House of Commons - Environment, Food and Rural Affairs

Select Committee on Environment, Food and Rural Affairs Ninth Report

CHAPTER 2 - SETTING THE SCENE

14. We have already acknowledged the crisis in United Kingdom agriculture. Often analysis of the situation ends there, but in this Chapter of our Report we attempt to separate out the long-term trends that have been affecting the sector for a number of years from the short-term factors that have buffeted it throughout the last decade. In doing so we hope to identify which of these issues will continue to affect United Kingdom agriculture in the future. We begin by defining some terms; reviewing farm income, a crucial measure of the health of the industry; looking at the role of the marketplace and of agricultural policy in determining incomes. We conclude by identifying a number of recent events that have affected agriculture.

Definitions

15. Provisional figures for 2001 indicated that agriculture contributed almost £6.5 billion to the United Kingdom economy, or 0.7 per cent of the total, in gross value added terms. The agricultural workforce of 550,000, which equated to 2.2 per cent of the workforce,[16] worked on a total of 233,200 holdings (excluding minor holdings).[17]

16. The total farmed area in the United Kingdom, including common rough grazing land and woodland, extends to over 18.5 million hectares.[18] Table 1 shows how most of that land is used and the resulting volume and value of output.

Table 1: United Kingdom agriculture: land use and output[19]

	Area (000 ha)	Head (000)	Production (000 tonnes)*	Output (£m)
Arable crops	5,297
of which: Cereals Horticulture**	3,013 199		18,990 ***	2,019 1,921
Grazing land	11,224
grazed by: Cattle - beef - dairy Sheep		10,600 36,716	639 14,301 265	1,809 2,818 442
Pigs Poultry		5,845 163,875	777 1,564	751 1,317

Note:

* except milk, million litres
** vegetables, fruit and ornamentals
*** includes 2,729,000 tonnes of vegetables and 315,000 tonnes of soft and orchard fruit

Agriculture, in general, and farms, in particular, include many different crop and livestock enterprises in their businesses. Our report refers to United Kingdom agriculture: we are primarily interested in the production of food crops but are aware of the importance of ornamental horticulture and the growing interest in non-food crops for biomass and other industrial uses: Professor Janet Bainbridge of the University of Teesside told us that "we will see far more ... use of the countryside to grow raw materials".[20]

Devolution

17. Under concordats with the National Assembly for Wales, the Scottish Executive and the Northern Ireland Executive Committee, the Department for Environment, Food and Rural Affairs has committed itself "to work together on the application of agricultural, fisheries and food policy within their respective responsibilities".[21] The responsibilities of the three devolved executives or legislatures vary. In Scotland and Northern Ireland agriculture is a devolved issue. The Scottish Executive has "the general duty to promote the interests of agriculture and other rural industries in Scotland".[22] The National Assembly for Wales exercises responsibility under European Union law for the CAP.[23] However, the United Kingdom Government is responsible for all relations with the European Union and therefore for negotiations on CAP reform, and it is in that context that we deal here with the future of farming in the United Kingdom as a whole. It is worth noting, however, that agricultural policies in England and Scotland, in particular, are diverging within the scope allowed by the CAP. For example, the treatment of the "national envelope" in the sheepmeat sector differs between England and Wales. The rules in place to guard against recurrence of foot and mouth disease are also different in significant ways, for example, the 20-day rule on animal movements.

The farm income problem

18. Total Income from Farming (TIFF) is defined as business profits plus income to farmers, partners, directors and those with an entrepreneurial interest in the business of farming. It fell to a little over £1.5 billion in 2000, its lowest level in real terms since the depression of the late 1930s. It rose slightly in 2001.[24] Figure 1 charts both TIFF and TIFF per head since 1976.

Figure 1: United Kingdom Farming Income Trends at 2001 prices[25]

The Tenant Farmers Association described agricultural incomes as having "fallen to their lowest levels for a generation",[26] and the Policy Commission said that "farm incomes are on the floor".[27] The Institute of Agricultural Management observed that "at the moment United Kingdom agriculture is almost entirely dependent on direct payments, [and] TIFF is less than the combined value of arable and livestock direct payments".[28] The Institute also noted that "the high levels of subsidy in recent years have failed to prevent the secular [i.e. sustained] decline in farm incomes".[29] The Institute also pointed out that "there is a great deal of disparity between the levels of performance though, even of farms of similar types".[30]

The Common Agricultural Policy

19. Farm incomes are affected both by agricultural policy decisions and by the market for agricultural products. Under the Common Agricultural Policy (CAP), intervention prices, protection from imports and the payment of export refunds has allowed European Union farmers to receive higher market prices for their output than would otherwise be the case. During the course of the 1990s there has been a switch from market support to direct payments to farmers. Although such payments are argued to be less distorting, they are linked to agricultural activity, and so they also affect decisions taken by farmers and consequently their profitability.

20. Moreover, the Common Agricultural Policy also affects input prices. For example, it was pointed out during our visit to East Anglia that the set-aside scheme, under which farmers are paid to leave arable land uncultivated in order to reduce agricultural production, has the effect of setting a minimum rental value for that land. Other distortions include the historic maintenance of cereal prices through price support, which affects the cost structure of intensive livestock production reliant on cereal-based diets. As a result tariff protection and export subsidies are required for pigs and poultry even though they do not have internal European Union market support regimes. Such distortions in input prices inevitably affect profitability in the industry.

Strength of the pound

21. The relationship between sterling and the Euro, and between the Euro and other currencies such as the dollar, has a two-fold impact on the profitability of farming in this country. The strong pound (relative to the Euro) has in recent years made food imports from the rest of Europe cheaper and food exports more expensive. In addition, because CAP support payments are made in Euros, they are worth less in the United Kingdom as the pound rises in value.[31] The damage done by recent currency movements is illustrated in the Figure below, which shows a clear relationship between the recent decline in farm incomes and the strength of sterling. We note, however, that in the first six months of 2002 the Euro appreciated by approximately 6 per cent against the pound.[32] That notwithstanding, uncertainty about currency movements between sterling and the euro may affect investment decisions of international companies engaged not only in agriculture, but also in ancillary industries.

Figure 2: The relationship between farm incomes and the strength of sterling[33]

22. However, despite the role that direct payments under the CAP now play in determining agricultural incomes, it is important not to lose sight of the fact that the largest proportion of farmers' incomes has always come from selling produce in the marketplace - albeit a market in which product price support continues to play a role. Figure 3 contrasts the total value of agricultural output, including all direct and indirect support payments to farmers, with the level of spending on all forms of agricultural support.

Figure 3: Gross output from agriculture and expenditure on support to farmers[34]

Notes:

Public expenditure under the CAP and on national grants and subsidies is recorded by financial year, so 1995 refers to 1995/96 etc.

* Excludes £2,208.3 million expenditure on foot and mouth disease

Thus the revenue that farmers receive from farming is dominated by the sale of crops and livestock. It is in that context that changes in the commodity market price for farm products have had a serious impact on farming incomes.

16 Agriculture in the United Kingdom 2001, Table 2.2. Back

17 Agriculture in the United Kingdom 2001, Table 3.3. Back

18 Agriculture in the United Kingdom 2001, Table 3.1. Back

19 Agriculture in the United Kingdom 2001, Chapter 5, various Tables, and Table 6.1. Back

20 Evidence taken on 6 February 2002, Ev 52, Q.238. Back

21 See for example, Main concordat between the Ministry of Agriculture, Fisheries and Food and the Scottish Executive. See: http://www.defra.gov.uk /corporate/devolve/concord.htm. Back

22 See http://www.cabinetoffice.gov.uk/constitution/devolution/guidance/dgn.index.htm. Back

23 Ibid. Back

24 Department for Environment, Food and Rural Affairs, Agriculture in the United Kingdom 2001, p.4. See:

http://www.defra.gov.uk/esg/work_htm/publications/cf/auk/auk.htm. Back

25 Source: http://www.defra.gov.uk/esg/work_htm/Notices/account.pdf. Back

26 Memorandum submitted by the Tenant Farmers Association, Ev 270. Back