Below is an extract from the National Chairman of the Tenant Farmers' Association 34th Annual General Meeting.
"2015 was an exceptionally demanding year for many within our industry. Before the year BEGAN we had already experienced a downturn in prices paid to dairy farmers, a momentum which continued unabated throughout 2015.
Early promises of an autumn improvement came to nothing and as we finished the year there was no sign of a light at the end of the tunnel, just more tunnel. The TFA played a pivotal role in attempting to bring together the industry in a concerted effort to put pressure on Government, retailers and processors to do all they could to support dairy farmers.
Although it took a while to get off the ground and has experienced a great deal of fragility, it was my call for the industry to come together at the 2015 NFU conference that led to the creation of the current dairy industry working group.
Given the huge impact on livelihoods and the future of farm families, it was no surprise that the frustration within the dairy farming community was expressed through well-organised and targeted protests led by Farmers for Action.
Although there were some who were critical of these actions, the TFA was more than happy to provide its support both because it gave producers a means to express their anger, upset and frustration and the protests opened the door to negotiations with retailers and processors about how they could better support farmers. I am convinced that we would not have had the access to these organisations without the strength of feeling expressed amongst those protesting.
Starting with Morrisons we attended meetings with all the major retailers and a good number of the major processors, to argue that more of the retailer return should be passed down the supply chain to support the farming community. This was easier said than done and we had to be careful not to overstep the line into illegal, anti-competitive practices but I do believe that much was achieved through these negotiations.
Although the market continued to deteriorate throughout 2015, the impact on dairy farmers would have been much worse had it not been for the pressure which was brought to bear on retailers and processors to pay more for milk to farmers than they had been hitherto, although I appreciate that this may be seen as little comfort in the continuing crisis within which we find ourselves.
The TFA was also pleased to share a platform with Farmers for Action at a number of farmer meetings held around the country. Hundreds of people attended each of these meetings and the one consistent theme was that the industry should work together to achieve a breakthrough for dairy farmers. Having called for the industry to work together, we had to play a key role in ensuring that we continued to work together. This was by no means a straightforward task and like the elegant swan gliding across the top of the water, from time to time, there had to be some frantic kicking underneath and unseen!
Of course, it wasn’t only the dairy industry which saw a downturn in its fortunes. The contagion sadly crept into nearly every sector of agriculture. Whilst a number of arable farmers were able to recover some ground by achieving better than average yields, there were many others, particularly to the West and North of the country, who suffered both in terms of yield and price. Returns from grazing and intensive livestock also took a battering throughout the year, not helped by the constant change in specifications from retailers and other purchasers. Only poultry and egg producers were able to hold their own principally due to lower than average feed costs.
So what are the solutions? Sadly, there is no silver bullet but there are a range of interventions that would make a significant difference.
Grocery sector
I start with looking at achieving best practice within the groceries sector. The TFA welcomed the establishment of the Groceries Code Adjudicator. We have long championed the need for an ombudsman with teeth to ensure that retailers act in ways which are sustainable both in terms of the impact on the agricultural industry and the future needs and requirements of British consumers.
Indeed, in times past the TFA was a lone voice amongst the major farming organisations asking for the establishment of this role, with other organisations pinning their hopes on voluntary codes of practice. The recent report of the Adjudicator into the dark arts employed by Tesco is a vindication of our consistent lobbying.
As much as we support the role of the Adjudicator we also believe that the office requires sufficient powers to deal with unfair and unsustainable practices within the supply chain. The work of the Adjudicator in relation to Tesco has merely scratched the surface of the issues that need to be addressed. The role of the Adjudicator would be significantly enhanced if it had powers to carry out short notice, own initiative investigations into matters of compliance with the Groceries Code.
Currently the Adjudicator only has the power to investigate on the basis of complaints. The TFA believes that the Adjudicator should be able to knock on any retailer’s door and ask for access to its books on any product line. In that way retailers would be under constant pressure to ensure compliance with the statutory code.
Secondly, the Adjudicator should have the ability to consider impacts all the way through the supply chain. Currently the Adjudicator can only look at direct supply contracts which means that those circumstances where products pass through a processor are off-limits. Whilst the TFA appreciates that widening the scope in this way could create a very large remit for the Adjudicator, the powers should exist to allow the Adjudicator to go down this route as necessary.
Thirdly, whilst not setting price, the TFA does believe that the Adjudicator has a role in assisting with price transparency in the marketplace by publishing information about producer, processor and retailer margins. Such information could be incredibly powerful in assisting producers and producer organisations in negotiating fairer and more sustainable contractual terms than exist currently.
Public procurement
Another area which needs to be carefully considered is public procurement. Correctly, the industry has been critical of the public sector for failing to support domestic producers in the procurement of food for institutions such as schools, hospitals, prisons and military establishments. For too long it was claimed that specifying British product was too difficult due to European rules and fails to comply with the need to achieve “best value” for taxpayers money.
Both of these objections were dealt a fatal blow by publication over a year ago of the Bonfield report, commissioned by the government, which concluded that public bodies could procure more from British sources if it used a “balanced scorecard” approach within public procurement frameworks. This would allow public bodies to select best value not only on price but also in relation to animal welfare, environmental, rural socio-economic and other important criteria.
The sad thing is that despite this open door for public bodies to support domestic producers, little progress has been made. The TFA has been responsible in challenging Government at the highest level to ensure that the principles set out in this report are indeed put into practice.
A vital piece of work needs to be done on looking at achieving greater penetration of domestic products in our own domestic market. Those countries which have achieved most through exporting have first achieved a significant hold over their domestic markets. Therefore, in my view, import substitution must be a key driver for our industry. If we could only achieve this in relation to cheese it would utilise an additional 1 billion litres of domestically produced milk each year and it seems to me that that is a prize worth having.
Of course, we need to ensure that we bring our incredibly supportive domestic consumers with us on this journey. However, I have no doubt that we have their support already. All throughout the current crisis we have received positive endorsement and practical support from our consumers. One piece of evidence for this can be found in looking at the response to “Morrisons Milk for Farmers”. Much has been said and written already about this initiative and the veracity of the claims it makes. Indeed the TFA itself was sceptical of the motivation of Morrisons in developing this initiative.
However, what is remarkable, behind all of the rhetoric and debate, is the fact that a significant number of Morrisons customers have been willing to walk into a Morrisons store and look at two identical, 4 pint cartons of milk sitting side by side on a supermarket shelf and select the one which says that 23p of the product price would be passed to farmers. To me this shows that consumers want to support British products and need only to be given adequate information and support at the point of sale to make a rational choice.
It is for this reason that we need to see a greater degree of expenditure on promotion. As part of that push we have been challenging AHDB on how it spends its annual budget of £65 million largely made up of money taken from domestic producers. It would appear that AHDB is slowly getting the message but there is a long way to go in getting to where we need to be.
More controversially, the TFA believes that we need to be reopening the debate about supply control within the context of our European market. The drive to open markets over past decades has meant that we have lost control of our production base causing us to be unable to do what other businesses do when prices fall - reduce supply.
Now that the starting gun on the next round of CAP reform has been fired with the first discussions occurring on the financial framework from 2020, the TFA believes that a key element of discussions must be how to build in production controls to deal with the market imbalances that we have seen over past months.
Basic Payment Scheme
Given the severe economic difficulties within the industry, many were hoping for an early payment of the new Basic Payment Scheme to ease cash flow difficulties and help business resilience - sadly this was not to be. In my annual report from last year I was predicting “carnage” as a result of the Government’s insistence on a digital by default approach to BPS which clearly wasn’t working even for those who felt comfortable working within a digital environment.
With mounting complaints, frustration and angst the TFA approached the Chief Executive of the RPA in mid-February to ask for an urgent meeting between senior industry representatives, the RPA and DEFRA to resolve the issues. This led to the creation, by the RPA, of a senior stakeholders group which held its first meeting in Reading on 04 March meeting weekly through the remainder of the spring and early summer and then fortnightly into the autumn. What became clear, very quickly, was that the RPA was not the master of its own destiny.
Rather than learning the lessons of the debacle of 2005 and ensuring that the RPA was in the driving seat for the development of the new system, responsibility was being shared between the RPA, DEFRA and the Government’s Digital Service with DEFRA the first among equals. In fact, DEFRA did not attend the first meeting of the senior stakeholders group and it was only after insistence from the TFA that a DEFRA representative attended thereafter. The DEFRA line was clear – there was no Plan B, the digital system had to work.
The industry line was clear we needed a Plan B – the digital system was never going to work on time. Happily, behind-the-scenes, the RPA had the same view as the industry and by mid-March, whilst DEFRA Ministers were still on public platforms expressing the view that there would be no Plan B, DEFRA was forced to accept the advice of the RPA that the digital system was not going to work and a Plan B was required.
Eventually, on 19 March of last year the Government announced its Plan B – just under two months before the closing date for submission of applications. Happily the UK secured an extension to that deadline which enabled the RPA, in a matter of weeks, to build from scratch a system which had not been envisaged before that point. From the TFAs perspective the RPA did a pretty good job in ensuring that everyone who wanted to was able to submit an application on time.
Much has been said about the delays to processing claims and making payments but again, against a very difficult operating environment, the RPA has delivered what it said it would be able to deliver which was the majority of claims paid by the end of December and the vast majority by the end of January. Of course there is debate about whether just over 75% of claims constitutes a vast majority and there are also concerns about individuals who appear to have been underpaid. However, given where we were a year ago and the carnage that was predicted, we believe the RPA should be given credit for what it has been able to achieve.
Of course, this is of no comfort to those who have yet to receive a payment and for those it is all the more desperate given the economic circumstances I have referred to. We are continuing to support and challenge the RPA to get the remaining payments out as soon as possible. Current indications are that nearly everyone should have been paid by the end of April.
Having now been put firmly in the driving seat, the RPA has a major job of work to do for 2016. The TFA is pleased that the RPA has announced that there will be a multi-channel approach to making applications so people will not be required to use the digital environment. This will help ensure a better performance for 2016 as this can be designed from the start rather than put together at the last minute. However, we will be challenging the RPA to ensure that it delivers a better overall performance in 2016/17 than it has been able to achieve in 2015/16.
The second pillar of the CAP has also not escaped without problem. The launch, by Natural England of Countryside Stewardship has been nothing short of a disaster. With approximately 11,000 individuals with expiring Entry Level Scheme agreements and potentially eligible to apply for the new mid-tier scheme under Countryside Stewardship, to have attracted less than 2500 applicants (not all of whom will be accepting schemes where offered) cannot be seen as anything other than a failure.
The causes of this appear to be a combination of too restrictive a list of options in an environment of overregulation (particularly in relation to record keeping and auditing) and payments which barely cover the income foregone for carrying out the activities. The TFA is in active engagement with Natural England to see how matters can be improved for the coming campaign but progress is painfully slow.
So with the backdrop of pressure on incomes, late BPS payments and difficulties with Stewardship, one would have hoped that we would have seen this feed into lower rents at review in 2015. Sadly this has proved not to be the case. Many landlords’ agents have been taking an aggressive stance to ward off calls from tenants for rent reductions so that in most cases rents have largely remained static although in some cases there have been increases but mainly for those farms where rents have not been reviewed for a number of years.
Farm Business Tenancies
On Farm Business Tenancies the TFA has been disappointed to see evidence of continuing high rents being bid, mainly by owner occupiers who simply don’t understand the impact they are having on their own businesses and others by offering rents at unsustainable levels. Happily there are fewer of them than have been in evidence in previous years but there are still too many.
It has been pleasing to hear that in many existing agreements landlords and tenants have been able to come to amicable arrangements on either rent reductions or abatements outside the formal framework but it is the headline grabbing tender rents which are used in situations where relationships between the landlords and tenants are more commercial.
Many tenants are worried about the costs involved in conducting a rent review. With a fully argued arbitration involving costs for all parties in excess of £40,000, this is not surprising. The TFA’s insurance which would cover the cost of going to arbitration against an unreasonable demand from a landlord does help but it is not a panacea.
It was hoped that the new rules which allow expert determination to be used within disputes under the Agricultural Holdings Act 1986 would have assisted in reducing the costs involved in rent review disputes, but sadly the way in which this has been implemented by the Deregulation Act 2015 has rendered the expert determination provisions impotent in relation to rent reviews. The TFA is challenging DEFRA to bring forward the necessary changes in legislation to allow expert determination to become a practical reality for rent reviews in the future.
The TFA has also called into question the tactics and modus operandi of some landlords agents who, in some instances, have been operating like dodgy used-car salesman. When dealing with people’s businesses, homes and family lives we need to see landlords’ agents taking a much more sensitive approach, still within the bounds of the commercial realities involved, but without the aggression, bullying and scare tactics that we see too often.
Of course, I do not want to give the impression that all landlords agents are of this ilk. There are many within the profession who live up to the motto of the CAAV to “do what’s right, come what may” but there are those who are damaging the reputation of those who seek to do the right thing. Whilst the TFA will continue to uncover bad practice we would ask those landlords’ agents who display good practice to ensure that their peers are encouraged and challenged to act with the same diligence.
As we head towards Lady Day rent reviews, the important thing is that tenants keep up the pressure. In the current climate, I would urge all farm tenants to consider serving rent review notices to keep options open for next year even as negotiations continue to agree rents for this year. The more notices served by tenants the greater momentum there will be for rents to fall.
From personal experience I am aware that rent reviews can be an incredibly stressful time for farm tenants and I therefore urge all landlords to ensure that their agents are not acting flippantly, aggressively or unreasonably. Sensible settlements can be reached when both parties are prepared to negotiate from a reasonable basis.
FBT10+ campaign
Of course a major focus for the TFA in 2015 was the FBT10+ campaign. In an era which saw the deregulation of everything from the London Stock Exchange to local bus services came the Agricultural Tenancies Act 1995 which ushered in Farm Business Tenancies (FBTs) and marked the most comprehensive deregulation of the agricultural let sector ever.
The free-market ethos which dominated political thinking at the time considered that the almost complete freedom of contract offered by the new legislation was the best way to ensure the most efficient outcomes for UK agriculture. Specifically, there were three main objectives for the new legislation; to encourage more letting of agricultural land, to increase opportunities for new entrants and to promote economic efficiency in agricultural land use.
In the early years of the new legislation, the pattern of secular decline in the area of let agricultural land was replaced with net gains up to 2003. However the past decade has been a period of fragile stasis. Much of the early success can be put down to the formalisation of agreements struck between parties prior to 1995 which were attempting to avoid security of tenure.
On new entrants, the Central Association of Agricultural Valuers (CAAV) reports in its annual survey on agricultural land occupation, that in 2014 around 5.5% of all lettings and slightly over 17% of lettings where there is a change in occupier, are going to new entrants. It is difficult to judge whether or not these figures can be viewed as success, but there is evidence of considerable, unfulfilled demand for opportunities from new entrants.
Even the 2002 University of Plymouth economic evaluation of the 1995 Act reported that it had not been as successful as many would have hoped with new entrants reporting that they felt excluded because of their inability to compete with established businesses. Solutions proposed by the researchers included alternative fiscal and financial interventions.
Turning to the third objective, the TFA argues that FBTs have failed to improve efficiency within UK agriculture. Farming is a long-term endeavour requiring significant capital investment, patience, good soil management and the ability to balance profitable years against the bad. None of this is assisted by the short lengths of term offered on today’s FBTs. Over the 20 years of the legislation the length of term on an FBT has, give or take a few months either way, averaged under four years.
Even so, why should we care about short term farm tenancies to the extent that the Government should intervene to change this as the TFA argues?
Firstly, there is a volatility. The past 10 years have seen larger and more unpredictable swings in agricultural markets than we have seen for a generation. A resilient industry needs to have long-term security to manage this volatility. The Government has recognised this already with the option of extending tax averaging from two to 5 years. The representative organisation for private landlords, the CLA, welcomed this move but it is still willing to allow the perpetuation of short lengths of tenancy term – shorter on average, than the very welcome extended period for averaging farm profits.
Secondly, there is much talk about the long-term economic plan and the need for investment to create growth and drive productivity. What incentive is there to invest as a tenant farmer if your agreement is less than four years or worse than that, rolling on a year-to-year basis? Long-term security is needed for sustainable investment. It is not just the TFA saying this.
Writing in a recent issue of the TFA Newsletter, Euryn Jones of HSBC said “Longer term agreements give tenants more confidence and motivation to invest in their business. They are more likely to invest in livestock, machinery and buildings. There is also a stronger motivation to undertake improvements such as fencing and reseeding – all of which enhance the quality of the farm and benefit both landlord and tenant.”
A third reason is soil management. The United Nations declared 2015 as the International Year of Soils and this coincided with warnings by UK soil scientists that we may only have 100 harvests left from our farmed soils. Landlords such as The Crown Estate are looking at how to weave soil indices into their tenancy agreements to ensure that soil condition is a factor that farm tenants take into consideration both when bidding for a farm and when the tenancy ends.
Soil management and improvement need long-term commitment, sustained action and significant investment. Those most likely to be up to that challenge are those with long-term interests in the land they are managing. How often have we heard stories of individuals who have taken short term agreements and who have farmed the holding with little care and attention to soil management leaving behind a soil depleted of nutrients, organic matter and structure.
With short term FBT’s it is little wonder that we are seeing a decline in soil indicators. Whilst the Crown Estate should be applauded for at least identifying it has a problem, its proposed solution deals with the symptoms and not the cause. If it was truly serious about ensuring that the soils on its farms were maintained in good condition it would be granting longer term tenancies with properly constructed schedules of soil condition.
We also need farmers to have the right framework to encourage the management of all environmental assets on land. Again, short-term interests lead inevitably to short-term thinking in regard to those elements.
Finally, economic and environmental objectives aside, the Government must surely have an eye to social objectives and there is little to be gained for families or communities, particularly in rural areas, where individuals are operating within very short time horizons.
The TFA argues that there is market failure with landlords reluctant to use anything like the full extent of the flexibility of the Statute but have gained considerably from the new legislation and its associated tax changes. With much higher demand than supply, landlords can offer short-terms, for high rents at very little risk and obtain into the bargain, 100% Agricultural Property Relief from Inheritance Tax. By contrast the short-term nature of tenancies is holding back progression, investment and sustainable land use.
After 20 years of the legislation the TFA decided enough was enough and launched its year-long FBT10+ campaign in January of last year both to highlight the issues and to argue for fiscal and legislative change to correct the market failure referred to above. It is on the fiscal side where the TFA believes we are likely to see the biggest impact for a relatively small number of changes. The following ideas are in active discussion between the TFA and the Treasury:
• Restricting the generous, 100% relief from Inheritance Tax (currently available to all landlords regardless of the length of time for which they are prepared to let land) only to those prepared to let for 10 years or more.
• Clamping down on those land owners who are using share farming, contract farming, share partnerships and grazing licences as thin veneers of trading activity as vehicles for aggressive tax avoidance since in practice they take no risk, have no entrepreneurial input and lack any management control.
• Offering landlords prepared to let land for 10 years or more the ability to declare their income as if it was trading income for taxation purposes.
• Reforming Stamp Duty Land Tax to end the descrimination against longer tenancies.
• Requiring landlords over whom the Government has influence (for example The Crown Estate) to default to using 10 year plus farm tenancies.
