James Dunn, ADAS technical director for business management, looks in depth at getting through the farm payment transition period.
It is the beginning of the end for the Basic Payment Scheme (BPS).
New methods of using ‘public money for public good’ will be introduced but these are still in the test and trial process at present.
This year the impact of us leaving the EU won’t be felt as direct payments will continue much as they did in 2019, with the same system of application and cross compliance rules as before.
However next year, all BPS recipients need to be aware their 2021 payments will be a little less than what they used to be.
Those receiving higher BPS payments in previous years will notice a more substantial cut, but the drop will affect every recipient to a degree.
We still don’t know by how much payments will reduce in 2022 and beyond, but what we do know is that by 2028 BPS payments will no longer exist at all.
The new system of using public money for public good will be known as the Environmental Land Management Scheme (ELMS) but is unlikely to be in place before 2025.
Depending on what the Government does in the meantime, the period 2021 to 2027 could be particularly difficult for many who depend on BPS payments to make ends meet.
Although BPS recipients in every agricultural sector will take a hit, this is particularly hard hitting for grazing livestock farms.
The average grazing livestock farmer depends on BPS for over 90% of their farm business profit so even a small reduction could mean the difference between breaking even and making a loss.
Comprehensive forward planning and a willingness to try new ways of working will be essential for BPS reliant farm businesses if they are to successfully navigate the next few years.
Carrying on with the status quo will not be a viable option.
Although much is still uncertain and outside our individual control, there are practical steps business can take to safeguard themselves as much as possible from this financial risk and be in a more secure position when change does happen.
We’ve put together the below basic plan as a starting point.
Most business need to make a profit to survive.
Look closely at your financial accounts and have a clear view of incomings and outgoings for the last 3 to 5 years.
Consider speaking with a farm business advisor who can consider this independently.
You will need to have a clear understanding of what your farm profit margin is and how much profit you need to maintain financial stability.
Look at the percentage reductions planned for next year and calculate the hit to your 2021 payment.
See if this reduction will leave you in the red.
Once you understand the impact for next year, conduct a gross margin analysis to identify production efficiencies.
Get to know overhead running costs and see if it’s possible to reduce labour, admin, or property outgoings.
Maybe now is a good time to negotiate a lower rent or look into restructuring finances for the short-medium term.
If possible, benchmark your business performance against other farms so you can learn if others are doing things differently.
Benchmarking to get a clear comparison picture of your business performance is a key step to learning where improvements can be made.
Take an objective look at your business and write down the strengths, weaknesses, opportunities and threats.
What are you doing well and where can you do a bit better.
How do you currently mitigate against risk?
Appreciate the full potential of your farm.
Are there other areas where your business could branch into that you haven’t considered before? Would considering a diversified income stream be worthwhile?
The ability to diversify your income will depend on your available resources.
Are you making the best use of all you currently have, including your facilities and even your own skills?
If you feel you don’t have the financial resources within your business, should you consider external funding streams?
Just this week, the Bank of England slashed low interest rates even further – there’s never been a better time to borrow and invest in improvements for future gains.
Before you take the plunge though, make sure your investment will indeed deliver a long-term, sustainable return that has a justifiable payback period.
If you’re not certain, seek out the advice of a farm business consultant or financial adviser.
Countryside Stewardship (CS) has, historically, had a low take up but it is strongly worth considering this time around as a secure source of future income.
The Government have confirmed that those entering a CS agreement this year, or prior to this year, will have those agreements honoured to completion and will allow overlap with the new ELM Schemes that start in 2025.
In fact, the Government is actively encouraging farmers to enter CS as a way to prepare their farm for the new ELM scheme which will provide funding for the enhancement of public goods.
The window for application in this summer (Higher Tier closes for applications 1 May 2020, Mid-Tier applications close 31 July 2020).
Take a look at the GOV.UK website or speak to an agricultural adviser if you’d like help
Once you have planned out where potential savings and earnings could come from, create a 5-10 year business strategy that includes all your expected financial budgets and cash flows and risk mitigation.
Succession planning must be fundamental to all of this, particularly if you are looking to retire or leave farming within the next few years.
If you are looking to retire or leave your farm business, it may be possible to receive your BPS as one-off cash lump sum.
Again if you need help with this, speak to a farm business adviser.
To understand the best way to support farmers through the transition period, Defra has developed a Future Farming Resilience Fund.
A pilot scheme has been launched which aims to identify the best methods of resilience support to farmers and land managers, particularly those who are most likely to be severely affected by changes emerging from the Agricultural Transition.
The pilot project involves seven consultancy companies across nine defined territories, each one applying a different method of delivery.
ADAS has been chosen to specifically engage with lowland and upland livestock grazing businesses in two schemes across Staffordshire, Shropshire, Derbyshire, and across The Yorkshire Dales and Cumbria.
It is completely free of charge to take part so if you live in these areas and would like to take part, please contact us at email@example.com or call 01623 844331 to register your interest.
There are schemes in other areas of the country being delivered by other consultancy companies so please check with Defra for details of these.
James can be found tweeting at @jim_1709