8th March 2023
Viewers of Jeremy Clarkson’s TV show have seen how financial pressures affect farmers. We take a look at the problems they face, and what the future may hold.
He’s tried his hand at running a restaurant and café, opened a farm shop and created a lager. Jeremy Clarkson’s array of side projects isn’t just there to provide new plotlines for the viewers of his hit TV show Clarkson’s Farm – it reflects what is happening in the wider world of agriculture.
Farmers have to increasingly look beyond traditional arable and livestock farming as the need to find new or enhanced income streams drives the creation of projects in areas as diverse as leisure and tourism, food processing and retail, residential development, Biodiversity Net Gain schemes, biomass energy and renewable energy production.
Diversifiction can also bring challenges and risks. A new venture may be better managed through a different business structure to shelter the farming business from trading risk or secure different investment and funding. This also supports the possibility of future business opportunity separate from the main farming business.
Managing infrastructure risks, the production and supply of new goods, direct supply, branding and intellectual property and issues in retail operations all carry a need for new or different skills and carry risk. They also provide opportunity for members of a family business who may wish to be involved in rural business in a different way. Managing the direct or indirect exposure of that diversified business and the farming family is complex but rewarding. Finally, diversification away from traditional farming activities can change the tax position of the farming business, giving rise to additional challenges, and opportunities, when considering succession planning.
Why farmers must be more commercially minded than ever before
The cost of living crisis means that there remains pressure against increases in the price of food to reflect increases in direct costs. That impacts on each stage of a supply chain which translates into pressure on prices farmers can secure on the sale of their produce. But a key impact on annual income is the phasing out of the European Union’s rural grants scheme, and the Basic Payments Scheme (BPS) in the UK post-Brexit is set to make a huge difference to the economies of farming. This will bite hard in 2023, when payments for many farmers will be down by as much as 35%. By the end of 2027, the scheme will have disappeared altogether.
Its partial replacement, the recently announced Environmental Land Management (ELM) scheme, rewards farmers for land-based environmental goods and services (“public money for public goods”) and is still a relative unknown. This approach may be welcomed as a weapon in the battle against climate change but some farmers may find the bureaucracy and work needed to meet the requirements onerous.
Other financial pressures facing farmers include rising interest rates and inflation, which are driving up the costs of farming inputs. These are likely to continue to rise, in contrast to farm gate prices which are showing signs of stabilising or reducing. Material increases in costs can have a very serious impact on a seasonal business.
All of this means there will be a potentially dramatic financial reckoning to come in some agricultural sectors.
There are also material concerns in a number of parts of the farming supply chains and the impact of financial pressure on businesses with low trading margins are difficult to manage in terms of cash and profitability and risk the need for greater use of capital. Anecdotally, there are heightened concerns about the financial headwinds facing the sector.
Know which parts of your business are profitable – and don’t be sentimental
Unlike Jeremy Clarkson, most farmers don’t have the benefit of a lucrative TV sideline. Faced with the reduction in BPS and other harsh economic realities, they are going to have to drill down into which parts of their business are profitable – and which will have to go. Understanding the impact of key decisions and risks is of vital importance.
This will leave little room for tradition or sentimentality – it won’t be an option for a farmer to carry on doing what they do because they’ve always done it. This may be a cultural shock for some farming enterprises, but the finances will tell their own story.
None of this is new. The pressure on the gate price of milk in the early 2000s was an area of key concern when Thrings lawyers were consulted by the NFU and Milk Development Council to better enable dairy farmers to consider how they may also become processors of milk and sell cheese because of the profit generated from that in-house production. Horizons are however now much wider and there is a much longer menu of diversification and business changes.
The current farming generation is much more prepared to embrace change and possibly take harder decisions than the one before it – and the next generation will need to be even more forward thinking.
Farmers may wear many hats
We’re not just seeing diversification in farming – farmers themselves are increasingly having to split their time between the land and other jobs. Jeremy Clarkson, of course, has his TV work and controversial newspaper column – and in the Thrings Agriculture team we know and work with farmers who are also surveyors, agronomists, ecologists, accountants and lawyers.
In future generations we are likely to see people coming through who will hold on to the land and make that work for them, or rent it out to other farming businesses, but also secure a regular income in other ways.
Preparation and succession planning is crucial
Given that future generations may or may not follow in their parents’ footsteps, it will be more important than ever for families to be crystal clear about their longer term intentions and expectations. The weakening of farm finances contrasted with the high asset values of land and buildings may lead to some tense conversations between family members with differing views about the way forward.
The traditional business structure for many farms has been a family partnership and we are seeing a gradual move towards more variety in business structures that can provide ways of enabling different financial, commercial and day-to day interest in the family business and also better enable generational transitions and manage complex tax issues that can arise. A more open dialogue and managed process and a documented structure is a far better way to plan business evolution and generational succession than casual discussion that can lead to confusion and impossible expections.
As we discuss in this blog, succession planning isn’t just about preparing for your retirement, but a business health check to ensure a smooth transition of control of your business, putting it in the best position to succeed. According to NFU Mutual, 35% of farmers surveyed didn’t have a succession plan in place.
Poor succession planning can store up a range of potential issues. Our tax regime often means that farmers remain in partnership or ownership of the farm and the major farm house long after the ‘reins’ of a family business may be passed on to the next generation. Longer life expectancy means that aged parents and the health and welfare of older members of the family are a key element of succession planning. Disputes can arise if this is not well managed and there can be calls for division of a farm or transfer of control or ownership and can lead to regrettable (and avoidable) complex disputes and claims. Our national expertise in proprietary estoppel, where a family member feels promises about their future entitlement to land and/or assets have not been kept, has grown through farmers failing to make early and clear plans for succession.
A more productive rural landscape may emerge
The future will be challenging for farmers and rural businesses, but it’s not all doom and gloom. There will be a pain barrier, but this is an opportunity to stop, think and act – and at the end of it we may emerge into a different but more productive rural landscape.
Food production will always be vitally important, and draft revisions to the National Policy Framework underline this – if accepted, they would require that ‘availability of agricultural land used for food production’ should be considered by planners when weighing up development proposals for agricultural land.
Alongside that food production, cash generated from tourism and leisure, environmental schemes, green energy production and other diversification projects will find its way to farmers – and in turn benefit the prosperity of local rural communities.
With careful planning, an adaptive mindset and the right advice, there is no reason why farming families and rural businesses should not thrive for generations to come.
The Thrings Agriculture team has been chosen by the NFU to act for its members in more counties than any other firm. It knits together groups of advisors to provide advice on a much wider scope of services than ever before and deliver those in ways focused on the needs of the rural and agriculture sector. Find out more about how we can support farmers, food producers and rural communities on our Information for Farmers page.