Brexit: Not all hard times ahead

Deal or no deal, 29 March 2019 (“B-Day”) is looming large for the rural sector. The Agriculture Bill, introduced into parliament on 12 September 2018, has started to show the government’s hand, but the implications and opportunities of Brexit are much wider reaching than the proposed replacement for European Union subsidies. Our trading relationship with the EU and migrant labour should be in the sights of farms and estates, as should debt, succession, new business models, and the possibility of more land coming to the market. Agriculture Bill The Agriculture Bill is an enabling bill: the detail will follow in secondary legislation. It does, however, outline Defra’s proposed approach to agricultural subsidy for England, and contains frameworks for Wales and Northern Ireland. In Scotland, the matter is wholly devolved to the Scottish parliament. The current direct payments regime, based on payment for the amount of land farmed, will continue in 2019 and 2020. Direct payments will then taper from 2021 to 2027. The taper in payments will be felt more and sooner by larger farms, but the pain will be less immediate than the absolute cap on payments which was expected and which larger farms would face if the UK remained in the EU. The replacement for direct payments will be the new Environmental Land Management Scheme (ELMS), based on the principle of “public money for public goods”: ie, public and environmental benefits (see end of article). ELMS will be trialled from 2019 and the aim is that it will be fully open for applications from 2021. As Tim Breitmeyer, president of the Country Land and Business Association (CLA), has identified, the key issues for clarification are the model to be used for ELMS (will it be the CLA’s proposed land management contract?) and the alignment of the taper with the new ELMS “to avoid any cliff edges for farm businesses”. Unexpectedly, the Bill provides for “delinking” direct payments from the requirement to farm land during the period to 2027. In Defra’s own words: “These payments, which may be calculated according to money received in previous years, can be used by farmers to invest in their businesses, diversify their activities or else retire from farming and give way for new people to enter.” The prospect of a golden handshake may hasten succession planning, in particular while agricultural property relief for inheritance tax remains available. Labour and trade There are more than 100,000 EU workers in the UK food and farming sectors, mostly seasonal. The 6 July 2018 Chequers plan was silent on the government’s plans for the labour market after the end of free movement of persons to and from other EU countries. On 6 September 2018, the government announced a two-year pilot scheme, allowing fruit and vegetable farmers to employ 2,500 non-EU migrant workers for seasonal work for up to six months a year. The stated aim: “Alleviating labour shortages during peak production periods.” So, it is not, in fact, intended to solve the real problem which fruit and vegetable farmers have faced in 2017 and 2018: greater difficulty in recruiting a sufficient seasonal workforce, in particular from EU, typically eastern European, countries. That is a much bigger problem than 2,500 non-EU workers will solve. After the Salzburg summit on 21 September 2018, the nature of any trade deal is uncertain. More than 60% of UK food exports are to the EU, the largest single market for our food exports. Although labour is the bigger issue for UK plc as a service economy, the trade relationship with the EU will have a particular impact on UK Farming plc. Finance Long-term mortgage finance, secured on agricultural land, is still available at historically low interest rates. The value of that security is holding: there is still a market demand for good agricultural land. There appears to be an obvious and narrow window to secure such finance before any significant market flux in March 2019 or before any substantial rise in interest rates. There is, however, a flip-side to 20-plus years’ growth in the value of agricultural land: lenders seem to have looked more closely at their security than at the ability of the business operating on it to service the debt. From Defra’s own figures, subsidy as a percentage of total farm income is significant: for example, 56.2% for dairy farms and 91.4% for farming cereals. Even with the taper and ELMS, it is not difficult to predict a large number of insolvencies in the sector, as well as farm sales through LPA receivers. The market for land  If the reduction in subsidies does cause land-based businesses to fail, there is likely to be more land coming on to the market and, in particular, the open market. That may depress prices for all but prime arable land, but it will provide opportunities for the acquisition of land, whether to expand existing landholdings for farming or to take a strategic view as to its development potential. Business models UK Farming plc is culturally conservative: its typical legal structures are sole traders and unincorporated partnerships, while its typical business models are usually based on one landholding and one family unit. There will be real opportunities and economies in collaboration between neighbouring landowners, sharing plant, labour, capital and land. Shared plant and labour is already common. Sharing capital and land will, for the majority, be a cultural change. It is not, however, difficult to see the advantages. A larger and more diverse landholding will tend to support more businesses. Scaling up may also increase opportunities to supply public goods under ELMS: for example, an imaginative scheme for public access or wider-reaching flood prevention measures. Business planning Farmers Weekly put it bluntly: “For many farmers, the coming decade will be a time to shape up or ship out.” With the publication of the Agriculture Bill, now, not 2021, is the time to consider the economic viability of your farming businesses – and whether there are opportunities to obtain mortgage finance or to re-finance; for retirement and succession; for restructuring; and for further diversification and collaboration, anticipating payment for public goods. Though there are hard choices ahead, there is also plenty of opportunity. What are ‘public goods’?  Improvements to air and water quality, improvements to soil health;  higher animal welfare standards;  public access to the countryside; and  flood reduction measures. James Pavey is a partner and head of the rural business & estates team at Irwin Mitchell LLP