The build-up of pressure on the agricultural sector
In 2021, UK agriculture provided over half of the food we eat. It employs almost half a million people and is a key part of the food and drink sector [1]. British farming therefore plays a significant role in the local food chain, job market, economy, and management of the environment. However, the aftershocks of the exit from the EU, the economic ramifications of Covid, Russia’s invasion of Ukraine, and the ongoing energy crises will undoubtedly continue to put pressure on bottom lines. The impact of these events can clearly be seen in agriculture, in terms of cost of inputs, supply chain management and consumer behaviour.
The exit from the EU has caused labour problems and for those farmers who rely on seasonal workers from Eastern European countries such as Bulgaria and Romania, it has been a challenge to operate effectively and efficiently through the harvest periods and some crops have remained unharvested. This problem is likely to continue until British citizens are attracted to work on farms.
Food insecurity has been rising since 2018 and even before Russia’s invasion of Ukraine, the increasing frequency and severity of climate shocks, regional conflicts and the pandemic were all taking their toll, disrupting food production and distribution, and driving up the cost of feeding people and families. Although food prices may have eased slightly from recent peaks, the high food and energy prices have fuelled a cost-of-living crisis. Consumer food shopping habits are changing as a result, with all the main supermarkets reporting an increase in sales of own brand products and discount products which will inevitably lead to a reduction in prices offered to growers.
In livestock markets, the impact of inflation on consumer habits and spending is apparent, resulting in a drop in red meat sectors as consumers protect their incomes and reduce spend. The hot, dry summer has also impacted on the dairy industry, having harmed the availability and quality of forage resulting in an increase of feed costs. Climate change itself is also one of the major issues facing UK farms and farmers with extreme weather having been detrimental for crops meaning that farmers are now having to consider whether there are any processes which can be put in place to enable them to work around the weather conditions. All of these issues combined with the rise in the price of fertiliser and fuel will continue to have significant impact on farming businesses, including intense pressure on profit margins.
The vision for the future
DEFRA published its report on the Farmer Opinion Tracker for England: April 2022 on 28 July 2022 which provides a snapshot of the views and opinions towards Defra’s vision for farming [2]. Some of the most salient highlights from the report were:
- Nearly one-fifth of all farmers do not have the information they need to plan ahead and do not know where to find it
- Farmers on 68% of holdings indicated that they will need to make changes to their farm business in the next 3 to 5 years
- Farms on 80% of holdings report that environmental impact will be highly important to the running of their business.
Never has it been more important for farmers to start looking to and planning for the future and important decisions will undoubtedly need to be made about such things as the size and shape of their business going forward.
Some practical steps
Planning, budgeting & monitoring
Squeezed margins, high inflation and significantly lower direct payments mean that it is important to plan, budget and monitor. It is vital that a business knows and understands its gross margins and its cash flow and therefore it is essential for farmers to create a business plan and cashflow forecast and keep up to date management accounts. Are your accounts structured to enable easy interpretation of what is happening?
Understand your financial position
Where the business includes a variety of livestock and/or crops the financial information should be sufficiently detailed to identify the relative profitability or otherwise of each area of the business. This will enable trends to be identified which in turn will facilitate early planning and decision making about the orderly wind down of unprofitable areas and investment in the most profitable core areas. Ideally an accurate cashflow projection of up to 18 months should be prepared together with a business plan for at least the next two years.
If you encounter problems with preparing these documents, then help can be taken from someone independent with the skills to look objectively at cashflow trends and who understands your industry. Once prepared, the financial documents should be revised and updated frequently, and professional advice taken and/or revisited if or when necessary.
Do not be afraid of talking to an insolvency practitioner
If your farm is in financial distress, it may be worth taking advice from a licensed insolvency practitioner who specialises in agriculture to ensure the accuracy of the management accounts and who will be able to advise you on all insolvency related matters including a solvent restructuring of the business or the need to enter a formal insolvency process. However, not all insolvency processes involve the closure of the business. Voluntary Arrangements are available to individuals, partnerships and companies and provide a mechanism for compromising historic debt through agreed monthly payments or from the orderly realisation of certain assets.
Consider future funding
It is important to carefully consider what financing you need and for what/how it will be utilised and make sure the money you obtain is used for that purpose. There are a number of financial packages available for the UK farming community to help deal with a variety of cost pressures, with capital being deployed through a range of measures including loans, asset finance and increase overdrafts, but it is important to take advice on such packages to ensure that the preferred product provides the support which is required and the terms are favourable and achievable. It is also important to bear in mind that banks will want to see accurate and up to date management accounts, including cash flow, balance sheet, profit and loss and business plans, which reinforces the importance of making sure such financial information is readily available, accurate and up to date.
Do not ignore unpaid bills
Do not ignore unexpected bills or late payment demands. It is advisable to approach suppliers and work out a mutually amenable payment plans, rather than ignoring correspondence and telephone calls and hoping the problem will go away. Again, and in the event of financial difficulties, reputable professional advice should be taken at the appropriate times.
Consider the structure of your business
Planning for the future also includes reviewing the structure of the business to assess whether it is fit for purpose. This may involve changing the partnership, undergoing succession planning in order to bring in younger generations or changing the business into a limited company. This is often a difficult conversation given the multi-generational nature of many farming businesses. However, not only will medium and long-term business planning help to alleviate stress, family relationship issues and difficulties in managing the farm in older age, but it may also help with shorter term financial problems by ensuring that the business is properly structured financially and with sufficient capital to, for example, enable it to take advantage of technological advances which will inevitably be required going forward to comply with environmental sustainability requirements and increase business efficiency and profitability.
Help is available
It is therefore important for farmers to start looking at the future and to plan accordingly, which may mean taking advice from professionals. For a lot of businesses and not just those in the farming world, assets have been depleted whereas debt has increased and as such taking advice from the right professional advisors at the right time is extremely important to ensure the viability and sustainability of the business.
The financial problems facing your farming business are serious, but insolvency is not inevitable. Obtaining advice and guidance, from financial advisors or insolvency professionals will provide you with the best options in your specific circumstances. Please get in touch rather than face your concerns alone.
[1] Department for Environment Food & Rural Affairs, Agriculture in the UK Evidence Pack, September 2022 update.
