Brexit and farming’s downturn

As negotiations around farm policy outside the EU commence, this Farmers Club Journal article considers the sector’s vulnerabilities, as shown so clearly by Defra’s own 2015 figures

Downturn  

The crash in UK farm incomes seen during 2015 was one of the worst falls for decades and serves as a stark reminder of how quickly farming fortunes can change. 

In just one year over £1.5bn (29%) was slashed from Defra’s Total Income From Farming (TIFF) figure, which dropped to just £3.769bn, as farmers in every sector were hit by a double-whammy of falling commodity prices and lower support payments. 

The impact was felt in the wider economy too, as agriculture’s contribution to the UK’s Gross Domestic Product (GDP) fell by £1.39bn or 14%. 

The 2015 figures are a far cry from just two years ago when TIFF hit its second-highest level since the mid-1990s at almost £5.5bn. 

Many farm businesses will feel the effects of this downturn for some time, especially as margins in all sectors remain squeezed and Brexit discussions impact on the wider economy and fuel uncertainty about future farm support. 

Delays to support payments earlier this year did little to ease the pain, prompting various organisations, including the Scottish Government and Lloyds Banking Group, to make money available to help those affected. 

Sector analysis

Almost every sector experienced a downturn in 2015, as each battled its own challenges. An issue common to all farm businesses was the drop in the value of Basic Payment support, caused by a relative strengthening of Sterling against the Euro. The net value of 2015 Basic Payments converted from Euros using the September exchange rate of €1 = £0.73129 was an estimated 7.5% less than 2014. (A short-term Brexit benefit looks like being more EU farm support, given this September’s rate of nearer €1 = £0.84, 14% up on 2015.) 

Dairy

The dairy sector has been one of the hardest hit, as farmgate prices have remained stubbornly below the cost of production for many producers. 

Despite a slight decline in costs in the year to March 2016, AHDB dairy puts the full economic cost of production at 25p/litre for the top quartile of British producers and 33.5p/litre for the bottom 25%. That compares to an average GB farmgate milk price (including bonuses) in 2015 of 25.13p/litre, and under 25p/litre for seven months of the year. 

Figures show almost one in 10 dairy farmers in England and Wales have quit over the past three years as numbers fell from 10,500 to 9,500, with 239 leaving in the year to July 2016 alone. 

Arable

Generally good growing conditions in the 2014/15 season meant crops yielded well for harvest 2015, more than offsetting the 3.5% decline in cropped area. Average UK wheat yields were up 4.6% to 9t/ha, the highest for 25 years, while barley and oilseed rape also performed better than 2014. 

However, lower commodity prices caused by increased global production and high stocks resulted in an 8% drop in the value of crop output, according to Defra. Cereals and sugar beet saw particular drops in the value of output, more than wiping out slight increases for oilseeds and protein crops.

Livestock

The overall value of livestock output fell 9.3% in 2015, due to lower prices in most sectors. The value of sheep, pig and poultry output all fell, as strong supplies at home and abroad, combined with a weaker Euro pressurised markets. 

The beef sector fared slightly better, as prices were underpinned by tighter global supplies, on the back of declining production in many areas. But for much of the past decade the UK breeding herd has been in steady decline reflecting ongoing concerns over profitability.

Outlook

Until June’s Brexit vote prospects for most sectors were similar or potentially slightly worse than 2015, according to Andersons consultant Richard King.

However, the weakening of Sterling following the “leave” result has paradoxically improved short-term prospects for exports, domestic prices and support payments.

“There may well be a short-term benefit from the exchange rate, so 2016 TIFF could come out slightly better than 2015. But beyond the exchange rate impact, I don’t think there’ll be any quick recovery in market fundamentals.”

There is some optimism the dairy market could recover in the next few months as the balance between supply and demand improves. The EU is past its annual production peak and GB production at the end of June was down 10% on the same period last year.

Uncertainty and market volatility remain key challenges for all sectors and farm businesses have to improve their ability to cope with unpredictable price and cost movements.

“It is possible that Brexit could leave UK agriculture more exposed to the opportunities and threats of global market volatility,” says AHDB’s Jack Watts, who chairs the Volatility Forum.

“We’ve seen this already in the form of a weak pound supporting farm output prices, but risking an increase in cost of key inputs, such as fertiliser, which are themselves globally-traded commodities.”

Various initiatives are available to help farmers manage volatility, from long-term supply contracts to group purchasing. Barclays also recently launched a £100m loan fund to help farm businesses improve efficiency.

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 Article originally published in Autumn 2016 edition of Farmers Club Journal (Issue 264).