UK: Land And Farming, Spring 2013 - A Brighter Forecast

Last Updated: 25 April 2013
Article by Smith & Williamson

EUROPEAN BUDGET IMPACT ON AGRICULTURE - AN UPDATE ON CAP REFORM AND MORE

CAP reform is entering a busy period, although it may still be some time off before any real farm level detail is known.

Readers of this bulletin will be aware these reforms of the Common Agricultural Policy (CAP) have been running in parallel with the setting of the entire EU budget for 2014-2020 and before reforms could gather any pace in earnest, a budget deal needed to be agreed.

EU budget agreed

In early February, EU leaders agreed on a budget for the years 2014-2020, officially known as the multi-annual financial framework (MFF), paving the way for reforms of the CAP to gather pace. In headline terms future spending will be around 3% lower than in the current 2007-2013 seven year period. The table below makes a comparison between the current budget, what the European Commission was originally looking for in the MFF, and what the result is. All figures are spending commitments at 2011 prices.

Total agricultural spending has dropped by around 9% in real terms over seven years – i.e. to around 39% of the total MFF. Pillar 1 (the single payment scheme and then becoming the basic payment scheme (BPS)) and Pillar 2 (rural development) ended up with similar percentage reductions. Direct payments across the entire EU-27 will be €278bn, so around three-quarters of CAP spending. There are no splits of funding by country available as yet. In terms of Pillar 1 though, there is a commitment to close the gap between countries in terms of average payment rates per hectare. As the UK is around the average then there may well not be much re-distributional change for us – i.e. payments would just be subject to the overall 10% CAP cut.

Capping

All issues to do with money were incorporated into the discussion on the MFF. Therefore capping of direct aid has been included in the deal. The text states simply that "capping of direct payments for large beneficiaries will be introduced by Member States on a voluntary basis". Defra has, in the past, been against capping.

Greening

Again, because it is a monetary issue, 'greening' was also dragged into the budget discussions. The proportion of direct aid going towards greening is to be fixed at the original figure of 30%. Those wishing not to meet the greening criteria will therefore only receive 70% of their BPS.

Modulation

There will be flexibility for Member States to transfer 15% of direct support funds to the rural development pot. This is equivalent to the current 'national modulation'. This is to be without an obligation for national treasuries to match fund the contributions so total amounts for environmental schemes is likely to fall.

Where next?

The fixing of the budget has allowed CAP reform negotiations to progress. Both the European Parliament (EP) and the farm ministers signed off their negotiating positions by the end of March. The next step will be three way discussions between the EP, Farm and Fisheries Council and EC. Some 30 trilogues have been planned from 11 April to 21 June. This is where negotiations on the finer details of the reform really start. The aim is for political agreement on CAP reform at the Farm Council meeting in Luxembourg on 24-25 June 2013. As ever, the devil is likely to be in the detail. The comprehensive 'Implementing Regulations' setting out this detail are unlikely to be available before the autumn at the earliest. So there is still some way to go before the final shape of the CAP post- 2014 is known.

FARM INCOMES

England

Defra has released its provisional estimates for farm business income (FBI) by type of farm in England for 2012/13. It will come as no great surprise that the 2012 year has not been as profitable as 2011. The table below shows that all sectors (apart from poultry) have experienced a fall in incomes. This is largely due to the weather making it such a difficult growing season, but also feed cost increases.

Although prices for cereals were higher, average yields were lower and the issue over quality has been well documented, meaning the income many received was lower. The wet weather meant spray costs increased and also fuel due to increased field operations and drying grain. General cropping farms will also have experienced similar problems. The substantial increase in potato prices is expected to offset the fall in yields and output is expected to actually see an increase. However, growing and harvesting costs are forecast to have increased by even more, resulting in an overall reduction in incomes.

Incomes from dairy farms fell by 44% in real terms in 2012. Average milk prices increased by 1% over 2012, taking it to record levels following the dips during the summer of 2012. But large rises in the costs of inputs most notably feed, and also an increase in the volumes of feed purchased due to poor quality forage will more than offset this rise in milk price. Grazing livestock farms saw the largest falls in percentage terms, with lowland and less favoured areas (LFA) units falling by 45% and 53% respectively taking average incomes to their lowest levels for four years.

Scotland

The Scottish Government released information on two provisional income measures; total income from farming (TIFF) and the average FBI for 2011/12. Initial estimates for 2012 show TIFF falling by £111m to £635m, a 19% fall in real terms. The figures for 2012 show output increasing year-on-year for barley, finished cattle and milk products, but a reduction for wheat, potatoes, OSR, poultry and finished lambs, with the weather impacting on yields and lower prices for lambs. Total input costs for 2012 have risen by £44m (2%) compared to 2011 levels. The main increases are from fertiliser and fuel. Feed costs are actually thought to have fallen but this is due to a projected fall in poultry numbers more than a reduction in unit feed costs.

The second measure of income; the FBI comes from the farm accounts survey (FAS) for Scotland. In 2011/12 502 farms were sampled. The statistics show the average FBI in Scotland for 2011/12 was £44,829 compared to £46,255 in 2010/11 (a 3% increase), although this masks large differences between farm types – the table shows the FBI by farm type.

Wales

The Welsh Government has also published its TIFF and FBI figures. These are only estimates and final data will not be released until later in the year. The initial 2012 estimates show TIFF falling by £116.2m to £123.6m, a 6.4% reduction in real terms. Reductions in the Welsh 2012 TIFF figures can be seen across all arable sectors as well as finished lambs, however an increase can be seen across the beef, pork, poultry, milk and egg markets. The 2012 figures also forecast input costs rising by 6.7%. Fertiliser is the only input cost to fall compared to 2011 with the greatest increase seen in feed costs.

The second measure of income from the Welsh Government forecasts average FBI for 'all farm types' in Wales to decrease by 29% to £29,000 for 2012/13. Similar to England all sectors experienced a drop in farm business income. The fall in FBI can be attributed to an increase in input costs, reduced output and a single payment, 8% lower than in 2011. Each factor can be attributed to the pound/euro exchange rate. LFA cattle and sheep farms are forecast to experience the largest fall in FBI at 37%. All the figures can be seen in the table below.

HORSEMEAT EFFECT

The revelations that have been unearthed by the horsemeat scandal have (in a relatively safe way) highlighted a series of weaknesses in the food supply chain.

Various factors have all come together at once to lead to the inevitable outcome of switching ingredients. Horsemeat is perfectly edible (the Japanese call it 'Basashi' and dip it in soy sauce and the Italians shred it finely for salads and call it 'Sfilacci' for examples). Indeed, horsemeat is only taboo in the UK, as the favoured animal has such strong associations as worker and pet. So the main issue is with renewed distrust of the food chain (although you would be forgiven for questioning the hygiene standards of operators who knowingly switch one meat for a cheaper one).

There is no excuse, but there are plenty of reasons. We all like a bargain, consumers, retailers, manufacturers and primary processors alike. This means that the whole supply chain is looking (particularly when times are austere), to save costs in a bid to retain some margin. Not only does this tempt some to switch ingredients, but it also discourages people from (the costs of) auditing, testing and checking their supply chains. Products are normally priced according to their cost of production plus a profit margin. Commodities are not; their value is unrelated to cost of production but the balance of supply and demand. The point at which commodities are incorporated into a product supply chain causes pricing (and therefore margin) problems as the input will vary in price notoriously more than the product. So, when meat prices continue to rise, the margins become even slimmer or possibly even zero. Bingo, in pops some dubious horsemeat.

While the consumer has a closer emotional link to food than any other fast moving consumer good (FMCG) as it is ingested, we have (or had) a huge amount of trust in the supply chains. Maybe this will change from now on. Errors occur because of ignorance (for example over 50% of tuna is apparently incorrectly labelled in store) but it is the dishonesty that is causing such concern here, and rightly so.

So what is the answer and how can the supply chain improve as a result? Many buyers (including the supermarkets) have already been talking about shortening and simplifying the supply chains, procuring more from local producers (which needs defining) and arranging longer term contracts. All these are fine ideas, however they only provide the opportunity to simplify the supply chain not guarantee quality. Horsemeat has appeared in very local supply chains (meat from a Welsh meat specialist in Wales tested equine- positive), and also in local produce (horsemeat has been found in other UK-only supply chains demonstrating that the UK is not free from rogues). However it does mean that the ability to audit and check the suppliers' credentials is somewhat easier and open the supply chains to greater transparency.

Some suppliers have found this year that making a commitment to source solely from the UK has not been possible in difficult years for farming with both Hovis and McCain recently changing their procurement policies from UK-only. However, the shorter the supply chain and the better known each member is to each other, will surely facilitate the auditing and trust that is shared between the sections. The episode has been great for local butchers, as well as the organic sector. How long lasting this change in consumption patterns continues will depend on whether any health issues are highlighted as a result but the opportunity for the industry to refocus and repair is now considerable.

RED MEAT MARKET - BEEF PRICE CONTINUES AT RECORD LEVELS

Beef

As the farmgate beef price continues at record levels, the organisation for the English beef and sheep industry (EBLEX) has published its forecasts for 2013 for the UK cattle sector. Supplies available for domestic consumption are forecast to be just under 2% higher in 2013 than in 2012 as a small increase in production and exports is offset by an increase in imports.

Prime cattle slaughterings in the UK were lower in 2012 compared to 2010 and 2011 and EBLEX sees only a small increase in 2013. There was an increase in calf registrations, mainly dairy bull calves at the end of 2011 and the start of 2012, but significantly, for the future of quality beef production, male and female beef calf registrations were down 1% and 2% respectively in 2012. Cow and adult bull slaughterings fell by 1% in 2012, although 2011 was the highest since BSE. Cow slaughterings are forecast to drop by 4.4% in 2013 to 608,000 head due to a younger and fitter herd, although this is still historically high; in 2009 only 497,000 cattle were culled.

EBLEX has forecast UK beef production in 2013 to increase by less than 1% compared to 2012 to 887,000 tonnes. The increase in prime cattle production will be offset by a reduction in cull slaughterings. Exports are forecast to increase by 2% with imports up by 4.5%. There is ongoing demand for cow beef on the continent, but this could be affected by exchange rate fluctuations and the ongoing problems in the eurozone. The increase in imports is mainly due to the expected upturn in production in Ireland. Imports from South America are forecast to remain low as these countries continue to exploit markets outside of Europe.

Sheep

EBLEX also released its 2013 forecast for the sheep sector with meat production forecast to rise 8% this year. Coupled with the high availability of lamb from New Zealand, competition for sales to buyers is likely to be fierce, suggesting bearish pressure on prices. Over recent weeks the sheep trade has picked-up, primarily as a result of the favourable exchange rate (weaker pound).

Production is seen increasing in 2013 but this will mainly be due to the large carryover of unfinished stock from 2012. The terrible weather in 2012 disrupted marketing. More lambs were recorded on farm in the June census but with slaughter numbers down during the second half of the year these extra lambs are expected to come forward during the first half of 2013. If weather patterns return to 'normality', slaughter patterns and carcase weights would return to 'usual' levels meaning production for the year should be higher.

On the back of a good couple of years the UK breeding flock was expected to reach 15m per head but this is unlikely now. The poor weather compounded by higher disease rates, including the Schmallenberg virus, is expected to lead to a lower lambing rate compared to 2012, but due to an increase in breeding numbers the overall lamb crop for 2013 is likely to be similar to 2012.

SOME RECENT DEVELOPMENTS IN TAXATION

By Paul Harris

What were the key items in this year's Budget for farmers and landowners?

Inheritance tax (IHT)

The ability to offset loans against assets chargeable to IHT on death is to be restricted - this came out of the blue and will not be subject to consultation. It has been common practice for many years for the borrowing used to acquire assets that will qualify for IHT business property relief or agricultural property relief to be secured against other assets that will be liable to IHT. For example, when making a loan to an individual for the purpose of buying a new business the bank may prefer to take a charge against the family home. The new rules will require the borrowing to be matched with the asset acquired, thereby resulting in potentially significant extra IHT liabilities for farmers and business owners.

Taxation of high-value residential property held by non-natural persons

Apart from a change in the acronym from ARPT (annual residential property tax) to ATED (annual tax on enveloped dwellings), no substantive changes have been announced to the draft legislation published in January 2013. It is not yet clear how exactly the exemption for farmhouses will apply, and the promised clarification from HMRC is not now expected until July, only three months before the 31 October deadline for claiming the exemption for the current year.

Heritage maintenance funds (HMF)

HMFs can be a very tax-efficient way of providing for the upkeep of heritage property such as historic houses, but so far take-up has been surprisingly low. One disincentive may have been a quirk in the existing legislation which could result in a double tax charge for beneficiaries of HMFs. The easing of this restriction with retrospective effect from 6 April 2012 has now been confirmed. This is welcome news and it is hoped that it will improve the appeal of HMFs.

Real Time Information (RTI) – beaters and harvest casuals

Under the new RTI regulations all people paid a 'wage' are now to be included on the payroll, even if their pay is below the earnings threshold. This means that beaters will have to be treated in the same way as all other employees and therefore included on the payroll.

HMRC has agreed that payments can be made each day but must be reported on the next payroll run and within 14 days. This causes a problem if a monthly payroll is in operation and the National Farmer' Union (NFU) is still trying to reach an agreement with HMRC.

Stop press: HMRC has announced that if you pay weekly or more frequently, but run a monthly payroll and have less than 50 employees, then RTI has been relaxed until October 2013. In the meantime you can continue to report monthly.

THE GREEN DEAL A LUKEWARM REACTION?

By Ben Short,
Associate Director, Savills,

The Green Deal, which launched in January has the potential to offer an affordable solution to creating better, energy-efficient homes for households that will be cheaper to run in the long-term. But is it as good as it sounds for rural landlords, or is the devil in the detail?

The scheme aims to recover the upfront costs involved in implementing energy saving improvements through the provision of loan finance for these measures. As an incentive, the Government is offering up to a £1,000 cash-back payment, on a first come first served basis, depending on the measures installed.

The 'cost' of the loan will be covered through savings on energy bills resulting from the installation of the energy-saving home improvements. The principle is that the bill payer should not pay back more in loan repayments than they are saving on their energy bill.

So far so good, particularly when you consider that from April 2016, landlords will not be able to unreasonably refuse requests from tenants to make energy efficiency improvements, where finance is available through the Green Deal. In addition from April 2018, landlords will be required to ensure minimum efficiency standards, which are likely to be set at an 'E' energy performance certificate (EPC) rating. All landlords are advised to take early action to identify properties which fall below this rating, and to put in place a long-term strategy and budget aimed at achieving at least this level, before the deadline.

This new legislation represents a real threat for landlords with let portfolios and the Green Deal may seem to be a real opportunity to help mitigate the cost. However, interest rates for the Green Deal at about 7% make the 'deal' unattractive to many property owners who may decide to source alternative finance at more competitive rates.

It is worth noting that the Green Deal loan is attached to the property rather than an individual, which has the potential to cause administrative burdens and make a let property less desirable to a prospective tenant. While the outstanding loan repayment is shown on the electricity bill, it is incumbent on the landlord to make new tenants aware of any Green Deal repayment responsibilities. In the event of a tenant defaulting on repayments, the landlord will assume responsibility for any debts and be responsible for the repayments in void periods. On this basis the scheme may be best suited to owner occupied homes, staff properties and long-term lets.

Careful planning regarding undertaking and financing energy-efficiency measures is now required in order to take account of new responsibilities and opportunities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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