Arable farmers are looking at “once-in-a-generation” decisions about the future direction of their businesses as they prepare for life without the safety net of direct payments.
Strutt & Parker will be using its Basic Payment Scheme (BPS) calculator at the 2021 Cereals Event to help farmers understand how phased cuts to support payments will impact their businesses.
The reality of what cuts to Basic Payments in England will mean to farm profitability is focusing people’s minds, particularly in the arable, mixed and lowland livestock sectors which have traditionally been heavily dependent on BPS to support profits.
We now know that reductions in payments will be implemented quite swiftly, with larger farmers facing the loss of two-thirds of their BPS by 2024.
An impact assessment carried out by Strutt & Parker suggests that for an average arable farmer, net farm profits could fall by as much as 54% by 2028, even if profits from Environmental Land Management (ELM) payments are double those generated under existing agri-environment schemes and assuming a 3% per annum rise in profits from farming and diversification.
Some people are hoping that ELMs will allow them to make up for the loss of BPS. However, our calculations suggest that even if payments under ELMs were five times higher than those paid under the current Countryside Stewardship Scheme – which they won’t be – arable farmers could still face a fall of up to 20% in net profits.
Even in the unlikely event that farmers were to secure similar levels of payments to BPS, the net profit from ELMs will be much lower than that generated by Basic Payments, due to the associated costs of carrying out environmental management work.
At the same time all of this is happening, there has been a shift in public expectations, with farmers being told they must start operating with a greater environmental focus. The reality is that many businesses do need to carry out a major reappraisal of their farming policy to prepare for the next chapter.
Now is a critical time for farmers to evaluate their options if they have not already started to do so, identify where there might be new opportunities and then turn their plans into action.
Despite the challenges, there will also be plenty of opportunities for the best operators to grow their businesses. But navigating the changes that lie ahead will require innovative thinking and a proactive approach.
Areas for farmers to focus on include:
People make all the difference – there is a clear link between successful businesses and a highly skilled team. Not all businesses will have the right blend of skills, drive and vision, in which case they should explore options to invest in training or find ways to bring new people into the business – either permanently or by buying in their expertise as required. Farmers who do not have the appetite to face the challenges ahead should be honest about it so succession plans or alternative business structures can be looked at.
Farmers in the top 25% will be less exposed to the impact of BPS cuts because they are already less reliant on direct payments and more resilient to volatility. Getting in the top 25% means focusing on profitability and not necessarily yields. This requires farmers to have a good understanding of their own data, so it is possible to have an agreed strategy for the business based on a critical review of how it is performing now and where the opportunities for improvement are.
Consider if new business structures could help to address any issues around improving efficiency or bringing in people with the right skills to move enterprises forwards. Collaborating with others through joint venture arrangements is not just about achieving economies of scale – it can also allow businesses to flourish by letting the different stakeholders concentrate on the aspects of the business they are best at. Working with others may also open up opportunities to produce public goods at a landscape scale – which Defra may be willing to pay more for.
Look at what is available through existing agri-environment schemes, such as Countryside Stewardship, and investigate how new Defra schemes like the Sustainable Farming Incentive or ELMs will generate new opportunities to access public money. Consider getting a natural capital account drawn up for your land and business, so you understand where there might be opportunities to generate new income streams by selling carbon credits or other ecosystem services to the private sector.
Growing income from diversification
Diversification will not be for everyone – not everyone has the right skills, assets, capital or location to make it work. However, profits from diversification can be significant and make the difference between a farming business making a profit or a loss. According to Farm Business Survey data for England, the top 25% of cereals farms are making on average £175/ha from their farming activities, £30/ha from agri-environment schemes and the equivalent of £120/ha from diversification.
To run your own figures through Strutt & Parker’s BPS calculator or if you would like support to help you evaluate your options, please contact a member of the Farming Department.