Diversification will continue to help farmers build business
Michael Aubrey, partner and head of agriculture at Mills and Reeve, examines the battles farmers face when considering diversification and offers tips to those thinking of branching out.
Why would any farmer want to diversify when doing the basics of the job is becoming ever more complex and challenging? Global warming is an unhappy shorthand for the increasing volatility of our climate.
As this article is being written, sheep farmers are still suffering catastrophic losses in the unseasonably late snowdrifts and fields have suffered severe structural soil damage because of the endless rains of 2012.
Add to this the fact the list of chemicals which farmers are permitted to use is being restricted year-by-year, farmers also have to watch and consider the possible implications of adopting genetically modified systems.
The volatility of the climate is matched only by the volatility of costs of fuel, fertilisers and commodity prices.
Currency fluctuations have the ability to affect a farmer’s profitability in terms of what they receive for their crops. Then, there is the endless deluge of regulatory change sent down from Brussels and Whitehall by politicians claiming to be cutting red tape.
As a result of this, many farmers have decided the business of running a farm is complicated enough as it is and the success of their enterprise depends on their ability to concentrate exclusively on farming.
Instead of spreading risk by moving into other businesses, they concentrate on managing the uncertainties of their farming activities by the use of commodity and currency futures and options to lock into favourable prices and exchange rates.
It is also important to remember how the tax system and landlord and tenant structure work to make diversification difficult for the tenant farmer.
In 1948, the Government gave lifetime security of tenure to farm tenants and in 1976 it was extended by another two generations. The only chance a landlord had of getting his land back in hand was to obtain planning permission for an alternative use.
Against that background, landlords were not minded to allow a tenant to diversify and yet they still enjoy that security of tenure.
Although the laws relating to newer farm tenancies have been relaxed, landlords are still apprehensive.
But at a time when there is less security, tenants are going to be reluctant to invest time and money in building a new enterprise if the land can be taken away.
What is more, the Inheritance Tax regime gives up to 100 per cent relief to landlords whose tenants are farming and no relief where the tenant is using the land for some other business.
As with most industries, it is the pioneers who tend to make the mistakes, clearing the way for others to come in and do better.
The more successful forms of diversification sprang out of the attributes of the land itself. In an area of outstanding natural beauty, bed and breakfast and holiday lets were, and still are, profitable and effective kinds of new enterprise.
In the case of farmland in the stockbroker belt, making land available for equestrian pursuits was often highly profitable.
In every case, farmers had to decide whether it was more profitable to run the business, or simply to provide facilities for someone else to do this for them.
This is a continuing dilemma for those wanting to diversify and some have discovered the hard way the same skills do not necessarily qualify them to understand the intricacies of running a pop festival.
One area of disappointment has been the conversion of farm buildings for alternative office or business use.
Some farmers have been tempted to adopt too-high standards, especially where the buildings are near to the farmhouse.
The cost of conversion has often run away with them, and at a time of economic downturn, starter units have not always offered a safe haven for the landlord.
Another problem is ‘mission creep.’ In one case, the original project of a really basic low cost polo ground seemed to make sense. Then, it became apparent to retrieve the cost over-run, a clubhouse would have to be built to extract money from the members.
Fairly soon, it became clear while the builders were on-site it would be better to add some accommodation and before the farmer knew it he was the proud owner of a struggling hotel and a vast increase in his borrowings.
But despite all the challenges, opting into diversification is certainly not all doom and gloom. One theme of diversification which has often presented good outcomes is the move from growing into the processing and selling of a branded product.
The success of producers of rapeseed oil in the East and sparkling wine in the South, and that of many boutique farmers and cheesemakers is testament to what can be achieved.
Today’s attempts at diversification build on the lessons farmers have learnt from their predecessors and are not radically different from what we have seen before.
Landowners have been encouraged by the Balfour Tax case in 2010, which allows lettings which can be seen as part of the farmer’s business to qualify in full for Business Property Relief from Inheritance Tax.
The major theme of projects currently being considered is energy generation, whether by wind turbines or photovoltaic solar projects. Both of these schemes tend to involve major companies providing the infrastructure and the farmer’s involvement is limited to providing the land.
The installation of anaerobic digesters, which produce energy from farm waste, may also provide a new model of neighbouring farmers working in co-operation on a diversification project.
While it is impossible to make predictions with much confidence in the current climate of volatile change, diversification projects will of course help encourage the next generation of farmers to remain on the farm.
As far as the regulation of these pursuits is concerned, it is arguable while governments will preach the benefits of diversification, they will do nothing to remove the legal and fiscal hurdles which arbitrarily prevent this from happening in too many circumstances.
We are also likely to see the beginnings of a format like contracting agreements being used to enable one farmer to buy another’s expertise in diversification as well as in farming.
The most certain prediction one can make at this stage is that a fine crop of new houses will remain the most profitable diversification for Britain’s farming community.
Top four diversifications
Horses and livery: Most liveries tend to be set-up and operated by people whose passion is in the equestrian sector, who have extended their hobby into a business. Equestrian operations tend to be very time intensive businesses with low margins of return. If high returns on capital employed is what is required, then this form of diversification may not be for you
Holiday homes: Remember who your target client base is and design and structure your holiday homes to meet their needs. If you are focusing on high-end specification, ensure the property is fitted out as such and beautifully maintained. For those seeking to attract people looking to experience the rural idyll, design and equip your homes appropriately. Consider your location carefully with regards to tourism and services, as that will largely dictate the enterprise and prepare for high utility costs
Fishing and shooting: Fishing can be valuable but is very location specific. Again, consider your target audience, as some people will require higher specification lodges and more amenities than others. Health and safety is the most obvious consideration with shooting, requiring licences, training, ongoing checks and stringent regulation. Beware of the mixture of guns and alcohol, for if there is an accident and you do not have the proper procedures in place you may be held liable. The Health and Safety Executive and HMRC are taking a greater interest in these casual activities
Renewables: Large-scale projects such as wind, solar and hydro-electricity are location-specific, and usually capital intensive. Small-scale wind turbines can be relatively profitable and benefit from advances in technology and favourable planning rules. Solar panels are popular at the present time as costs are more flexible depending upon the size of the project. Farmers should be cautious of installing solar panels on the roofs of their farm buildings. They need to ensure the structure is capable of taking the weight and check the quality and reliability of the contractor as damage to the roof of a building can prove expensive