Lloyds TSB’s agriculture director tells Farm Business how Common Agricultural Policy (CAP) reform will shape the future of British agriculture

 

With subsidies possibly halving over the next 10 years, farmers must grasp new opportunities and help shape an industry that is set to change dramatically by 2020, says Gareth Oakley, agriculture director at Lloyds Banking Group.

 

“Currently three quarters of net UK farm income is from support,” he points out. 

 

“Support might decline gradually from 2013, but some commentators believe it could be worth only half what it is now by 2020. Farms will need to become more market focussed, generate more non-food income streams or concentrate on delivering environmental benefits to remain profitable.”

 

Mr Oakley has spent most of his career in commercial banking. He became agriculture director at Lloyds Banking Group last year at what he regards as a key time for British farming. “I’m very excited to be involved in farming at such an interesting and important time. There’s increasing demand for food crops, meat and dairy products to feed the growing UK and world population, and there are  opportunities for new non-food crop products including biofuels.”

 

He suggests the underlying trend for prices is up, but farmers need to be prepared for a lot more volatility that could threaten their businesses if they are not prepared.

 

“Volatility is likely to remain a key uncertainty, for commodity farmers especially, and could potentially have a huge impact on cash flow if not well managed.”

 

Mr Oakley believes volatility will be driven by a mix of speculation, higher production in response to higher prices, tighter supply chain management resulting in the maintenance of lower stocks, and faster changes in consumption patterns driven by more demanding consumers.

 

But there will also be other more established reasons for volatility, with exchange rates being one of them.

 

 “It has been suggested that around 60% of the large variation in farm incomes can be attributed to currency changes,” says Mr Oakley. “The future strength or weakness of Sterling will be critical to commodity prices in the UK.”

 

The pound:euro rate is very important to UK farmers because of the amount of produce traded with Europe and it also determines the value of the Single Farm Payment. But Mr Oakley also stresses the importance of other exchange rates.

 

“Most globally traded products are priced in US dollars so the pound:dollar exchange rate will become increasingly important. Hedging currencies is a skill that farmers will have to develop over the coming years.”

 

The pressure on profitability is likely to lead to more consolidation in the farming industry as farmers seek to become more efficient, but this will provide opportunities.

 

“The trend might be towards fewer and larger farms, but there will still be room for innovative farmers to build businesses producing food or delivering services in imaginative ways,”

 

The likelihood is that land prices continue to increase, given strong long term prospects for the industry.

“Higher land prices will strengthen the balance sheet of British farming, but it will put pressure on tenants and new entrants. However, farming is an industry that can obtain the finance it needs to develop.”

 

Mr Oakley says that the Lloyds Banking Group sees farming as a key industry for the future.

“The size of Lloyds Banking Group’s commitment to the industry gives us a good perspective of the challenges and opportunities facing British agriculture, while also allowing us to operate an extensive network of agricultural managers who can help individual farmers develop their businesses.”