3 options for post-Brexit farm support explained

Ever since the UK voted to leave the European Union in the referendum last June, there has been much debate about what kind of agricultural support policy might be suitable for post-Brexit Britain.

Defra minister George Eustice has let out several hints about the way he would like to see things developing.

He has made repeated references to initiatives such as agri-environment schemes to support nature, insurance models to help farmers tackle volatility and grants to improve productivity.

See also: NFU reveals ‘three-pronged’ approach to farm support

But the government is still in “listening mode”, and last month Defra organised a meeting with the Agricultural Economics Society to delve deeper.

Among the speakers were three of the country’s pre-eminent agricultural economists. Farmers Weekly invited each to explain their chosen options.

Ecosystem services

Professor Ian Hodge, Department of Land Economy, University of Cambridge   

The various benefits that arise from the management of rural land are increasingly characterised as “ecosystem services”.

These include saleable products, such as wheat, milk and renewable energy.

But they also include other benefits, such as wildlife, landscape, water management, carbon storage and public access – things that are valued by the local community, but for which there are no markets.

Currently the Common Agricultural Policy provides payments through Pillars 1 and 2, often for rather unclear reasons. 

Greening requirements are intrusive, but deliver little environmental benefit. Agri-environment payments are centrally managed, but don’t necessarily deliver the mix of land uses and public benefits that would be most valued at a local scale.

An “ecosystem services policy”, however, would be more devolved and funding could be used for a broader range of purposes

There could be money to support large-scale conservation areas, greenhouse gas mitigation or flood control.

Or local funds might be used to support the provision of landscape, wildlife and public access. Government might even offer match funding to complement funds raised through voluntary donations. 

There could also be private sector support for more specific schemes, such as water companies paying for higher water-quality standards, or local communities paying for changes in land use for flood control.

Flexibility

Such approaches would give flexibility and encourage landowners to look for new ways in which they can deliver ecosystem services and hence attract funding.

Farmers could develop a portfolio of activities, such as flood mitigation, wildlife conservation and public access, alongside their commercial production.

After all, they are the people with the best information about what options are possible on their land, and how they may best be implemented. 

What is critical for policy at this stage is to clearly identify the new approach. Government should signal the shift in direction and the longer-term goal of developing a more comprehensive framework.

In the shorter term, funding should be gradually transferred from fixed area payments to new schemes, as the capacity to implement them effectively is developed. 

Too rapid a change, however, could run the risk of environmental and social harm, so the new approach should be adopted in a planned and systematic way.

Will this be good for farmers? As with any change there will be winners and losers.  But, after Brexit, funding for agriculture will have tougher competition.

It will become increasingly critical to demonstrate that government funds paid to landholders generate clear social value in order to compete with demands for funding for health, education and social services.

Risk managment

Emeritus professor Berkeley Hill, Centre for Environmental Policy, Imperial College London

UK farmers have to contend with a variety of risks and uncertainties, including accidents, weather, price instability, and now policy change as we prepare to leave the European Union.

The probable removal of Basic Payments sometime after 2020 will take away a steady and predictable cushion to incomes from farming and expose operators even more to market variations.

How risks are assessed and tackled will be critical to the continuing health of post-Brexit UK agriculture.

Some opportunities to reduce risk are in the hands of farmers themselves, such as mixing enterprises, reducing exposure to crops that are notorious for volatile yields or prices, diversifying or using forward contracts. 

Some risks can also be “shared” using commercial insurance, typically for personal accidents, fire and some natural happenings such as hail damage to crops. 

However, for some risks, formal insurance is either not available or too expensive. 

This applies in particular to natural catastrophes, such as extreme storms, widespread flooding or pollution incidents.

The market simply does not work in such circumstances and only governments can mitigate such disasters by stepping in to cushion the impact.   

New options

Until now, UK governments have made little use of the various options available under the Common Agricultural Policy to help farmers cope with risk. But that could all change post-Brexit.

For example, a solid rationale exists for the government to help at times of natural or man-made catastrophe; the choice is really whether this should be by maintaining the present ad hoc approach after the events or by using mechanisms worked out in advance.

This might include subsidising insurance to make it more affordable – something being considered in Wales – or setting up contingency funds, probably in collaboration with producer groups.

There is a similar good case for government to provide information, advice and training for farmers on their use of risk-management tools.

Some of the more sophisticated approaches, including options and hedging, require a degree of skill that has to be developed, bought in or shared. 

Income smoothing, by averaging for tax purposes or by using tax-sheltered savings funds, can also be justified on both grounds of fairness and of efficiency. 

American approach

Beyond these, things are very uncertain. Some look to North America for a model, where both Canada and the US have comprehensive suites of publicly supported risk-management tools.

These include subsidised insurance of prices or margins, and income stabilisation schemes. 

However, these typically imply heavy government involvement and require large amounts of farm-level data, typically taken from taxation records, both of which may not be acceptable in the UK. 

The US system of subsidised insurance is also dependent on the involvement of commercial insurance companies that are willing to accept agricultural risks – something UK providers have so far kept well away from. 

Though there may be some lessons to be learned, for the UK to adopt a North American approach to agricultural risk management would involve changes to our systems; for which there is no apparent political appetite at the moment. 

When considering introducing post-Brexit agricultural policy risk-management tools, it seems preferable to proceed cautiously.

The government will need to respect what is technically feasible and clearly identify the public benefits that might flow from the use of UK taxpayers’ money.

Exit bonds

Emeritus professor David Harvey, School of Agriculture, Food and Rural Development, Newcastle University

Former permanent secretary at MAFF, Richard Packer, recently suggested that British agricultural objectives post-Brexit might be best pursued “by something that is fundamentally similar to the present policy”.

According to his paper, that could include area payments to farmers – a point of view that is seemingly endorsed by recent government reassurances about the longer-term future of public support for agriculture.

But this seems like wishful thinking. No British government, of whatever political hue, has shown any support for the longer-term continuation of direct support for the industry during the past four reforms of the Common Agricultural Policy.

Nor is it conceivable that continued direct payments for farmers will generate much support from either the Treasury or from competing government departments such as Education, Health or Transport.

So while the status quo appears to be the simplest form of any UK agricultural policy, the real question is how and when will direct payments be eliminated?

There is virtually no defensible, intellectual support for the continuation of direct payments. It is also pretty clear that the Basic Payment Scheme is slowing, perhaps substantially, the necessary structural adjustment of the industry to improve both productivity and profits.

On the other hand, it is also clear that the industry as a whole and a substantial fraction of its farmers are heavily dependent on these payments.

Defra figures show that direct payments contribute 48% of the Total Income From Farming (TIFF) as a five-year average. In 2014/15, a year of notably low TIFF, 57% of English farmers made a loss, after accounting for family labour, even with these payments.

Structural change

The critical question, then, is how to discontinue direct payments without causing both substantial personal traumas while also positively assisting the necessary structural change?

The conventional answer is to phase the reductions over time – say five, 10 or even 15 years.

But that still leaves serious questions about how quickly rents and land prices will reduce, and how easily will farmers be able to retire, expand or otherwise adjust. And what might happen to margins for remaining farmers?

The better approach would be to cease direct payments overnight and offer farmers a “UK exit bond”, being a once-and-for-all compensation payment for the loss of equity resulting from the elimination of direct support.

The details of the exit bond – who gets how much – will have to be worked out, as all the bond does is to roll up a future stream of potential payments into a single lump sum.

But once achieved, this option would provide both the capital capability and confidence for the necessary adjustment, because farmers wishing to leave the industry could cash in their bonds.

This would prompt more rapid structural change and, hence, a faster emergence of the new market conditions and land-use patterns.

Only by actually generating the conditions of an unsupported industry can we hope to learn what sort of conditions would actually emerge, and therefore what adjustments will be needed, without compromising producer livelihoods.