The Agriculture Bill provides thin pickings for farmers and their advisers trying to work out what will happen next. It does show the direction of travel and has some elements which we can – with a bit of imagination and study of the supporting papers - use to construct a partial vision of the future.
Here Burges Salmon’s experts on food, farming and land set out their thoughts:
Prepare for the changes now
The most obvious advice to farmers who currently receive Direct Payments is understand and plan for the withdrawal of this income source over the next 9 years. The reductions will start in 2021 and payments will end in 2027. The reductions will affect every current recipient. The challenge for farmers is that whilst it is clear that Direct Payments will end, it is unclear what alternative schemes (including public goods) will be available and what the net effect on a farmer’s income will be.
The idea of placing a threshold on reductions to protect those who receive very little is being rejected, with the express intention of ensuring that every farmer can feel the change approaching. While the Government is looking to avoid a cliff edge, no farmers will be featherbedded.
Emma Folkes
Emma.Folkes@burges-salmon.com
Plan your approach
The guiding lights for Government policy are 'Environmental benefit' and 'productivity', so it is not all about focusing on providing environmental public goods. The draft Bill suggests that financial assistance will be targeted at all the expected environmentally friendly purposes (such as management of soil and water), but there is also mention of 'financial assistance for starting, or improving the productivity of an agricultural, horticultural or forestry business'.
Farmers should be stress testing the financial performance of their businesses to anticipate the removal of Direct Payments. It is possible that grants or loans will be available for some investment if the productivity benefits can be proved to the managing agency (currently expected to be the RPA).
Emma Folkes
Emma.Folkes@burges-salmon.com
Consider the effects of 'de-linking'
It seems that owners will be able to sell land and tenants terminate tenancies but still receive their annual payments, possibly in the form of a lump sum. This raises a number of questions.
- How will environmental standards be upheld? The guidance notes indicate that the environmental benefits of the current cross-compliance and greening conditions will be preserved through improved environmental regulations and policies. Might this mean that the burden of additional compliance will fall on the new occupier of the land (ie the new owner on sale or the landlord following the termination of a tenancy), without imposing any requirements on the outgoer?
- Will landlords have a claim on payments if the tenancy ends before the seven year period expires? If not, then they will be in possession of land where no direct payment is available – the new version of the 'naked acres' seen at the start of the Single Payment System. Is the landlord’s right, contained in many tenancy agreements, to receive the 'entitlement' at the end of the tenancy wide enough to entitle them to receive the payment derived from that entitlement in these circumstances?
- What will tenants want to do? It is possible that some tenants will regard the de-linked payment as an 'exit grant' and will look more closely at their rights to terminate their tenancies. FBT tenants will often be locked into fixed terms and termination will require an agreed surrender and release from their landlords. AHA tenants usually have the ability to unilaterally terminate but they would be giving up what has traditionally been regarded as a valuable asset.
Emma Folkes
Emma.Folkes@burges-salmon.com
Will more land be taken back in hand?
The DEFRA papers confidently assert that rents will fall as a result of the progressive reduction in payments. Combined with the feeling of many landowners that in hand farming offers greater resilience against changes in the tax system there may be a trend towards taking land back in hand. In which case - if the numbers can be made to work – there will be opportunities for farmers willing to act as managers or contractors on large in hand holdings.
Tom Hewitt
Tom.hewitt@burges-salmon.com
What does natural capital look like?
The Government’s intention to use a natural capital approach to deliver on its policy of 'public money for public goods' has long been trailed (see our commentary on this year’s Oxford Farming Conference). The big unanswered question has always been, 'What does this look like in practice?' The Agriculture Bill tells us very little. We do have a better understanding of the categories of public goods that might be rewarded, but these are stated only in broad terms.
The idea remains that farmers and managers of land who provide the greatest environmental benefits will receive the largest financial rewards. To make this approach work, the incentives will move away from a tick-box, generic rules-based system to a results-orientated system where the value of the naturally occurring assets (such as geology, soil, water and living organisms) is measured.
The Bill is, however, silent on the tools that might be used to value the natural capital and how improvements in value might correlate to payments. As we wait for further detail from Defra, it is possible to look elsewhere to get an idea of how the system might work. The concept of natural capital accounting is not new, and Burges Salmon’s environmental specialists have been advising on it for some time in other areas, such as its use in non-financial reporting for corporates eager to prove their environmental credentials, and its use in quantifying, and then addressing, environmental harm following pollution incidents.
Lessons can be learned from other countries too: the Scandinavian economies have been using natural capital accounting for some time. However, there remains a lot of work for Defra to do to establish a natural capital accounting system that is accessible, comprehensible and fair across the many varied and diverse land uses across England. We will be watching this area with interest.
Michael Barlow
Michael.barlow@burges-salmon.com
Lenders and borrowers
Lenders will continue to focus on loan-to-value ratios and the controversial question of whether changes to farm support will lead to a fall in land values. The phasing out of Direct Payments will mean that for some farmers serviceability may become a challenge. In the meantime we are seeing some landowners with low gearing taking on fixed rate long term debt whilst rates remain low.
It is likely that financiers will, over time, introduce more rigorous affordability criteria for agricultural businesses borrowing monies in order to protect against the inability of borrowers to service debt during or following the phasing out of Direct Payments. Businesses and estates may need to produce more detailed business plans to satisfy these criteria.
Rachael Ruane
Rachael.ruane@burges-salmon.com
Fairness in the supply chain
The Government has said it wants to increase information sharing across the food supply chain in order to improve the position of farmers and smaller food businesses, increase transparency and improve productivity. The stated aim is to level the playing field by providing market data which is currently only available to larger retailers and processors.
The Agriculture Bill grants powers to force food businesses throughout the supply chain to provide specified data for a range of purposes. The Government could, for example, require businesses to provide information on pricing and volumes of goods with the aim of promoting fairness for producers of agri-products. However, the Bill goes further than this as it also includes powers to require data provision for the purposes of:
- reducing waste
- minimising adverse environmental effects from food production
- tackling health and disease.
The Bill also grants powers to impose fines for non-compliance. Time will tell how these powers will be used in practice.
Since the appointment of the Groceries Code Adjudicator (GCA) to enforce the Groceries Supply Code of Practice (the Code) there has been a well-needed rebalancing of power between the major supermarkets and their immediate suppliers. The downside of the Code, however, is that it only governs the relationship between the top 10 groceries retailers and their direct suppliers. The effectiveness of the GCA in enforcing the Code has led to calls for its remit to be widened to promote fair dealing across the whole food supply chain.
The Agriculture Bill appears to go some way to addressing these demands by granting powers to the Government to impose obligations on the 'first purchasers' of agricultural products. This could include requirements to provide written contracts with specified terms relating to volumes, pricing mechanisms and the timing and methods of payment.
Such regulations could help farmers by providing greater certainty and improved pricing, although they would not necessarily remove the range of commercial pressures which larger businesses can deploy when dealing with businesses at the lower end of the supply chain.
In any event, the Bill does not go as far as many would wish in covering all entities in the supply chain. There remains a whole raft of food businesses which are neither primary producers nor direct suppliers to the top 10 supermarkets and which would therefore fall between the two stools of the Code and any regulations brought in under the Bill.
Tom Hewitt
Tom.Hewitt@burges-salmon.com