Agricultural policy post-Brexit – risky business?

In 2018, the Scottish Government unveiled a £250,000 fund to compensate farmers and crofters for lost stock due to ‘the beast from the east’. This adverse weather caused a record number of lamb losses in the UK.

In 2001, a foot and mouth outbreak led to the slaughter of 753,517 animals in Scotland. The total payment of £154 million for culling, and £17 million for livestock disposal, came from the Department for Environment, Food and Rural Affairs (Defra).

In between, there have been other one-off payments to farmers to assist with unexpected events.

These examples show that the UK and Scottish Governments often respond with ad hoc payments to manage risks faced by the agricultural sector. But other countries outside the EU have different approaches.

Could Scotland and the UK consider different risk management techniques in their post-Brexit agricultural policies?

highland cow

Figure 1 | In 2018, extreme weather conditions were experienced across the UK (Source: The Scottish Farmer).

Managing risks on farms

Critics say that ad hoc payments to help farmers deal with unexpected events should be considered as ‘an exception rather than a rule’. The European document on risk management states:

“One of the lessons learnt is that we cannot only rely on reactive measures. The agricultural sector has to become more resilient and take responsibility in addressing risks.”

Risk management could become more integrated into agricultural policy frameworks. This can improve farm resilience, leading to better strategies for risk management.

Risk management under the Common Agricultural Policy (CAP)

The CAP gives access to EU funding via schemes under two Pillars.

Pillar 1 involves direct payments to farmers for working farmland. These payments act as a passive form of risk management, shielding farmers from fluctuations in markets and acting as a financial safety net.  However, payments don’t provide ways to tackle market volatility, nor do they respond to market variation. A paper from the Scottish agricultural champions, amongst others, recommends these direct payments should be reduced post-Brexit.

Pillar 2 contains a risk management toolkit, which has had very low uptake from farmers due to other available safety net measures, including direct payments and ad hoc payments. Scotland has chosen not to make use of this toolkit.

Policy interest in Risk Management

On 8 March 2017, in a European Scrutiny and Environment Food and Rural Affairs Committee meeting on Brexit: Agriculture and Fisheries, George Eustice, Minister of State for Defra, stated:

“We are looking at a range of policy options around risk management and resilience.  We are looking at the approach taken in countries like the U.S. and Canada, and even Australia, where they have approaches that help farmers manage risks.”

So, what are these approaches?

1)    United States

The United States has the largest government subsidised agricultural insurance programmes in the world. This means the government guarantees compensation for farmers for losses of crops or livestock, if yields or revenue fall below a specific level. The share of insured U.S. cropland has increased from below 30% in the early 1990s to nearly 90% in 2015 (Figure 2).

The EU CAP involves less than 1% insurance (or risk management) tools and 60% income support through direct payments. Contrastingly, the U.S. agricultural policy involves 60% insurance tools, and 0% direct payments.

insured cropland.png1.pngFigure 2 | Total U.S. cropland acreage and insured acreage (Source: United States Department of Agriculture).

Commodity programmes

These schemes support farmers’ incomes when prices or farm revenue fall below reference levels. Farmers select one of two commodity programmes: Agriculture Risk Coverage or Price Loss Coverage.

  • Agriculture Risk Coverage (ARC) gives payments to farmers when their total income (i.e. revenue) from certain commodities (i.e. crops, seeds) falls below 86% of a benchmark revenue. This benchmark is calculated as the average revenue for either the county (ARC-County) or the individual (ARC-individual) farms from previous years, depending on what the producer selects.
  • Price Loss Coverage (PLC) gives payments to farmers when annual market prices for a commodity fall below a reference price, set by the U.S. farm bill. This is aimed to address sharp declines in market prices, and is not based on historical revenue of commodities. This is based on market prices, rather than the revenue obtained, for a commodity.

Supplemental Coverage Option (SCO)

This acts as a ‘top up’ of a farms existing crop insurance, increasing protection to 86% guarantee coverage.

Dairy Margin Protection Programme

This is a system of insurance for dairy farmers, providing money to farmers if national dairy margins fall below a specified level, decided by individual farmers each year.

2)   Canada

Canada manages agricultural risk through business risk management programmes. Of the three billion Canadian dollars spent on agriculture over the last five years, two thirds has gone into these programmes to support farms.

  • AgriInsurance stabilises a producers’ income by minimising the effects of production losses caused by natural hazards, and can cover crops and livestock insurance plans.
  • AgriStability is designed to help producers cope with large declines in profit, caused by low prices and production losses.
  • AgriRecovery is designed to help farmers subsidise large costs of activities, needed after significant losses from natural disasters.
  • AgriInvest is a savings scheme, providing cash to producers to manage small income declines. The government matches deposits made by the farmers.
  • AgriRisk Initiatives is a programme through which federal, provincial and territorial governments support the development of new risk management tools.

Ad hoc payments are also administered for disaster level market events.

3)   Australia

Half of Australia’s agricultural budget is spent on policy instruments to prevent income losses through disaster assistance programmes and tax concessions.

Disaster assistance programmes include:

  • Farm Household Allowances, which is an income support payment, paid to farmers facing financial hardship. These are not dependent on financial triggers, but on the individual financial status of the farmer.
  • Farm Finance Concessional Loans Scheme, which includes three programmes to help farmers in times of difficulty, with subsidised interest rates, including a Dairy Recovery concessional loans scheme. These can be a maximum 10-year loans of up to $1 million.

Tax concessions include:

  • Farm Management Deposits, which enable farmers to deal with income fluctuations. Farmers can reserve money during times of high income into a tax-free savings account, which can then be withdrawn during low income years.
  • Income tax averaging, which enables farmers to average out high and low-income years and the tax payable over five years, putting farm businesses on a level playing field with other taxpayers with a steadier income.

Future agricultural policy

Agricultural policy is changing within the EU, the UK and Scotland. If the agricultural sector is to become more resilient, elements from these countries approaches to risk management might be worthy of consideration.

Gareth Thomas, UK Research and Innovation PhD Intern, Brexit, Environment and Rural Affairs.