EU exit Perspectives: beginning of the end for direct payments

Monday, 30 November 2020

As direct payments in England start to be phased out, David Swales, Head of Strategic Insight, shares his thoughts regarding the impact on the industry and highlights a useful AHDB tool which can help farmers to prepare.

Much has been written about EU exit and its implications for our industry. With uncertainly in areas such as future trade deals, agriculture policy, regulation and access to labour, it’s often difficult to see the wood for the trees.

From where I sit one change dwarfs all the others in terms of its significance, namely the phasing out of direct payments in England. We know that from 2021 these payments to farmers will start to be phased out – disappearing completely by 2027. This week Defra made an announcement about the pace at which payments will reduce for the first four years of this seven year transition. While the devolved administrations haven’t gone as far in their policy intent, I would expect change there too, albeit at a slower pace.

Data released by Defra demonstrates just how important direct payments are. The average English farm made a Farm Business Income (a measure of profit) of just over £50,000 in 2018/19. Of this direct payments contributed £27,300 or 55 per cent. So profitability would more than halve were direct payments not included. That’s a significant hit by any measure.

For some sectors the situation is even more challenging, with direct payments accounting for 126% of profits for lowland grazing livestock and 155% for their upland equivalents. This means that on average these farm types were loss making before the payments are taken into consideration, Averages often don’t tell the whole story, and the situation will be different for every farm. AHDB has produced a Business Impact Calculator which allows farmers to put in their direct payments figures to understand how they might change (we have had to made a couple of assumptions which are explained on the page). I would encourage everyone who hasn’t yet thought through what this will mean for their business to visit the calculator as a first step.

Clearly, knowing how your direct payments will change is one thing but doing something about it is another. Our industry has great resilience and farmers have dealt with significant changes in the past. In order to survive and thrive in the future farm businesses will need to adapt. Every business is unique and a range of approaches will be taken to manage this change. I think there are two main ways this will happen:

Firstly, exploring alternative income sources. This might mean growing different crops or livestock or diversifying outside of agriculture. However, there is an obvious alternative in that rather than direct payments, the new system in England will see farmers paid for ‘public goods’, such as better air and water quality and soil health. A new Environmental Land Management (ELM) scheme will begin next year. This will be an important new source of income for those farmers able to deliver environmental outcomes. Indications are the scheme will be more generous than the ‘income foregone’ approach taken with Countryside Stewardship, although those hoping it will completely offset direct payment losses are likely to be disappointed.

Secondly, taking steps to improve business performance will be important. From our Brexit scenario work we know high-performing farms are best placed to weather the changes thrown at them. The key factors here are within a business’ own control – knowing your costs, knowing your market, having attention to detail and so on. Our Horizon report on the characteristics of top-performing farms explores these.

AHDB is here to support you with a range of services and tools which can help, so please scan through the website or contact one of our knowledge exchange team in your area.

Image of staff member David Swales

David Swales

Head of Strategic Insight

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