The UK farming sector is at a crossroads due to major changes brought by Brexit. Fundamentally, the government plans to phase out any direct payments to farmers by 2022 and the funds from these payments will be redirected to environmental schemes. This is a substantial shift away from the support mechanism for farming to improve the environment.
Direct payments were first introduced in 2005 to replace the Common Agricultural Policy (CAP), which was used to subsidise agricultural produce / production. It is calculated and paid on a per hectare basis to farmers and growers as a safety net which supplements the main farm business income. The scheme requires farmers to maintain a minimum level of environmental standards and other benefits.
When it was first introduced, the scheme was called the Single Farm Payment but was renamed Basic Payment Scheme in 2015. In 2019 the average basic farm payment across all farm types was £27,800.
The Agriculture Act 2020
The Agriculture Act 2020 has been described as a “landmark moment” for the post-Brexit farming industry. The Department for Environment, Food and Rural Affairs (Defra) stated that, “from 2021 farming will start the transition period away from EU regulation and the phasing out of the Basic Payment Scheme” by 2027. A new approach will be introduced from 2024 with implementation Sustainable Farming Incentive schemes, most notably the Environmental Land Management scheme (ELMs).
The government claims it will pay the same amount to farmers, “though the way it is distributed will change”, with the objective to promote environmental programs. Various incentive measures are being implemented, which are intended to support the rural economy while achieving environmental goals and the commitment to net zero emissions by 2050.
The aim of this government bill is to incentivise farmers and other land managers for delivering sustainable farming practices that enhance the environment such as clean air, clean water, thriving plants and wildlife, protection from environmental hazards, adaptation to climate change, beauty, heritage, and engagement with the environment. The government describes the system as public money for public goods with the Environmental Land Management Scheme, although still under design, being at the centre.
There is some scepticism within the industry that all funds from directs payments will not be channelled back to the farmers going forward. The general consensus between industry experts on this topic is that farmers entering the scheme will probably only receive about 75% of what they used to receive from basic payment schemes. Therefore, they need to find ways of making up the short fall in their income either by improved efficiency and / or diversification.
Defra defines farm diversification as “non-agricultural work of an entrepreneurial nature on or off farm but which utilises farm resources.” The income from diversified activities was £734 million in 2019 / 2020, some 28% of total farm business income. The main diversified activity is letting out buildings for non-farming use, which roughly 45% of farms do.
The coming years arguably will generate further opportunities for farm diversification. For instance, there is increased interest in staycations from the British public due to COVID-19 and as a result, more farmers are looking into creating camp sites.
Over the next ten years, it is widely expected that farmers will rely on environment schemes with potentially 50% to 75% of their income coming from such schemes. There will be continued advancements in technology and its implementation, although this should be an incremental growth. There will also be continued reliance on diversification and the public will have increased access to the countryside.
Insurers will continue to insure four walls, four wheels and four legs. Whilst this may change slightly in concept, shape and material, the biggest risk will likely continue to be the two-legged kind — an increased risk of public and product liability claims. For instance, the pandemic has led to a reported fourfold increase in the number of people accessing the countryside for recreation and exercise, resulting in damage to crops and a significant increase in livestock worrying incidents. Generally, diversified business activity on farms will increase footfall and the potential increased if not managed correctly. Insurers may wish to consider their business interruption definition to incorporate loss of revenue from environmental scheme due to events such as fire, pollution and malicious damage.
The Sustainable Farming Incentive is still under design with ongoing tests and trials with farmers, and environmental and agricultural stakeholders. It is expected to launch next year and then we will have a better understanding of the implications. Overall, it would appear that improving the environment — coupled with implementing technological advancements within farming — should bring great opportunity for the progressive minded, both for the farmer and insurer (less so for the traditionalist!). The carbon crisis is likely to be a significant influence on the farming / rural sector and the potential opportunity this will bring cannot be underestimated.