Bridging the funding gap

James Dunn, ADAS technical director for business management, looks in depth at getting through the farm payment transition period. It is the beginning of the end for the Basic Payment Scheme (BPS).New methods of using ‘public money for public good' will be introduced but these are still in the test and trial process at present.This year the impact of us leaving the EU won't be felt as direct payments will continue much as they did in 2019, with the same system of application and cross compliance rules as before.However next year, all BPS recipients need to be aware their 2021 payments will be a little less than what they used to be.Those receiving higher BPS payments in previous years will notice a more substantial cut, but the drop will affect every recipient to a degree.We still don't know by how much payments will reduce in 2022 and beyond, but what we do know is that by 2028 BPS payments will no longer exist at all.The new system of using public money for public good will be known as the Environmental Land Management Scheme (ELMS) but is unlikely to be in place before 2025.Depending on what the Government does in the meantime, the period 2021 to 2027 could be particularly difficult for many who depend on BPS payments to make ends meet.Impact on livestock farmersAlthough BPS recipients in every agricultural sector will take a hit, this is particularly hard hitting for grazing livestock farms.The average grazing livestock farmer depends on BPS for over 90% of their farm business profit so even a small reduction could mean the difference between breaking even and making a loss.Comprehensive forward planning and a willingness to try new ways of working will be essential for BPS reliant farm businesses if they are to successfully navigate the next few years.Carrying on with the status quo will not be a viable option.Although much is still uncertain and outside our individual control, there are practical steps business can take to safeguard themselves as much as possible from this financial risk and be in a more secure position when change does happen.We've put together the below basic plan as a starting point.Understand your current profitabilityMost business need to make a profit to survive.Look closely at your financial accounts and have a clear view of incomings and outgoings for the last 3 to 5 years.Consider speaking with a farm business advisor who can consider this independently.You will need to have a clear understanding of what your farm profit margin is and how much profit you need to maintain financial stability.Look at the percentage reductions planned for next year and calculate the hit to your 2021 payment.See if this reduction will leave you in the red.Once you understand the impact for next year, conduct a gross margin analysis to identify production efficiencies.