By Chris Wongsosaputro

Introduction

The agriculture industry faces challenges such as post-Brexit funding changes, a tightening of funding from banks and inflation. There are also non-financial challenges although this article focuses on only financial challenges.

Challenges in greater details

The post-Brexit challenges facing the UK’s agriculture industry relate to:

• Removal of the EU agriculture funding:
  • The Government pledged to keep the post-Brexit funding consistent with pre-Brexit volume only during this Parliamentary term
  • Beyond that, the Government will remove the Basic Payment Scheme in 2021 that is based on the land area farmed¹
  • In its place by 2027 will be the Environmental Land Management Scheme (ELMS), rewarding farmers who contribute to progressing ecological and animal health²
  • Estimates imply that farmers received c.10% lower in 2021 from ELMS than CAP and c.50% by 2024⁴ Farmers are also sceptical about practical details such as implementation timeline and the scheme’s complexity

• Food production being excluded from the new funding mechanism²
  • Only c.9% of state funding allocated to farming productivity initiatives³, thereby decreasing the incentives away from food production

• Fundraising challenges:
  • While still navigating the new funding environment post-Brexit, farmers also need to grapple with another fundraising challenge from the banks who have been tightening their funding provision⁵
  • In addition, higher interest rates have increased repayment costs

• Inflation:
  • Similar to other sectors, agriculture is impacted by high inflation, hampering its ability to invest in capex, R&D and renewables.⁶ In particular, fertiliser costs in 2022 have risen 3x vis-à-vis 2021⁷

Possible funding-related initiatives

The Government and the private sector could look to solve many of these funding challenges alongside the agriculture industry by:

• Funding more capex and R&D initiatives in agriculture:
  • Examples are agritech (e.g. robotics, vertical farming etc.) as well as agroforestry and ecological land use ⁸
  • Having more capex and R&D funding so will facilitate the implementation of enhanced farming methods to boost productivity and the UK’s food supply
  • A starting point will be to expand the scope of ELMS to cover food production, renewables, capex and R&D
  • The Government had started the £270m Farming Innovation Programme in October 2021 to facilitate agriculture-related R&D⁹ so the scheme can be expanded further
  • The UK Government is already offering 20-30 year loans guarantee, offering the scope to expand their involvement to include direct funding

• Exploring funding sources beyond the Government and onto the private sector:
  • Possible funding sources include retail banks and smaller challenger and private banks
    • Retail banks charge higher interest costs and cover short to medium-term funding
    • In contrast, smaller banks are typically more open on accessibility and long-term loans
    • Some High Street banks such as NatWest are already providing £1.25bn funding into agriculture via credits, asset finance and overdraft
  • The other possibility is via private investors such as asset management companies and fund managers⁶
  • M&A deals and funding volumes also indicate an increase in investment into cutting-edge agricultural tools and renewables¹¹
  • There are some indications that agriculture provides attractive investment returns with possible maximum ROI of 8-10%¹² and farm land value rising by 6.2% in 2021.¹³ This suggests the potential for the sector to receive more funding going forward

• Accompanying any changes to the funding mechanisms with clear logistical details:
  • Examples are timings and amounts
  • Knowing the government’s planned support in advance will allow farmers to plan, unlike the uncertainties arising from the Government’s recent U-turn on its Net Zero commitments ¹⁰

• Enhancing public-private collaborations to provide more funding:
  • This can be done either by offering guarantees or launching co-funding schemes
  • In the event of public-private collaborations, there is a need to prioritise long-term investors instead of short-term investors looking for quick profits

Conclusion:

The UK agriculture industry faces a crucial juncture amid financial and non-financial challenges facing the sector. The Government can play a pivotal role in ensuring the viability of the industry by providing funding to the industry either directly or indirectly together with investors.

Ensuring a viable agriculture industry is important for the UK economy, especially as food inflation at 13.6% in August 2023¹⁴ was a major contributor to inflation. Without a viable long-term plan for the sector, there is a risk of farmers leaving the sector.¹⁵

Sources:

1. “Challenges UK farmers face and how they overcome them?”, Blanchards Bailey, 9 July 2021, https://blanchardsbailey.co.uk/insights/challenges-uk-farmers-face-and-how-they-overcome-them
2. Coe, Sarah and Uberoi, Elise, “Farm funding: implementing new approaches”, UK Parliament House of Commons Library, 15 March 2023, https://commonslibrary.parliament.uk/research-briefings/cbp-9431/
3. “Funding uncertainty hinders UK’s agricultural productivity”, Belfast Telegraph, 20 October 2022, https://www.belfasttelegraph.co.uk/business/ulstergrocer/food-and-drink/funding-uncertainty-hinders-uks-agricultural-productivity/42082395.html
4. Gittins, Peter, “I’m a sheep and cattle farmer in England, and Brexit has left farmers in fear for their futures”, The Conversation, 16 August 2021, https://theconversation.com/im-a-sheep-and-cattle-farmer-in-england-and-brexit-has-left-farmers-in-fear-for-their-futures-165843
5. “Why farm finance is getting harder to find and how to overcome it”, R&BS, February 2020, https://www.ruralmortgages.co.uk/news/1817/getting-farm-finance/
6. Reeves, Craig, “Tackling UK Farming’s Funding Shortfall”, The Hedge Fund Journal, August 2015, https://thehedgefundjournal.com/tackling-uk-farming-s-funding-shortfall/
7. “£1.25bn of support for farmers facing inflation challenges”, NatWest Group, 18 July 2022, https://www.natwestgroup.com/news-and-insights/news-room/press-releases/enterprise/2022/jul/125bn-of-support-for-farmers-facing-inflation-challenges.html
8. “Main challenges facing the UK agricultural sector”, Agricultural Recruitment Specialists, 2022, https://www.agrirs.co.uk/blog/2022/09/main-challenges-facing-the-uk-agricultural-sector
9. “New funding for agriculture and horticulture automation and robotics”, Department for Environment, Food & Rural Affairs, 13 December 2022, https://www.gov.uk/government/news/new-funding-for-agriculture-and-horticulture-automation-and-robotics
10. Horton, Helena, “UK net zero policies: what has Sunak scrapped and what do changes mean?”, The Guardian, 20 September 2023, https://www.theguardian.com/politics/2023/sep/20/uk-net-zero-policies-scrapped-what-do-changes-mean
11. Rushworth, Molly, “Current trends and technologies in the UK Agricultural Technology industry”, Price Bailey Chartered Accountants, https://www.pricebailey.co.uk/reports/current-trends-technologies-uk-agricultural-technology-industry/
12. Pritchard, Chris and Binns, Chris, “Growing returns: investing in agriculture”, Barnett Waddingham, 5 November 2021, https://www.barnett-waddingham.co.uk/comment-insight/blog/growing-returns-investing-in-agriculture/
13. Harrison, Louise and Teanby, Andrew, “Farmland investment: as safe as houses, but with better returns”, Savills, 19 January 2022, https://www.savills.co.uk/blog/article/323989/rural-property/farmland-investment–as-safe-as-houses–but-with-better-returns.aspx
14. “Cost of living insights: Food”, Office for National Statistics,  https://www.ons.gov.uk/economy/inflationandpriceindices/articles/costoflivinginsights/food#:~:text=Prices%20of%20food%20and%20non,housing%20costs%20(CPIH)%20release
15. Davies, James, “Brexit: Challenges and Opportunities for Agriculture”, rdp Law, https://rdplaw.co.uk/brexit-challenges-and-opportunities-for-agriculture