Agriculture may be the (second?) oldest profession, but it is one that remains ever relevant to modern day life. Farmers are not only producing food, they are also environmental stewards through no other reason than they are the people literally on the ground and on the front line.
Agriculture underpins the UK’s last great manufacturing industry – food manufacturing - which currently adds something in the order of £110b to the economy. However, farming is faced by several challenges, some beyond human control, meaning that many farming businesses exist on a knife edge. These challenges can be categorised as “structural”, 'climatic', 'market', and ‘political’. A farming business facing just one of these challenges can be severely compromised, let alone two or more.
Bearing this in mind, why has there been a relatively low volume of recoveries in the agriculture sector over the years? This is mainly to do with the ever-increasing value of land which has meant that it has often been possible for a business to sell land (as a very broad rule of thumb 10 acres = approx. £100,000) to pay off any loans. Tighter banking requirements since the 2008 crash has meant this strategy is becoming less effective as, overall, farming businesses are struggling to demonstrate sufficient affordability of loans. Banks are also sensitive to market perception and the risk of damaging their brand by taking recovery action against farms. Farmers are, generally speaking, very conservative and many still own their farms in which all their capital is tied up, with no bank borrowing nor an overdraft. To many in business that is extraordinary.
Although all businesses have their threats and challenges, most can exercise a degree of control over their future unlike the farming industry. For farmers, there are four factors in particular over which they have minimum control .
Many farms are often unincorporated businesses (either sole traders or partnership) although many do not really understand what that means in practice, for example, partnerships often operate without a written partnership deed. Farm businesses are also reluctant to spend money on professional advice, including good quality business advice. As a consequence, many muddle through with the result that there is little clarity around who owns what or how, and who is occupying which parcels of land and under what sort of agreement. For instance, it is quite normal to find that a farm is still part of the estate of a family member who died 100 years ago due to a less than thorough approach to probate.
Farm structures are more often than not governed by an individual tax planning approach rather than the profitable running of the business. This creates inflexibility within the business and the tax tail inevitably wags the dog. This approach can also lead to resentment between family members who may or may not be working on the farm leading to particularly destructive litigation.
It is obvious that setting up a business structure that works is within the power of the individuals involved. It is just that they do not choose to exercise that power. Cost is often cited as a reason but my experience, in reality, is that it is the prospect of the difficult conversations that have to be had among the family that stops people addressing these fundamental issues.
It is no surprise that the weather plays a central role in the farming year. It is clear that we are experiencing more extreme weather events (2018 was cold at the start, hot in the middle and dry all the way through). Farmers cannot control weather, all they can do is have emergency plans in place and understand the impact on their business. The trouble is they do neither of these things; the average farmer is fairly fatalistic about the impact of the weather – what will be, will be. Of course, climate change and global weather patterns affect harvests elsewhere with the subsequent impact on world markets affecting all countries including the UK.
Market problems are a significant issue for the modern farmer. World commodity prices are highly volatile and the farming economic cycle is very long (it takes about 18 months to finish a calf for the meat trade). A modern farmer needs to be a good speculator because they are betting on where the market is likely to be when their produce is ready for sale. But, unlike a commodity speculator, the farmer has to see it through; they cannot bale out half way.
There are also political aspects that affect the market. Brexit is of particular concern for the industry at the moment. Currently EU support for farming amounts to about 60% of the industry’s average profit. With EU support disappearing and no guarantee that a future UK government will step into the breach, many farming businesses are likely to experience a black hole in their accounts – and not everyone is fully prepared for the impact.
Other political decisions have significant repercussions for agriculture: labour supply and modern slavery issues, environmental protection, animal health regulations, competition from imports, and the cost of inputs imported from abroad, to name but a few. Suffice it to say, agriculture is likely to be the hardest hit of all industries when we leave the EU and is probably the least prepared and the least aware of the issues coming down the line.
Navigating a farming insolvency
For an insolvency specialist, an appointment in relation to an agricultural or rural land-based business is fraught with difficulty. Chief amongst these will be the engagement of the individuals concerned. They will feel acutely embarrassed; they may well be suffering from mental and/or physical health issues and may be looking at not only losing a farm that has been in the family for generations, but also losing their home. Because of these dual pressures, they may often be economical with how much knowledge of their situation they are prepared to divulge.
There will also be significant issues in understanding who owns what, and how and what assets may be charged or belong to someone else. There may be livestock which need looking after, crops that need harvesting, or cows that need milking two or three times a day.
As a consequence, there is considerable opportunity for things to go horribly wrong for the unwary, or unaware, with considerable potential for liability ascribed to any insolvency professional appointed along with significant reputational damage.
Whilst forms of insolvency and recovery against rural land-based businesses have been at a low level for many years, it is likely that matters later in 2019 and early 2020 will force unprecedented change on the industry. As a result there may well be an increase in farming business casualties. However, the dangers for those involved in this work lies only just below the surface.
Joel Woolf is the only specialist rural recoveries solicitor in England and Wales, advising LPA receivers when they are appointed over farms and estates. Please contact him if you would like further information about how he can help or about farming insolvencies more generally.