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Iain Fraser is Professor of Agri-Environmental Economics at the University of Kent’s School of Economics. His research interests cover various aspects of agricultural, environmental and resource economics. Since September 2012 he has been an editor of the European Review of Agricultural Economics. Iain is also a member of the SSA Science Panel.

De-linking final Basic Payments from farming: Hardly ‘public money for public goods’

A lukewarm welcome to the Agriculture Bill

In September 2018 the Government published a new Agriculture Bill. It marks a profound change in the design, delivery and rationale of agricultural policy in the UK. It is proposed that farming can only expect to obtain public financial support for the production of public goods, such as the provision of biodiversity, improving soil management and quality, and planting of trees. There is a great deal of emphasis on the environment and the delivery of the promises that have recently been made in the 25 Year Environment Plan. As a result, the most striking aspect of the Bill is the minimal amount of actual agriculture policy in any traditional sense.

What this means for agricultural and rural policy in the UK is that the support payments currently made to farmers under Pillar I of the Common Agricultural Policy (CAP) in the form of the Basic Payment Scheme (BPS) will be removed. These payments are substantial – significantly greater than £200 per hectare in 2017. Although these payments are “decoupled” from historical levels of agricultural production it is difficult to defend them as anything other than a subsidy to farming.

Within the Bill there is a proposed seven-year transition period over which these payments will slowly be phased out. What will be left in 2027 is an agricultural policy that will in large part look very similar to what is currently referred to as Pillar II – that is, an array of agri-environmental schemes plus bits and pieces to support rural development. There are also parts of the Bill that have identified the need for improvements in how supply chains operate so as to protect farmers, as well as conditions that are retained from the CAP allowing market intervention if there are “exceptional” market conditions.

Given the extent of these changes, combined with new trade arrangements and the wider impacts of Brexit itself, predicting outcomes for the food supply chain is fraught with difficulty.  In my opinion, however, several themes warrant serious consideration.

First, it has been argued that a potential outcome of the change in agricultural policy will be reductions in the price of agricultural land. The extent to which farm payments are capitalised into increased land prices is significant. For example, Defra report median estimates of inflated land rentals of 25%. From an efficiency, as well as an equity perspective, it is difficult to defend the existing BPS. Why should bigger land owners receive bigger payments?

Second, even if the reduction in payments brings about a realignment of land values so as to reflect real agricultural productivity, the likely impacts will not stop there. A quick examination of current agricultural incomes suggests that several types of farming activity (i.e. beef, dairy, sheep) will face serious economic challenges with the loss of this income stream.  So in the short term UK farming could face serious structural changes. That process may well result in a more competitive and efficient farming sector but, even if economically justified, these changes will be politically challenging and commercially complex. And we know from experience in agriculture that to make policy happen frequently requires the use of “compensation” payments.

Third, the extent of the potential structural change in the farm sector could easily be exacerbated by the type of trade deal that emerges post Brexit. If a “no deal” is the final outcome then it is already accepted that the cost of buying food from the EU will rise. If in turn we source food from further afield, and at the same time unilaterally remove import tariffs, there is a likelihood that this may result in lower-cost food entering the UK, although not all of this food will be “fresh”.  If this were to happen while the UK farming sector was undergoing such profound structural change, it becomes very difficult to imagine what the sector will look like in 2027. The potential impacts on the UK food supply chain, in terms of how it sources and meets its requirements, become equally difficult to imagine.

Fourth, another aspect of how the Agriculture Bill and Brexit will impact the industry stems from the proposed changes to the entry of EU farm workers. Recently, the government advisor Professor Alan Manning, chairman of the Migration Advisory Committee, expressed the view that the freedom of movement of labour has been making the life of certain parts of the UK agricultural sector easy. He has gone as far as expressing the view that the impact of the potential removal of this source of labour and the likely economic consequences are not something that should concern the wider economy. Currently, the Agriculture Bill does discuss how non-UK seasonal farm workers can continue to gain access to the UK, but the numbers considered in the Bill are tiny. Furthermore, the farm sectors most likely to be affected by this change (e.g. horticulture) are those that have typically not been in receipt of high levels of subsidy under existing farm policy.

Fifth, the proposal to pay farmers for the provision of public goods will potentially extend the scope of activities currently undertaken within Pillar II of the CAP. The Government has proposed that to deliver these public goods, farmers will implement an Environmental Land Management System (ELMS). Any such system will require extensive monitoring of actions and outputs. And it is far from clear whether the required data collection infrastructures or metrics exist to allow meaningful monitoring for all the public goods identified. For example, there is aspiration to manage land so as to improve soil quality. However, it is unclear what is meant by soil quality, how it will be measured or how changes in land use as a result of changing incentives would be taken into account. It is also the subject of some debate as to whether soil can be considered a public good and as such should attract public payments.

Sixth, the Agricultural Bill places a great deal of faith in the ability of the agricultural sector to achieve higher levels of productivity and as a result become more effective and efficient. There is good reason why this increase in productivity is required. The sectoral body, Agriculture and Horticulture Development Board, has presented evidence about the poor performance of the UK agricultural sector in terms of productivity. But simply asserting the need for increases in productivity and achieving them are two different things. Furthermore, the structural changes that the sector will face mean that identifying opportunities for achieving productivity gains are uncertain.

And finally, there is the transition period and several new and somewhat untested policy proposals. Between 2021 and 2027 the existing BPS will be phased out. During the transition period it is proposed that payments can be de-linked from any form of agricultural activity or the need to farm the land.  The rationale behind this proposal is that it will introduce more flexibility and allow farmers to plan for the new policy environment post 2027. Quite what farmers will do and how they might react is far from clear. Furthermore, how will the general public react to farmers being given “handouts” for apparently doing nothing? This is hardly public money for public goods! In addition, the implementation of this policy offers the potential for farmers to take the de-linked payments as a single lump sum payment. The thinking behind this idea is that it might increase the rate of exit from the industry of older, less productive farmers. But this is only one possible use of the payment. Quite simply, if there is the need to encourage farmers to exit the industry, then there should be a single policy designed to achieve this objective. But, as currently envisaged, the transition period policies are designed to address a whole raft of policy objectives and as we know from experience, implementing policy with fewer instruments than objectives, is unlikely to be effective.

In summary, the change in emphasis in agricultural policy has long-standing support amongst many commentators and academics. However, the potential structural changes that will result, along with the evolving trade environment, mean that the agricultural sector and food supply chains in the UK are likely to look fundamentally different by the time we reach 2027. It remains to be seen if the extent of these changes will be tolerated politically.

Interesting times…

Iain Fraser, 12 December 2018

First published: foodresearch.org.uk/foodvoices/delinking-basic-payments/