Business challenges ahead for 2008/09

Securing food supplies

Securing global food supplies at the same time as improving environmental stewardship standards are the twin challenges facing farmers and land managers, writes Derrick Wilkinson, chief economist and head of land-use at the Country Land and Business Association.

Rising population and income growth, together with biofuel demand, are placing growing pressure on food supply. At the same time, our ability to meet that demand is constrained by limited land and water, together with flat to declining yields. Factor in the likely effects of climate change, and the impending problems are dramatic.

Early indications of these pressures are already present. With global stocks at seriously low levels and prices rising, more countries are resorting to export restrictions to alleviate the internal political pressures rising food prices bring. Similarly global food aid programmes are desperately short of food and funds. It would not be too strong to suggest global food security will be one of the most important challenges we face during the coming decades.

While addressing food security, we must also consider the impact on the natural environment not doing so will ultimately be self-defeating. In the EU in particular, public demands for higher environmental stewardship standards show no sign of abating.

This challenge must then be placed within the changing policy context. The CAP “health check” and, more importantly, the EU Budget review will have very significant effects on the structure and behaviour of the farming industry.

When the CLA began highlighting this challenge over a year ago, the government paid little attention. Now the first effects have begun to appear, with the dramatic rise in international food prices, food production has risen rapidly up the political agenda.

Unfortunately, political attention spans can be perilously short, and much of the analysis is only partial. Both government and industry have to fully understand the profound implications of this 21st century land challenge, and find practical ways of addressing it.

Dealing with the consequences of reform

Farmers have always been faced with managing challenges from sources beyond their control, and this is unlikely to change over the coming year, writes Keith Preston, director of Savills Agribusiness.

The effects of legislative change and policy reform, often have unintended consequences, or unexpected impacts on producers and the industry at large. Take set-aside, which was introduced across the EU as a means of managing supply. Unintentionally, in some circumstances, it started providing new habitats for wildlife and plant species so successfully that some conservation/environmental bodies now regard set-aside as an environmental measure that should not be abandoned.

While the jury is out as to its future, it must be remembered that, at a time when production and subsidies are no longer linked, its function was economic and not environmental. Any retention on environmental grounds should therefore be based on sound scientific evidence.

Another example of indirect effects of policy reform is the changes to the EU support mechanism for maize last autumn, which had an unintentional knock-on effect on the UK wheat price. Cheaper maize imports undercut the UK wheat market leading to a reduction in wheat prices as domestic demand from livestock producers fell.

Looking ahead, the imposition of the European Climate Change Bill and the associated greenhouse gas reductions will inadvertently increase the costs of home production, with the unintended consequence of potentially exporting production to the worst polluters. Likewise, the proposal to require companies to publish details of greenhouse gas emissions as part of the reporting process is likely to lead to additional paperwork and calculation costs for producers.

Another factor growers should consider is the EU regulations on agrochemical approvals. This will reduce the number of products available, increase the cost of production and may well also reduce the level of production while allowing imports from countries with less stringent approval systems. Home production will be undercut by cheaper, less regulated imported products.

Reducing greenhouse gas emissions

Now is the time to examine your farm’s greenhouse gas emissions and decide what to do about them, writes Keith Leddington-Hill, Laurence Gould Partnership managing director.

In partnership with the University of East Anglia‘s Climate Reduction programme (CRed) Laurence Gould has recently completed the “Carbon Baseline Survey Project” on behalf of Natural England.


The project, managed by senior environmental consultant Paul Holmes-Ling, aimed to assess the direct greenhouse gas emissions of 200 farms across England, with the aims of developing the first baseline data for the industry, raising awareness, and delivering advice to help reduce emissions (including renewable energy options, such as biogas to “offset” the businesses’ emissions).

The results show that for most sectors, nitrous oxide and methane are the most important gases, due to their potency when compared with carbon dioxide. In fact methane is 21 times more potent than carbon dioxide, and nitrous oxide is 320 times more potent.

For arable farms, the majority of emissions come from nitrous oxide from fertiliser usage and releases from crop residues ploughed into the ground. Carbon dioxide releases from energy and fossil fuel use are important, but small in comparison. The rate of sequestration (locking up of carbon) on the cereal farms studied varied widely. Existing woodland, new woodland and land use change to grassland, including grass margins and arable reversion, were the biggest sequesters.

With the government having set such high targets for reducing greenhouse gas emissions, mounting public interest, and ever-increasing costs of fossil fuel, fertilisers and other inputs, there has never been a better time to consider your options to meet future business targets.

The agricultural credit crunch

As the city struggles to absorb the impact of the sub-prime mortgage market and the “black holes” emerging in their lending books, it seems agriculture is once again a fashionable investment. Indeed, the food sector and agriculture are now being talked of as future “blue chip” industries into which city funds should be placing their investments.

Should we be pleased with all this attention or could this be the start of something more sinister, writes Simon Blandford, a partner at Smiths Gore‘s Winchester office.

What is clearly of concern is the perception that agriculture, and in particular arable farming, is riding high on the crest of a wave. Undoubtedly the 2008 harvest could be a well deserved shot in the arm for many. However, 2009 and beyond is a brave new world of rising input costs, tightening supply lines and soaring overheads. Yes, there is growing world demand and new emerging markets, but we have to take a reality check, lest we in the arable sector experience our own form of credit crunch.

Arable farmers must show prudence in the face of the waves of euphoria sweeping before us in the run up to harvest 2008. Many will face significant rental or land charge increases. The price of fuel is stratospheric and labour costs are not far behind. Fertiliser budgets are at levels never seen before. Machinery dealers are prowling with offers too good to be true. The banks are all too happy to fund those extra (marginal) acres now back under the plough.

The whole industry is clawing back a little bit too much, too quickly for my liking. Arable farmers need to stop and take stock. Don’t forget the basics: Cost control, cash flow, budgetary planning and risk management are, and will continue to be, the backbone to any successful business.

Let us all hope that this super-cycle that the city analysts predict continues to bring good fortune to the blue chip industry that is UK Ag Plc.

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