Tumultuous times for farming - but land still seen as a safe haven

The war in Ukraine could tilt a strongly environmentally-driven UK farming agenda towards a more robust strategy for food production as the government tries to wrestle with a diverse set of challenges. These include climate change, rocketing inflation, and fears of global food scarcity in the wake of the war, East Anglian land agents suggest.

Critics of some of the content of prime minister Boris Johnson's recent Food Strategy announcements suggest that while there were welcome remarks about safeguarding current levels of UK food production in the white paper, the government's plan was short on concrete proposals for achieving this.

Meanwhile supply of East Anglian farmland remains tight - although the impact of this complicated backdrop of contending forces may become clearer after harvest, agents suggest.

Giles Allen, senior associate director in the Ipswich office of Strutt & Parker pointed out that the war in Ukraine has led to massive rises in input costs, but the global uncertainty has also resulted in to sharp increases in commodity prices, meaning good margins should be achievable for 2022 and - to a lesser extent 2023 - if growers are able to manage their risks effectively.

“A year ago, one of the main topics of conversation in the East Anglian farming community was the impact of declining Basic Payment Scheme (BPS) payments and the introduction of Environmental Land Management schemes (ELMs)," he said.

"Twelve months on all the talk is of soaring fertiliser, fuel and machinery costs with farmers firmly focused on the fact that they will end up spending more on the crops they will soon be drilling than ever before. The 2023 season will be a high-risk year making careful budgeting and cashflow control crucial."

Meantime, demand for farmland in East Anglia continues to outstrip supply - putting upward pressure on prices despite the extra costs presented by recent interest rate rises and inflation,

"Farmers are still keen to buy farmland – but there is a wide range of other buyers active in the market too. In fact, the Ukrainian situation is further intensifying what was already a tight supply/demand situation.

"In times of economic uncertainty, there tends to be a flight to land from investors because people see it as a safe haven for their capital.

Farmland may only deliver modest annual returns - but it is seen as an attractive investment vehicle, say land agents (Image: Sarah Lucy Brown)

"Farmland may only deliver modest annual returns, but it is an attractive investment vehicle, because of the inheritance tax benefits and its potential for capital appreciation.

"Also in the mix are buyers looking to secure a farm or estate for amenity and lifestyle reasons. Most sales are currently achieving strong levels of interest with the resulting sale prices usually above their guide price. The overall effect on the arable land market in the East is that values are increasing modestly.”

Oliver Holloway of Clarke and Simpson said farmland was subject to a growing list of demands - and meeting them on a fixed number of acres required innovation, multi-functional solutions and new forms of government support.

"It will have been an awfully long time since two such major and contiguous events shake up national priorities – the environment warning us that we need to change farming policy followed by Russia’s invasion of Ukraine thrusting food security back onto the agenda,"he said.

But he added: "Currently two thirds of the funding is for nature’s recovery and only one third for encouraging sustainable production. Somehow farmers will need to try and balance their roles in food production and environmental improvement.

"Farmers will naturally gravitate towards environmental land management subsidies to make up for loss of income from the Basic Payment Scheme but the government’s recent policy changes have been thrown into uncertainty following the Russian invasion of Ukraine

"Although the land market remains very robust, firm prices stem mainly from a lack of supply and there is still some hesitancy to make a decision – record inflation, huge changes in input and commodity prices and war in Ukraine, will only compound this."

Will Hosegood of Brooks Leney acknowledged there was a huge amount of uncertainty surrounding agriculture at the moment off the back of Brexit as well as the changes to the direct support system.

"When you add in inflation, food shortage and the impact the horrendous Ukraine war is having on the world markets, this creates an even greater level of concern for the future of farming," he said.

"That being said, the farmland market is not one for knee-jerk reactions and is often seen as a safe haven for money during volatile times. It is therefore too early to see any changes to the market and questionable as to whether we will see changes as a result of the above.

"Having seen the usual flurry of farms hitting the market throughout April and May which include some very large investment farms most notably in Goole and the Fens and more recently in East Cambridgeshire it will be interesting to see how and to who these sell. East Anglia is still seen as one of the most farming focused regions with a vast amount of British produce grown in and this will not change.

"The farmland market is still driven by scarcity and tax with the basic premise that “they don’t make land anymore”. The ever-increasing pressure of building more and more houses result in a demand from land owners with rollover funds looking at the tax benefits of owning and farming agricultural land.2

They were now starting to to see potential new buyers in the market looking at opportunities around carbon and biodiversity net gain, he said.

"I think as these markets develop we are likely to see increased demand from non-food producing buyers looking at the potential of farms and farmland from an alternative income stream point of view.

"This concerns me and I think many in the industry fear that government policy is resulting in food production playing second fiddle to the environment.

"Boris’s Food Strategy paper released on June 13 does represent a milestone and sets out the challenges that face the food system and champions home-grown food by pledging to back farmers, but it has been met with criticism with no real details to call it a strategy.

"There needs to be a balance between the food and the environment and farmers are best placed to deliver this. It is worth remembering that the original subsidy system was brought in to encourage food production in the UK and the new Environmental Land Management appears to be moving focus away from this. This brings into question whether someone is still a farmer, if they are not growing food on their farm."

He pointed out the farmland market is an investment which reacts more slowly to change, and beneficial tax policies are in place for farmers. Therefore the market was unlikely to fall - although agents would have a better handle on this later in the year when farms are under offer and sales are completing post-harvest, he said.

Will Hargreaves, director Savills farm agency pointed out that despite rises in the cost of production, the transit of commodities out of Russia and Ukraine among other factors has pushed the price of many commodities to all-time record prices.

"History shows that in time of economic uncertainty, farmland has tended to be a sought after asset class offering a stable and less risky alternative to many other types of investment. The awful events in Ukraine will almost certainly exacerbate this trend given the higher levels of profitability we are expecting to see for some farming businesses this year," he said.

"With stronger looking balance sheets in 2022, it may be that some look to invest those gains in farmland. Confidence is a key driver for most markets - farmland is no different and we remain optimistic that land prices will remain strong as demand holds firm."

There were few signs of a rush of land to the market in East Anglia, he added

"The correlation between productivity and land price has been an abstract one for decades and there are multiple reasons, beyond producing food, that attract people to land ownership. Even if more land was available to buy, the number of buyers registered with us suggests the market has capacity to absorb additional acres without affecting average values.

"There are now more competing land uses than ever and the mood is changing in terms of the perception of the importance of food production, shoring up food security and improving food provenance. We can all remember the panic buying at the beginning of the Covid-19 pandemic and the Ukraine crisis has reminded us of our reliance on importing some basic foodstuffs.

"However, while it is still possible to buy food more cheaply from abroad it is difficult to see how consumers’ habits will change - particularly as we face a cost of living crisis. Any wholesale change will need to be driven by regulation."