Brexit: Naturally a capital idea...?
Agriculture is at a crossroads; the threats and opportunities presented by the most extensive reforms since the Second World War are considerable. As farmers and land owners look ahead we consider some of the competing priorities for agricultural policy and how they may present opportunities for farm businesses.
The focus during the major reforms after the Second World War, as now, was productivity, and this was also was one of the main terms of reference when TRIG was recently asked to report by DEFRA. However in contrast to current times, productivity in the 1940s was a simple concept; the threat posed to an island nation by German U-boats was obvious. As UK agricultural policy now develops, it will inevitably have to bring about fairly radical changes in agricultural productivity, which has been plateauing since the early 1990’s.
Given that conventional methods of production have not resulted in increased levels of productivity, the answer may be found in the emerging areas of the agricultural sector. The use of insect protein as a feed source for livestock and humans is just one potential avenue and any new approach to supporting the industry may focus on opportunities such as this. Equally the prospect of exporting to new or emerging markets may help stimulate production. For example, some UK dairy producers are already exporting selenium rich milk to the Middle East.
This is a highly specialised market but other opportunities may exist.
Brexit represents an opportunity to reshape agricultural policy and there seems little doubt that more emphasis will be placed on benefitting the environment than before. Clearly agricultural productivity is also a priority, but there will perhaps be a recognition that some farmers will be better placed pursuing different policy goals.
Although TRIG obviously focussed on the let sector, the question as to how agricultural policy will evolve concerns landowners, tenants and all those who work alongside them.
Whilst the government has confirmed that the same amount of money will be available for agricultural support for the remaining life of this Parliament, that leaves considerable uncertainty as to what will happen after that. It is also debateable that the current Parliament will remain as constituted until 2022.
Michael Gove, Secretary of State at DEFRA, has made a number of statements in recent months, but the writing has been on the wall for agricultural support for a considerably longer period than that. Whether one considers the ever increasing budgetary pressure on the Common Agricultural Policy or the swing from pillar one support to pillar two, the emphasis has been on less money, more effort required to earn it and a linkage with environmental benefit as opposed to direct agricultural production.
The current timetable for Brexit reform will see us formally leave the European Union on 30 March 2019. We are likely to see an agriculture White Paper early in 2018 with the Bill itself following in the summer. There has been considerable comment about how long it might take to negotiate and formalise international trade deals and the one positive aspect of that delay is that it does give the agricultural sector a considerable period of time (probably several years) to get its house in order.
The third aspect of agricultural policy, after production and environmental benefits, is the human ecology of certain areas, such as hill farming communities. It might be something of a sweeping generalisation but perhaps one can see a situation where agricultural support migrates westward and up-hill; hill farmers are likely recipients of support when one considers the environmental and social arguments for increased payments to them.
DEFRA has announced that the Government will be producing a 25 year plan for the natural environment and that is in response to three reports by the Natural Capital Committee. The plan itself is due later this year and given the timing of agriculture White Paper it is safe to assume that the latter will be influenced by the former.
Natural capital is defined by the committee as “those elements of the natural environment which provide valuable goods and services to people, such as the stock of forests, water, land, minerals and oceans.” It will quickly be appreciated that farmers, landowners and tenants are responsible for managing and owning natural capital and these assets represent an opportunity to receive agricultural support and/or a diversified income.
At a basic level, landowners should be assessing what natural capital stocks they possess. There should then be a consideration of the eco system benefits provided by those assets and what monetary income can be derived from those benefits. An obvious example is a landowner who owns low lying land adjoining a river, which is effectively a flood plain. The Environment Agency may elect to provide the land owner with an annual payment in exchange for the ability to flood that meadow at times of flood risk, to avoid villages or town downstream taking the burden instead.
The concept of an ecological balance sheet might seem odd now, but it is likely to become increasingly commonplace. Organisations such as The Crown Estate and the National Trust are already engaged in assessing their natural capital assets and working out the monetary value of the benefits they provide. Other landowners may not go to quite these lengths, but even at the less formal end of the spectrum, farmers and landowners will have to get used to taking into account the value of natural capital in decision making, as it will become increasingly important in the context of agricultural support and diversified income.
The Brexit opportunity
The theme of natural capital has an obvious tie in with Brexit. Leaving the EU represents an opportunity to create new systems of payments for eco system services and moving towards a regime of contracts for those services with landowners and farmers. It is not just contracts between farmers and central government that could provide benefits though. Examples have already been seen of contracts with water companies, where farmers have been paid to adopt appropriate land management practices in upstream catchment areas to reduce water treatment costs. Farmers reducing fertiliser application and curtailing livestock grazing near waterways meant that water treatment costs of £650m were saved by the organisation, in return for a £10m investment over a 30 year period. Every estate will be different, but there are plenty of opportunities if farmers and their professional advisors think laterally.
It seems likely that any element of agricultural support, which is seen as an income payment, will be subject to some form of capping, as we have seen with the Basic Payment Scheme. However, any payments supporting the procurement of public goods, may escape this capping, which must be right in principle, as larger landowners may be in a position to provide benefits commensurate with their larger land holding. An obvious example is the provision of public access. In that sense larger estates and landowners will clearly see a benefit in the provision of public goods as opposed to the more traditional focus on agricultural productivity. Although clearly both still have their place.
There is clearly also going to be an emphasis on soil quality. This has been a growing theme in recent years and its fundamental importance to agricultural production and indeed to supporting eco systems generally, makes it a logical focus point for support. This focus will inevitably result in the elevation of the status of soil quality, both in the context of negotiations between landlords and tenants at the start of a tenancy and also in the context of claims for dilapidations at the end.
These changes of emphasis will predictably have an effect on capital valuations; clients and their professional advisors alike will have to look at existing assets in a different way when considering values. This will inevitably also have an impact on capital tax planning, asset disposal strategy and many other decision making processes; we live in uncertain times!