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Structural change
Encouraging structural change and reducing any impediments to it in order to see a more competitive and resilient industry
Improvements to productivity might be being held back by a slow rate of business turnover which is linked to the high costs of entry or expansion faced by the more entrepreneurial in the industry. Research evidence suggests that productivity is heavily dependent on the structure of the industry and that increasing farm size (and specialisation) is a key productivity driver. High land prices and rents represent a barrier which prevents successful farmers from expanding (and extending best practice) and would-be farmers from entering the industry. It is not the role of government to seek to impose a particular structure on the sector, which should be driven by the market. However, it needs to be recognised that realising the objective of a thriving farming and food sector is likely to imply a significant degree of consolidation and restructuring at the farm level. Increasingly fewer businesses would account for an increasingly larger share of production. Joint Venture Farming (JVF) arrangements do provide possible routes for structural change within the sector by potentially allowing businesses to join or expand and others to contract or effectively withdraw from active farming in a fairly painless fashion. We would also expect that any reduction or removal of the Single Payment Scheme would lead to some downward adjustment in land prices and rents. This would aid structural change.
Section 9 of the documents talks about the impediments to structural change that are inherent in the industry. It also asserts that removal of the SPS would lead to a drop in land prices and a consequent easing in one of the key barriers to new entrants to the industry. However the SPS should be seen in a wider context, in terms of the certainty that it provides for farmers and prospective farmers. Removing the SPS will remove this certainty, and thereby create a further, new barrier to entry. However there is a wider point about how best to facilitate the wide structural change that is required in the industry if the UK is to play its part in meeting the challenges envisaged by John Beddington’s ‘Perfect Storm’, and more specifically the challenges around rising global populations and food security concerns. Agriculture is at a cross-roads, with a clear need to increase production, whilst at the same time not jeopardising the public goods associated with protecting and promoting environmental outcomes. In some ways, the scale of change facing UK Agriculture is similar to the scale of change that governments addressed in the post-war era, with far-reaching and comprehensive (and interventionist) Agriculture acts. Government’s approach to agriculture in the past 2 to 3 decades has been developed from a philosophical orientation towards the market, and the market’s ability to deliver change throughout the vertical value chain. The danger inherent in this approach is the short-term nature of the market and the outcomes and returns it seeks. Individual decisions are aggregated into the voice of the market, and these can change from day to day let alone year to year. The pursuit of short-term outcomes in financial markets delivered a set of outcomes that culminated in a global recession, which we are still only beginning to recover from. Market decisions in Agriculture are at best annualised, as (for the arable sector) they are driven by cropping choices and annual harvest prices. Governments should carefully consider whether the market is the right mechanism to deliver the type of long-term, investment heavy structural change that is required of the industry. Our ability to provide for our own future food security relies on our response to these challenges and the confidence of farmers to invest in the changes needed to allow us to increase production in an environmentally sustainable manner. Government, and governments acting together internationally can have an important role to play in addressing these issues, but the impact will be limited if this is undertaken through a market focused ‘laissez-faire’ approach. Under the section on CAP reform the background document suggests that fixing output prices will tend to increase income volatility, given the correlation between input and output prices. A more nuanced approach, and one that would give farmers a high level of confidence to invest for the future, would be to link Government support to input prices, allowing farmers a relatively guaranteed income, and encouraging government to manage its own cost risk by investing in R&D to find ways of decreasing input costs in ways that can be applied at an industry-wide level. There is no reason why this could not also be framed in an environmentally responsible framework that encouraged and motivated sustainable practices that enable UK Agriculture to deliver its part of the bargain on global food security.
The premise in the paper is that if you are old, you are not highly skilled, motivated, etc. Whilst this may be true in some instances, previous discussion has highlighted the complexity of structural change. Not least, farms and land represent an asset, and there is an important psychological aspect to take into account when considering structural change. In essence, owner occupiers that leave agriculture consider themselves to be effectively ‘selling the family silver’ and limiting future generations’ potential to farm. Also mentioned previously were potential changes to land prices as a result of policy changes. The scale and rate of any adjustment are important issues, given that they will impact the net worth of the farming sector, its asset value, access to credit, etc. The paper looks at the current situation for funding, but does not review credit access issues prior to 2007 when farm income (as measured by TIFF) was at historically low levels and fails to look at future scenarios for lending. In addition, a fiscal structure in the UK that stimulates investment in agriculture and allows the management of land to transfer readily will be critical to facilitating structural change.
This section also highlights the potential for driving productivity through increased farm size. Whilst economies of scale are important, it is worth questioning the compatibility unit size with the public goods that are currently expected of agriculture.
Structural Change
The Commercial Farmers Group (www.commercialfarmers.co.uk) agrees completely that “farm size and structure must be able to adjust in response to market signals” (p. 40). We agree also that a “significant degree of consolidation and restructuring” is needed to increase overall productivity. However, the paper confuses farm size and farm business size.
The ownership of land and the number of farms is not especially relevant in this debate. What is important is the total area farmed by one farming business.
There are many thousands of formal contract farming agreements in place, which allow one farm business to farm the land of a number of individual farmers. And there are countless (literally) informal farming agreements of this type. This is a highly desirable situation. The original owner of the farm can stay in his farm home, taking a pride in his physical assets while his land is farmed by a (generally) more successful neighbour, who can thus benefit from economies of scale and be more competitive. This process supports the structure which many consumers prefer, of a countryside of small farms, whilst allowing productivity increases. It also means that there is no real fear of large-scale “corporate” US style farming in the UK – the successful contract farmers in the UK are almost all still family businesses.
The development also reduces the number of new entrants required – and changes the skill-set needed by new entrants. Their skills must include man management and business management as well as agronomy and livestock husbandry.
Our view therefore is that no publicly funded promotion is needed to encourage farm business structural change. The only need is for improved training.
I agree that productivity is heavily dependent on larger farm size and specialisation. But it is also influenced by the farmer’s management and entrepreneurial skills and the workforce’s experience and skills. Most importantly it is positively related to a culture of investment not only in fixed capital but also in human and knowledge capital. New entrants are a proven source of new ideas and techniques and high land prices – in large measure a direct consequence of public support – are a barrier to this entrepreneurial lifeblood. In the absence of direct payments the industry would undergo significant productive structural change as more land was worked by farmers with a mindset tuned to the adoption of new systems and technologies. Structural change would not mean an end to what might be described as ‘hobby or lifestyle’ farms – they currently account for approximately two-thirds of farm holdings and produce less than 3 per cent of the industry’s value added – but it would mean the demise of many smaller scale ‘full-time’ businesses that are frankly not very efficient and even with public support lack the funds and skills to improve the competitiveness and resilience of their farms. We face a clear, if hard choice. We cannot have a thriving, dynamic farming industry while most of its businesses are run by individuals who have succeeded their fathers regardless of their farming and management skills and who have been indoctrinated into a dependency culture. No other industry would expect to succeed on this basis and ultimately farming is a business and should be viewed and treated as such.