Brexit-proofing the farming business
The Basic Payment makes up between 90 per cent and 180 per cent of bottom line profit on mainly arable farms (source: Churchgates Farm Business Survey 2016, Top 25 per cent vs Average).
For the top 25 per cent of businesses that might still make a profit without BPS, the quantum of the profit is generally way below a sustainable return to provide for capital reinvestment and a living for the proprietor.
BPS is only guaranteed until the 2019 claim year. Thereafter the future is uncertain. While agriculture is by no means the only subsidised industry in the UK, politically the case for funding agriculture is probably quite weak.
Berrys has a three point plan to survive beyond BPS:
1. Ensure maximum technical and cost efficiency – there remains a wide disparity of costs and performance on farm, with the better businesses achieving better gross margins and lower labour and machinery costs.
2. Utilising all existing farm assets to the full, engaging in appropriate diversification and added value opportunities.
3. Reviewing the deployment of the business’s capital and seeking to increase return through diversification of investment. With land typically earning 0.5 per cent to one per cent return on capital the profits of a business can be substantially increased by investing in higher return assets like commercial property at, say, eight per cent. This can take various forms:
• Creating capital windfalls from planning opportunities and reinvesting the proceeds into commercial property.
• Using surplus funds/equity to invest in commercial property on a fully or semi geared basis (commercial property returning in excess of 8.5 per cent is cashflow neutral if debt funded over 20 years at 3.5 per cent after allowing for purchase costs, management fees, landlords costs and tax).
• Selling outlying land or property assets in order to redeploy the capital for greater return. For example, 60 acres of land might earn an annual income of £5,000 but the same capital invested into commercial property might earn £40,000. Thus a 500 acre business could do away with its reliance on BPS by becoming a 440 acre business with a separate managed commercial property.
Clearly this sort of thinking has additional considerations, especially tax, succession, business objectives, and so on and is potentially a radical way to restructure a farm business. However, to create sustainable businesses for the future the one key underutilised asset on many farms is the strength of the balance sheet and the one key weakness is the low return on capital of that balance sheet.
Matthew Anwyl is managing partner at Berrys
