Monday, June 18, 2012

Farmers go for pre-nups as land prices soar

The rise in the price of farmland is leading increasing numbers of farmers to sign pre- and post-nuptial agreements to protect their wealth from enlarged divorce payments to their spouses. A roll in the hay can clearly have consequences not envisaged in the past.

Farmers who have not completed such an agreement face the unwelcome prospect of selling farmland or borrowing money to finance a divorce settlement. Farming divorces are complicated by the fact that the farm is usually the marital home, meaning its value is taken into account when deciding financial settlements for ex-wives.

Selling off part of the farm is not really a solution. 25 years ago a farm might have been viable between 500 and 700 acres, but today something like 1,200 acres is needed to sustain a profitable business, even with CAP subsidies (which are related to the farmable area anyway). If the farm is reduced in size, it may no longer be able to support heirs, particularly if more than one wants to be involved in the farm business.

According to the National Farmers Union it has had more calls from members on this topic since the 2010 ruling involving German heiress Katrin Radmacher which stated that courts can take pre-nups into account when deciding settlements. It has handled 40 referrals from members seeking advice on divorce and pre-nups over the last three years.

This gives a new meaning to the term selective benefit in the pressure group literature. Anyone can get advice on a divorce from a family lawyer, but they may not encounter that many cases involving farms and be relatively unfamiliar with the special considerations involved. That is where an organisation like the NFU can help, showing the relevance of Olson's by-product theory of selective incentives which seeks to explain how lobbying activity can be sustained in the face of the free rider problem

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Tuesday, June 12, 2012

Fields of gold

English farmland has gone up in value by more than 10,000 per cent in the last 60 years. Research from agent Knight Frank shows that an investor who paid £56 an acre for land when the Queen ascended the throne in 1952 would get £6,073 if they sold today, although that is slightly below last June's average figure of £6,156.

Land values started to soar once the UK joined the European Community in 1973. Farmers were then able to benefit from CAP subsidies and land values rose by 390 per cent between 1972 and 1982. There had been subsidies before then, of course, but deficiency payments were more closely related to market fluctuations than blanket EU subsidies. Another consideration was that farmland looked like a relatively safe asset class against the background of the economic turmoil of the 1970s

The 1980s were less buoyant, but in the 1990s demand started to outpace supply, pushing up prices. In 1995 flexible farm business tenancies were introduced which made it more attractive for farmers to rent out land. This led to less land being available on the market at a time when demand was rising.

The recent debate over global food scarcity has reawakened interest in land, along with the drive for alternative fuel sources. However, it may be that prices have peaked. Yields are very low, 1 per cent at best, and farm businesses have an erratic performance due to the impact of the weather and other factors beyond the control of the farmer.

There were important tax incentives relating to land ownership, relating principally to income tax, capital gains tax and inheritance tax. Measures to cap reliefs from trading losses at 25 per cent of income or £50,000 whichever is the greater, will restrict the possibility of offsetting losses on farm businesses.

Many purchases are, however, are lifestyle related. The British tradition of spending a weekend in the country has survived and one way to demonstrate that you have arrived is to buy a country estate. There will always be a strong demand for estates with sporting rights, particularly if they are within an easy drive of London.

The other side of the coin is that it is difficult to break into farming other than by inheritance. Tenancies do not become available that often and local authorities are cutting back on their portfolios of entry level farms to release their capital value. Whilst statistics sometimes exaggerate the ageing profile of British farmers because some of them are in semi-retirement, the industry needs a constant influx of innovative younger people.

It's not an easy life, though. Hours can be long, there is a high rate of deaths and injuries from accidents and there is a lot of often monotonous work. To succeed you need a combination of farming, technological, business and marketing skills. But for some people it is the only life. Two of my nephews grew up on a very successful Welsh farm that has been in the family for generations. One stayed on the farm and loves it. I will be visiting an exhibition of pottery by the other one later this month.

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