Road to recovery: down on the farm, it’s time to sow into sustainability and cultivate the cash

This year has been relatively manageable for the agriculture sector, but 2021 is looking challenging.

  • Agricultural businesses are preparing for a tough 2021.
  • Brexit is expected to hit the sector hard.
  • Farms are looking to replace lost subsidies through the Basic Payments Scheme.
  • The new Enterprise Land Management Scheme is based on land use – some farms are exploring their options early.
  • Labour-intensive farms are turning to tech innovation.
  • With unpredictable weather, economic uncertainty and the aftermath of the pandemic, conditions are volatile.

Although one size doesn’t describe all, in general terms 2020 has been less brutal on the agriculture sector than other parts of the British economy.

Labour-intensive farms have certainly struggled without access to the European workforce. Those farms that mostly supply hospitality have also had to diversify. Additionally those that have diversified into farm cafés, bed and breakfasts and glamping facilities to earn extra income have, overall, lost business.

However, many farms have had a relatively stable year despite the pandemic.

Livestock sector resilient

This has been particularly true of lamb and beef farmers, which have performed better than expected. “I would imagine that our year-end accounts for 31 March 2021, look fairly good,” says Kate Bell, agriculture partner at Albert Goodman.

Next year looks worse for beef and sheep, in fact, because of Brexit. Whatever the ultimate deal, the expectation is that exports will be hit hard. Arable farming had poor crop yields due to unpredictable weather across 2019 and into 2020 and is facing a tougher year in 2021.

The Basic Payment Scheme (BPS), which provided EU subsidies, will be phased out. BPS entitlements will have declined by 25% by 31 December 2021, so cash is likely to be extremely tight.

Dairy farming has been good, depending on the contract the farm has. Foraging has also been strong. But all businesses, like many sectors this year, are focusing heavily on managing cash. The expectation is that 2021 will be tough.

“It’s time to build up the war chest of cash to be able to cope with these volatile times,” says Bell. We’ve seen it with the weather, we’ve seen it with politics. And now we’ve seen it with coronavirus. It’s just becoming more and more volatile out there. And it’s trying to ensure that they can cope with the worst-case scenarios and trying really hard to be in the top quartile.”

Ben Brookes, Associate at Wellers, has a less positive view of the sector, though it has been mixed. But he agrees that tough times still lie ahead. “Large amounts of the farming community are trying to recover from not just the impacts of Covid-19 but also the impact of a poor planting season for many arable farms. Crops will go in late, if at all, so it will be a long road to recovery.

“There is the additional impact of Brexit to consider, and what trade deals are agreed as we approach the end of December. But there is hope that once the vaccination programme has been rolled out, there will be a return to normal.”

Tax changes ahead

There is also much concern among farmers about the changes to Inheritance Tax (IHT) and Capital Gains Tax (CGT). Both taxes are under review and consultation at the moment and there is an expectation that land-owners will be expected to pay more. Bell believes that this is unlikely to come in next year, particularly as the economy will not have recovered from the impacts of the pandemic.

“One of our biggest risks is Business Asset Disposal Relief that we would use quite frequently,” says Bell. “That may go, but I don’t think we’ll be hit as hard as others with some of the potential CGT changes. If it goes up to 40%, then there’s potential for the rebasing to be not 1982, but 2000. Farmers have generally held agricultural property for years. So, actually, if they rebase it to 2000, even if the rate increases to potentially 40%, I don’t necessarily think we’ll be hit as hard as some people.”

The Agriculture Bill and ELM

With BPS likely to reduce, agriculture businesses are looking at the Enterprise and Land Management (ELM) Scheme to bring in new subsidies. As outlined in the new Agriculture Bill, ELM bases its subsidies on how farms use the land, with particular emphasis on benefiting local communities and protecting the environment. But it’s still early days for the scheme; it may not come in fully until 2024.

“In simple terms, it’s the Government being able to control what we do with farmland, and how businesses will be rewarded. Public money for public goods is the big theme throughout the Agriculture Bill. It’s farmers engaging with the wider public, whether that be flooding defences, peatland restoration, etcetera.”

Farmers are generally very receptive to the idea of better land use to benefit their environment. It’s in their commercial interests to protect the land that they farm on, but also there is a strong feeling among British farmers that farmland should be farmed in the right way, with an eye on the long term. “It’s in everybody’s interest to farm in a sustainable manner,” says Bell.

Innovations and tech adopt/ion

There are some opportunities for innovation in farming that are being driven by the volatility in the market.

“Certain dairy and vegetable farms that rely very heavily on foreign labour are looking more and more to agritech to evolve how they do things. It’s no different to other industries in that technology can offer us more and more. They are definitely looking at the use of technology, whether it be the use of GPS on tractors, robotic milking systems – there are all sorts of ways that technology is becoming more key within the industry. We’re seeing that with some of the research and development tax savings people have been having as well.”

Tiered lockdown: minimal effects

As rural businesses and classified as key workers, the tiered lockdown system will have little effect on farming. During the first lockdown, there were considerable issues with the supply chain, but unless they are labour-intensive, farms have carried on.

Labour remains the biggest challenge within higher tiers, says Ben Brookes. “For those in tier three, there will be further restricted movement of labour which presents additional challenges going into the winter.”

Critical advice

Bell is giving a lost of advice to clients about the potential CGT and IHT changes, which will likely result in businesses looking at the way they are structured, their succession plans and other long term planning. Farms are looking at diversification to ensure that they have an income stream to fall back on if another fails.

The other crucial thing, common in many sectors at the moment, is the need for more cashflow planning. With 2021 looking difficult for the sector, many are monitoring cash levels to ensure they’re ready for what’s ahead of them.

“Cash is king for farms. The sector is very lucky in that farms often have a lot of assets. Still, you need cash to keep the wheels on.”

Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.

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