Brexit: subsidies hit likely but drop in pound could benefit exports

The long-term future of Britain's farmland values remains uncertain, with analysts divided on whether the market will be hit by subsidy cuts or stay flat.

The future of the UK farmland market is uncertain today as investors wait for a future British agricultural policy following the country’s vote to leave the EU.

“For the last few years, many if not the vast majority of British-based farming companies would have made a loss without subsidy income,” farmland specialist and senior manager at Deloitte, Paul Cooper, told Agri Investor, adding that farmland prices were in the long term tied to commodity prices and subsidies. “The question now is whether the government will make good the subsidy shortfall now we are leaving the agreements set out by the Lisbon Treaty.”

EU subsidies currently represent about 67 percent of the average UK farming income, according to Savills.

Experts warned that in some sectors subsidies are likely to be lower than under the EU, and that as a result associated farmland prices would like suffer more severely. Sheep farming has in particular been highlighted as a likely problem area, but some commodity crop farmland has also been the subject of speculation today.

“I can’t see that the UK government will be able to pay UK farmers as much as Brussels have,” said head of rural research at Knight Frank, Andrew Shirley. “With the competing pressures for cash from other sectors of the UK economy, I don’t think farmers alone will have quite such a strong negotiating position as EU farmers together, because the farming lobby in Britain is less powerful than lobbies in the EU as a whole.”

Ian Bailey, head of rural research at Savills, said Brexit would not dramatically affect values: “Our forecast remains that for the next five years the overall farmland market will be pretty flat. We don’t anticipate a crash in overall farmland values.”

He said that in the long term he was confident that overall farmland prices would not be substantially damaged by Brexit, adding that it could even be seen as a stronger hedge as equity markets suffer.

Observers agreed large-scale farmland deals are unlikely in the short term, but were divided over the short-term market health. While some emphasised landlords were unprepared, others like Bailey, suggested relative calm and a return to business as usual in comparison to the equity and commercial property markets.

Barclays, one of the main UK agricultural lenders, would not comment on any plans to change interest rates on farmland debt, but said to us that they would continue to do their best to support farming customers.

“There could even be a short term bounce in optimism among the farming community,” said Shirley. “We should acknowledge that many if not the majority of farmers according to polls actually wanted to leave the European Union.”

“The fact that the sterling has fallen quite sharply in the short term is good for UK farming because it makes our exports such as lamb more competitive on global markets. If the sterling remains low, when it comes to making subsidy payments in September, converting euros into sterling will be very good for farmers and a lot of them could even see a significant increase in their payments this year.

He said that some certainty could also return to the farmland market in the coming weeks, with foreign buyers again taking advantage of the fall in the value of the pound, after many deals were put on hold in wait for a decision on Brexit.

“Some of the deals that have been put on hold will start to go through because we now know one way or the other what is going to happen. The market can start again,” said Shirley.

However, Cooper warned that landlords may have to reduce rents quickly if it becomes apparent their tenants are affected by lower subsidies.

“Many arrangements will have been done before [Brexit] was really on the radar therefore rental agreements affected by subsidy income will be about renegotiation discretion. There is no point in a landlord rinsing a tenant for three years though … Common sense suggests a compromise until things level out.”