Britain’s chaotic post-Brexit agricultural revolution

The government is making huge changes to how farm subsidies operate after Brexit. Farmers say that the details of what will replace them are still far too vague. Cris Sholto Heaton reports

Minister for Agriculture George Eustice
Farmers don’t think that environment secretary George Eustice is really backing them
(Image credit: © Mike Kemp/In Pictures via Getty Images Images)

What’s changing for farmers?

The entire system of agricultural subsidies on which most farms in Britain depend to remain in business. At the end of November, the Department for Environment, Food & Rural Affairs (Defra) announced plans to reduce the main form of subsidies in England – known as basic payments – by a minimum of 50% over the next four years. The larger the basic payment that a farm currently receives, the bigger the cut will be: the 50% figure applies to payments below £30,000, while anything between £30,000 and £50,000 will be trimmed by 55%, anything between £50,000 and £150,000 by 65% and anything above that by 70%. These cuts will be phased in: payments next year will be between 5% and 25% lower. Scotland, Wales and Northern Ireland are developing their own policies, which will mean that payments fall by different amounts in different regions.

Will farm incomes fall that much?

Hopefully not. Total subsidies will be kept at around the current level of £2.8bn per year for the duration of the current parliament (which will end in 2024, if this government lasts a full term). However, a growing proportion of those subsidies will be delivered through new transitional schemes rather than basic payments – and the details of those transitional schemes have not yet been published (or even developed). This means that many farmers are understandably rather concerned about how they can plan to survive the next four years, let alone prepare for longer-term changes to the subsidy system when basic payments are replaced entirely, which is scheduled to happen after 2027.

Is this related to Brexit?

Yes, although it involves deliberate policy decisions that go beyond leaving the European Union. Until last year, the UK was part of the EU’s common agricultural policy (CAP). This began in 1962 as a set of schemes that aimed to ensure higher food production (food security was a top priority in post-war Europe), improve productivity and make farm incomes more stable. In short, it paid farmers to grow certain products and curbed the supply of others in order to avoid gluts. Over time, price controls and quotas fell out of favour, due to the distortions and restrictions they inevitably bring. The CAP evolved into a new approach – initially called the single payment scheme or single farm payment and later the basic payment scheme – under which farmers are paid based on the amount of land they own.

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So the subsidies had to change?

Not necessarily. The EU budget sets aside money for the CAP (€58.12bn in 2020 – 34.5% of the total budget), of which most is for direct payments (€40.6bn in 2020). This is distributed between countries (in a way that reflects a combination of past spending and changes due to reforms and EU enlargement rather than policy objectives), who then split their share among their own farmers (so payments per hectare vary between countries). The UK left the CAP on 31 January 2020, but continued the same payments for the first year. It could have carried on in the same way indefinitely, paying farmers a flat rate (which is £233 per hectare in 2020). However, it had already said that it would be introducing a new subsidy system that operates very differently to the CAP.

How will this new system work?

The details are not clear, but the core in England will be the new environmental land management (ELM) scheme. Subsidies will focus on activities with environmental benefits. ELM will initially base payments on income forgone by farmers who set aside land for planting hedges, creating natural flood-prevention features or restoring woodland. This starts in 2024 – hence the transitional arrangements until it’s ready. ELM will then run alongside basic payments until they are eliminated in 2028. Ultimately, ELM will reward farmers for positive environmental outcomes rather than just pay for lost income, claimed Defra secretary George Eustice last month – but details are non-existent. This is for England only; other parts of the UK will run their own schemes.

How do farmers feel about this?

Worried, even though many think the CAP is poorly designed because it means that the largest landowners get the most. EU data shows that 1.9% of farms got €12.8bn in direct payments in 2018 (30.8% of the total), while 75.2% of farms got less than €5,000 each (totalling 15.7% of the amount paid out). Direct payments under the CAP have often been blamed for inflating land prices in the last couple of decades, beyond what can be justified by agricultural productivity – add in the fact that farmland is exempt from inheritance tax and you can see why deep-pocketed investors have been keen to build up large estates. The problem is that farmers don’t know how ELM will work, what will fill the gap in the meantime or if the result will be an improvement. Some suspect that large farms will find it easier than small ones to benefit from environmental subsidies.

How should we reform subsidies?

Most countries have some agricultural subsidies, but New Zealand eliminated all of these in the 1980s. Advocates of doing the same after Brexit say that farming there has become more profitable and productive (and no longer relies on changes in government policy). Critics argue that New Zealand has lower population density, a different climate and weaker environmental standards, and offers a poor blueprint for other countries. Either way, this is not the path the UK has taken, but its new focus on the environment is a very radical change and New Zealand’s experience carries a lesson. The changes there caused great distress (including more than 50 suicides), and many believe the transition should have been smoother. Britain’s farmers need clarity and time to prepare, but they aren’t getting it from Defra.

Cris Sholto Heaton

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.