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

Environment & Rural Growth

The farming industry in general has welcomed DEFRA secretary, Owen Paterson’s decision to reduce the proposed 15% shift in payments from direct payments to farmers to the environment and rural growth. It had seemed the government was committed to the 15% shift in their consultation document on CAP reform published earlier in the autumn, but they have listened to what the respondents to this document have said which is gratifying.

As a consequence Paterson has announced that instead of transferring 15% of payments away from direct support they will now only transfer 12%. Many farmers had been hoping the shift would have been even less than this but even so this move has been generally welcomed by many.

Mr Paterson said, “England’s £15 billion Common Agricultural Policy must deliver real benefits to farming, rural businesses, the countryside and the taxpayer. Today’s decision will see £3.5 billion invested in the environment and rural development schemes over the next seven years. This is a significant change in the way we allocate CAP money and even with a smaller overall CAP budget, the Government will be spending a bigger share of the budget on the environment than before.”

In response to this announcement the Country Land and Business Association president Henry Robinson said: “We are pleased that DEFRA secretary Owen Paterson has listened to the industry and moved 12% from Pillar 1 to Pillar 2 rather than choosing the maximum figure allowable of 15 percent. He has struck a reasonable balance between supporting the environment and rural development and ensuring that farmers in England get a fair deal.”

These sentiments were also echoed by NFU deputy president Meurig Raymond who said: “I am delighted Mr Paterson has decided to keep the rate of modulation below the maximum for the four years until it is reviewed.”

I suspect many farmers will still question why as much as 12% of “their” payments are to be siphoned away from money that in their minds is rightly theirs but I think if such payments are to continue to receive any degree of public support they need to be seen to be delivering wider public benefit than simply income support for farmers. So, it appears this is probably a compromise which will not keep everyone happy but at least it shows the government are willing to listen to reasoned argument when it is presented to them.

However, the next big challenge will be for the policy makers to ensure the schemes which will be formulated to deliver the £3.5billion are put in place as soon as possible. The rules will also need to be simple because if my experience of the roll out of similar schemes is anything to go by, there is likely to be a significant pregnant pause before any of this money hits the ground which in my view has been one of the biggest weaknesses of rural development programmes in the past.

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

New father time

At the year’s end Will Mooney, Carter Jonas partner and head of its commercial agency and professional services in the eastern region, is looking forward, very far forward.

Whether your view of Old Father Time is that he hands his watch over to New Baby Time on Hogmanay or you’re of the feeling that, much like the Grim Reaper, the old fellow is a fixed feature who watches over us year-in year-out as the sands of our lives slip through the hourglass, is a matter of cultural education or superstitious belief.

What the Oxford Martin Commission for Future Generations wants us to do is exorcise our habit of short termism and think about the consequences of our actions. When I say us, what I mean are policy makers who are urged in the Commission’s report “Now for the Long Term” which calls for radical thinking in policy and business.

The Oxford Martin School (http://www.oxfordmartin.ox.ac.uk) is an “interdisciplinary research community of over 300 scholars working to address the most pressing global challenges and opportunities of the 21st Century”.

The Commission’s latest report has ideas about transforming the way governments and corporates go about their business. But the ideas are not founded on wishy-washy sentimentalism. How could it be? The international brains of the commission are chaired by the former director general of the World Trade Organisation, Pascal Lamy who only left that post in September.

The report identifies megatrends - demographics, social mobility and technology to name but three - that are shaping the 21st Century. A century which, the founder of the School Dr James Martin, says could be our best or our worst ever.

These megatrends are, by default, drivers of change and our institutions need to update themselves or become obsolete.

Business and financial systems come in for criticism for short termism. The sector is urged in the report to re-wire itself for long term investment as opposed to slavishly following quarterly reporting cycles.

Interestingly, on the day Pascal Lamy was fulfilling his media commitments about the launch of the Commission’s report, news broke of the departure from Invesco Perpetual of one of the biggest stars of fund management. Neil Woodford said his decision to leave his role managing a £24.6 billion fund and co-managing another of £6.4 billion was based on where he sees long term opportunities in his industry.

Monsieur Lamy pointed out to one interviewer that the news media seemed to be frightened by the long term too. In a time of rolling 24-hour news schedules to fill, it’s no wonder many journalists and producers look to the brevity and immediacy of Twitter and other social media platforms for news and views to source or reinforce a story or even report social media activity as news in itself. There’s a lot of air time to fill and our attention span appears to be ever-shortening.

Pascal Lamy pointed to a couple of examples where business and policy makers had come together to think about the long term with staggering success achieved in a relatively short space of time. Namely, anticipation of Y2K technology meltdown in the year 2000 and also in setting minds to tackling HIV-AIDS in the late 1980s and 1990s.

It seems fitting to quote Marx here: Groucho Marx. “Why should I care about future generations – what have they ever done for me?” But it seems that the Oxford Martin Commission’s view is that in thinking about future generations, we could actually do ourselves a favour right now.

Will Mooney MRICS
Partner
Commercial, Cambridge

Government modulation - hot topic of debate

Until 2005, I thought modulation was a musical expression referring to a change in pitch or tone, but as is so often the case in the context of “EU diplomatic speak” this word popped up with quite another meaning when the CAP was last reformed in 2005. Its new meaning is basically a “tax” to be taken off one payment and added to another and in recent weeks this has become a hot topic of debate.

Under the forthcoming CAP reforms which are due to take effect in 2015, the government is proposing to modulate or effectively tax the payments due to be received by farmers by 15%. Farmers and farm leaders are not impressed and are urging government to reduce modulation to a much lower rate of 9%.

The reason for the argument is that the funds received from the EU to support farmers and the wider rural economy come under two funding streams or “pillars”; pillar one providing direct payments to farmers and pillar two providing wider rural economy payments.

Historically the UK has always had low pillar 2 funds compared to the rest of the EU, which at least in part stems back to the budget rebate negotiated by Margaret Thatcher in 1984. As a result when subsequent governments have wanted to increase funding for the wider rural economy they have effectively “taxed” or “modulated” the pillar 1 pot to supplement the pillar 2 pot.

Most recently one of the primary drivers for such modulation was to fund the environmental stewardship schemes which have been introduced widely throughout England and it is understood that around 70% of the farmland in England now falls within one scheme or another. However, in addition to the environmental schemes, pillar 2 funds have been used to fund a whole raft of measures in the wider rural economy varying from “knowledge transfer” schemes to helping fund small start up businesses.

My experience with the latter schemes in particular is that although they do have some merit, by the time it has taken the relevant authorities to develop the rules and implement the schemes, it often means it takes many years for the modulated funds to reach their ultimate destination. In these economically difficult times, such delays could be very damaging and therefore, although I would support the continued funding of the existing environmental schemes, I would suggest that increasing the money being fed in to pillar 2 funds at the expense of direct payments to farmers would be a bad idea.

To put it simply, paying funds direct to farmers and landowners will be a much quicker and more effective way of getting financial support out of the EU in to the our rural economy than would be the case if we invented a whole raft of new schemes with their associated rules and bureaucracy to reallocate the same funds, on occasions to exactly the same people, but often several years later than would otherwise have been the case.

It is appreciated conservation organisations in particular will disagree with this but it also has to be appreciated that like farmers they receive significant funds from the CAP in one form or another. It is understandable that they would like to see more funds directed to conservation but equally, many such organisations will have experienced the cash flow problems that occur when new schemes are introduced with the resultant delay in receipt of funds. Thus, in my view supporting a continuation of the existing environmental schemes as suggested by farm leaders rather than an expansion of pillar 2 funding as suggested by government is the most sensible approach in these uncertain economic conditions.

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

The Rural Payments Agency

The Rural Payments Agency (RPA) has reported that it has successfully paid Single Payments to 95,600 farmers in England on the first day of the payment window being 2nd December this year. This is the best the RPA has ever achieved since the Single Payment Scheme was introduced in 2005 and it is a far cry from the chaos and delays which were experienced by many farmers in the early years of the scheme.

Indeed the payments made on 2nd December exceed the RPA’s own payment targets, which is good news for farmers, many of whom in the livestock sector in particular are still reliant on these subsidies in order to make a profit.

However, there is a concern that with the forthcoming reform of the CAP which will come in to force in 2015 that the RPA does not take its eye off the ball. It is imperative the RPA makes sure that as far as possible the progress that has been made in recent years is not squandered when the new scheme is introduced.

There is hope that the new scheme will be easier to administer because the government has sensibly decided to roll over the existing “entitlements” in to the new scheme. This will mean farmers will not have to go through a fresh registration process under the new scheme but there will no doubt be many other complications which may have the potential to cause problems.

The entitlements are important because in order to claim the area based support payments under the Single Payment Scheme and the new successor scheme, farmers need to match the number of entitlements they hold with an equivalent area of qualifying farmland. Therefore, as a result of the decision to roll over existing entitlements in to the new scheme, the value of entitlements has appreciated from around £200/entitlement to around £300/entitlement because there is now certainty that they will be around until 2020 which is when the CAP will next come under review.

Accordingly, those farmers with spare entitlements may consider selling them sooner rather than later because under the new scheme it is understood that any entitlements which are not claimed in 2015 will be confiscated without compensation. These entitlements will be put in to the National Reserve for distribution to other claimants, the rules for which are as yet unknown.

Further, any claimants with less than 5 hectares of land will no longer be allowed to claim in the new scheme which means they may wish to offload their entitlements now even though this would preclude them from making a claim in 2014.

So, it seems just as the RPA have got to grips with the existing Single Payment Scheme after 9 years of trying, there is a danger things could go awry as a new scheme is introduced in 2015. However, I hope the roll over of entitlements will make this process much more manageable than it was in 2005 although that does not mean to say the RPA or farmers should be complacent. The new scheme will present both opportunities for some and dangers for others and farmers will need to keep abreast of developments as the detail of the new scheme rules start to emerge over the coming months.

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

Carter Jonas' Energy Index

The Energy Index 2013 has just been published by Carter Jonas’ research team and I think this will make interesting reading to farmers, landowners and anyone with a general interest in the subject of onshore renewable energy technology.

The report gives a brief over view of the five principal technologies which are anaerobic digestion, biomass heating, solar photovoltaics, hydroelectric power and wind and then analyses how they perform against a variety of measures. These include efficiency, cost of installation, annual operating costs, development timeframe, planning risk and the financial support mechanism of each technology type.

The key objective of the index is to rank the various technologies against the various measures to help landowners and farmers through the difficult decision making process as to which technology may be the most suitable for them to pursue. Clearly the physical characteristics of every site are different and these will often be the most significant factors guiding a landowner as to what opportunities may be available but I would suggest this index will be of interest to anyone who is at the start of this thought process.

The energy sector is clearly high on the political agenda and at the time of writing we await an anticipated announcement in Chancellor’s autumn statement on potential changes to the manner in which green levies are to be raised in order to fund renewable energy developments. Clearly if these changes result in significant cuts in the subsidies which are paid to encourage certain types of renewable developments this could have a significant impact on the viability of certain technologies.

Having said that, the renewable energy sector and its costs of development and pricing structure are already changing; there are a number changes to the financial support mechanism which are in the pipeline and forthcoming government announcements may result in further changes. It is uncertainties such as this which last week saw the shock announcement that RWE Innogy has decided to cancel the proposed development of the so called “Atlantic Array” which was planned to be a 240 turbine wind farm located off the North Devon Coast.

In light of this volatility it is Carter Jonas’ intention to update their Index on an annual basis although will be worth keeping in close contact with their energy team to ensure you keep abreast of changes as they happen because waiting a year for an update in this fast moving industry will be too late.

Anyone interested in receiving a copy of the index should contact James Stephen on james.stephen@carterjonas.co.uk or they can download a copy from the Carter Jonas website: www.carterjonas.co.uk

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