2020-08-14
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The long-term effect of the Covid-19 lockdown on the agriculture sector

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Posted by Joel Woolf on 22 April 2020

Joel Woolf - Agriculture and Farming Lawyer
Joel Woolf Partner

There are lots of quotes doing the rounds at the moment.  A particular favourite is one attributed to Lenin: “There are decades when nothing happens and then there are weeks when decades happen”.  This feels particularly apposite at the moment while we experience a strange juxtaposition of everything but nothing happening.

As a consequence, many businesses have found themselves in uncharted waters.  Those in the food chain may have thought themselves reasonably isolated but the lockdown has effectively bought the food service sector to an abrupt halt. 

The current lockdown is causing significant issues for farmers, but those issues are far from straight forward and the impacts are being felt unevenly across the agriculture sector.  That unevenness looks set to continue as we move through the year.  To understand this, it is best to look at some individual sectors within agriculture.

Dairy

It might seem odd, but the dairy sector is seeing the first impacts particularly at a time when there is heightened retail demand.  Processors such as Medina and Freshways, which are highly exposed to the food service industry, have seen demand for their products fall significantly after pubs, cafés restaurants, hotels and other outlets were closed in March.  As a consequence, there have been significant and sudden cuts to farmgate milk prices, reductions in collections and sudden changes to payment terms, all of which have forced some farmers to throw away produce.

Even those processors more exposed to the retail and supermarket sector are cutting demand.  This all comes as the spring milk flush is coming through and milk production is at its highest.  It can be expected that some dairy farmers will find that their cash flow significantly reduced and, without support, many may be unable to afford inputs such as animal feed, raising the prospect of having to slaughter animals if they can.  The ever-present threat of bTB, rising input prices, input supply chain disruption and labour issues are likely to add up quickly and may very well overwhelm a business.

Horticulture/fruit

The biggest issue facing this part of the sector is labour shortage.  Some 70,000 seasonal workers are needed in the UK.  This may mean that produce is unpicked and left to rot in the fields.  There has been a drive to get furloughed staff out to farms but logistically this is difficult and while it is understood that an estimated 35,000 people from around Britain applied for picking jobs, the majority of them either did not complete the application process or subsequently rejected those jobs when the Chancellor announced his furlough scheme. 

Last week the first 150 people from Romania landed at Stansted and, after being checked for Covid-19, were transported to an East Anglian farm for the lettuce-picking season. The plane was chartered by G Growers, a farming cooperative that needs approximately 1,250 people to harvest salad crops for supermarkets. More flights are planned.

The work is not only hard and tends to be for long hours, but also needs a surprisingly high level of skill in order to minimise wastage.  The average furloughed worker may not be as appropriate as many think and there has been an historical lack of interest from British people.   As spring progresses some crops might be lost.  Take asparagus.  This can generate a good return but needs skilled field workers to pick it, it has a short season and must be delivered to the shelf quickly to avoid spoiling.  As the year progresses, we may also see greater issues with the supply chain both to and from the farm.  Some crops need to be sent to market or the processor quickly.  Peas for instance are generally frozen within two hours of harvesting.  This requires large numbers of drivers for harvesters and for lorries to transport peas to the freezing facility which might not be available.

Given that farmers rely heavily on migrant workers (from EU and non-EU countries) for harvesting crops, it is very likely that large numbers of British workers will be required if crops are going to be saved. However, it remains to be seen whether they will subject themselves to an entire summer of hard labour away from family and friends.

Cereals

Cereals are likely to be the most insulated save for the significant challenges the very wet 2019/2020 winter has caused.  Plantings are well down and many are late, which means yields will be reduced.  Although many farms are efficient, there can still be a demand for extra staff at harvest which may not be possible.  The biggest impact on this sector will be what happens on the global market.  If commodities cannot be transported because ships’ crews are either not available or are in the wrong place and cannot travel, then this will cause interruption.  Owing to the nature of cereal farms’ cashflow cycle it is likely that significant casualties will not occur until next year.

The flour mills, relying on wheat supplies, have been taken by surprise by the boom in retail sales of flour. Supermarket flour sales rose considerably because people with more time on their hands are baking more resulting in supermarket shelves being empty of flour although mills are running 24 hours a day. Because most flour is packed in wholesale weights there is insufficient capacity on packing lines for retail sized bags which is why they are not able resupply supermarkets fast enough.  Packing lines cannot easily be converted to the small 1.5kg bags that supermarkets want. Existing packing lines that are running 24 hours a day are not able to keep up with demand, providing an opportunity for wholesalers and bakeries who can sell bags of flour direct to the public. It has been suggested that some supermarkets may start selling larger weights or perhaps we might see zero packaging concepts return with people bringing their own container to the store to be filled, although hygiene of such offerings will be a key concern.

Red meat

Beef and lamb producers were already staring into a Brexit abyss.  Now they are facing collapsing demand, because the food service industry has stalled, there is increasing flexitarianism and veganism, and processors seeking the cheapest product they can.  ADP recently imported 400 tonnes of Polish beef simply because it was cheaper than the UK and Irish equivalent.  The markets are closed or finding trading difficult, the animals coming to be finished now were born up to16 months ago (beef), and we have just come though the lambing season.  By the end of the summer it is likely that the position will tighten further and many businesses in this sector will have significant cashflow problems. The closure of the leisure industry has meant that there is a lot of excess product in the system and retail shopping trends have changed over the years away from joints and mince to ready meals.

Diversification

Whether or not a diversified business is having a good or a bad time will depend on what they have diversified into.  Those that rely on holiday cottages, cafés and visitor attractions will have found that their cashflow has literally fallen off a cliff, especially as the Easter holiday is a key time for leisure activities.  Those with farm shops will, as long as they can rise to the challenge of maintaining social distancing, be seeing exceptional trading, but how long that will last will depend on the robustness of their own supply chain.

Tenanted sector

There is uncertainty as to what is going to happen to those farms which are tenanted particularly those which are tenancies under the Agricultural Holdings Act 1986.  Whilst forfeiture is for the time being suspended, any rent unpaid remains a debt which is recoverable.  Some landlords may use the current situation as an opportunity to bring old tenancies to an end by using insolvency.  This may cause significant difficulties especially where there is a farmhouse involved. 

Agriculture was ever a complex industry.  However too many businesses have relied on European and Government subsidies to maintain their profit (or at least make their loss smaller) and there is generally very little in the way of cash reserves.  Brexit will have a disproportionate affect on agriculture and with Covid-19 added to the mix, this may be too much for many businesses to endure.  Some will not qualify for the various schemes that are available and others will just not take them up.

Many farming businesses have relied on the high asset value of farm land to get them out of trouble.  With the economy effectively shut down this does not appear to be a viable rescue method for the time being and a business may not be able to survive long enough once lockdown is lifted to make a sale happen, even if there are buyers out there.

For IPs who become involved in farming businesses there are myriad issues to trip up the unwary, ranging from animal husbandry to the mental health issues of the farmer.  Negotiating these issues needs careful consideration coupled with practical advice.

Tags: Agriculture

About the author

Joel Woolf

Partner

Joel specialises in strategic advice to rural business clients.

Joel Woolf

Joel specialises in strategic advice to rural business clients.

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