroring our European neighbours.
2) An area based subsidy system creates inefficiency in farming. I appreciate that farming in some parts of the UK would be impossible without subsidy. But for many farming businesses subsidy only hinders the drive for efficiency and profit, encouraging businesses to act in irrational ways. It has also played a part in restricting structural change in farming and land ownership. I can only comment on the Scottish system, but here the CAP regime has encouraged landowners to retain land, often to claim subsidy for little farming activity.
3) The environmental benefits delivered by farmers must be separated from food production. The message needs to be delivered that the environmental measures have a cost to the farmer for giving up time, profit and often land. Ideally the environmental measures should be largely optional for farmers, leaving the Government to decide on how much they want to encourage and pay to deliver environmental policy.
There will be many competing interests starting to lobby Government on farm subsidies post 2020. It is important that we as an industry start to establish a clear vision of what we want. To do this we should ignore the current area based system, and instead look towards a system which is largely optional, rewards environmental measures. Of utmost importance, we need to ensure we secure the support of the UK public.
If you want to discuss any of the points raised in this blog please get in touch with me here, or:
01738 441 888
The information in this blog should not be regarded as financial advice. This is based on our understanding in December 2016. Laws and tax rules may change in the future.