Rural view from New Zealand

Tom Bishop, farmer and land agent with BCM, explores farming without subsidies in New Zealand


30th April 2018

Hokianga Harbour, North Island


LACK OF FARM SUBSIDIES RAISES ENVIRONMENTAL IMPACT

The lack of subsidies for New Zealand farmers gave them a tough ride but they face another over the next few years.

A result of the lack of subsidies has been more intensive production, especially in the dairy industry, which has meant an increase in surplus nitrogen, something the NZ government is becoming very hot on resulting in similar requirements to our NVZ regulations in order to protect the environment.

The obvious question for farmers is that if they are not paid any subsidies then why should they conform to regulations which in NZ will mean reducing cattle numbers, in turn cutting efficiency and therefore profitability?

Some adjustment, and perhaps lessons from the UK regime, may be required. NZ farmers seem allergic to buildings and concrete, something UK farmers are obsessed with, and having concrete pads, separation tanks, and fences for all water courses as a future requirement, together with no funding from the government, could be a huge financial headache, just as it has been in the UK for a number of years.

Therefore should we consider whether keeping a balanced environment is always going to hinder farmers in improving efficiency, productivity and their incomes and should farmers be compensated for providing this public service or perhaps farmers should take more responsibility for the environment. In the good times, I think all farmers will consider they are adding value to the environment, but should interest rates rise, prices reduce, and a drought occur environmental practices may be the first to go.

As DEFRA Secretary of State Michael Gove has previously mentioned, any payments will require greater environmental credentials as justification to the public but we should be grateful for getting any grants or funding, which is not as common here in NZ, and I would urge all farmers and landowners to take advantage now!

No Entry Level Stewardship (ELS), Higher Level Stewardship (HLS) or Countryside Stewardship (CS) schemes are available in NZ; farmers here think we have hit the jackpot with our weak pound pushing up our BPS payments, guaranteed environment support, and the raft of other grants - they keep asking how can we not make money? Having taken a step back from UK farming, perhaps they are right and Brexit will provide this shake-up required by the industry for a number of years.

However, we need to be careful when considering this as most farms are managed in hand here, with the traditional English estates consigned to the history books and “Downton Abbey”. The reduction in subsidies may have a much more all-round effect on landlords’ investments, the local community, and associated agricultural sector. Being paid for environmental obligations may not keep the rents up to today’s levels or even farmers’ first charges as part of a contract farming agreement. Could this therefore mean the objectives of the Landlord and Tenant / Contract Farmer become misaligned with one focusing on production and the Landowner concentrating on the environmental payments?


CASE STUDY 2

A 750 acre upland farm on the edge of the Hokianga Harbour, Northland, which until recently was part of a 1,500 acre unit, focusing on finishing store cattle on an extensive system brought up from the South Island, together with a herd of Aberdeen Angus. The holding was recently split as the two brothers in ownership decided that division would allow both parties to “plough their own furrow”.

Mentioning concentrate and supplementary feeding are dirty words on this farm, with low costs and low labour essential (a common theme so far). Paddocks are rotated regularly but as they average 50-plus acres they are much larger than those on the lowland drystock and dairy farms. Some silage may be used in a hard winter but given the grass growth, low stocking density, and cattle finishing in excess of 24 months the extensive system seems to work well with the owner as sole labour force.

Constant battling against scrub and rushes requires large amounts of work on steep banks to continue to improve the grass quality. Spraying is also a large part of the work; given the steep banks, the vast majority is done on foot or horse back.

This farm perhaps mirrors a number of our upland farms at home but is successful and making profit without any form of subsidies thanks to the use of effective low-cost solutions. Some alternative income is found through beehives and the use of an airstrip by neighbouring farmers for fertilising and spraying but here is an upland hill farm surviving with no government support. Less is more in this instance!



16th April 2018

Hamilton, North Island


LACK OF FARM SUBSIDIES DEVELOPS A DIFFERENT MINDSET

In New Zealand, farm subsidies disappeared at a stroke in the 1980s. That may not be the case in the UK after Brexit but one thing common to both scenarios is the need to develop a different mindset.

When I mention Brexit, the first thing all New Zealand farmers ask is less how will it affect us in the UK and more how will that benefit farmers in NZ? This is an example of the business-minded approach adopted since the abolition of subsidies with farmers always looking to reduce costs, turn a profit, and stretch their assets as they seek additional opportunities.

Farmers and landowners appear much more flexible and cooperative, something I have already predicted may be necessary in the UK. A number of people I have met are investing in farms together for business purposes and returns rather than to fulfil lifestyle ambitions or utilise tax advantages, as is the case with many UK buyers. Farms are bought and traded more frequently with less sentiment and more fluidity in changing farming enterprises. For example, here a retiring dairy farmer may turn to the less work intensive kiwi and avocado orchard, or upland sheep enterprises to lowland suckler. However, there are still a number of long term occupiers with ownership passing through the generations since arriving in the 1850s.

Individuals, groups, and investors also seem to have the luxury of buying up land and converting it into more valuable enterprises, such as from pasture to orchard or dry stock to dairy farms, to increase capital values and saleability. I cannot imagine this happening in the UK’s current tax regime but in NZ it helps as there is no Capital Gains Tax (CGT) or Inheritance Tax (IHT) making investments more credible and flexible and less about tax avoidance and strategy. The no-subsidy system drives efficiency and encourages true investment. NZ businesses would not accept a measly one percent return on investment as is the case in the UK.

Traditionally, values for NZ farmland were based on earnings potential but are now switching back to a more NZ$/hectare basis due to investors knowing that they may be more productive and also that potential sub-division (lotting a property) could be utilised. Splitting properties is much more difficult as a result of strict planning policy and the legal requirements to split the land titles and other such rights. Overall, there is a hybrid ownership system of both farmers and investors looking for true realistic income and capital returns. Subsidies are a distant memory and it’s something perhaps that farmers are proud of in now not relying on subsidies and other market adjustments. Although incomes can be more volatile as a result, farmers feel they are reaping the rewards of farming effectively through imaginative partnership and funding opportunities, something we in the UK will have to consider post-Brexit on all farms, no matter what basis, tenure, or enterprise.

It would seem that our current tax regime does not help; it reduces productivity and investment in land over fears of taxation and upsetting our inheritance tax strategies. We therefore need to consider how to be imaginative, balancing our complicated tax structure, valuation methodology and earning potential post-Brexit.



CASE STUDY 1

The first farm I stayed on was a small 140 dairy cow herd, across 550 acres west of Hamilton, south of Auckland on North Island. This owner-occupied farm utilises home labour of the father and son team, with contractors for all arable operations.

There is an extensive system milking once a day; its low input, low output makes a very basic parlour work for them and they always question why they would need to invest in concrete and buildings when they are just not required. I think they might struggle with this system in our UK climate but it is perhaps a good point to bear in mind when old buildings may have to be sufficient or merely modified rather than replaced when our subsidies dry up.

The team makes do without flash kit in order to maintain low inputs and reduce labour but interestingly they have hit diversification in a big way, unlike a number of farmers I have so far met. An existing horse trekking enterprise undertaken by the father utilises more than 70 homebred horses. They are looking to expand this via off grid camping, huts, and other accommodation together with putting a large emphasis on education. The only way the milking parlour would be replaced is if it became part of the educational enterprise with a glass viewing platform installed for guests to view milking.

Off-roading and motorcross are both being looked into for future events as they are real cash generators. The owners potentially see the farm as more of an events venue than a core farming enterprise due to the economies of scale now required and the coming need to meet new environmental regulations. Without the enterprises, milking would not keep them financially viable.

New Zealand, a rural economy at heart with tourism spread across the holiday hot spots and cities, seems to shy away from diversification as we know it in the UK, with many seeing either it as a distraction from their farming business or not having the ability of UK farmers to exploit their location or transport links. However, with the rise in regulations and environmental conditions creeping into the industry, diversification or adding value to their products may be something many Kiwi farmers review in due course.