Without the insurance of direct payments, average-performance beef, sheep and cereal farms in both NI and Britain would consistently face negative incomes.

Presenting the analysis at last weeks’ Spring Conference, organised by the Irish Farmers Journal in association with the Livestock and Meat Commission (LMC), Graham Redman from farm business consultants Andersons painted a stark picture.

“There is no money to be made from being average at farming in these sectors. Dairy, pigs and poultry might be somewhat different. In particular, dairy farmers make a profit in most years before direct payments are added in,” he said.

Despite that, the Andersons analysis shows that in 2015/2016 and 2016/2017, profit on the average dairy farm was also non-existent without the cushion of direct payments.

Land value

While many farms are making little profit before direct payments, the UK farming balance sheet remains extremely healthy as a result of high land values.

“Even if the value of land was to halve, it would still leave the industry in a very strong position,” maintained Redman.

Given the low profitability of farming, and the potential for less direct payments in future, some believe this could have a negative impact on future land prices

His analysis suggests that land prices in Britain have generally trended down in the last two years, but the reverse is happening in NI, with average prices here nearly £2,000 /ac ahead of arable land in England and Wales.

Given the low profitability of farming, and the potential for less direct payments in future, some believe this could have a negative impact on future land prices. However, Redman pointed out that other factors drive the market, such as the low cost of borrowing and agricultural property relief from inheritance tax. With little sign of either changing, he believes lower prices are unlikely, particularly for good-quality land.

Future payments

To illustrate the likely impact of future policy changes, Andersons has created a model farm in each sector, tracking profitability based on a number of assumptions. Perhaps the main one is that direct payments made to UK farmers in 2030 will, in real terms, be 50-60% of what they are now.

“We see support levels going down. Inflation will also eat away at the value of that support. Farmers will have to do more (eg agri-environment schemes) for less in the future,” suggested Redman.

On top of that, Andersons has also looked at the possible impact of Brexit. Three outcomes were analysed:

  • The withdrawal deal currently on the table.
  • No deal, with the UK putting in place the same tariffs as the EU.
  • No deal, with the UK implementing low or no tariffs (a cheap food policy).
  • Arable

    In the model arable farm (600ha of combinable crops), a net margin of £77/ha is estimated for 2019. Adding in direct payments, it is a business surplus of £298/ha. By 2028/2029, the margins across the three Brexit scenarios are all down (mostly because of cuts to direct payments), the lowest being the £154/ha estimate where the UK pursues a cheap food policy.

    In the arable sector, the Brexit impact is smaller than in other sectors

    “Margins are cut, but the farm remains profitable regardless. In the arable sector, the Brexit impact is smaller than in other sectors,” said Redman.

    Dairy

    The Andersons model dairy farm is a year-round calving unit with 200 cows on 130ha in NI. In 2019/2020 the business surplus is estimated at 2.9p/l, which includes direct payments worth 1.9p/l. Only if there is no deal (and the UK adopts EU tariffs) does this surplus increase to 3.5p/l. If the UK pursues a cheap food policy, Andersons estimates the farm to be losing 1.6p/l in 2028/2029.

    Pigs

    Perhaps the sector with the most to gain (and most to lose) from Brexit is pigs. With the UK only 61% self-sufficient in pigmeat, if it was to adopt the same tariffs on imports as the EU, it would have the effect of driving up prices to producers.

    But if the UK allows in pigmeat at low or zero tariffs it has the opposite effect, leaving the industry unsustainable.

    Grazing livestock

    However, the sector most impacted by cuts to direct payments is grazing livestock. The Andersons model farm is a 60ha unit in NI, with 27 sucklers in a birth-to-beef operation, 200 ewes and a small dairy bull beef operation.

    In 2019/2020, when all costs are included, this farm is losing £73/ha, despite direct payments of £316/ha. Assuming these payments are cut to £180/ha by 2028/2029, it leaves the farm facing even greater losses. The worst-case scenario is the no-deal option, where the UK opens its market to cheap food, with a loss of £380/ha.

    “This farm is not viable for the future. It is a loss of £22,800,” said Redman.

    Range

    However, in all the analysis, Andersons points out that there is a large range in financial performance across farms, even operating in the same sector. The best farmers have a clear business strategy, keep overhead costs down, meet market requirements and continually focus on things they can control.

    “They are currently making a respectable return on their investment,” said Redman.

    We don’t necessarily expect loss-making businesses to disappear if the going gets tougher

    He pointed out that many policy makers assume that if things become financially more difficult due to Brexit, farmers currently losing money will be the first to go. It could potentially benefit the more efficient farmers.

    “But how do they [the poor performers] survive now? We don’t necessarily expect loss-making businesses to disappear if the going gets tougher. There could be accelerated restructuring anywhere on the curve,” said Redman.

    Farm incomes look set to increase in 2019

    Total UK farming income should see a small increase in 2019, but that outcome is dependent on avoiding a disorderly exit from the EU over the coming months.

    Providing the analysis, experts from the Andersons Centre point to relatively stable prices across most sectors this year and some increases (for the likes of beef).

    However, a key driver in farm incomes is also the euro to sterling exchange rate.

    “The current weakness of sterling is supporting farm profits,” notes the analysis from Andersons.

    However, a no-deal Brexit later this year could have an immediate negative impact on producer prices.

    The converse of that, if Brexit soon gets resolved this could strengthen sterling and be bad for farming in the short-term, suggests Andersons.

    EU entry

    In his presentation, Graham Redman from Andersons also looked at how farming in the UK has changed since entry to the EU in 1973. Back then, there were 294,000 UK farmers, double what there are now.

    The Andersons analysis shows that UK farmers were more profitable in 1973. In real terms (allowing for inflation), UK farmers realised a profit of £10.1bn in 1973, compared with only £5.8bn in 2017.

    With higher prices (wheat was the equivalent of £500/t and milk the equivalent of 60p/l), total output from the sector in 1973 was also significantly more, at £41.9bn compared with £26.3bn in 2017.

    The analysis suggests that being in the EU has gradually brought lower prices and lower profits for farmers

    UK farmers in 1973 received £4.1bn in support/subsidy payments compared with £3.6bn in 2017.

    Redman also pointed out that UK food self-sufficiency has changed little throughout EU membership, standing at 62% in 1973 and 60% in 2017, but UK household income spend on food has dropped dramatically, from 24% in 1973 to 13% now.

    Therefore, the analysis suggests that being in the EU has gradually brought lower prices and lower profits for farmers.

    But is that a trend that would happen anyway, inside or outside the EU?

    “It is a general rule that the prices of commodities fall in real terms over time in industrialised economies.

    “Farming continually has to be more efficient in its use of inputs simply to stand still in terms of profitability,” notes Andersons.

    The Brexit backstop trilemma

    With a further Brexit extension now granted by the EU, it has given the UK government some time to consider options. But according to Michael Haverty from Andersons, the fundamental problems that have dogged the process remain. He pointed to three mutually exclusive things promised by the British government:

  • To leave the EU single market and customs union.
  • No hard border on the island of Ireland.
  • No checks across the Irish Sea between Britain and Northern Ireland.
  • The withdrawal agreement negotiated by British Prime Minister Theresa May, which includes the Irish backstop proposal, effectively addresses points one and two above, but fails to address three. As a result, the Conservative partners in government, the DUP, have opposed the deal. However, some have suggested that technology is the solution to the Irish border, effectively removing the need for the Irish backstop at all.

    Haverty accepts that technology could have a role in the collection of tariffs (taxes)on goods that cross the Irish border. But checking that goods meet relevant standards is where the problem lies.

    “Technology can’t discern whether a container load of beef is hormone-treated or not,” he said.

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