Over half of Scottish farmers surveyed by Johnston Carmichael are pessimistic about the outlook for 2016 and beyond, in contrast to the accountancy firm’s 2015 survey which revealed a broadly upbeat mood.
Of the farm businesses who responded to the questionnaire, 69% highlight output prices and 61% input costs as the main areas of concern, an increase on the 2015 figures of 54% and 44% respectively. Both of these issues have a significant bearing on the profitability of farm businesses, but because they are shaped by global market forces farmers have limited control.
“The drop in prices across the board for farming produce, coupled with the reduction and delay in subsidy payments, has affected not only the working capital of farming businesses but also had a knock-on impact for suppliers to the agricultural industry.”Neil Steven, Agricultural partner, Johnston Carmichael
The survey also reveals concerns over tax ranked at number three, followed by land reform and the viability of finance/funding, ranked equally at number four. Retirement and recruitment/staffing take sixth and seventh place respectively.
The Scottish agricultural sector is an important contributor to the Scottish economy, not just in its own right but by producing output for additional process in downstream sectors – for instance the beer and whisky industries, dairy products, abattoirs and meat processing.
Neil Steven, agricultural partner at Johnston Carmichael, says that given that the profitability of the Scottish agricultural sector is heavily dependent on subsidies, this is an important issue for farmers.
“The drop in prices across the board for farming produce, coupled with the reduction and delay in subsidy payments, has affected not only the working capital of farming businesses but also had a knock-on impact for suppliers to the agricultural industry. Whilst lenders have generally been supportive during this period, their assistance will not be open-ended. Therefore, all farms need to prepare and review their business plans and make operational changes where appropriate regarding existing systems or diversify into other land-based activities.”
At the end of April this year, the Scottish Government’s Land Reform Act was given Royal Assent. The legislated changes include the right-to-buy to further sustainable development for communities, removal of exemption from non-domestic rates for shootings and deer forest along with agricultural holdings legislation regarding new forms of tenancies, changing procedure for rent reviews and expanding assignation and successful provision.
46% of respondents to the survey felt that these changes would decrease land values, nearly double the 22% who expressed this opinion last year, with only 40% confident that land values would be retained, a significant drop from the 65% last year. Those farmers surveyed who felt land values would increase has remained at 14%. For applicable respondents who rent land, there has also been a move towards a decrease in rental values.
Investment within the farming industry is normally ongoing and is typically debt-financed, but in recent years the level of debt within agriculture has increased because it is often used as the primary means to finance investment. In the forthcoming year 28% of respondents to the survey plan to undertake major capital investment, only a slight reduction on the 31% last year. This is a similar figure to the 25% of farm businesses – last year 31% - seeking additional debt finance from their lenders.
Neil Steven says that although investment on qualifying expenditure does bring favourable tax reliefs through capital allowances (in particular the annual investment allowance), this would not be repeated unless similar levels of investment are made each year.
“It’s interesting to see there is only a slight drop in major investment plans despite the negative outlook. This could be interpreted in a few ways: for example an investment could be planned to the existing farming system to promote growth and improve profitability, or an investment could be made into a new venture to spread the business risk.”
Business and succession and retirement
Succession planning is a vital component for any business strategy and this includes the agricultural businesses who responded to the survey. The percentage of respondents who have a plan in place remains at 45%, leaving a majority who still need to implement one which, given the ageing demographic of business owners, is a high percentage.
On the flip side, it is reassuring to note that 75% of respondents have a Will in place and 73% have made financial provision for retirement, especially as 75% of respondents are over the age of 50. However 43% of respondents, compared with 57% last year, will need to draw on funding from the farming business, although 82% of these respondents do have a private pension. Neil Steven believes this suggests that in many instances life-time pension saving has not kept pace with expected funding requirements for retirement either via levels of contribution, performance of policies, starting to save too late or a combination of these factors.
A new question for this year on renewables found that 37% of farm businesses surveyed have renewable energy enterprises on their property. The income from this has been as expected for 42% of those who responded, more than expected for 16% and 21% less than expected, with the remainder too soon to tell.
Neil Steven believes that, in the short-term, the direction of travel around output and input prices may mean some farmers will need to confront big and difficult choices surrounding the future of their business and how these are inter-linked with other cash flow requirements.
“There are clearly challenges in the medium to longer term outlook which include structural and demographic issues such as labour supply, the ageing profile of those who work in the industry and finding effective structures to accommodate the divergence of farm ownership from operational management. It’s also imperative that the younger generation get a foot in the door of the industry as they have the ideas, energy and aspirations to make a career in farming although they might not necessarily have the financial capability to make an upfront capital investment.
“Even with this challenging outlook for the primary growers of Scotland’s produce, the profile and quality of Scotland’s food and drink sector remains strong and a positive differentiator in the market place. This means market opportunities will be there so it is vital for farmers to align their home grown produce to market requirements in a cost-efficient manner, by making appropriate and timely decisions to enhance profit and cash flow.”