What does direct payment subsidy mean for farming accounts?

I recently attended a seminar on the prospects for UK agriculture and of course, most of the conversation was circled around the uncertainty resulting from the UK leaving the EU. However, with the release of the most recent consultation from DEFRA it does look almost certain that the direct payments (BPS as we know it) will not be with us in its current shape beyond 2022.

It is also almost certain that any (likely environmental based) scheme replacing this will not be as big and will most likely require more work and cost for the farmer. This all made me consider how the UK farming accounts would look without a direct payment subsidy.

You can see on the graph to the right that I have summarised the UK’s total income from farming both net and gross of subsidies over the past 16 years.

It is clear to see that in the round, income net of subsidies has risen from a net deficit of around £1,550m (in 2000) to a net surplus of around £500m (in 2016) – perhaps an indication of viability without subsidies.

However while £500m sounds a large amount of money, it actually only translates to an average income per farm of £9,575 (based on DEFRA stats of 56,500 farms in 2016).

The Future of UK Agriculture

So what does this mean for UK Agriculture in the long term is that farm incomes are going to fall unless or until the market adjusts and increases the prices paid for UK produce.

However, it is also important to remember that as incomes change so do other factors – particularly costs. Suppliers to farming are all conscious that there is a Basic Payment – and they will all be aware that if it disappears, their customers (the farmers) will have less money to spend. In time those suppliers will have to reduce their prices if they expect to keep on selling and so some the impact to farmers of losing a subsidy is shared amongst the wider supply chain. Perhaps the best example of this is the price paid for rented land which will surely have to reduce – less obvious but nonetheless important will be basic inputs like fertiliser, feed and new machinery.

There will certainly be variation amongst the farming sectors in line with their respective reliance on subsidies – lowland red meat is likely to suffer more than the upland environmentally sensitive areas, the pig and poultry sector will likely not be affected at all and the amount of Basic Payment on a typical dairy farm is less than 1p/litre.

Subsidies are not necessarily a good thing, they distort markets and so if/when they disappear it will not necessarily be a bad thing. Over a period of time those markets will become less distorted – but only after some time has elapsed and in this case, it will be a number of years.