EU referendum - Impact on the land market

Arable farmers in particular are desperate to see more sun because sunshine at this time of year is so important to help their crops yield heavily.

June was a relatively dull month and July did not look summery till this week so there are concerns that yields will be down on last year, which is almost inevitable because last year was in general a bumper harvest - albeit crop prices were low. 

On the upside the weakening pound following the EU referendum has helped protect UK farmers from recent falls in wheat prices on world markets as UK wheat has become comparatively cheap. 

This weakening of sterling on the foreign exchange markets is generally good news for farmers because it makes imports more expensive and UK exports more competitive.  This has generally helped UK commodity prices such as beef, lamb or cereal. 

Indeed the exchange rate is probably the single most important factor impacting on the profitability of farmers in the UK and so in the short term at least, the effect of the referendum is good news although the longer term impacts of an exit from the EU is far more difficult to predict.

So what impact is all this uncertainty having on the land market?  Well, early indications are that Brexit has had little if any immediate effect.  Having seen a surge in land values over the last decade, farmland prices had started to ease a little over the last six months as the impact of the massive slump in commodity prices affected farm incomes. 

But with commodity prices firming a little and concern that other commercial and residential asset values are likely to slip, farmland may once again become a more attractive investment for farmers and investors alike.

And with interest rates looking destined to fall this is making borrowing money as cheap as I have ever seen.  For example fixed term rates of up to seven years offered by the Agricultural Mortgage Company have fallen below the Bank of England Base Rate, which must surely indicate that the money markets are anticipating a rate cut.

So, in the short term the outlook for farming has become a little brighter and lets hope our late arriving summer weather stays.

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk

Greening measures for arable crops

As the new Basic Payment Scheme (BPS) looms in to site on 1st January 2015, changes are already afoot with farmers having to make sure this autumn’s planting of arable crops will be compliant with the new Greening measures.

However, another date is also looming that may be of significance for some, which is the deadline for transferring single payment entitlements. This is of importance for several reasons.

First, if one is wanting to transfer entitlements under the new scheme, there are likely to be delays before the transfer is confirmed which may cause unnecessary hassle when completing next year’s forms for the first time. Therefore getting the entitlements transferred under the old scheme will mean they are automatically transferred to BPS entitlements ready for immediate use next year which may make life easier.

Second, and perhaps of more importance for some, the person acquiring the entitlements under the new scheme rules will have to qualify as an “active farmer”, the precise meaning of which is still not entirely clear. This may be of significance for organisations such as wildlife trusts or landowners who may have purchased land but who do not necessarily farm in a traditional sense.

To avoid any concern regarding the interpretation of these new rules, individuals or organisations who think they may be affected by the active farmer test should seriously consider acquiring entitlements prior to the 21st October deadline.

This is not likely to affect very many people or organisations but it could catch some people out who have up until now have been able to make legitimate claims under the existing Single Payment Scheme but this may not be quite so straightforward under the new scheme. Also, farmers who may sell land to such people will have to ensure that the recipient of the entitlements is eligible to receive them otherwise this may upset some land transactions.

No doubt there will be ways of manoeuvring around these rules to achieve the desired result, whether that be through some form of contracting farming arrangement or the like, but if one is looking for a simple life, now may be the time to think about transferring entitlements so as not to get tied up in unnecessary complications or delays in receiving BPS entitlements next year.  

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk

What to do to comply with the new Basic Payment Scheme rules?

As harvest draws to a close and cultivations in readiness for sowing next year’s crops are well under way, farmers still face considerable uncertainty as to what they will need to do in order to comply with the new Basic Payment Scheme (BPS) rules.

As most readers will be aware the Single Payment Scheme, which is the existing EU support scheme for farmers, will be replaced by the BPS from 1st January next year and in so doing farmers will need to comply with a whole raft of new rules, many of which seem to me to be entirely pointless. However, compliance with these new rules will be necessary if farmers are not to lose out on support payments next year.

It seems likely that with many agricultural commodity prices at low levels, these EU support payments will be even more important next year in order to balance the books. However it is frustrating that following the publication of the latest update from DEFRA on the new rules, there are still many questions left unanswered.

In particular some of the rules surrounding Ecological Focus Areas (EFAs), that form part of the “Greening” measures which will affect many arable farmers, are not entirely clear. Under these rules, farmers with more than 15 hectares of “Arable Land” may have to put 5% of their arable land in to an EFA.

The simplest way to do this is to “set aside” 5% of the Arable Land as “fallow”. But care is required to understand both the definition of “Arable Land” land and what will qualify as “fallow”. I do not have space to deal with these complexities here but suffice it to say one can end up with some rather counterintuitive results, which for example will allow temporary pasture to qualify as fallow provided it is not cropped or grazed between 1st January and 30th June. It seems to me this will achieve absolutely nothing of benefit for either farmers or the environment.

Another option is using hedges as a means of claiming the 5% EFA. However, the rules in relation to hedges seem even more confusing. At present it seems clear that if a hedge is bordered directly by arable land in the ownership of one farmer, then the hedge can be claimed. However, if the hedge borders permanent pasture, a road or a neighbour’s land on the other side, it is not clear whether this hedge can be used to contribute to the EFA and if so to what extent.

Further guidance is awaited on this and many other points of detail from DEFRA and so my advice to farmers is to keep things as simple as possible in the first year of the new scheme and plan next year’s cropping on the “knowns” rather than waiting for DEFRA to define the “unknowns”. 

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk

Arable prices at their lowest for years

As harvest begins, arable prices have fallen to their lowest levels for some years. “Farmers Weekly” figures for last week show feed wheat trading at around £132/t as compared to £162/t a year ago, and similarly feed barley trading at £107/t as compared to £140/t and Oilseed Rape at £235/t compared to £320/t.

In this area I have only seen winter barley being harvested to date although having been in Oxfordshire last Friday I did see combines rolling in the first fields of oilseed rape. It is too early to comment on crop yields but with prices where they are, farmers will need a bumper harvest to prevent significant losses.

Anecdotal evidence from the farmers I have spoken to indicate that although the crops look good, some have suffered from the very wet winter which has impacted yields, particularly on the wetter land while crops on more free draining land have fared better.

In addition to concerns over commodity prices and yields, farmers are also faced with another raft of decisions to be made concerning next year’s cropping which need to be addressed very soon. This is because next year will see the introduction of new rules for European support payments as the Single Payment Scheme is replaced by the new Basic Payment Scheme.

Allied to this scheme are a raft of new “greening measures” to which I have alluded in previous articles. These measures require arable farmers to observe new rules concerning crop diversification and the introduction of so called “Ecological Focus Areas” (EFAs).

Complying with these rules will be predictably complicated and what is clear is that farmers will need to make decisions very soon while the detailed rules are only just emerging. This is further complicated by the fact that the EFA rules will also impact on the payments received by some farmers under existing agri-environment schemes.

In addition many arable farmers who farm land on a “contract farming” basis will now need to treat these areas as a separate holding from their own land. This may sound simple to the uninitiated but it has the potential to threaten the viability of some long standing contract farming arrangements. As a consequence there will need to be detailed discussions between the landowner and contractor in the coming weeks if the payments due under landowner’s Basic Payment Scheme claim in 2015 are not to adversely be affected.

So, after a reasonably good run over the last few years arable farmers are faced with not only low commodity prices but also rule changes from Brussels which will make things more complicated and expensive with no obvious upside for anyone.

If farmers or landowners require advice on this matter they are welcome to contact James Stephen on 01749 683381.

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk

The Future of Farming

With farmland prices at an all time high, now may just be the time to think about selling land if you are looking for a better return on capital value.

 

Farmland tends to provide a yield of not much more than 1-2% which reflects the low risk nature of farmland compared to many commercial property investments. But in recent years the total return from farmland has been bolstered by significant capital growth and the big question is whether this capital growth will continue as the wider economy recovers which may attract non farming investors in particular to search for higher yields elsewhere.

 

However, farmland does still have very significant tax advantages as compared to many other assets. For instance let land qualifies for Agricultural Property Relief which can provide up to 100% relief from Inheritance Tax on the agricultural value of the land. This can be a significant driver for many cash rich individuals who may be prepared to accept a low return on capital in order to shelter their money in the long term from the tax man.

 

There are then farmers themselves who are generally feeling optimistic about the future of farming following some more profitable times in recent years. Having said that it is still difficult to justify the price some farmers are prepared to pay for land considering the relatively modest profit that will be generated from farming the land.

 

But land is an unusual asset in that unlike shares for example, “they are not making any more of it” and there may be one off opportunities that arise which may not have been anticipated at the time of purchase. For instance, if one had purchased an area of poor quality land on some windswept hillside twenty years ago you would probably not have anticipated the renewable energy opportunities which are now available which could liberate both capital value and significant revenue generating opportunities. Clearly if you don’t own the land such opportunities would not be available to you and although it is difficult to quantify this in terms of value I believe owning land does bring opportunities which owning other assets may not.

 

So, there are conflicting forces at work although if my firm, Carter Jonas is anything to go by we did see an upturn in farmland sales last year where we offered over 18,000 acres of land in to the market across the country. This does perhaps indicate that some large landowners are now prepared to consider rebalancing their property portfolio by selling at least some of their agricultural land to take advantage of the record prices currently being achieved.

 

So what are the prospects for 2014? Well, it seems to me that demand is still likely to outstrip supply but the market is patchy with good sized blocks of arable or dairy land likely to attract premium prices while smaller blocks of secondary quality land are attracting less predictable demand and consequently, on average lower prices.

 

Anyone interested in discussing either the sale or purchase of farmland is welcome to contact me in Wells or Kit Harding in our Bath office who heads up our farm agency team in the South West.

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk

Difficulties with the weather

This is the time to reflect on the events of the last year and although the weather proved much less of a talking point this year than last, it was the aftermath of last year’s wet weather that has been one on the most significant factors affecting this year’s profits in the arable sector in particular.

 

The terrible weather in 2012, which continued in to early 2013 meant that many farmers were unable to plant winter crops last autumn. As a consequence they were forced to plant crops this spring, many of which struggled to grow as wet weather gave way of cold northerly winds well in to April. Such spring sown crops generally yield significantly less than their autumn sown equivalent, hence the impact on profits.

 

The weather did eventually warm up and we experienced hot dry conditions during June and July which impacted on the yields of some crops but in general the weather for harvest and the establishment of crops for harvest in 2014 was good. However, the writing was already on the wall for the yields for the 2013 harvest and the double whammy came in the form of falling world commodity prices. For example feed wheat and barley are trading at around £159/t and £134/t respectively today as compared to £206/t and £194/t a year ago. Accordingly with lower yields and lower prices it is not difficult to do the maths for arable farming profits in 2013.

 

As far as the livestock sector is concerned, 2013 has in general proved rather more positive than for arable farmers. This is in part because the falling arable commodity prices has reflected in falling feed prices which is particularly important for dairy farmers and more intensive beef producers. However, the margins in beef production still remain incredibly tight, despite 2013 seeing historically high beef prices peaking at over £4/kg.

 

This however causes problems to those beef farmers who fatten young beef animals bred by other farmers. The price of these so called “store” cattle has been incredibly strong which has meant beef fattening units now have frighteningly large amounts of capital tied up in livestock from which they are earning a very low margin and many of these businesses are still heavily reliant on EU support payments to make a profit.

 

In contrast to the beef industry, the lamb price was low early in the year and with wet followed by cold weather in to late spring, lambing was not easy. Further the lamb trade is heavily dependent on exports and with the EU economy suffering, demand from France in particular has been weaker which has not helped prices. Accordingly it has been a generally difficult year for many sheep farmers.

 

As far as the dairy sector is concerned the prospects look reasonably positive, provided you are not affected by the ongoing problem of TB which can have a devastating impact on dairy farms in particular. The improved weather in 2013 allowed dairy farmers to repair grass swards which were damaged by last year’s weather and to refill their empty silage pits and barns with good quality forage stocks. Further, falling arable prices will reduce feed costs over the winter and coupled with a significant increase in milk price over the last year as world demand outstripped supply, dairy farmers should see better returns in 2013, although it has to be said they did come from a very low base in 2012.

 

So, all in all the weather was so much better in 2013 than 2012 and that alone gave farmers a feeling of optimism, but the reality is that the “hangover” from last year’s weather is probably going to be felt in this year’s profit and loss accounts. But with most winter crops safely in the ground and beef and milk prices remaining firm, there is hope for most that 2014 will prove a more profitable year than 2013.

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk

Wheat prices on the slide

Arable farmers will be looking with a degree of gloom at the recent trend in wheat prices which has seen them steadily fall since a peak in April of over £200/t to £142/t last week, which is the first time in over a year that this year’s price has dropped to lower than it was a year ago. Further a year ago wheat prices were rising on fears of world shortages as Russia had banned wheat exports but in contrast the market pressures are in reverse this year with fears of falling demand due to the slowdown in the world economy and generally better than expected harvests. It seems there is little a farmer can do to influence these international forces and so they must turn their minds to improving the efficiency of production in other ways.

In this respect many readers will have notice that in recent years there has been a trend away from ploughing land following harvest towards what is known as “minimum tillage” where the farmers pass over the stubble with a various types of machinery which usually comprise a combination of discs and tines of one form or another. The seed for the next crop is then “direct drilled” in to the seed bed which has been created. This makes sense on various levels; first it maintains the soil structure which is otherwise broken up during conventional cultivation techniques because a plough basically inverts the soil. Once ploughed the soil has to be broken down again by various other machines to create a suitable seed bed in to which the next crop can be drilled. This work is in itself expensive in terms of machinery and fuel.

At another level the minimum tillage techniques are also believed to preserve an better population of earthworms which help with the soil structure and having been on one farm walk earlier in the year, it was clear that this technique had retained far more moisture in the soil than would otherwise have been the case had the soil been ploughed. This has been particularly important in recent dry years when spring sown crops in particular have suffered from the drought conditions.

However, what I had not realised until I read a recent report of some field trials is that there can be a very significant benefit in yields for wheat crops which have been the direct drilled rather than using conventional cultivation techniques.

A recent study carried out in Suffolk has shown that the average yield from 31 plots which were direct drilled was 3.7t/acre as opposed to an average yield from all the conventionally drilled plots of 2.9t/acre. This represents an increased yield of over 25% which seems quite staggering to me and begs the question why everyone is not adopting this technique.

One reason is perhaps the fear that it is more difficult to control weeds, which is probably true, particularly for such things as “black grass” which can be very pernicious but the benefits of minimum tillage do seem quite compelling and so I suspect this will be an increasing trend for many arable farmers.

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells