Blog: The big issues behind the headlines

South Downs landscape, West Sussex_275_183

Phil Bicknell, chief economist_182_275

He writes:

In the wake of various awareness-raising tactics, the last couple of weeks have seen farming repeatedly make the national news. While this means that few can have escaped the fact that milk prices are down 25% year on year and the challenges that rapidly falling prices create, it also prompts a host of questions about our industry from the media and the public. The questions I’ve had most relate to farm size, our ability to compete and what makes 2015 different? All of these are big issues in their own right, but I hope that the below gives a bit more food for thought and challenges some of the assumptions that I’ve been hearing of late

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Does this mean the end for small family farms?

Like any business, there are economies of scale in farming and it’s no surprise that the average farm size has trended upwards over time. Yet the idea of ‘mega-dairies’ and giant agri-corporations dominating the UK farming landscape is still really wide of the mark. For example, the average UK dairy herd comprises of approximately 130 cows, while over 90% of farms in England are sole traders or family farming partnerships. History indicates that consolidation will continue, but I firmly expect UK agriculture to be made up of tens of thousands of relatively small businesses for a long time yet.

I think it is the family-based structure of many farms that gives agriculture its unique character. It means that our farmers have an overriding interest to hand down a successful thriving farming business to the next generation. It can lead to a longer term outlook on investment decisions and helps give a core of resilience to farming. It makes the crises that farming can face no less challenging, but explains the determination to survive and the passion that has been so evident from farmers in recent times.

Can our farmers compete?

I’ve had this question in different guises, but in a nutshell, it’s asking the same thing - if our farmers are struggling, does this mean that they can’t compete? Our farmers are facing tough times, but we should not forget the positives that UK farming has recently achieved. Our sheep sector is the largest in Europe. Our dairy and arable farmers are amongst some of the highest yielding producers on the planet.

We’ve seen our food and drink exports reach record levels. In the months following the Russian ban on various EU food products, the UK actually saw its overall exports grow 8% year on year, outperforming the every EU member state in the process.

Nonetheless, prices have fallen and whether it’s our European counterparts or further afield, few have been immune from this downwards trend. The pressure on UK farmers has been further exaggerated by the strength of the pound relative to the euro. Because it makes it tougher to export food and our food imports cheaper, that adds to the downwards pressure on our prices.

Add in the challenges created by the battle for customers amongst some of our leading supermarket chains, and it all means that farming is in a tough environment. And all this might mean that we make some changes in the medium term if things don’t improve. I expect we’ll still be the largest sheep producer in Europe, but if we continue not to make money on lamb, then I expect the size of the national flock to shrink over time.

Similarly, where’s the incentive for farmers to up milk or grain production if every extra litre of milk or tonne of grain costs more to produce than we receive for it. Our trade gap on food will increase and sustaining that growth in exports will become a problematic.

Why is 2015 different?
Farming has always experienced different cycles. Yet the world we operate in has changed. We have seen a shift in the Common Agricultural Policy that includes lower support payments and removing production controls in some sectors, such as the removal of milk quotas earlier this year. As our farm policy changes tack, it means that market dynamics have a greater impact on farming businesses today than they have for several decades. At the same time, those market dynamics are increasingly volatile.

In today’s world of global trade and continuous information, the price of wheat moves as much in a day as it used to move in a month or longer. Dairy prices are obviously in the headlines and we have seen prices fall at various points over the last decade. But in 2009 and 2012, those prices fell consecutively for seven and five months respectively before prices started to strengthen. Right now, our dairy farmers have experienced 15 months of price falls, with further price deductions expected.

That combination of fewer policy measures and greater volatility makes farming businesses in some sectors increasingly exposed to rapid change, particularly where contracts, futures markets and long-term relationships are lacking.

Of course, the most frequently asked question is ‘so what helps’?

Everyone will have their own viewpoint on this and there are many different actions that could be taken. If I had to opt for three, I would like to see:
-          farmers in all sectors have the tools to better manage changes in the market
-          longer term commitments to farmers, backed up by longer term contracts, that give certainty and stability to farmers
-          more effort to develop export markets, particularly beyond the EU.
These don’t happen overnight, of course, not everyone can help make this a reality. However, there is one thing we can all do that helps make a difference – look out for the Red Tractor logo and Back British Farming.