The Longer View

Although the government remains confident that we will officially leave the EU on March 2019, it also appears that there is now a growing consensus that this will also mean that there will have to be a “transitional agreement” allowing us several years to disentangle ourselves from EU rules and regulations that are so intimately entwined with our own domestic regulations.  This entanglement is nowhere more obvious than in farming where domestic agricultural policy has effectively been exported to the EU since we joined over 40 years ago.

Thus farmers are rightly concerned about what the future holds post 2019 and although the government has confirmed that they would maintain the same level of funding through to 2022, it has not been clear whether the rules for the allocation of these funds will change.

The easy option would be to continue with a UK agricultural support system that mirrors the existing CAP at least in the short term and this may be necessary, not only to prevent our farmers being at a significant competitive disadvantage to our European neighbours, but it may also be a requirement of the transitional arrangements which may ultimately be negotiated.

But, the most fundamental concern going forward will be the extent to which our farmers will have access to EU markets.  It is difficult to see how we would ever negotiate enough non-new EU foreign trade deals in the short term to compensate for the sudden loss of free access to the Single Market and so the terms of any transitional arrangements that can be agreed are likely to be important.

In this context Philip Hammond, the Chancellor of the Exchequer has explained that, although the UK will leave the single market and customs union on 29 March 2019, the government would be seeking a “Turkish model” customs union agreement which would allow the UK to trade freely with the EU during the transitional period.  

However, it remains to be seen how easy it will be to persuade the remaining EU member states to allow such free trade and one can only imagine any such access would also require compliance with most EU rules and possibly also some financial contribution to the EU coffers.  

This is clearly something that many “Leave” voters would not have been impressed with on 23rd June but I suspect this is just the start of what is going to be an long period of brinkmanship where uncomfortable compromises will need to be agreed by all parties if a deal is ultimately going to be reached and in the meantime this will result in a continued period of uncertainty that is likely to last beyond our formal departure from the EU.

A surge in residential and commercial development across certain parts of the UK is benefiting farmers and landowners alike; many of whom are selling off parts of their land ownership to accommodate this expansion.

In areas where development opportunities are prevalent, landowners in the right locations are making significant profits. Those who rollover the proceeds into qualifying assets stand to mitigate the Capital Gains Tax payable on receipt. This provides landowners with an injection of capital to reinvest back into land, and as a result there has been a direct impact on land prices across the West Midlands where, in some cases, it is valued at twice the price per acre compared with parts of the East Midlands.

While investing back into the land is second nature for most rollover buyers, there are several things that they should consider.

Tips
1)    Play by the rules: Vendors should ensure that their land isn’t tenanted when launched to the market. In order to qualify for CGT relief, rollover buyers must devote their funds to a business that they will be operating first hand, rather than an investment asset that is being farmed by someone else.

2)    Give yourself a head start: Rollover buyers have a window in which to re-invest into land, spanning from 12 months before the original asset is disposed of, and up to three years after. As such, buyers should start the process as early as possible in order to maximise all options available.

3)    Talk to your neighbours: The most valuable way for a rollover buyer to spend their funds is to invest in their neighbours’ land, to expand their own holdings. They may well charge a premium, but the benefits can be invaluable.

4)    Take your time: While it’s important to start early, rollover buyers should avoid jumping at the first opportunity that arises. And, of course, it’s unwise to start shopping until the funds are in the bank, as the process has a tendency to be protracted.

5)    Think outside the box: Careful consideration should go into the location of a new investment. Buyers should look at land opportunities in alternative parts of the country – while the scope for development might be smaller, the land could deliver significantly more value for money.

As dairy markets continue to firm, many farmers will welcome the news that Arla Foods, the UK’s largest milk processor, has increased its standard non-aligned milk price from 1st September.

This means that the standard manufacturing price will increase by 0.83p/litre to 30.79p/litre and the standard liquid price will increase by 0.79p/litre to 29.61p/litre.

The Arla Foods manufacturing price has risen by 3.06p/litre in the past three months, which represents an increase of 11%, and an increase of approximately 42% over the last 12 months.

Arla Foods amba board director Jonathan Ovens said the improved price was a result of strengthening markets and CEO, Peder Tuborgh said,  “The improving market conditions, driven by increasing milk fat and protein prices, particularly in Europe over the recent months, is indeed good news for Arla Foods and our farmers.”

Mr Tuborgh continued, “We expect the positive price trends to continue and we have introduced further increases in our prepaid milk price to our farmers in July, August and September and expect to sustain this high level for the rest of the year.”

So dairy farmers are feeling positive, at least in the short term and this is driving dairy cow prices higher with auctioneers reporting “flying trades” for freshly calved cows and heifers where quality pedigree heifers are topping £2000/head.

This does bring in to question the merit of paying such prices simply to expand production in the short term because over the lifetime of such an animal it seems inevitable that the dairy markets will go through periods of low as well as high prices and dairy farmers will need to be prepared for such volatility.

As an alternative to purchasing stock, farmers can rear their own, although for significantly less than the prices currently being paid at market.  However, rearing replacements takes at least 2 years and is therefore a long term process.  As well as labour and other input costs necessary to rear them, the replacements take up land and buildings that could otherwise be used for productive stock during these two years.  This lost opportunity cost can justify paying more for a freshly calved heifer on intensive farms, where there is little surplus accommodation.

However, while milk prices are firm, many dairy farmers will welcome the introduction of any home reared heifers that will be entering their herd in the coming months because their long term commitment to the herd will be immediately rewarded by increased production and profit which will be a gratifying change from the experience many have had in recent years.