How phasing out direct payments could be catastrophic for farm profitability

Farmers and landowners can now see the full impact of the planned reduction in payments from the Basic Payment Scheme (BPS) over the next few years and the impact on profitability will be significant for some and catastrophic for others unless other factors also change.

What is important to understand is that this change will have a significant effect on all land-based farming, irrespective of the size and sector. With uncertainty as to what will replace the income lost from phasing out the BPS, those farming land will need to look hard at their businesses to understand how they can adapt to this drop in revenue.

The graph below shows the full impact of the BPS reduction over the next few years for claims ranging from 50 Ha to 2,250 Ha.

Even the smallest example of a 50-hectare farm (125 acres) will see a 50% reduction in BPS income, from £10,000 per annum to £5,000 per annum over the four-year transition period to 2024, equating to £100/ha or £40/acre.

The situation gets even more serious for those with larger farms. For a 1,000-hectare farm, the drop in BPS payments over the four years is 63%, equating to a £126,000 loss of income over that period, or £126/ha (£51/acre).

Farmers with 2,000 hectares will lose two thirds of their BPS income by 2024.

Details of how the government’s new Environmental Land Management scheme will reward farmers for improving the environment, animal health and welfare are expected to be announced next year.

Decreasing reliance on direct support through efficiency gains is likely to go only some way to mitigating the impact of these changes, with many farm businesses already working hard to make improvements in this area.

Looking for cost savings may also be part of the solution, but again many businesses will have already turned over this particular stone. The one cost that will need to be considered carefully is the cost of occupying land itself, and if payments are set to decrease significantly then it is not unreasonable to expect the price a farmer pays to rent or indeed buy land to also decrease – if common sense has its way.

In particular, farmers will need to be careful with their rental payments, land tenders and existing tenancies. They will need to review existing agreements to see if it will remain profitable to farm each holding they occupy, and should consider talking with landlords early to see where each party expects land rents to go.

With uncertainty over import and export trade and the impact on UK farmgate prices, and now the impact of the Environmental Land Management Scheme becoming clearer, all farming businesses need to take a hard look at their finances to understand the implications of the changes.

Accountants and advisers often make this recommendation, but the combination of Brexit and the 2020 Agriculture Act leading to the loss of BPS payments mean farming is about to go through a seismic change which will significantly affect all sectors and all sizes of farm.

However, land is also a fabulous resource to manage, with opportunities to not only produce high quality, sustainable food for the nation but also contribute to our environmental goals and aspirations. In all cases, businesses have to be profitable to survive and generate sufficient income to reward the hard work put in.

Farmers as well as landowners need to be on the ball in responding to these changes to identify the best opportunities for themselves as we move into the next decade.

Any farmers or landowners who would like to discuss the issues raised here are welcome to contact me on 07458 064162 or [email protected]. For more information about our agriculture specialists, click here.