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Sponsored article - How the end of the CAP will impact UK ag finance

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The UK remains largely in the dark about what the impact of Brexit will be.

Whether you take the optimistic view that it is a great opportunity for self-determination, or the pessimistic view that it threatens political and economic disaster, the simple fact is - no one really knows.

However, unlike most of the nation, those in the agricultural sector can talk with a certain degree of certainty about the changes that will befall them when the country leaves the European Union in spring 2019. For upon leaving the EU, the UK will also exit the Common Agricultural Policy (CAP), the financial support mechanism for farmers and agri-businesses across all member states.

The CAP has dominated agricultural finance in the UK for nearly half a century, since it joined the then European Economic Community (EEC) in 1973. Leaving the CAP will therefore represent the biggest shake up in a generation, ending around £4bn in subsidies at current levels.

Upheaval

However, even under the CAP, financial upheaval is nothing new to farmers. Perhaps the biggest change the industry will face come the end of CAP is the loss of direct subsidies based on acreage, but that scheme was only introduced in 2003. Many farmers still remember the days of quotas, and before that even, subsidised market prices.

Agricultural business owners are already having to adjust to the most recent changes in CAP policies. In 2015, British farmers received around £2.4bn in direct payments under the scheme. Following reforms agreed in 2013, last year the UK received an overall pot worth £4bn, but less than half of that was available as direct subsidies. The rest was allocated to the so-called 'second pillar' of the CAP, rural development subsidies.

So a shifting financial landscape is already par for the course of British farmers. But come 2019, what exactly can they expect?

Falling incomes

The UK government has always been a vocal critic of direct subsidies within the EU, so the likelihood is they will not be replaced. This will impact more sharply on certain sectors, such as upland sheep farming, than others. By contrast, the UK has always argued in favour of the 'second-pillar' funding offering better value, and indeed opted to reallocate some of its direct subsidies to rural development funds under the current CAP settlement.

So given that as an indication, UK farmers can perhaps expect more funding available for business development and diversification, environmental projects and work in areas such as forestry and rural maintenance.

No one knows for certain, but again the government's past positions suggest a move to market liberalisation of some form. Much will depend on the sort of trade deals the UK will be able to negotiate abroad, but none of the likely scenarios paint a very positive picture for farmers. An NFU study into three likely trade arrangements post-Brexit suggests that the average farmer will be between €17,000 and €36,000 a year worse off.

The extent to which development subsidies could offset this kind of financial hit is open to debate, especially in sectors such as cereals and dairy which would still be competing in EU markets, now against their former CAP-backed colleagues.

Finally, leaving the CAP is expected to have a detrimental effect on land prices. This would be a blow for asset financing, leaving farmers in a weaker position to secure loans. The message therefore is, if you have capital investment projects to carry out, do it now while the conditions for obtaining finance are still good.

Peregrine Finance is the UK's largest provider of asset finance to rural businesses. With more than 25 years' expertise in the field, Peregrine specialises in providing bespoke financial services to land based industries. To read more about our award winning services, please visit www.peregrinefinance.co.uk.

By Peregrine Finance

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