News
4th Mar

2015

TFA Media Release No. 03 – TFA AGM Report from the National Chairman

Tenant Farmers Association

THIRTY- THIRD ANNUAL GENERAL MEETING

WEDNESDAY, 04 MARCH 2015

Report from the National Chairman

If the buzzword for my report last year was “weather” this year it is definitely “volatility”.  It is clear that markets are becoming much more difficult to predict and even some of the basic assumptions that we have relied upon in farm business planning and budgeting for years are looking decidedly shaky.  For example, who would have predicted a year ago that the price of oil would have declined so markedly.  The long-held belief that the only direction for oil prices was up is no longer valid.

As we started 2014, the TFA presented a hypothesis about rents on holdings let under the Agricultural Holdings Act 1986 to its panels of Recommended Professional land agents as follows: Assuming that rents had been properly reviewed in 2011 and in the circumstances that the economic situation prevailing within agriculture would be sustained throughout the year, there would be no justification for further rent increases in 2014.  In response the TFA received almost unanimous support that this hypothesis should hold true.  However, rather than the agricultural economic situation remaining constant, we saw a major downturn in fortunes for nearly every commodity and particularly for arable and dairy.

Understandably many members argued that they should be having rent reductions.  However the system of rent reviews under the Agricultural Holdings Act 1986 builds in lags which might mean, if conditions continue to be difficult in the coming year, there may be rent reductions but standstills continued to be the order of the day in 2014.  Sadly, that has not prevented a number of landlord’s agents from seeking to use inappropriate tactics to pressurise farm tenants into agreeing rent increases.  This bad practice has included using the outcome of Scottish agricultural tenancy legal cases wrongly to argue, spuriously, that FBT rents are comparable with those under the 1986 Act and the old chestnut of trying to attach a separate value to the farmhouse to add to a predetermined split of any pre-rent surplus arrived at using a budgetary approach to the rent review.

The TFA has spent much time throughout last year in advising its members to stand up against such sharp practice and as a result, we are pleased with the number of situations where landlords have indeed backed off from arguing for increases and in many cases serving new rent review notices for a further discussion to take place in the following year.  It is true that some increases have been agreed but in the main these have been in situations where the rent has not been reviewed for some time or where the 2011 rent was below what might have been otherwise achieved at the time.

Having said all of that, the TFA continues to have major concerns about Farm Business Tenancy rents.  Whilst there has been a notable reduction in the number of people tendering for holdings and land at unsustainable levels of rent, it only takes one or two individuals in each case to over-egg the pudding.  The TFA is already on record in stating that the drivers here are scarcity, hubris and the economics of the madhouse.  We have been pleased to see Anderson’s Farm Business Consultants support us in that view.  As part of their presentation in their recent autumn roadshow, Andersons show the clear futility of over bidding on additional land even with low rent and finance charges on the home holding, on the premise that there is the possibility of spreading fixed costs over the wider area.  Very quickly it is clear that the farm operators simply get busier for a lower return.  We need this message to be received loud and clear by everyone tendering for new Farm Business Tenancies.  The simple message from the TFA is that people must do their homework before they bid on these holdings not just for their own sake but for the sake of everyone else where landlords and agents attempt to tar everybody with the same brush when it comes to an FBT rent review.

Notwithstanding that, I am very pleased to receive reports from right across the country where members have been able to achieve much more sensible levels of rent at FBT reviews than is evident in the tender market.  A number of landlords, including those from the institutional world, are beginning to realise that they need long-term relationships at sustainable levels of rent for both parties to be able to profit from the holding and to ensure that the holding is kept in good heart.

Arable farmers have been particularly badly hit by the volatile market place.  Grain, oilseed rape and potato prices simply tumbled through 2014 and with two poor harvests behind them there was little reserve in the tank remaining to see them through.  In the main, banks have been reasonably supportive and the arrival of the Single Payment Scheme money in December certainly helped a number of cash flow situations.  With forward prices not looking much better, the outlook for the arable sector remains sticky at best.

Much more in the headlines over recent times has been the dairy sector which again has seen massive price reductions.  Unlike the situation prevailing in 2012 when UK farmers were receiving the lowest milk price within the European Union, prices right across the EU have taken a massive hit.  There is clearly a global problem with both an increase in supply and a tightening of demand.  The Russian embargo on UK dairy products and the decision of the Chinese not to import milk powder to the same extent as in previous years, has severely dented demand.  Most commentators agree that there is no silver bullet to resolve this crisis but whilst dairy farmers batten down the hatches there are a number of things that would certainly assist.

The TFA has been at the forefront of challenging the major retailers.  With at least 85% of our dairy production used domestically there seem to be much less justification for driving prices down.  Retailers continue to market dairy products based on the concept of family farms with cows outside on green pastures whereas it is these producers we are losing week after week in favour of larger units based on indoor systems.  That is not to say that the TFA takes an ethical position on this, but what is clear is that consumers clearly value the fact that there are family farms with herds of cows grazing grass – if they didn’t then why would retailers use this imagery in their marketing.  Consumers will be expecting retailers to be supporting those very production systems but sadly they are not.  Retailers need to be putting value into what it is they are promoting.

The TFA has also been challenging DairyCo about its responsibilities to the dairy sector from which it extracts £6,000,000 of levy per annum.  In the long term there needs to be a greater degree of accountability to dairy producers through how this money is being spent and in the short term DairyCo should be focusing much more on promotion.  The TFA has suggested to DairyCo that it takes a leaf out of the marketing strategy of Fonterra in New Zealand rather than simply spending the time telling farmers how to benchmark their businesses and save costs.  That is not to say that these latter issues are not important, but many farmers already understand the need to do this and those that don’t do not have a bright future in the industry in any case.  DairyCo need to be thinking strategically about the future of the industry given the number of dairy farms we are losing week after week.

A further weapon in the armoury has to be the Groceries Code Adjudicator.  Established in 2013 it is almost farcical that the Adjudicator has had to wait until relatively recently even to have the teeth to fine a retailer which it believes to be in breach of the statutory Groceries Code.  It was as a result of a report from the Environment Food and Rural Affairs Select Committee that the necessary regulations were put in place.  The TFA was pleased to be invited to present evidence to the Select Committee as part of its Inquiry into dairy prices during which we focused significantly on the role that the Adjudicator could play in ensuring a more level playing field for producers in the long term consumer interest.

As well as the power to fine, the TFA has argued for three further changes to the remit of the Adjudicator.  First the Adjudicator must have the power to initiate own initiative investigations.  Currently the Adjudicator is only able to act on complaints.  In the same way that OFSTED has the powers to investigate the performance of schools on its own initiative and with very short notice, the same powers should be provided to the Adjudicator to be able to investigate code compliance amongst retailers at any time.

Secondly, the Adjudicator needs to be given a role to look at the whole of the supply chain.  Currently the rules surrounding the Adjudicator allow for only direct supply contracts to be investigated.  Given that the vast majority of farm produce passes through a processor before it hits supermarket shelves the Adjudicator is therefore unable to consider the impact of retailer activity on farmers where there is a processor in between.  This has been highlighted recently with some retailers driving down the price of milk to 89p for 4 pints which in turn has caused processors to reduce the price paid to farmers.  The TFA along with Farmers for Action has argued that this activity needs to be investigated by the Adjudicator, however the Adjudicator has refused to investigate partly on the basis that the complaint comes from an indirect supplier of the retailers rather than from the processors who have the direct relationship.  This anomaly needs to be resolved.

Thirdly, whilst not wanting to give the Adjudicator the power to fix prices, the Adjudicator should have the powers to investigate and report on the balance of pricing throughout the supply chain to ensure that each of those involved in the supply chain, from farmer through the processor and on to the retailer, are receiving a fair level of benefit when prices are good or sharing in a fair level of the pain when prices fall.  This information will provide much needed transparency which will assist farmers and others in their negotiations with retailers.

Although we welcomed the introduction of the Adjudicator in 2013, we recognised that the powers of the office were significantly less than what we would have preferred.  What we have seen over recent months is evidence that we were right in that assessment.  It was particularly pleasing to hear David Cameron agree, during a recent round of Prime Minister’s questions, that the remit of the Adjudicator needed to be reviewed and we are urging the Government to get on with the review quickly. I had the opportunity of speaking directly with the Prime Minister in Leeds in February of this year about our concerns.  His response was that we needed to make sure we were clear with the retailers that we meant business.  Words are one thing, actions are another.  Whilst low prices on supermarket shelves today might appear to be a good thing for consumers, if we lose a large part of our production base as a result, in the long term we will all be losers.

It is also vital that we do not lose sight of the need to enhance our resilience to severe weather.  In my report to last year’s AGM I set out some clear recommendations for improvements to flood risk management and drainage control including making sure that we were devolving responsibility to local drainage boards encompassing people with specialist knowledge and resourcing them to do the necessary work that is required to keep our rivers and drains properly flowing.  Despite the necessary work that has been going on to alleviate problems within the Somerset levels, little has changed elsewhere.  We will be holding the Government to account on what it is doing to ensure that in a volatile market place we are at least resilient to volatile weather.  It will be too late to take action when the next flood hits.  Despite the headline grabbing statements that have been made farmers simply cannot suffer months of waterlogged land again just because of the weather.

As I said, for many people, the arrival of the Single Payment Scheme money in December was a great relief and it is sad therefore that this continues to be a target for politicians of all colours for culling.  In all the debates about our membership of the European Union it is expenditure on the CAP which often gets raised as a case in point.  However within a volatile market place the cushioning that is provided by the direct payment needs to be properly understood.  Without it, food prices would undoubtedly be higher and we would be much more reliant upon imported product than we are today.

However, of course we need to ensure proper accountability for this taxpayer support part of which is ensuring that it is received by the right people.  In that respect, by far the biggest disappointment of this round of CAP Reform has been the dilution of the “active farmer” test to such a point where it is now a meaningless, box-ticking exercise.  Early on in the process of reform the TFA provided evidence to the House of Commons Environment Food and Rural Affairs Select Committee suggesting that the correct definition of an active farmer should be someone who is in occupation of land, who is taking entrepreneurial risk and in day-to-day management control.  In fact the TFA was pleased that the Select Committee endorsed the TFA’s definition and recommended it to DEFRA for implementation.  This would certainly have ruled out a large number of land owners using sham agreements in a thinly veiled pretence of “farming”.  However, DEFRA and the European Commission found an increasing number of ways to make the active farmer test more and more meaningless to the extent that it lost all potency whatsoever.  With so many of its members likely to have been appropriately disenfranchised from accessing the scheme no wonder the CLA was quick to trumpet the effective demise of the test.  The TFA believes strongly that this matter needs to be looked at again on a more objective basis in the next round of reforms.

Equally, the TFA had argued that support should not be open-ended and that individual claimants should have a ceiling above which payments would be capped.  The European Commission had suggested a cap of around €300,000 which the TFA was happy to support.  However, despite the fact that it would only have impacted on around 176 individual claimants the ceiling was opposed by both the NFU and the CLA and surprisingly for an organisation which is so avowedly anti-Pillar I, DEFRA.  The main advantage as we saw it was that the money saved could have been transferred into Pillar II for expenditure on agri-environment and rural development schemes cutting the rate of modulation needed from all other recipients.

However, there is some good news; the fact that at least in England we have been able to roll forward pre-existing Single Payment Scheme entitlements into the new Basic Payment Scheme has provided an important element of protection for many farm tenants.  The TFA is aware of a significant number of Farm Business Tenancy agreements where landlords had inserted clauses into those agreements in an attempt to seek control or ownership of new entitlements to payment under any CAP reform.  Pleasingly, very few of those clauses have proved to be successful as they have been drafted in ways which do not catch the manner in which the new entitlements have been created.  Of course it is a different story in Wales and tenant farmers there may still have to deal with situations where landlords seek to invoke clauses in tenancy agreements to snatch away entitlements at the end of their terms.

That said, tenants do need to take great care when signing up to new agreements to ensure that they are not, inadvertently, agreeing to clauses which could see them having to give up entitlement at the end of those new agreements albeit often in return for compensation but sometimes not.  Tenancy agreements need to be checked and rechecked to ensure that there is clarity on what happens to entitlements at the end of the tenancy and that this is in accordance with the tenant’s wishes.

An outstanding matter awaiting Government decision is the future for “dual use”.  This is where two parties are able to claim different payments on the same area of land.  Typically it would be where a tenant is claiming the payment for the Basic Payment Scheme and Greening elements under Pillar I, whereas the landlord is claiming payments under an agri-environment scheme under Pillar II.  The Government has already decided that this practice can continue for existing agri-environment schemes but has yet to make a decision about what will happen with the new Countryside Stewardship Scheme.  DEFRA is under pressure from the EU to end the practice and the TFA agrees that this should happen.  Too often we find situations where landlords enter into agri-environment schemes but pass the scheme stipulations onto tenants through tenancy agreements without passing on any of the benefit of the payments under the scheme.  Of course there are some landlords which do share the rewards of the schemes with tenants but there are many who don’t.

The history of the relationship between Government and major IT schemes is littered with disaster and we have described the debacle over the introduction of the Single Payment Scheme in 2005 in England as the “Ghost of Christmas Past” which looms large over the current plans of DEFRA to deliver both a new set of CAP rules and a new computer system to deal with the application process.  If that wasn’t enough, DEFRA has also decided, wrongly in our view, that applications can only be made using the online system.

Countless assurances have been received that the lessons of 2005 have been learnt and that the new IT system will be fit for purpose and easy to use.  With a few short weeks to go until the deadline for applications on 15 May, it is my fear that once again we are heading for carnage.  The difference between the situation now and that in 2005 was at least most individuals 10 years ago were able to get their applications in on time and it was only afterwards that the problems occurred.  This time we are at real risk of seeing vast numbers of individuals being unable to complete their applications on time because of the major problems with the system.

The last thing we want to do is to have to use those four short words “we told you so” but we did question from the very beginning the justification of requiring everybody to apply digitally and we have called for some time for a “Plan B”.  In 2005 the RPA became DEFRA’s whipping boy despite the fact that DEFRA had set it up to fail.  Exactly the same situation is occurring now.  We are seeing hard-working RPA staff pulling out all the stops to try to get the system working against an unrealistic, unfair and disjointed DEFRA policy.  The RPA should have been given full responsibility to develop the IT rather than it being retained as a DEFRA responsibility.  That way we would have been in a much better place than we appear to be now.

Turning to the situation in Wales, TFA Cymru Chairman Dennis Matheson is in close contact with the Welsh Government following the successful court action which meant the abandonment of its plans for implementing the Basic Payment Scheme and in particular the use of the moorland region above 400 m.  The TFA has been a strong voice arguing for the equalisation of Pillar I payment rates between lowland and the SDA areas.  However, for moorland areas we have had concerns about agriculturally inactive land owners in moorland areas capitalising on payments illegitimately.

That is why the TFA made a strong case for the need to have an agri-environment scheme for moorland areas focused on grazing livestock to ensure that farmers in those areas were properly rewarded for the significant benefits that are provided through grazing livestock systems to these most fragile and important areas.  Leaving moorland farmers without the benefit of that support would have been unsustainable and unjustifiable.  We also made it clear that if the Welsh Government could not ensure it could deliver adequate funding to moorland areas in this way, that we would have no option but to argue that payment rates should be increased for moorland in line with other areas.  Perhaps if the Welsh Government had of been clearer on its intentions, it would not be in the current position.

Turning to wider issues and looking first at planning, the TFA was successful in its lobbying to ensure important safeguards to protect farm tenants within the context of the decision in England to extend permitted development rights to allow the conversion of farm buildings into houses.  Residential development is always a lucrative business and with the Government deciding to allow farm buildings to be turned into houses without full planning consent, without safeguards for tenants, landlords would have been keen to wrestle buildings out of tenancies to profit from the new rules.

As a result of TFA lobbying, the Government agreed not to allow development of farm buildings into houses to be permitted where there is an existing agricultural tenancy and where the landlord has not obtained the consent of the farm tenant.  Landlords also need to obtain consent from outgoing tenants where the use of permitted development rights occurs within one year of the expired tenancy agreement.  A number of TFA members have already felt the benefit of this protection in situations where owners have had to seek consent before progressing any permitted development notification.

With the large expansion of the number of Anaerobic Digestion (AD) plants coming into use many tenant farmers are understandably concerned about how these plants will influence the price of land available to rent to grow grain, straw, maize and sugar beet.  The TFA is not against AD or any other form of renewable energy but it cannot be right that farmers are being priced out of the market for land available to rent because of the current feed in tariffs (FiT) subsidising renewable energy production.  It is right that the Government should continue to provide support for non-crop-based plants using food waste and green waste which are about one third as efficient as crop based systems, but to remove it for those using dedicated crops as feedstocks.  Given that growers are willing to pay up to £300 per acre to grow crops for AD – more than double what the average farmer would be willing to pay for a Farm Business Tenancy to grow maize for livestock –  there is clearly no need for it to receive Government subsidy.

Returning to more traditional territory for the TFA, we have continued to play an active role within the Tenancy Reform Industry Group.  It is hopeful following a long gestation, that we will soon see some significant changes to certain aspects of tenancy legislation.  Firstly, there has been a full review of the model repairing clauses which apply to tenancies let under the Agricultural Holdings Act 1986 which are either silent or incomplete in relation to their repairing clauses.  The aim of the review has been to update the measures including some of the financial limits which will also be future proofed.  Secondly, there will be changes to the end of tenancy compensation rules which will see the abolition of the specific values placed on items for compensation which were last reviewed in the 1980s.  The new regulations will simply refer to the value of the items to an incoming tenant providing a better basis for assessing end of tenancy matters.  Finally, subject to the coming into force of the Deregulation Bill which is currently wending its way through the final stages in the House of Lords, it will be possible to have disputes under the Agricultural Holdings Act 1986 heard by an independent expert as opposed to arbitration.  Disputes relating to Notices to Quit, given the need to ensure the highest judicial scrutiny of such matters, will continue to be heard by arbitration only.

The TFA is keen to promote good landlord tenant relationships which is why we welcome our ongoing engagement with most of the country’s major institutional landlords.  Although we have ongoing dialogue our annual, formal meetings with each of the institutional landlords has become a fixed point for discussion on a wide range of issues impacting upon the landlord tenant sector.  However, it is disappointing that this year the Crown Estate decided against having our formal gathering, the first time that has happened in at least 15 years.  Sadly, this is indicative of a much more hard-nosed approach by the Crown Estate nationally, ushered in by its new management.  The TFA has sought to remind the Crown Estate that under the legislation by which it is governed – the Crown Estate Act 1961 – whilst it is required to take a commercial approach it must do so in keeping with the principles of good estate management.  The TFA very much questions whether this second aspect of its remit is currently being met by the Crown Estate.

Our meetings with the institutional landlords have been helpful in putting together our recently launched campaign focusing on the need for longer term Farm Business Tenancies.  The TFA is using the 20th anniversary of Farm Business Tenancies in 2015 to argue that they have been too short for too long.  Farming is a long-term endeavour requiring significant capital investment, patience, good soil management and the ability to balance profitable years against the bad.  None of this is assisted by the shockingly short lengths of term offered on today’s FBTs.  Over the 20 years of the legislation the length of term on an FBT has, give or take a few months either way, averaged four years.  In fact, the Central Association of Agricultural Valuers reports that the 2013 average hit a new low of just over three years.

Landlords are reluctant to use anything like the full extent of the flexibility of the Statute but have gained considerably from the new legislation and its associated tax changes.  With much higher demand than supply, landlords can offer short-terms, for high rents at very little risk and obtain, into the bargain, 100% Agricultural Property Relief from Inheritance Tax.  By contrast the short-term nature of tenancies is holding back progression, investment and sustainable land use.

Our “FBT10+” Campaign seeks to argue that average lengths of term should be 10 years or more.  Speaking at the Oxford Farming Conference, the Scottish Agricultural Secretary, Richard Lochhead urged the UK Government to use its “fiscal levers” to encourage longer tenancies.  The TFA agrees – only those land owners prepared to let for at least 10 years should be in receipt of the generous Inheritance Tax relief and at the same time, the Government should clamp down more heavily on those land owners using share farming, contract farming, share partnerships and grazing licences as thin veneers of trading activity to gain tax advantage when in practice they take no risk, have no entrepreneurial input and lack any management control.  However, understanding how sensitive landlords are to their taxation position, the TFA is prepared to argue that those letting for over 10 years should be able to declare their income as if it was trading income for taxation purposes.

The TFA is also aware that some landlords, particularly institutions, are nervous about letting for long periods of time given the difficulties that occur when attempting to bring a tenancy to an end when the tenant is in breach, particularly for non-payment of rent.  The TFA would be prepared to see easier to use provisions for handling breaches inserted into the legislation in circumstances where landlords let for 10 years or more.

We are looking to put in place a framework which is positive for both tenants and landlords.  Landlords who already use long term FBTs should have no problem with our position.  I look forward to the debates which will take place throughout the year and to reporting back on the success of the campaign in my next annual report.

As I draw my report to a conclusion I have a number of important thank yous to make.  Firstly, the TFA works closely with around 60 professional land agents, accountants and solicitors who are experts in the landlord tenant field.  We are grateful to each of those individuals for the time and sponsorship they give to the Association and the sound advice provided to TFA members.  In the past year we have mourned the passing of two of our professionals.  John Shrive from Norfolk was a true gentleman and a strong advocate of fairness and old-fashioned values.  His death in a tragic car accident was a shock to us all.  Rowland Beaney from Suffolk was probably the most well thought of rural chartered surveyor in the country and was regularly holding on to many hundreds of arbitration appointments at any one time, such was his reputation for clarity of determination.  He had fought a long battle with cancer which sadly took him in the end – he leaves particularly large shoes to fill.

I would like to thank all of the organisations we have met and worked alongside as we continue to press the issues which impact upon the tenanted sector of agriculture.  Having now completed my first year as National Chairman I would particularly like to thank the TFA staff which has worked incredibly hard throughout the year on behalf of all of our members.  I have worked closely with James Gray and Mark Coulman as part of the National Chairman’s team and I thank them and the other members of the Executive Committee for their dedication to the Association.  Last, but not least, within the TFA team special thanks to George Dunn for all his hard work and commitment.  Finally, I would like to thank my home team for filling in when I have been away on TFA duties and being so very supportive of my role.

I look forward to serving the members of the Association in the year which lies ahead.

Stephen Wyrill

TFA National Chairman

March 2015

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