Our insolvency & restructuring team sits within our Rural Sector team, working to warn farmers and encourage them to seek advice on potential cash-flow issues relating to the change in their grants and subsidies before restructuring or changing their businesses.
Launched in 1962, the EU’s Common Agricultural Policy (CAP) is a partnership between agriculture and society, and between Europe and its farmers.
It aims to:
- support farmers and improve agricultural productivity, so that consumers have a stable supply of affordable food;
- ensure that EU farmers can make a reasonable living;
- help tackle climate change and promote the sustainable management of natural resources;
- maintain rural areas and landscapes across the EU; and
- keep the rural economy alive, promoting jobs in farming and associated sectors.
CAP is a common policy across all member states of the EU and is managed and funded by the resources of the EU’s budget.
The overall EU budget for 2018 was ‚Ç¨160.1 billion (£142.5bn), with ‚Ç¨58.8 billion (£52.4bn) of this being used to support farmers. CAP payments are managed at the national level by each EU member state. Approximately ‚Ç¨3 billion (£2.67bn) per year of this is paid directly to UK farmers. A further ‚Ç¨800 million (£712m) is paid to farmers undertaking environmental projects.
The CAP payments accounted for 61% of the average annual farm profit from 2014 to 2017, according to Defra statistics, although that level varies widely depending on the type of farm. Statistics suggest farms grazing livestock rely on subsidies for more than 90% of profits.
At the time of writing this article, we do not know if the UK will leave the EU with an agreement in place or not. Farmers currently receiving support will continue to receive an equivalent level of support from the UK government until the end of 2020.
However, going forward, any new farm policy will be set within the UK budget and will be competing alongside other sectors, such as education, for the same money. It is therefore possible that the level of support will be cut, with some believing support to agriculture may be reduced by 50%.
At the end of 2018, the Government introduced the Agriculture Bill, with new legislation in the form of an Agriculture Act proposed to come into force after the UK leaves the EU. The bill is currently undergoing various amendments in Parliament. The legislation is intended to phase out the area-based payments, and introduce grants and subsidies linked to “public good” – mainly environmental benefits delivered by the farmer, such as reducing ammonia and emissions, planting trees, and maintaining hedgerows as wildlife habitats. The Government’s rationale is to reward farmers who protect the environment and leave the country in a greener and cleaner state.
The Bill pledges to match the sums currently being paid via CAP in both 2019 and 2020. However, cuts will be introduced from 2021 and continue until 2027 when the scheme will cease. The reductions will vary, so – by way of example – annual payments of up to £30,000 will be cut by 5% in the first year of the transition, while payments of £150,000 or more will fall by 25%.
Potential impact on the farming sector
The payments under a new Agricultural Act will constitute a radically different system from the CAP system. Farmers are likely to have to adapt their business model in order to continue trading successfully. To become more environmentally friendly and thereby benefit from the new grants will probably require significant capital outlay. Farmers may wish to consider selling surplus land no longer in use, which previously would have gained them increased subsidies, in order to finance these improvements. They will need to weigh up whether the expense of changing their farms to qualify for the new grants will be cost-effective in the long term.
The new system, combined with projected dramatic reductions in farm income, may lead to fewer, larger farms over the next few years, as these currently benefit from the enhanced payments but will suffer in terms of larger initial funding cuts from 2021. However, farms with between 200 and 400 acres appear most at risk, as they may not have the cash to make the changes needed both to qualify for the new grants and weather the loss of income. Although smaller units are likely to be hit hardest, we anticipate that the changes will affect many enterprises to a greater or lesser degree, as few have large sums available, in the required timescale, to fund the environmental changes necessary for grants.
There will also be special considerations for landlords and tenants of tenanted farms. The TFA has predicted that a number of tenanted farms which rely heavily on subsidies will not survive financially. Landlords in such situations will need specialist advice, as their ability to regain possession on insolvency differs between fixed-term and periodic Agricultural Holdings Act tenancies, and also with Farm Business Tenancies. The first will be governed by the Case F notice to quit procedure, and the second and third by the wording of forfeiture clauses in the Agreement.
However, these changes may also bring opportunity. Many have noted that the Bill will ensure British farmers no longer have to contend with the rules of CAP, which some say are too stringent, are unfit for the modern-day challenges of food production, and do nothing to recognise and reward those seeking to protect the environment. There will be new opportunities for progressive farmers and those passionate about the environment who previously may have struggled to incorporate changes in their business and make a profit.
With all this uncertainty, farmers should seek advice before they attempt any business restructure or large investment in environmentally friendly projects, and should involve their bank at an early stage of the discussion.
Our insolvency & restructuring team offers a specialist and bespoke service to assist anyone working in agriculture who may need to consider changing their business models, or who is looking to exit completely. Such advice should be sought in any restructuring scenario, even when insolvency is not an issue, due to other complexities such as tax and the potential impact on employees of a change in structure. Restructuring may also require estate-planning experts, especially where the business is run through a family trust or partnership.