With direct payments to be phased out in coming years, farmers may struggle to control cashflow effectively. But what is being done to help?
As farmers look ahead to the post-Brexit policy landscape, where direct payments are gone, one of the biggest challenges they face will be managing volatility.
This is a concern the NFU has repeatedly raised, pointing out the role the Basic Payment Scheme (BPS) has played in helping farmers even out peaks and troughs in cashflow.
Rohit Kaushish, an economist at the union, explained it was difficult to know whether the proposed new Environmental Land Management Scheme (ELMS) would be able to do the same without knowing the payment rates associated with it.
“There is a lot of talk about the new ELMS replacing direct support, allowing farmers to diversify their income through more generous agri-environment payments,” he said.
“But because there is not enough detail on how that will be priced up, it is very difficult to see in the short-term.”
Government has committed to look more closely at other risk management solutions, such as insurance, but for most insurers this kind of product is not yet feasible.
To protect farmers against a milk price drop, for example, insurers would have to charge a huge premium to cover the risk, because prices drop all over the country at the same time.
For this reason, the US Government has been forced to subsidise crop insurance premiums by 60 per cent.
“We have done a lot of work looking at how feasible revenue insurance is,” said Mr Kaushish.
“We found without any subsidy, the premiums would be too high for farmers to make it worthwhile.”
Other measures to help farmers manage volatility, such as futures markets, would also be unsuitable for livestock farmers.
“We understand direct support may be phased down, but for the livestock sector it will remain critical,” Mr Kaushish said.
“Aside from business resilience measures, such as supporting the sector to become more efficient and productive by adopting technology and genetics advances, it is really difficult to see how the industry can make up the shortfall.
“Even if a livestock farmer massively increases productivity, they will still not be able to turn around from a position of loss-making to a significant profit.”
For other sectors, such as arable and dairy, futures markets are a more viable solution. But they would depend on the rest of the supply chain, with farmers having to rely on other actors like processors to hedge and lock in future prices.
These issues with the products already available on the market have left a vacuum, which is currently being filled by direct support.
But the Government is now looking at ways to encourage the private sector to plug the gap.
The Agriculture Bill, for example, gives Defra the power to collect market data for agricultural and processed commodities such as liquid milk, skim milk powder, butter and cheese.
Mr Kaushish said: “They could start collecting information on how much volume is produced and traded, helping the market to understand the supply and demand dynamics.
“You need the market data. If you do not have reliable data on prices, you cannot insure the commodity.”
It is, however, unlikely that the Government’s work will come to fruition by the end of the proposed agricultural transition, in 2027.
“Until there is a clear signal on what the future will look like, it is difficult to know what market conditions you are developing the tools for,” said Mr Kaushish.
“It is really difficult to evaluate the risk profile and farmers need to understand how worthwhile it will be in the new world to take on these tools.”
The NFU is pushing for an incentive for the private sector to build the tools, to avoid a situation where farmers cannot access them after BPS cuts have already begun.
Mr Kaushish said: “By the end of the transition period, we could start seeing some pilot schemes and new approaches, but there is a lot of uncertainty about the scalability and how quickly they can be rolled out.
“If BPS was going to be reduced by the same amount each year, farmers will start feeling the pinch halfway through the phase-out, so there is a real difficulty there.”
Despite this uncertainty about the future, Mr Kaushish was clear Brexit provided an opportunity for farmers to become more efficient and productive.
“There are variances in performance and that should not be seen as a criticism, because it means there is space for a lot of farmers to start thinking afresh,” he said.
Stable – a new insurance product, is looking to be part of the mix after Brexit.
Designed by Richard Counsell, a farmer’s son from Somerset with a background in finance and IT, this risk management platform allows farmers to protect their products, as well as offering cost rise insurance and gross margin insurance.
As part of a Nuffield Scholarship, Mr Counsell spoke to more than 3,000 farmers, who all said they wanted to manage their risk with insurance.
But despite two years of research from top academics at Harvard and Liverpool Universities, the breakthrough did not come until Mr Counsell chose to explore the ‘up corn, down horn’ theory, working with AHDB and Defra to prove it was true.
“We know mixed farming is less susceptible to volatile prices than a single commodity farmer,” he said.
“That gave me an idea to see if we could we build an insurance company which acted like a traditional mixed farmer.
"We spread our risk across all sectors and we also operate in other countries, so if you think of us as a very big mixed farmer which farms Australian almonds, salmon in Norway, British beef, Kenyan flowers and milk in Denmark, there is no direct relationship whatsoever. That is how we do it.”
In November last year, global underwriters Lloyds of London agreed to back the platform, allowing farmers to take advantage of the product in much the same way as car insurance.
To get a quote, farmers must say what they want to protect, how much, and for how long, as well as choosing an excess level.
There is no claims process, because the system is based on the AHDB price, so payments are made automatically within a week.
“My big thing was democratising risk management, because obviously you need to be huge to buy a futures contract, but here you can protect ten tonnes of a crop or just 10,000 litres of milk,” said Mr Counsell.
“It is available to everyone, no matter how big or small you are.”
■ Build skills and knowledge through research, local discussion groups, specialist training courses and advice
■ Think through likely issues and be ready to respond if they happen, such as having alternative water sources for drought situations
■ Know your budgets inside out and incorporate sensitivity analysis which allows you to understand what level of volatility your business can withstand
■ Look at diversification opportunities or other income sources
■ Skills audit to identify where further training might be beneficial or advice needed
■ Get insured – the market is developing new index-based products which can provide some buffering on price changes or weather events
■ Understand marketing – many farmers put huge care into growing crops and producing livestock, but selling at the right time can make the biggest difference to income. Getting the marketing right could mean working better in a co-operative with professional marketers, or being prepared to do it yourself
■ Use buying groups and forward buy
■ Negotiate contracts for output to get better price stability. While not available for all farm output, it is worth investigating
Source: CLA chief land use adviser, Susan Twining