UK farmers gamble on an uncertain harvest of returns

For those who see running a farm in the tranquil depths of the English countryside as an opportunity to escape the pressures of the wider world, Philip Rees offers a bracing corrective.

“It’s a bit like gambling at the moment. You put a crop in the ground and you know what it’s going to cost — but you’ve no idea what you’re going to get for it a year later,” says the owner of the 400-acre Rees family farm near Milton Keynes in Buckinghamshire.

Farm revenues have always been subject to fluctuations in crop prices, but soaring inflation and the war in Ukraine have brought a new level of risk to the business, opening up a big gap between the cost of this year’s inputs such as fertiliser and feed, and the price a farmer can expect to fetch at market next year.

Like many farmers, Rees has taken steps to limit the impact on his business, reducing the number of beef cattle he keeps on his pasture so as to make the grass last longer as a food source through spring and summer. He saved on fertiliser by buying in advance, so expects a good result in 2022 for the wheat he grows, which is selling at higher prices.

But if this year’s rises in input costs hold firm, next year is a worry. “You’re looking at 30 per cent extra cash to grow a crop than you were before,” he says.

Inflation is just one of several forces currently colliding for UK farmers, farm owners and farmland investors. A post-Brexit subsidy regime will take effect in stages over the next five years, rewarding farmers for environmentally beneficial measures rather than the old EU-based system of direct payments based on the amount of land they farm. Smaller farms may struggle to avoid losses when the payments finally disappear in 2028.

The Covid-19 pandemic prompted a surge in demand for country homes that has also been felt in the market for farms. New “lifestyle” buyers are competing with existing farmers as well as companies building infrastructure projects and housing. Fewer farms have been coming on the market, keeping prices at a premium.

The upshot is that some farms and investors will be challenged to make their sums add up, while others may spy new opportunities. FT Money asks farmers, land agents and farm consultants — what are the coming prospects for harvesting good returns from farmland?

Punishing cost rises

Commodity prices have spiralled in the wake of Russia’s invasion of Ukraine. The two countries supply about 30 per cent of the world’s wheat exports and are important producers of commodities such as organic seed, chicken feed and fertiliser.  

In its “agflation” index published this month, farming consultancy Andersons estimated the costs of farm inputs such as feed, fertiliser and fuel were rising at an annual rate of 28.8 per cent, compared with CPI of 7 per cent.  

Inflation can cut both ways for farmers, with food prices also rising, and so its effects vary from farm to farm. Dairy and pork producers have been hammered by the higher cost of feed; pork and milk prices are rising too, but not fast enough to offset this surge. Wheat producers can gain some confidence from higher global prices for their crop, but only for grain they can sell now. Next year is a different matter, given the soaring input costs.

Joe Scarratt, a partner at Andersons, says the 2023 market “might deliver a margin if everything stays the same. But the working capital demand — the amount of money farmers have to borrow to fund that crop — is just huge, far greater than ever seen before.”

Part of the problem is that the current £300 per tonne price of wheat — which allows farmers to offset the higher cost of fertiliser — is higher than the future price of wheat. For wheat to be harvested in 2023, it is only about £220, he says. Fertiliser at £200 a tonne a few years ago is now approaching £1,000 a tonne.

“It’s always been a risky game, let’s make no bones about it, but the risk now is just enormous. Most banks will probably lend the money against well-capitalised businesses that have performed reasonably well historically, but there will be some where it’s become a problem to source the working capital needed.”

Regime change

Farmers were already having to deal with fundamental changes to their business model before the Covid-19 pandemic and the Ukraine war, as the payments available to  the industry under the EU’s Common Agricultural Policy began to be phased out over a seven-year period from last year.

Under its new system, set to be in place by 2028, the UK government will switch to paying farmers for improving the environment, lowering carbon emissions, practising sustainable farming, restoring landscapes and preserving biodiversity.

Those EU-style payments are falling away more sharply for farms in the highest payment bands: those receiving £150,000 or more a year will see a 70 per cent cut by 2024; for those earning up to £30,000 the reduction is 50 per cent. All will be withdrawn entirely by 2027. After 2024, as a way of preparing for the new environmental focus, owner-occupier farmers or tenant farmers will no longer need to work the land to receive payments.

How will this affect farm businesses? Some farmers will worry that in five years they will be unable to fund the costs of growing a crop because of the loss of direct payments, says Emily Norton, head of rural research at estate agent Savills. Uncertain as to how they would make sense of the “new zeitgeist” of environmental land management, they have been reconsidering retirement or handing over to the next generation.

The sharp increases in the costs of farming, mixed into this climate of uncertainty, are pushing farmers into much more rapid decision making, she says.

“The slow Brexit transition and the pressure that it was going to put on finances within the farming system has essentially been accelerated by the dramatic increase in input prices,” she says. She cautions, however, that any impact on sales of farms is unlikely to become apparent until next year, given the average 12-month period it takes to prepare a farm for sale.  

The new parameters of government support are also likely to redraw the map of value in farming estates. One indicator of this is the marked rise in value of the lowest-quality land in areas such as Scotland, upland Wales and the north of England, as buyers have sought to exploit the revenue opportunities in forestry-related carbon sequestration schemes.

“We’ve seen this radical shift of land selling for three or four times what it was only a few years ago,” says Roland Bull, head of rural investment at farming consultants Bidwells.

Not everyone will benefit from the new criteria, however. “Everybody looks at these [environmental] schemes and thinks, ‘Well, we’ll be able to get some money off that.’ The reality is that the opportunities for environmental enhancement from public grants and private markets are very location specific. Individual parcels of land have different characteristics and different potential to deliver biodiversity outcomes — and that is not necessarily understood by a lot of people yet,” Bull says.

A sellers’ market 

The Covid-19 pandemic has intensified demand from a new type of buyer in the farmland market: the well-heeled investor with designs — often philanthropic — on furthering the green agenda.

Will Matthews, head of farms and estates at agent Knight Frank, says he has seen a surge in rural buyers contacting his firm not only in search of country homes but also land. Many of these so-called “lifestyle” buyers have amassed wealth from a career in business and now want to play a part in the move to a more sustainable way of life.

“So many people since Covid are looking at things differently. There are an awful lot of people who now want to get into land ownership for reasons of environmental enhancement,” Matthews says.

For example, these enhancements might include allowing parts of a farm to return to nature, planting trees, providing nesting sites for birds or flower-rich areas for pollinating insects, keeping stubble on fields over winter, maintaining hedgerows and ditches or keeping a 10m buffer around trees in fields for wildlife, or using low-emission equipment to farm.

Bull is helping a former finance director for a FTSE 100 company, who is looking for an estate of around 200 acres, with a plan to “rewild”, restore habitats and ultimately gift the land to a conservation charity. “And they’re not the only one,” he says.  

One obstacle for those with aspirations to buy their own patch of countryside is that the amount of land up for sale has significantly dwindled in the past three years. According to agent Strutt & Parker, only 192 farms were publicly marketed last year, the second lowest number in 20 years. In the mid-2000s, a typical number was more than 300.

Another longstanding barrier is that existing farmers often have a strong financial motive to pay over the odds for land, because of the tax relief known as “rollover”. A farm owner who, say, sells a portion of land to a housing developer can “roll over” the capital gain by buying another qualifying asset — typically more farmland. But the relief comes with a deadline: to claim it, they must reinvest between one year before the sale of the original land or three years after.

When the clock is ticking, these farm owners will often outbid the non-farming buyer, Matthews says. “Anyone making a tax-driven purchase is willing to pay what it takes because it saves them rather more tax than just paying a high price for land. There are an awful lot of people who want to get into land ownership, but if they’re really pushed to pay massive premiums, are probably unlikely to do it.” 

The shortage of available farmland is one reason that the UK has not seen the emergence — as in the US — of investment funds or trusts designed to provide investors with access to farmland returns without buying land for rent or farming themselves. Estates on the scale required to back a fund seldom appear on the market — only six farms of 1,000-plus acres were for public sale in England in 2021.

Food vs environment

The sharp rise in food import costs following the war in Ukraine has prompted questions in the farming industry over whether the government is right to continue to push ahead with environmentally-driven policies given worries over food security. The National Farmers’ Union, backed by the Labour party, has called for a two-year “pause” in the withdrawal of direct payments to provide breathing space for farmers under pressure over costs.

Andrew Shirley, head of rural research at Knight Frank, believes it remains possible to maintain a reasonable level of food security alongside initiatives to improve farming sustainability, biodiversity and cut carbon emissions. But he adds: “Farmers have lost a bit of confidence in the government because that policy seems very narrow and seen through this environmental focus. You also need to look at farming in terms of production, food security and countryside communities.”

Some farmers may see the government’s new system of rewards as a salve for an increasingly difficult financial situation. Others, like Philip Rees in Milton Keynes, may stick for the time being with their familiar models of farming, given demand for his output. He says: “With prices where they are on the arable side, I don’t think there’s much of an incentive to go into schemes at the moment.”

Case study: Branching out in Norfolk  

Tom Raynham, who runs the substantial 5,000 acre Raynham estate in north Norfolk, has deep family roots in farming — and in innovative ways of making it pay. His efforts to diversify have led the farm business in myriad directions.  

Raynham’s 18th century forebear Charles, second Viscount Townshend, earned himself the nickname “Turnip Townshend” when he introduced the idea of four-crop rotation, adding turnips and clover to wheat and barley. The clover reinvigorated the soil by fixing nitrogen, as well as providing food for grazing livestock, which then manured the ground. The turnips fed sheep and cattle, while improving soil structure. The result was a leap in agricultural yields.

But in recent years Raynham has taken his ancestor’s principle up a notch, bringing in a seven-crop rotation system of wheat, barley, rye, beans, maize, sugar beets and oilseed rape, each preceded by a “cover crop” in early spring of clover or radishes that reduces the amount of fertiliser required for the main annual crop.

“It’s understood now that the benefits to the soil are so much greater when you’re incorporating, say, animal manure as well as cover crops,” he says. “They not only help the soil but . . . improve the yields of crops without using as many chemicals.” 

Higher productivity through better soil — and offsetting the risk of a falling price in one crop by producing seven — helps deal with unpredictable factors such as weather, commodity prices or changes to farming policy. “The things that affect the farming industry more often than not are completely out of the hands of the individual farmer,” he says.

Among the non-agricultural activities the estate has introduced are a glamping site complete with luxury yurts, and weddings and other events held at Raynham Hall, the family seat. In August his fields will fill up with music fans and their children as the estate hosts a new weekend music festival, “Wide Skies and Butterflies”. 

What excites him most, though, is the improvement brought with the introduction in 2015 of an anaerobic digester, which he feeds with the maize, rye and the pulp that remains after the sugar beet has been processed. The biomethane it produces goes directly into the gas network, providing enough energy to power around 3,500 homes, according to his estimates, and helps stabilise finances by indirectly providing a set price for three of his seven crops.

The circle is completed by the treasured byproduct of this process, known as digestate, a substance rich in nitrogen, potash and trace elements that reinvigorate the soil. “This was an absolute game changer for us,” he says, describing how it allowed them to halve the amount of artificial fertiliser they apply, cut their spraying by one-third and generated revenue from selling the excess digestate to neighbouring farms. As fertiliser prices have spiralled along with energy costs, the decision appears prescient.

Raynham says around 40 per cent of the farm’s income now comes from non-food activities — though he insists the two are linked, since food production has also risen as a result of the impact of the digestate.  

For smaller farms on tight margins, the capital outlay required for biomethane production is typically out of reach. But farmers who confine themselves purely to farm-based revenues are going to struggle, Raynham says, as their input costs hit new highs. “Sadly, we’ll see some farmers go out of business because they are not able to cope with that, alongside the reduction in subsidies,” he says.