Jeremy's Blog 3rd May 2024: Farming Incomes - Risk or Reward

This article by Jeremy Moody first appeared in the CAAV e-Briefing of 2nd May 2024

The Agriculture Act 2020 gave powers for measures to promote “fair dealing obligations for business purchasers of agricultural products”. Three and half years later, the first fruits of that process are now coming through with the Fair Dealing (Milk) Obligations Regulations due to take effect from early July. These set standards that milk purchase contracts are to meet with both specific opportunities for producers and a route for complaints to the Secretary of State. The regulations are developing for pork, eggs and fresh produce.

The regulations provide a high-level framework for matters including both fixed and variable pricing, banning volume limits or tiered pricing in exclusive contracts and governing termination (including using it as a means to revise prices). Naturally, in a world of competition law they do touch on actual pricing.

That means that these important guardrails for good practice, responding to concerns expressed over the years, may well improve behaviour but do touch on farming’s central economic issue of reward being commensurate with its greater risks and the scale of working capital required.

While this is especially challenging for our high value output sectors where, as examples, pressures, including exposure to supermarkets, are seeing apple trees grubbed and broadacre vegetable areas reduce, it can be seen across the board for those handling movements in global commodity markets. The decades have seen margin taken from farming and then competed away between the supermarkets, giving low margin food chains while the public now has stagnant incomes. Some now see more profit in exporting than supplying the home market.

One permanent answer is to improve the business if it can then hold any margin won. Other answers at farm level combine seeking other income and mitigating risk. Earning away from the farm, from farm contracting to other employment, can give an additional economic security, less linked to fortunes of produce markets. Where it does not compromise management, capital and the farm, on-farm diversification is another answer though it is often lettings, from holiday lets to solar farms and storage, and less often the business activity that would qualify for BPR from Inheritance Tax. Strengthening incomes, they cushion economic pressure.

A more entrepreneurial approach is to find ways not to be a commodity producer, whether producing something different, processing, creating a brand or other ways round conventional supply chains to be a price setter, not a price taker.

For the higher value sectors selling more directly to supermarkets, the bleak answer at January’s Oxford Farming Conference was that only undersupply could correct the balance – The “tomato crisis ” and the story of eggs a year ago showed we have the least attractive buyers in Europe; the individual buyers meeting farmers are seen to work in an unforgiving, short term environment. Experience suggests that any re-balancing only comes late (in the second year) when buyers have run out of all other options and is then only temporary. Farmers face their own “prisoner’s dilemma” between collective undersupply and individual profit and so instead seek to be the “last man standing”.

There can be no entitlement to comfortable supply chains; markets transmit pressures for improvement and the better allocation of resources. The question, repeated from many differing quarters, is how to find a way to change the culture of the food chain in response to our now greater risks; how to support farming’s longer-term confidence with its annual cycles and need for investment. Advancing climate change and growing international instability for supply chains threaten larger swings in UK farm output, yet more value is at risk.

Needing to produce more from less, how might we avert a default retreat from competitive productivity to lower production with less working capital exposed to risk? Many farm-level answers could avoid the pressure to improve productivity or to produce towards food security targets. As with water and energy, we confront the legacy of seeking cheapness over investment.

If we do not adequately recognise risk and finds ways, through public policy and private action, to afford more resilience and a greater tolerance of risk, we have a difficult interaction between businesses protecting themselves and the goals of food security and improving productivity.