Agricultural & Rural sector insight
Having operated in the Agricultural & Rural sector for many years, MHA has more than 1,000 clients ranging from family farms, operating in the livestock, dairy, arable and top fruit sectors, through to large commercial Agri businesses. We also advise a variety of farming sector suppliers - particularly manufacturers and providers of agri-chemicals and plant & machinery - and act for a number of rural related businesses within the leisure & tourism and property sectors. Our continued membership and involvement with organisations such as the CLA and the Institute of Agricultural Management (IAgrM) is important and ensures we remain up-to-date and involved with current agricultural issues and directives.
The following is an extract from Duncan Cochrane-Dyet's article published in the Rural's PLC The voice of Rural Business in Kent Annual Report 2017.
We live in interesting times. If there is one thing that can be certain, it is that the next few years will see significant change – politically, financially, and whatever else you care to mention.
As accountants, much of the advisory work which we do for agricultural clients revolves around risk. We identify risk, and mitigate it by control systems, insurance, Will planning, trusts, pensions, partnership and shareholder deeds and even pre-nuptial agreements. On a strategic level investment risk is reduced by portfolio theory, hedging and professional investment management. Basically - if there is a risk, accountants will by instinct identify ways of reducing it.
Farmers have an entire industry which operates in an environment full of risk – weather, pricing, currency movements, disease, regulation and indeed the physical risk of dealing with unpredictable large animals and dangerous machinery in an outdoors and often isolated environment. Some of the risks can be reduced by (say) hedging, preventative sprays and medication, forward sales and insurance, and so on. But climate and world forces will always be unpredictable.
Over the last couple of years a new level of structural risk has, of course, been added to the known day to day uncertainties. The Brexit vote has already sparked price volatility, fuelled largely by currency fluctuations. At present these movements are largely positive in terms of sales income, but the cost of imported raw materials and machinery has risen in a way which had not been anticipated and for foreign workers, currency movements have made the UK less attractive. Post Brexit we are likely to see further price changes, particularly in the livestock sectors as new tariffs or production quotas begin to bite. Amongst other uncertainties here is that of timing, so we have little firm idea of what farm prices might look like in future or when they might change. There is also the impact of immigration controls which may reduce the availability of labour.
Longer term, farm subsidies, which make up a huge proportion of farm profitability, are up for discussion. In recent years the total national agricultural subsidy has been very close to total farm profit, but in future subsidy levels will be decided by a largely urban-facing UK government which is unlikely to have the same priorities as the Common Agricultural Policy. In terms of risk, we have an unknown future for the biggest source of net income on almost every UK farm.
Finally, we have political risk. Politics is something which many accountants avoid discussing with their clients, but in the current climate of a tottering government and a renascent opposition with radical tax plans it would be wise to do so. Both the Labour party and the Liberal Democrats have, for example, expressed a desire to increase the take from Inheritance Tax and the 2017 Labour manifesto suggests tax increases in almost every area. As by-elections bite and internal wrangling continue it is by no means certain that the current Government will run its full term – or even make it past the Brexit negotiations.
Some of these structural risks may not be capable of mitigation in the usual way, but they should certainly be considered and discussed in the limited window which remains to us. Initiating restructuring and succession now, with an eye on the future, may be the best advice an accountant could ever give.
Change can of course be positive. With the Basic Payment monies coming in somewhat higher than previously, due to the favourable exchange rate, there is more positive news on the Stewardship scheme. Preliminary details were released on the plans announced by Michael Gove to revitalise the Countryside Stewardship schemes.
The new arrangements will be much easier to access and strongly resemble the old Entry Level Scheme (ELS). Applicants can “mix and match” from a range of the most popular stewardship options from the four categories, of arable, grassland, mixed and upland farms. There are also improvements, more money and easier application for the “hedges and boundaries” option. The options include, for example, AB8 for overwintered stubble, which can help with blackgrass control and a range of buffering, field margin and hedgerow management plans, all of which will improve the farmed environment without necessarily reducing production. Most importantly, and unlike the previous Stewardship schemes, the new offers will no longer be subject to competitive “point scoring “, so any eligible farmer can join the scheme.
We believe that the new arrangements will prove very popular, providing real environmental benefits without the bureaucracy which caused the disappointing take up of the previous Stewardship scheme.
If this is indicative of the government’s future agricultural policy post Brexit, it is definitely a step in the right direction.
All of this highlights the importance of effective planning for your business. The events around us mean that forecasts which looked sensible six months ago may now need revision. So what can you do on the next wet day to increase your profitability?
Spruce up the cash flow forecast with new acreages, probably lower yields and more up to date prices. If financial pressure points emerge consider how they can be eased or whether a call to the bank is needed. If so, better sooner than later. Once the 2018/19 cash flow is done, you can extend it into a medium-term business plan to cover the next five or ten years. We can be fairly sure that there will be a change in the subsidy regime over that period so “stress test” the model to see how it impacts on your business. Slot in capital expenditure. See what happens when variables such as input or output prices change. What is the breakeven price for your key outputs? Once the picture starts to emerge consider what you can do to improve it. Is it time to look at succession and build that into your strategy? If existing tax reliefs are withdrawn and inheritance tax is due on succession, can it be funded?
Even though exact results can rarely be predicted, the discipline of planning and evaluating outcomes is a valuable one and will usually at least remove the element of surprise from next year’s accounts meeting. It might also make all the difference between the farm surviving into the next generation or not.
Before moving into action on the succession plans it is probably worth checking your title deeds. Who owns what? Is that ownership reflected in the farm accounts? Where is the borrowing secured? It is not unusual for this exercise to throw up surprises. But it is much easier to sort them out whilst everyone is alive (and still talking to each other). There is nothing like a death, divorce or partnership dispute to make land ownership problematic.