Farm expansion may no longer work after Brexit

Leaving the EU will bring a more challenging and more commercial environment in which farmers will have to watch net margin rather than gross cash flow, according to Jeremy Moody, secretary and adviser to the Central Association of Agricultural Valuers.

The commercial realities of farming will focus rental values more on the productive capacity of land. Decisions about land occupation will include a consideration of fulfilling new requirements under a domestic farm policy including environmental public good.

In the past businesses have tended to become larger as they seek economies of scale, but this may not be the pattern in the future. Some will find under the new regime that land they have taken on to expand will no longer perform financially.

Scale will probably still be a goal for commodity producers but with a sharper business focus.

Farmers don't drive land prices

It is often claimed that Brexit will bring down the price of farmland and make life easier for new entrants. However, according to Strutt & Parker, lifestyle buyers and tax-savvy investors are about to overtake farmers as the primary buyers of agricultural land. This conclusion is based on an analysis of every public sale of over 100 acres since 1996.

Farmers bought 68 per cent of the holdings for sale in 1998 but they bought over 51 per cent of those sold in the first six months of this year. Private investors have increased from 4 per cent of buyers in 1998 to 20 per cent this year. Lifestyle buyers have stayed largely constant at 25 per cent of sales [most of these sales in England are within reasonable travelling distance of London]. Overseas and institutional investors fluctuated around 4 per cent combined.

Stamp duty is capped at 5 per cent when a country house comes with land, otherwise a mansion is liable for up to 12 per cent. Agricultural land is also exempt from inheritance tax.

Sir James Dyson, who bought 33,000 acres (of admittedly good quality land) in Lincolnshire, Oxfordshire and Gloucestershire, is believed to have paid £15,000 an acre in 2013. Average prices peaked at £10,100 in acre in 2015 and, because of many years of poor prices and Brexit uncertainties, have dropped to around £9,600 an acre.

James Beedell, head of research at Strutt & Parker, said that investors have turned to farmland after the 2008 financial crisis because they wanted something safe. 'Lifestyle buyers and investors set prices because what they are prepared to pay for land isn't necessarily related to the profit it can produce.'

If there is a fall in land prices in Brexit, it could lead to greater consolidation as those with capital or access to it buy up smaller farms. Some think that would lead to productivity gains, others that it would have an adverse effect on rural communities and landscapes.

Fall in farm land prices

After many years of above inflation increases, the price of agricultural land fell by 7 per cent last year with the average price per acre dropping to £10,223. The Royal Institute of Chartered Surveyors blamed a sense of uncertainty linked to the prospective loss of EU subsidies.

A survey by Knight Frank found that farmland prices had fallen last year at the fastest rate since 1999. Its survey of bare agricultural land (not including homes or farm buildings) found that prices fell by 9 per cent to £7,470 an acre. Nevertheless, a pound invested in agricultural land in 2009 would still be worth twice as much as a pound invested in a house or the FTSE 100 share index.

It is thought that the price of farmland could continue to fall this year because of higher input prices resulting from the fall in the value of the pound. Prices are, however, being propped up by lifestyle farmers who are estimated to account for a quarter of purchases.

A fall in land prices might be seen as a benefit of Brexit, making it easier for new entrants to come into the industry, reducing the average age of farmers and boosting innovation. However, the real consideration here is whether rents for tenants fall significantly as this is the usual entry route other than in cases of succession.

Even then, new entrants face the cost of machinery and, other than or arable farms, livestock. What may be needed is new means of building up a herd such as share farming which is being experimented with, following the Nee Zealand example.

The rise in farmland prices

Over the past decade farmland prices have grown at twice the rate of prime London property with good agricultural land increasing 270 per cent in value compared with a 135 per cent rise in London house prices during that time according to Savills. This makes it three times the price of farmland in North America and 15 times the price of such land in Australia, reports The Economist.

The reasons cited include limited and diminishing supply and constraints on world food supply. However, it should be pointed out that a lot of land in reach in London is bought at least in part as sporting estates which offer the additional incentives of a safe haven for money and tax breaks, such as exemption from inheritance tax after seven years.

However, of course, a lot of the demand is driven by farmers themselves. Economies of scale demand bigger units and although land can be rented, this may not offer security of tenure and often results in a patchwork quilt of land which means that time and money is taken up moving equipment around, not to mention complaints about slow moving agricultural vehicles on the roads.

What this means is that it is now very difficult to get into farming on your account unless you inherit a farm or a large pot of money. This has been exacerbated by the decline of county council entry level smallholdings. This means that farming is deprived of people who might bring in a fresh perspective and innovative ideas.

So, farewell then, CWS Farms

Faced with a £2 billion deficit, the Co-op is to sell off its farms. The group now regards them as 'non-core' and thinks that they distracted from its other activities. Most of the farms are arable, although there is also some soft fruit production.

Now is a good time to sell as farmland prices are rising and these are good farms in attractive locations which have been well looked after, although there have been some expressions of concern that their arrival on the market may depress prices (but I think that is unlikely). There are still individuals with £30m or more in cash willing to buy farms in the UK. They could be worth £350m, although presumably would be sold separately. Some of the farms are thought to have development value. They are located in Cambridgeshire, Gloucestershire, Herefordshire, Leicestershire and Yorkshire. There are also farms north of the border in Aberdeenshire and Perthshire.

CWS was, I think, Britain's biggest farmer, certainly after Sentry Farming disappeared from view, although there are other contract farming companies, notably Velcourt: Velcourt . Farmers Weekly commented in an editorial that 'The C0pop's exit from farming is in part an acknowledgment of the high capital requirement of modern commercial agriculture relative to the returns.'

The CWS owns 15 farms that cover 19,830 hectares (49,000 acres). Only 2 per cent of production ends up in the Co-op's own supermarkets, with cereals sales to bread manufacturers accounting for 70 per cent of production. The Co-op has owned farms since the 19th century and had argued that they provided an edge over its competitors as consumers were becoming more concerned about the provenance of food (in practice only some consumers).

When I was growing up in London in the 1950s we got virtually everything from the Co-op from milk and bread to clothes. The return for customers was a declining 'divi' whilst the stories failed to modernise as competitors strengthened their offer. The Royal Arsenal Co-operative Society, then the biggest in the country, was known locally as 'Rob All Customers Slowly.'

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.