Incompetent, inconsistent and dishonest: UK agricultural policies

Most British farmers are too preoccupied with their daily work to blockade London. Yet last week saw a demonstration of rural discontent, and we might yet see slurry being dumped in the streets of some city. As usual, the BBC and similar media reports focused on one “newsworthy” aspect of the protests – the impact of inheritance tax changes – but most neglected the underlying problems that have been generating an increasing amount of unhappiness over several years.

Readers wanting to get a better sense of these problem should read articles written by farmer-journalists such as James Rebanks and Jamie Blackett.[1] One crucial factor, which I will return to, is that they are small or medium-scale livestock farmers living in remote or upland areas of Britain.

To understand the issues facing British agriculture today it is necessary to go back to the 19^th century. At that time, most agricultural land was held in large estates owned by aristocrats or institutions. Many colleges in Cambridge – including my college Christ’s – long owned agricultural land as a core part of their endowment. However, the long agricultural depression in the second half of the 19^th century reduced land values and the returns from agriculture. This was a consequence of, initially, the Corn Laws which lowered tariffs on agricultural imports and, more important, the drastic decline in transport costs that opened the US Mid-West and later Canada, Russia, Australia, Latin America as sources of food imports.

The policy of free trade, which persisted from the 1850s to the 1930s with a brief interruption during the First World War, lead to a gradual but fundamental shift in the structure of agriculture. Both wealthy families and institutions split up their estates, selling their land to former tenants and to others who wanted to operate family farms. At the same time, a lot of land was abandoned and left uncultivated.

I was brought up on a family fam in Warwickshire on the edge of the Cotswolds. Much of our farm had been abandoned in the first half of the 20^th century because the soil was difficult to work without machinery and could not be farmed profitably. It was brought back into cultivation during the Second World War when there was a desperate need to produce food domestically to replace imports threatened by German attacks on sea transport.

The prospects for British agriculture improved in the 1930s as the British government moved away from free trade and began to adopt policies to support farming and manage various agricultural markets. During the Second World War most food production was controlled by the government with a heavy emphasis on arable and milk production. These interventions continued after the war via agricultural price supports and subsidies for investment in mechanisation and other improvements.

Price supports for agricultural prices became more generous after Britain joined the EEC in 1973 and was covered by the Common Agricultural Policy (CAP). The consequence was that farmers focused on improving both land and labour productivity. Often, the changes provoked hostile reactions from the public and environmental groups because of their impact on the landscape and wildlife as well as concerns about intensive use of agricultural chemicals. The inevitable consequence of generous price supports – over-production and increasing subsidies - eventually caused the EU and the British government to change course. Instead of focusing on production, agricultural subsidies were redirected to provide income support and pay for environmental improvement. It is the failure to keep promises concerning new arrangements for agricultural support made at the time of Brexit that underlies much of the discontent among British farmers.

The economics of British farming is entirely different today from the images that many people have of how things were a century ago. In business terms, agriculture is capital-intensive because land and machinery have replaced labour. Most farms operate rely on family labour plus, at most, one employee. Excluding horticulture, which relies more heavily on employees than other types of agriculture, nearly 70% of workers in agriculture are farmers or family members. Even excluding the value of land, the value of capital employed in agriculture – tractors and other vehicles, machinery, buildings, processing equipment, etc - is at least 3 to 4 times the gross value-added of the sector.

Unfortunately, based on farm accounts British agriculture is absurdly unprofitable. In 2021 total profits (total farm income) plus rent payments amounted to £6.6 billion. That total should cover self-employment income for farmers and their families as well as a return on non-land capital and a notional rent on land assets. If allocated entirely to self-employment income it is equivalent to just over £22,000 per year, well below the average wage and below the current minimum wage for people who often work for more than 40 hours per week, 52 weeks per year.

Total farm income was relatively high in 2021. In real terms it has varied between £4 billion and £6 billion per year since 2007 with an average of a little over £5 billion per year. Yet even in a “good” year, more than one-half of total profit comes from government payments of various kinds including agro-environmental payments and special support for less favoured areas.

This is the trap in which British farming is caught. The new limits on the exemptions from inheritance taxation for both business property and agricultural land have brought to head the lack of any kind of reasonable return on agricultural assets. The figures cited by the Treasury on the expected revenue from these changes are ridiculous. The agricultural sector is simply too unprofitable to pay such amounts out of its cash flow.

How is it that the agricultural sector has accumulated such large amounts of non-land capital? The reason is that farmers have been able to take advantage of very low interest rates for many years, since they have substantial land assets that can be offered as collateral for long term debt. As businesses, they have covered debt interest and repayments out of cash flow, primarily from amortisation and depreciation allowances but they have not earned a reasonable return on such investments.

In 2021 total utilised area for agriculture was a little over 17 million hectares. The figure below shows how land prices for different types of land have increased over the last 30 years. The range of prices between prime arable land and poor grazing land has increased but not by a lot. On average land prices increased by about 7.5 times over 30 years in nominal terms or about 7% per year. The periods in which land prices increased most rapidly were from 2005 to 2008 and from 2011 to 2014. These were periods of extremely lax monetary policy and easy borrowing.

The average price for bare farmland in England and Wales in 2021 was £17,850 per hectare.[2] Allowing for lower land prices in Scotland, the total value of agricultural land in the UK was about £280 billion in 2021, more than 9 times the gross value of output from the sector.

With such an imbalance between capital values and gross output it is no surprise that agricultural rents offer a very low yield to investments in agricultural land. The rental yield on agricultural land is barely 1%. The average annual rent in England and Wales in 2022-23 was £228 per hectare for a Farm Business Tenancy, while the average market price for bare agricultural land was about £21,000 per hectare.[3]

The key question is, then, why have agricultural land prices reached such high levels, when the sector is clearly unable to earn what would seem to be an adequate return on its assets? Part of the story must be the classic “they aren’t making any more of it” logic. This is a self-sustaining argument. The belief that land prices will rise in future encourages more investment for as long as the bubble (as it might be) continues.

Land agents like Savills argue that over the last 100 years land prices have grown at about 5.7% per year in nominal terms or about 2% per year in real terms. Hence, the total expected return is better than can be obtained on index-linked bonds over a much longer period. As an asset class, agricultural land is clearly riskier than bonds, but its returns are probably uncorrelated with other assets. Such arguments might underpin a substantial growth in the proportion of agricultural land that is owned by institutional and corporate investors.

On the other hand, it is hard to reconcile that explanation with other evidence that since 2000 about 50% of purchasers of agricultural land have been farmers. The second main group of buyers is what are called lifestyle buyers, who represent an average of 40% of purchasers over the last two decades. The share of land purchases by institutional and corporate buyers has grown over the last 5 years from 10% to 20% of purchases but this is still much smaller than the other two categories.

The category of non-farmer or lifestyle buyers includes the Jeremy Clarkson types who, in the view of the BBC and similar commentators, have been buying agricultural land on a large scale for tax avoidance reasons. This illustrates how little journalists understand about agriculture. Most farms in the UK are livestock businesses with no employees and over 70% of agricultural land is used for grazing.

Lifestyle buyers do not purchase farms to get up at 6 am every day to milk cows, feed pigs or herd sheep. A few may buy and manage farms operated by employees. There are hobby farms with relatively small areas of agricultural land used for grazing horses and other livestock. However, many of the non-farmer purchasers are people who want to enter the industry and have borrowed the money required to get themselves established. That is what my parents did 70 years ago!

There is one other key feature of agricultural business in the UK. Most agricultural products are sold to monopsonistic buyers – large food processors and supermarkets. Economies of scale in food processing and distribution have greatly reinforced the imbalance between farmers and those who process and sell food to ultimate consumers. This leads to an often-antagonistic relationship between farmers and the buyers of agricultural products. This is reinforced by liberal import policies and what farmers may believe to be very different environmental and welfare policies in the UK and in the countries which supply imports.

This imbalance between sellers and buyers is observed around the world. Agricultural support policies have often sought to correct the imbalance by establishing minimum prices for output, but that does not always work as intended for small and poorly capitalised farmers. Two other common responses are cooperatives and marketing boards. Both attempt to correct the imbalance by offering the opportunity for farmers – or obliging them - to sell collectively rather than individually. Marketing boards may take on the responsibility to promote quality standards and improve production efficiency, but their main function was to counteract the buying power of food processors and distributors.

The idea of cooperative action by farmers fell out of favour at the end of 20^th century, partly because of lobbying by the buyers who wanted more freedom over their buying policies, and partly because guaranteed prices for agricultural products appeared to give adequate protection for farmers. Of course, once this form of agricultural support was abandoned farmers found themselves operating in markets that were completely dominated by a small number of buyers. While there have been various efforts to promote codes of good practice, etc the reality of the huge imbalance between sellers and buyers has only got worse.

Adding this evidence together, farmers operate in an economic framework for which the barriers to entry grow ever larger while the returns for labour and capital inputs are derisory. There is little prospect that the squeeze on incomes imposed by competition from imports and monopsonistic buyers will be reversed.

On top of this farmers have lost the collective sense that they are essential to national well-being. When I was a child, the wartime experience underpinned a belief that agricultural production was critical to national security. Naturally, farmers complained about being neglected – that is what they do. Still, they felt that there was a fundamental agreement on the importance of maintaining or increasing domestic food production. Many families still had connections to rural communities that their parents or grandparents may have left in the past.

Today, most urban and suburban dwellers only see rural life through the sentimental lens of television and environmentalism. That is why there are jokes about new rural residents complaining about the noise of chickens or the smell of cattle and manure. These reflect a gulf of understanding between farmers for whom the countryside is a harsh working environment and other residents for whom it is the backdrop to a suburban lifestyle.

This division is reinforced by the systematic neglect of rural services by local and national government. The condition of our roads, access to education and health services, and, especially, the lack of support for an ageing population highlight the lack of interest in rural communities and problems. There are reasons for this: money is short, while urban problems may have been neglected in the past. Nonetheless, the basic message is that, relative to the past, agriculture and rural populations are of no interest to urban politicians and bureaucrats. Even worse, such people don’t learn anything but pursue policies that are based on ignorance and prejudice.

None of this is new, nor is it unique to the UK. There have been widespread protests by farmers in several European countries, prompted by various issues. All reflect an increasing gap between the beliefs and concerns of rural populations and urban populations with little interest in either agriculture or rural life, except as a canvas on which to inscribe their ideological precepts.

The assessment of UK agricultural policies in the title of this piece is fully justified. Still, farmers are not exempt from the observation that they could have responded much earlier to the increasingly unfavourable direction of policy. Part of the problem is that the leadership of the National Farmers Union is hopelessly compromised by its desire to keep in with politicians and bureaucrats in London and Edinburgh. As with fishing, mining and other declining industries, there is an understandable but fatal reluctance to face up to the consequences of industrial and economic decline.

For decades the mantra has been diversification: the idea that non-farm sources of income can supplement stagnant or declining profits from agricultural production. This is a delusion. Only a few, and fortunate, farmers can earn significant sums from farmers markets, direct to consumer sales, and mountain bike trails. Equally, diversification is jeopardised by hostile public and political reactions to the primary source of non-agricultural incomes – rural tourism. For as long as outsiders and visitors are pilloried and penalised because they occupy limited housing, there is little hope for increasing non-farm incomes by a significant amount.

Sad though it may be, the best option for most medium and small farmers is to get out – sell up, pay the capital gains taxes, and retire or move on. Much of the less productive land will be abandoned, especially in upland areas of the North of England, Wales and Scotland. That is already happening on a large scale in the South of Scotland, where abandonment takes the form of forestry planting financed by carbon credits and government grants. In addition to forestry, abandonment may be presented as rewilding, habitat restoration or other environmental projects.

Large farmers on better quality arable land will survive. For them, scale and mechanisation are crucial. Many of these are not family farms of the conventional kind. They are agro-businesses on a scale equivalent to farms in the US Mid-West or the prairies of Argentina, Brazil and the Eurasian Steppe. The other form of food production that can probably survive are large scale dairy and poultry operations. Neither of these are traditional agriculture because they tend to rely upon imported animal feed.

Land costs are too high for any type of grazing livestock to be viable without support that governments are not willing to provide. That is why land currently used for grazing livestock is most likely to be abandoned or converted to other uses. If UK agriculture changes as seems likely, what non-farmers will miss most is landscapes with grazing herds of sheep and cattle. However, climatic and economic conditions mean that most of the UK is not competitive against countries like France and New Zealand in livestock production.

Whatever the proponents of land conversion may believe, such exercises have nothing to do with restoring imagined past ecosystems. Modern forests – even the better designed ones – are commercial monocultures. They are quite different from ancient English woodlands or the temperate rain forests of western areas of the UK or the Caledonian Forest.

If land is no longer valued for agricultural production, it is better than it should be for something that someone is willing to pay for rather than reverting to shrubby scrub as happened in the past. Still, this is little different from the indulgence of aristocratic parks and hunting reserves from the past, even when it is dressed up in highfalutin and moralistic terms.

Finally, we should remember Percy Bysshe Shelley’s poem Ozymandias:

          "My name is Ozymandias, King of Kings:
          Look on my works, ye Mighty, and despair!"
          No thing beside remains. Round the decay
          Of that colossal wreck, boundless and bare
          The lone and level sands stretch far away

In two or three centuries little of current political idiocies will remain. The landscape, climate, and habitats will be much as they have been for the last millennium. Of course, change is painful for those who are caught up in the backwash of current policies, but as the Persian adage quoted by Abraham Lincoln puts it: “this too shall pass”.

[1] See, for example: https://unherd.com/2024/11/a-farmers-revolt-is-coming/ ; https://www.spectator.co.uk/article/labours-farm-tax-makes-no-sense/ ; https://wickedleeks.riverford.co.uk/opinion/the-future-of-farming-hangs-in-the-balance/ ; and https://unherd.com/2020/09/how-to-save-british-farming-and-the-countryside/ .

[2] Land prices - https://content.knightfrank.com/research/157/documents/en/english-farmland-index-q1-2024-11118.pdf .

[3] Agricultural rents - https://www.gov.uk/government/statistics/farm-rents/farm-rents-in-england-202223.