It is generally accepted in a capitalist economy that business failure is simply the market’s method of weeding out poorly managed, unprofitable companies. This is probably too simplistic a view as organisations fail for a whole variety of reasons - although poor management or tough trading conditions will exacerbate underlying weaknesses. Sometimes a concatenation of events will conspire to fell even the most soundly run company – and the last two COVID-dominated years bear to witness to that.
Having only rarely troubled insolvency practitioners, the farming sector now finds itself in an unusually delicate situation as industry observers predict a run of farm insolvencies. Although the replacement of BPS payments with environmental subsidies is seen as the chief threat to farm incomes, geopolitics look set to overtake domestic concerns as the full horror of the war in Ukraine starts to unfold. For a sector that operates on a multi-year cycle, factoring in events over which it has no control introduces another serious level of risk to the business of farming.
Risks of operating in a global market
- Falling profitability: Brexit was a defining point in the history of UK agriculture. According to Defra, around a two thirds of British farms relied on EU agricultural subsidies in order to make a profit. Once BPS finally washes through, even those farmers in the most productive areas are predicted to experience a drop in income from £150 - £200 per hectare to £70 per hectare. The figures are likely to be even less attractive in more marginal areas so it is hard to see how casualties will be avoided.
- Market access: Brexit has also ended British farmers’ unfettered access to one of the world’s largest markets on their doorstep (which, of course, works both ways). For all its faults, farmers were operating, more or less, on an equal playing field with everyone working under a similar regulatory regime, with free movement of goods and largely stable prices. Not only is trade with the EU now subject to import and export controls, but the devolved UK governments are at liberty to establish a competitive internal market by, for instance, subsidising Welsh sheep farmers to the disadvantage of their English counterparts.
- Trade deals: Although there has been disquiet expressed over the recently concluded Australian and New Zealand trade deals, the bigger threat to British farming will come from the US and Canada given their greater geographical proximity. Cheaper food produced at lower standards will be attractive to a UK population used to cheap food. The cost of producing food in the UK to higher environmental standards will rise, compromising food supply resilience and forcing producers to find niche markets.
- Labour shortages: The law of unintended consequences has prevailed in the face of tighter immigration controls, leaving farmers without pickers, butchers, abattoir workers and HGV drivers.
- Contracts: Farmers continue to deal with the financial damage caused by COVID-related cancelled contracts, particularly those supplying the hospitality industry which stopped dead in March 2020.
- Fraud: Evidence is emerging of fraudsters using farm businesses as cover for taking out COVID business interruption loans.
- Global supply issues: Global supply issues, particularly around raw materials and energy, were problematic even before Putin’s invasion of Ukraine. They have been feeding into rising prices with obvious knock-on effects on farm inputs: fertiliser costs have tripled in a year and they’re still climbing. And it’s not just inputs: like most other industries, the farming sector has become increasingly reliant on ‘just in time’ supplies; increasing tightness in supply chains means that harvesting schedules can be upended if key machinery components have to be sourced elsewhere.
- Climate change: The climate has always been the ‘silent’ partner in every farming business. As more extreme weather events increase in number and severity, it is becoming increasingly difficult to predict harvest outputs across the world, particularly in countries with marginal agriculture. Farming in temperate countries has never been so critical. On a micro level, individual farmers need to have a Plan B – and possibly a Plan C – to enable them to mitigate weather-related risk as much as possible.
Protecting the farming business
However, all is not lost. By focusing on what is within your control and conducting a thorough review of your balance sheet, you can anticipate and deal with pinch points before they morph into problems:
- Business structure: Running the farm as a business with written agreements in place is critical. For instance, a farming partnership should be governed by a partnership deed that clearly states who owns what and how, and who is occupying which parcels of land, and under what sort of agreement. This knowledge is critical for succession planning as well as ensuring that the business is run for profit. Although effective tax planning for individual partners is important, it shouldn’t be carried out at the expense of the business.
- Environmental agreements: Farmers will be able to sign up to various agreements including biodiversity net gain; woodland carbon guarantees; and other carbon offsetting projects. Ensure that these are properly documented and reviewed, particularly given the length of time they are intended to last.
- Death and divorce: These are perennial issues facing all businesses. Always take the partnership agreement into account when drafting wills to avoid the latter contradicting the former. Most farming disputes arise because of a poorly drafted wills. Likewise, a pre-nuptial agreement, while not romantic, can help to avoid farming business assets being included in a divorce agreement.
- Financial security: Keep debt levels under constant review, and keep an eye on inflation and interest rates. Running and reviewing management accounts every month and interpreting the annual accounts is critical to understanding the health of the business as well as ensuring that the interests of individual partners do not trump those of the business. Although rising land values mean that banks generally look favourably on farms, they won’t lend if the underlying health of the business is questionable.
- Investment: The increasingly technical nature of farming means that more decisions are being driven by data but, unless that data is interpreted correctly, that investment will be wasted. Many investment decisions are being shaped by environmental considerations and sustainability and this is where help from an experienced professional can be invaluable.
The farming industry is in a period of flux. For an industry that operates on long cycles, the uncertain economic and geopolitical landscape is introducing even more variables to the planning process. Although many farmers are reluctant to spend on professional advice, there are several grant options available, such as the Farm Resilience Fund, and this is an ideal moment to take full advantage. Most land agents and agricultural consultants will have access to the latest information – and when it comes to reviewing business structures and associated agreements, you know where to come!