Memorandum submitted by Tenant Farmers Association (A1)
The Tenant Farmers Association welcomes the opportunity of making a submission to the Select Committee as part of its "Future of UK Agriculture: Farming Beyond Subsidies" Inquiry. The TFA is the only organisation dedicated to representing the interests of tenant farmers in Great Britain who farm approaching 40 per cent of the total agricultural area of the country. As well as providing direct advice and support to TFA members we have an important role in scrutinising policy and new legislation to ascertain its impact on farmers whose businesses and homes are based on rented property. Policy changes can have differential impacts on farmers depending on whether they are owner-occupiers or tenants. The TFA's role in lobbying Government at all levels is to ensure that the interests of tenant farmers are properly taken into account.
A principal focus of this submission will be to consider what policies are appropriate for the long-term viability of the agricultural industry and allow for the widest possible involvement from farmers regardless of tenure. It will also consider the difficulties often faced by tenants in accessing some of the current "Second Pillar" schemes and warns against policy solutions, which look to simply stepping up activity on those schemes.
HISTORICAL CONTENT AND DRIVERS FOR CHANGE
Agriculture within the United Kingdom has been supported through Government policy for a number of centuries. However, since the beginning of the 20th Century policy objectives for agriculture have moved from being production oriented towards being in favour of limiting production whilst concentrating more on wider, public benefits. Between the 1940s and 1980s the major issues of concern for the UK and the rest of Europe were food security, self-sufficiency and a policy of promoting "cheap" food for consumers. Policy was driven by memories of two world wars and slogans such as "Dig for Victory". At the end of that period the UK moved towards a set of policy objectives, which regulated the importance of production. The 1980s saw the introduction of the ALURE (Alternative Land Use and Rural Economy) package bringing in various schemes including Environmentally Sensitive Areas, Farm Diversification Grants, The Farm Woodland Scheme and The Farm Conservation Grant Scheme. Whilst they were targeted at farmers they were aimed at encouraging them to consider alternatives to agriculture.
Together with this move in the UK, at a European level the Common Agricultural Policy was changing and had begun to restrict the amount of support available whilst looking at alternatives to traditional agriculture. A big step in this direction was taken with the much-debated 1992 MacSharry reforms and again by the Agenda 2000 reforms which introduced the concept of the second pillar and a dedicated Rural Development Programme. With the desire to swell its boundaries eastwards the EU is keen to further reform the CAP since the threats to the budget of allowing the current CAP to operate in the various candidate countries is immense.
Parallel with this domestic and European changes there were also major moves at an international level. The post-war negotiations on the New World Order were an attempt to steer the world away from the type of depression experienced in the 1930s. The major aims were to reduce protectionism and promote free trade. As well as the establishment of the International Monetary Fund and the International Bank for Reconstruction of Development (The World Bank) it was envisaged that there should be an International Trade Organisation to regulate the structure of world trade. The beginnings of this latter organisation were first seen in the signing of the first General Agreement on Tariffs and Trade (GATT) in Geneva in 1947. Since then various rounds of negotiations have taken place finally resulting in the creation of the World Trade Organisation in 1999. Its functions are to facilitate the orderly conduct of world trade and the reduction in barriers to trade. Non-agricultural issues, in the past, dominated these trade talks but over the past two decades agricultural issues have been more in focus.
Despite this move towards freer trade within the international arena there is still a considerable amount of national self-interest with regard to agricultural policy. Nevertheless, the drivers for major reform of the CAP are considerable and it is therefore important to develop a coherent and viable strategy for implementing sensible and balanced agricultural reforms.
BUILDING A NEW POLICY FRAMEWORK
The TFA argues that it will be impossible to build a new policy framework without taking account of the following issues:
1. Food security as a policy aim.
2. Global demography.
3. Global warming.
4. The implications of the "free market".
5. The proportion of income spent on food.
6. The impact of policy on production costs.
7. The structure of the food chain.
8. Agriculture's contribution to the environment and rural socio-economics.
9. The implications of land tenure.
Food security as a policy aim
Although the UK and Europe appear to have achieved a stable position of food security as a result of both increased domestic production and the ability to trade, it cannot be guaranteed that this will always be the case. It took two world wars for the UK to realise that it could not rely on the colonies to feed the home population and that effort needed to be channelled into producing food from our own resources. The absence of Europe from global conflict over the last half century may have provided us with a false sense of security and we must not lose sight of the possibility that there could be problems of achieving food security in the future. The recent outbreak of Foot and Mouth Disease has also called into question our ability to protect our home production from disease threats coming in from abroad. Further powers and more resources must be allocated to the Food Standards Agency, Airport and Port Authorities to ensure that imported food is at the same high standards as our own domestic production. There is little point in having high standards at home if we allow imported food to enter our country with much lower standards. It is important that long-term food security is retained as a policy goal and that further resources are employed to ensure protection from imported disease.
The world population is growing at an alarming rate. Although current levels of food production just about match the current global food need there are doubts as to the continued ability for this to be sustained in light of predictions of a doubling of the world population in the next 20 years. This is leaving aside issues of global food distribution, entitlement failures and over "consumption" in some parts of the globe which leave us unable to ensure that everyone is adequately fed now. In these circumstances it could be seen as foolish to be looking at ways of reducing agricultural production in Europe. Also, the United Kingdom has, in the past, helped to secure global food security through its programme of Research and Development. With a reduced emphasis on this the UK risks losing its international status in this field and reduces our role in contributing to the global need. At the very least there must be the real possibility of more opportunities for Exports in the future and at most Europe must play its full part in ensuring that global food demand can be met.
There are considerable differences in the opinions of the leading experts in the field of global warming as to its extent, nature and possible impact. However, it would appear that significant shifts could take place in the productive capacity of large parts of the globe causing substantial changes in regional food supplies. It is important to consider the implications of global warming both to domestic production and the availability of food on international markets.
The implications of the "free market"
There is a perceived wisdom that suggests that agriculture should operate as far as possible in a free market with specific support made available only for the production of public goods beyond traditional agriculture. The TFA's view is that the free market is both unattainable and undesirable for agriculture.
Economic theory sets out the following rules, which all must be in place if markets are to operate advantageously, for perfectly operating, free markets:
2. The products are homogeneous.
3. No seller is big enough to influence markets.
4. No buyer is big enough to influence markets.
5. There is perfect mobility for factors of production and products.
6. Everyone involved in markets has perfect knowledge.
Impersonality requires markets to be devoid of ethics and altruismnot perhaps appropriate for the production of food or for an industry, which relies so much on the use of the natural environment and animals. The products of agriculture are far from homogenous. Even within categories of production (eg wheat, vegetables, beef and lamb) there is significant variation in type and quality of product. Some consumers also wish to differentiate between products that are essentially the same but come from different geographic areas or produced in a particular way. Behind the issue of homogeneity is the assurance that competitors are producing their goods in the same way and within the same policy structure as you. On a global scale this is clearly not the case.
The vast majority of agricultural producers in this country are price takers fulfilling the criterion that no one producer is big enough to influence market prices. However, the same cannot be said for purchasers. Although there are many ultimate consumers the main players are the major supermarkets who individually do have the power to influence markets.
The factors of agricultural production are not perfectly mobile. By far the most important factor is land, which is fixed both in space and quantity. There are also restrictions to the mobility of other factors of production such as labour, water and fixed equipment. There is also major doubt as to the amount of knowledge there is in the market between buyers and sellers.
The rules for a perfectly functioning market are not present and second best solutions will cause problems. A move towards the free market will leave agriculture exposed as the weakest link in the food chain. Examples of sectors of agriculture, which have been operating close to the free market, are pig production and poultry production. In recent years these sectors have become highly concentrated to the extent that they are almost employing industrial processes. This has had to occur to maintain competitiveness. The TFA believes that important lessons can be learned from the development of these sectors in the context of forcing the rest of agriculture down the same route.
The proportion of income spent on food
As economies grow and consumers experience increases in income, it is a fact of economic life that they will spend a reducing proportion of their income on food and food products. They may spend more on quality or processing but there will be a limit to the extent that this can occur and the ability to retain much of it on farm. In view of this, those who are responsible for the production of primary food products will have a decreasing proportion of national income spent on their products and will lag behind economic growth in the rest of the economy. In order to rebalance this position, transfer payments need to be made from those who do benefit from economic growth to those who don't. These transfer payments are funded through taxation and traditionally have been paid to producers via the Common Agricultural Policy.
The impact of policy on production costs
Despite heavy intervention in agricultural markets and the provision of large amounts of direct support through the CAP it is a fact that agricultural incomes have fallen to their lowest levels for a generation. Commentators have consistently asked where the £3 billion pounds of taxpayers' money spent on agricultural policy in the UK each year has gone. Clearly it is not staying within the farming community which is the constituency rightly identified as requiring support by the founding fathers of CAP. The TFA's conclusion is that CAP support has been translated into higher input prices, including land, sending the benefits of the CAP upstream. The squeeze on incomes not only causes problems for now but will also lead to future problems as levels of investment on farms have fallen to chronically low levels. Unless this trend is reversed the ability of UK agriculture to continue to be competitive will be severely dented. The CAP has created a high cost structure within which agricultural production takes place and therefore fails in meeting its primary and justifiable objective of supporting producers.
A good example of how this can occur can be seen as a result of the abandonment of the rule within the Arable Area Payments Scheme which required producers to have farmed arable land for two years before setting it aside. Landlords letting arable land on Farm Business Tenancies (FBTs) are now able to use the level of set-aside payment as the minimum rent they would be prepared to accept since they would be able to receive the set-aside payment themselves by farming it in hand. As the "market rent" for this land it becomes replicated across the whole of the sector for new lets and for existing FBTs which come up for rent review. This immediately adds costs at the farm level.
A new policy framework must avoid or significantly reduce the leakage of support away from its intended beneficiaries.
The structure of the food chain
As already noted above, agricultural producers are price takers. For the bulk of agricultural production there are only a few outlets through which ultimate consumers can be reached and these outlets are able to dictate, to a very large extent, the price that they will pay. Even at the intermediate level it is apparent that a small number of large operators who take commodities from agriculture (especially in the grain trade) are able to manipulate the market to their advantage. At the other end of the production chain the input supply industry is also much more concentrated than agriculture and can also dictate the prices at which they will sell inputs to farmers. Agriculture is therefore squeezed at both ends and has difficulty in maintaining much of any value added inside the farm gate. This situation can be changed in a number of ways.
1. Allowing and encouraging greater co-operation amongst existing producers (difficult and undermined by the Monopolies and Mergers Commission report into Milk in 1999).
2. Placing and enforcing restrictions on suppliers to agriculture and those who take its production (for example implementation of the code of practice on Supermarket activity).
3. Reducing the number of farm units and increasing their size (bearing in mind the environmental and socio-economic consequences involved).
Agriculture's contribution to the environment and rural socio-economics
It must not be forgotten that agriculture is the principle user of over 70 per cent of the UK land area. It is therefore the main driver in creating, maintaining and enhancing the natural environment which appears to be prized very much by the public. Policy changes that impact on the profitability of agriculture will therefore have an impact on the management of the environment including vernacular features. Agriculture is the backbone of the rural environment and the rural economy. Whilst there is much more to the rural economy than agriculture alone, without it the rural economy would be very much the poorer.
The implications of land tenure
By their tenancy agreements and the legislation that underpins them, agricultural tenants are restricted in the use of the land they farm. Essentially they can be involved only in agricultural activity. Although the definition of agriculture as contained within Section 96 (1) of the 1986 Agricultural Holdings Act is inclusive; it is only safe for the tenant to consider uses not specifically mentioned if they are similar to those which are. This definition is not helpful when farmers are looking increasingly to agri-environment and other non-farming activity as a source of new income and when Government is encouraging them down that road. Before considering non-agricultural activity tenants require the permission of their landlords which is very often difficult to obtain and may only be forthcoming at a cost to the tenant.
Tenants are also less able than owner-occupiers to take full advantage of all the features of the holdings they farm. They are restricted in the renting out of cottages, the use of spare capacity in the farmhouse for bed and breakfast accommodation, developing farm shops, the granting of wayleaves and easements and allowing public access. The TFA argues that tenants' ability to take part in non-agricultural activity of the type encouraged through the rural development programme needs to be thoroughly researched.
A NEW POLICY GOAL
In response to these nine, major issues The TFA proposes the following policy goal:
"To create a policy framework which, sustains the ability to maintain food security, allows farm businesses the freedom to thrive, supports individuals and offers scope for rural land users to supply public goods and services in return for public payment".
ACHIEVING THE POLICY GOAL
This policy goal will only be achieved if we commit ourselves to a comprehensive and sequential process of policy development requiring action at both domestic and EU levels. The elements of this process need to include the following:
1. A short term package of recovery post Foot and Mouth Disease.
2. A Retirement Scheme.
3. A Reassessment of the position of farm tenants.
4. A new direction for CAP reform.
5. Maintenance of border support.
A SHORT TERM PACKAGE OF RECOVERY POST FOOT AND MOUTH DISEASE
It is no underestimate to say that Foot and Mouth Disease has been one of the deepest traumas experienced by the farming community for many years. The impact on the tenanted sector has been particularly severe as so much of livestock tenants' capital is bound up in the livestock itself. For those who have lost their stock the anguish has been acute but we should not underestimate the chronic problems being experienced by those with stock remaining on holdings and in particular those in Infected Areas of the country or otherwise under Form D restriction. It is essential that a package of short-term aid be agreed to help recovery and to allow producers to achieve a better basis upon which to make decisions for the future.
This could be achieved through the introduction of a Foot and Mouth Disease (Consequential Loss) Compensation Scheme. It would provide farms where livestock had been slaughtered (through contracting Foot and Mouth Disease, as contiguous units or dangerous contacts) with a further payment equivalent to 20 per cent of their slaughter compensation. Those farms that have not been directly affected by the disease should also be given consequential loss compensation. This can be done through top-up payments on Sheep Annual Premium, Hill Farming Allowances, Suckler Cow Premium and Beef Special Premium. Dairy producers should receive compensation in respect of quota held as at 31 March 2001 and pig producers should be compensated on the basis of the number of pigs (differentiated by category) recorded as being on the holding prior to movement controls. Any changes between then and the introduction of the scheme would have to be explained and movements verified.
Together with this there should be a Foot and Mouth Disease (Restructuring) Loan Scheme made available to any farm business affected by Foot and Mouth Disease either directly or indirectly. It would offer heavily subsidised loans aimed at encouraging farm businesses to restructure, seek new markets and/or find new ways of doing existing tasks more efficiently.
A RETIREMENT SCHEME
The TFA has long campaigned for the introduction of a means tested Early Retirement Scheme to allow producers, whose financial position does not allow them to make a rational choice as to their future, to be helped to leave the industry. A full justification for and explanation of how such a scheme would operate is contained in Annex 1 to this paper.
The TFA was pleased that leading up to the last General Election most of the major political parties, including the Labour Party, made the introduction of a retirement scheme a commitment in their manifestos. We now look to the Government to fulfil that commitment.
As well as meeting the socio-economic needs of individuals that TFA believes that a retirement scheme would encourage more land onto the market for both renting and purchasing thereby encouraging restructuring.
A REASSESSMENT OF THE POSITION OF FARM TENANTS
The table below shows the importance of the tenanted sector in England.
Type of Agreement
Area (`000 hectares)
Full Agricultural Tenancies
Farm Business Tenancies
Source: 2000 June Agricultural Census
With the total area of land on agricultural holdings in England being 9.471 million hectares, tenanted land (including land on informal agreements) accounts for about 40 per cent of the total. This is a sizeable proportion of total agricultural land. Nevertheless, in the creation of a new policy in the field of agriculture the implicit assumption often made is that all farms are owner-occupied. This is clearly not the case. As has been noted above policy changes can have differential impacts on farmers depending on whether they are owner-occupiers or tenants.
A clear example relates to the current drive encouraging farmers to take advantage of agri-environment and diversification schemes under the Rural Development Programme. The TFA has gathered information from its members on the practical and legal constraints they face in approaching opportunities to consider such non-agricultural activity.
The practical issues relate mainly to landlord/tenant relationships. The TFA has observed that different categories of landlord can react to non-agricultural proposals from tenants in predictable ways. Whilst it is sometimes dangerous to generalise, the TFA would provide the following analysis of its experience of how the various categories of landlord react to non-agricultural proposals put to them.
Nature of landlords
Old, established estates tend to take a long-term and pragmatic view when looking at any proposals put to them by tenants. As the roots of the owners of these estates tend to be in the countryside they have a strong appreciation of what their farm tenants require. They tend to be some of the best landlords in the country and genuinely wish to see their tenants prosper. Problems can occur when the personalities involved change through inheritance or particularly if ownership and management are passed to a form of trust.
Established institutions such as the Church Commissioners, National Trust and Crown Estate are also landlords that look to the long-term. However, they each have their own individual aims and objectives that colour their decision-making processes across the whole of their estates. Nevertheless they do continue, in the main, to have the long-term interests of their tenants in mind so long as this fits with their wider objectives.
Other institutions such as pension funds and investment trusts often have a limited knowledge of agriculture and are primarily concerned about issues relating to investment potential including return on capital. The TFA finds that these are less likely to be positive about diversification and agri-environment activities proposed by tenants as they are risk averse in their management of farm estates. Often, if development were considered appropriate these landlords would rather do it themselves than allow their tenants to become involved.
County Councils collectively have a substantial number of farm tenants. These landlords are extremely short on available cash and are also subject to stringent, Central Government rules on providing "Best Value" in all their services. They are also governed by political considerations which leads to a fairly short-term approach which is not conducive for many non-agricultural activities. Small trust and charity landlords also tend to be risk averse in their attitude towards activities which are not strictly agricultural and have little cash of their own to invest in the farms they own and run. They are often swayed by vocal individuals on their boards and clearly have fiduciary duties to their beneficiaries.
Small, rural based, private landlords often have farmed themselves or have family members who are now, or have in the past been, farming. They may be cautious in allowing tenants to become involved in non-agricultural activity due to concerns about the impact on Agricultural Property Relief. They may also have family members who are looking to farm the land themselves in the future or they may even live close to the let land and have very specific views on how they want their land to be farmed as a consequence of their nearness to it.
Finally, it is our experience that urban based, private landlords have, in the main, little understanding of the countryside and the needs of farmers. They are extremely risk averse and less likely to embrace new ideas from tenants for non-agricultural activity.
Nature of landlords' agents
Besides the nature of the landlord a key person who impacts upon most landlord/tenant relationships is the landlord's agent. In the TFA's experience the role of the agent ranges from being deliberately obstructive through to practical encouragement and facilitation of the tenants aspirations for the holding. The TFA believes that more landlords' agents should be educated on the joint benefits that can be shared between landlord and tenant from successful non-agricultural projects. Tenants are put off from developing ideas for non-agricultural activity if they believe they will receive a negative response from the landlord's agent regardless of their proposal.
Nature of tenants
Clearly the nature of the tenant is a further important consideration in the process of developing non-agricultural activity on farms. The TFA has always said that there is little reason why, in every case, a good farmer could make a good proprietor of a non-agricultural business and less reason why a bad farmer could make the transition. The tenant's business acumen, determination and financial standing are all important. At the present time whilst there might be the will and the experience, a lack of access to further capital rules out consideration of diversified activity for many tenants.
Statute and contract
On top of these practical issues there are legislative and contractual issues to consider. Whilst the statute provides an inclusive definition of agriculture it remains limited in its scope. Many tenants have been concerned about going beyond the letter of the definition for fear of incurring notices to remedy or notices to quit from their landlords. There have also been concerns about the possibility that the nature of the tenancy itself could change (eg from a 1986 AHA tenancy to a 1954 Act Commercial tenancy).
Most tenancy agreements will provide for agricultural use only and will have a provision prohibiting any subletting or assigning. This will make it difficult for tenants to consider letting out units for light industrial or other uses without landlord's permission and that is not always forthcoming. A further limiting factor on the tenant will be any reserved rights by the landlord. Some diversified activity may be incompatible with reserved rights for example, there is little point in having an open farm if the landlord is likely to use his shooting rights on a regular basis. There will also be reservations relating to wayleaves and other issues which may impact upon a tenant's ability to diversify.
Landlords also have a statutory right to resume any land or buildings under a tenancy subject to planning permission. Where planned, non-agricultural activity by a tenant requires an application for planning consent; there is a concern amongst some tenants that their landlord will use this to their advantage as opposed to allowing them to continue with their plans. In these situations tenants require a guarantee from their landlords that notices to quit will not be served.
Potential successors to tenancies under the 1986 Agricultural Holdings Act, where succession rights apply, have to tread carefully in order not to mar their chances of succession. One of the conditions of eligibility is that successors have taken the majority of their livelihood from farm work on the holding, or a larger unit of which the holding forms part, for five out of the last seven years. If the potential successor has been involved in non-agricultural activity either on or off the holding then this may prejudice an application for succession. As it is normally other members of the farm family apart from the principal farmer that tend to become involved in diversified activity, this can be a major constraint if landlords are not willing to be flexible. However, as it is advisable to seek the approval of the Agricultural Land Tribunal for successions, especially on retirement, there may still be problems if care is not taken at the outset of any diversified activity to ensure that the returns do not jeopardise a potential successor's application.
Changing the Statutory definition of agriculture
There are many obstacles to engaging in non-agricultural activity on a tenanted holding. Some of these are related to the tenant himself, to the landlord and his agent, to the landlord/tenant relationship and to the legislative and contractual background of the tenancy. Many of these issues can be resolved where landlord/tenant relationships are good but where they are not it is unlikely that any non-agricultural schemes will start, let alone thrive.
Whilst the practical issues will have to be handled with care between the parties to a tenancy agreement, the legal constraints could be reduced through Government action. The TFA argues that the Secretary of State should use powers available to her under Section 109 (1) of the 1947 Agriculture Act to designate other land as agricultural within the meaning of the 1986 Agricultural Holdings Act by Secondary Legislation. Clearly there will have to be some restrictions, in particular that the agricultural use of the holding is not put in jeopardy. However it would seem reasonable to include within the definition activity specified by agri-environment schemes and the rural development programme where the uses are ancillary to agriculture. It is stressed that Primary Legislation is not required for this change.
County Council Smallholdings
While the 1995 Agricultural Tenancies Act has provided a real opportunity for County Councils to consider restructuring their estates very few County Councils have taken advantage of the opportunities. The TFA believes that County Council Smallholding estates should be viewed as national rather than local assets and there should be a greater degree of co-ordination from national government. The TFA believes that there should be a national review of the strategic reports of county farms resulting in formal guidance to County Councils about the management of their estates. We are greatly concerned about the ad hoc nature of policy towards county farms up and down the country. Some County Councils run their estates extremely well whilst others perform badly. Some County Councils have decided to follow a policy of disposal while others continue to retain their units and will replace land sold on a like for like basis.
Farm Business Tenancies
Farm Business Tenancies (FBTs) were meant to provide a better framework within which to consider diversified activity. However, surveys show that average lengths of term are very short. This provides little incentive to tenants considering diversified activity that will ordinarily require a reasonable length of time for any investment to be recouped. This is exacerbated further if there are very tight user clauses within the tenancy that the landlord is not willing to waive. Legislation, which was meant to be helpful, has created a situation where many individuals are disenfranchised from taking part in agri-environment or rural development schemes.
The TFA welcomes the Government's current review of FBTs which fulfils a promise made in 1995 by the Labour Party in Opposition. At that time Gavin Strang promised that the next Labour Government would hold a review of FBTs five years following the introduction of the 1995 Agricultural Tenancies Act which introduced them. We have been encouraging the Government to commit itself to implementing the full recommendations of the independent researchers who have been given the task of evaluating the effectiveness of the legislation. The Government has so far declined to make this commitment.
There is no doubt there has been an expansion of let land following the introduction of the 1995 Agricultural Tenancies Act. However, in the main this has been taken by existing producers and has been of particular benefit to those with low rent and finance charges on their home units. There have been relatively few opportunities for whole holdings which is disappointing. The combination of the housing legislation of the late 1980s and FBTs provides a greater incentive to landlords to split land from dwellings and to let them under different management for the highest return.
The TFA believes that the legislation has allowed the pendulum to swing too far in the landlord's favour. The average length of term of tenancy being offered by landlords is very short. Independent research would indicate that the average length of term is just over four years for all holdings and 11 years for fully equipped holdings. However, there is no information collected on break clauses and many of these agreements will have an effective life much shorter than that stated on their tenancy agreements given the ability for landlords to terminate them early.
A missing element in the new legislation concerns the ability for landlords and tenants to use the provisions of the 1986 Agricultural Holdings Act by mutual consent. This is particularly important where there is an existing landlord/tenant relationship, which has to change for whatever reason. Two examples are where the landlord is able to serve a notice to quit on a tenant following grant of planning permission and wants to provide an alternative holding elsewhere on his estate or where the landlord has a progressive policy of moving tenants through the estate and is now unable to grant a new holding on the same terms as the old holding. There are also problem when land is to be added to an existing tenancy.
The inability to contract back stifles freedom of contract and puts a break on the proper development of farm business that are based on tenanted units. The Government is already encouraging restructuring within the industry but this has been made difficult for tenanted units let under the 1986 Agricultural Holdings Act as they are now unable to add land to their existing tenancies.
There is also a problem with agreed succession for tenants under the 1986 Act. The 1995 Agricultural Tenancies Act does not provide that agreed successions are exempt from being classed at FBTs. This means that where there is an agreement between a landlord and a tenant they are forced to take the expensive and time-consuming route of going to the Agricultural Land Tribunal for consent. This legislative burden on the tenanted sector needs to be removed.
The new legislation has not provided a significant increase in the number of opportunities for new entrants that can be sustained into the long run. Due to high rents, short lengths of term and the restrictive user causes employed by landlords, many new entrants fail early into their tenancy agreements.
Unfortunately, there is not a free market in tenancies where landlords and tenants can agree terms. In most cases landlords are in a position of being able to dictate terms given the number of tenants seeking land.
The TFA recognises that there is a risk of unsettling landlords if too many, radical changes to legislation are proposed. The goal is to make as few legislative changes as possible whilst improving incentives and reducing disincentives to create a more beneficial position. However, there are legislative changes that will be required as follows:
1. A change to Section 4(1) of the 1995 Agricultural Tenancies Act to allow contracting back into the 1986 Agricultural Holdings Act by mutual consent of the parties to an existing agricultural tenancy. The position should be confirmed by the service of notices by each party.
2. Section 4(1)(d) and associated sections of the 1995 Act need to be amended to allow successions by agreement to be valid under Section 4(1)(d).
There are four important changes to the taxation of agricultural tenancies that would provide incentives to landlords to let their land for longer periods of time and with less strict user clauses.
1. Landlords who have agreements with their tenants which, from the outset have the ability to run for 10 years or more and do not contain clauses limiting use to agriculture only, should be able to take advantage of Capital Gains Tax, Roll Over Relief on any expenditure on improvements on the let land at any time during the tenancy. The relief should not be available where a landlord has an agreement with a tenant that contains a break clause operable by the landlord at any time within the first 10 years of the tenancy agreement. However, it should not be excluded in situations where the tenant can only operate the break clause.
2. Since rental income is not considered to be income from business assets landlords are unable to claim the higher taper relief for business assets on disposals of land or buildings previously subject to tenancy agreements.
Landlords who have agreements with tenants as defined in 1 above should have access to the taper relief for business assets on disposals of agricultural land and buildings previously tenanted.
3. Agricultural landlords, who have agreements with tenants as defined in 1 above, should be able to declare their rental income under Case I Schedule D as opposed to Schedule A. Those who are farming in hand or under a contracting agreement have the ability to do this already and thus creates an anomaly between land that is farmed in hand and land which is farmed under a tenancy agreement. It is particularly important for those landlords who obtain a significant proportion of their income from letting land and are unable to make maximum use of the tax efficiencies of pension schemes to provide for their retirement. It is our view that the inability to declare rental income from agricultural land under Schedule D creates a block to new lets of holdings.
4. Landlords may be more willing to draw up tenancy agreements without strict agricultural user clauses if they were able to be assured that their position as regards Agricultural Property Relief would not be put in jeopardy by the tenant's wish to consider rural development or agri-environment type activity.
The review of FBTs presents a major opportunity to amend legislation and policy before there are long term, damaging consequences. The TFA believes the changes suggested here would go a long way to rebalancing the position between landlords and tenants and allowing the Act to better reach its objectives.
Attitudes of Planning Departments
On top of all these constraints faced by tenants it must also be pointed out that the attitude of planning departments, despite PPG7, can be less than conducive to facilitating viable, diversified enterprises.
A NEW DIRECTION FOR CAP REFORM
It has already been noted that producers currently get very little of the benefit of the billions of pounds spent through the CAP. The CAP has simply served to inflate the costs of agricultural production thereby squeezing the margins received by producers. In view of this the UK should lobby for the introduction of a Producer Bond in future CAP reform negotiations. The introduction of a Producer Bond, guaranteeing annual payments would also ease the burden of administration and would ensure that most production decisions would be decoupled from support payments. Environmental top-ups could also be offered.
A bond would represent a radical change in the process of support payments but would be reasonably simple to administer. It would begin by considering the total amount of direct support paid to producers in an average year. This would include for example Arable Area Payments, Set-aside, Livestock Subsidies, Extensification Payments, HFA etc. An average year could be calculated by considering the level of these payments over a historical period and taking a broad average.
Once an annual, overall figure had been established, the farmer would then receive a document entitling him to receive future payments every year at that average level over say five, ten or fifteen years. The farmer would keep that document and continue to receive the annual payment irrespective of what he does with his land. However, there would be a document which he would be expected to sign setting out that he will fulfil basic environmental objectives and, as far as possible, comply with the codes of good agricultural practice.
If the Government were then to guarantee this string of payments to whoever owned the document of entitlement then farmers would be free to trade these in the financial markets for a capital sum if they desired.
There would be four main elements to a new Bond regime. The first, which would be called "A", would be a guaranteed sum (perhaps index linked) payable every year for a period of say five to ten years which recognises the need for a transfer payment to primary producers. This would be a Bond in every sense of the word and could be capitalised in the market place. The next element called "B" is future compensation for the removal of price supports in sectors not already covered by direct payments or Bonds. This would be transitional and some of this would be fed into "A" when Bonds under "A" were reviewed. In the long run "B" would disappear but "A" would be that much augmented. The third element called "C" would be annual payments to producers in return for an annual contract covering environmental, rural development and animal welfare issues. This would be set at a "Tier 1" compliance level and the payments would not be capable of assignment or capitalisation. The payments whilst guaranteed for five years would depend upon the individual producer's ability to meet the contractual terms. The fourth element called "D" would again be in respect of an annual contract but for a higher compliance level than "C". Again there should not be the possibility to assign or capitalise these payments.
Consideration should also be given to the introduction of a new entrants bond under appropriate circumstances.
# A bond scheme would have major administrative advantages and would save considerable amounts of money through the abandonment of the scheme administration carried out under the terms of the existing CAP. It would also help to ensure that the EU met its WTO commitments as no individual products are being supported.
Maintenance of border support
Competitor countries may still employ methods of support which are production linked and therefore present an unfair trading position with domestic producers. Border protection will continue to be necessary to mitigate the impact of this activity and to stop the influx of cheap imports produced with low animal welfare, animal health, safety or environmental standards when compared with domestic production.
The TFA presents the following major conclusions.
1. It is important that long-term food security is retained as a policy goal and that further resources are employed to ensure protection from imported disease.
2. New policy must take into account the rapidly increasing world population.
3. The implications of global warming both to domestic production and the availability of food on international markets must be carefully considered.
4. The free market is both unattainable and undesirable for agriculture.
5. There is still a justification for the continued support of agricultural producers.
6. The CAP has created a high cost structure within which agricultural production takes place and therefore fails in meeting its primary and justifiable objective of supporting producers. A new policy framework must avoid or significantly reduce the leakage of support away from its intended beneficiaries.
7. Agriculture is the main driver in creating, maintaining and enhancing the natural environment which appears to be prized very much by the public.
8. The ability of farm tenants to take part in non-agricultural activity of the type encouraged through the rural development programme needs to be thoroughly researched.
9. The new policy goal for agriculture should be:
"To create a policy framework which, sustains the ability to maintain food security, allows farm businesses the freedom to thrive, supports individuals and offers scope for rural land users to supply public goods and services in return for public payment".
10. A Foot and Mouth Disease (Consequential Loss) Compensation Scheme should be introduced.
11. A Foot and Mouth Disease (Restructuring) Loan Scheme should be introduced.
12. A targeted Retirement Scheme for farmers should be introduced.
13. The Secretary of State in DEFRA should use powers available to her to extend the statutory definition of agriculture to include activities encouraged under the Rural Development Programme.
14. There should be a national review of the strategic reports of County Council Smallholdings resulting in formal guidance to County Councils about the management of their estates.
15. Farm Business Tenancies have in the main been a benefit to existing producers (particularly owner-occupiers) those with low rent and finance charges on their home units.
16. There should be a change to Section 4(1) of the 1995 Agricultural Tenancies Act to allow contracting back into the 1986 Agricultural Holdings Act by mutual consent of the parties to an existing agricultural tenancy.
17. Section 4(1)(d) and associated sections of the 1995 Agricultural Tenancies Act should be amended to allow successions by agreement to be valid under Section 4(1)(d).
18. Landlords who have agreements with their tenants which, from their outset have the ability to run for 10 years or more and do not contain clauses limiting use to agriculture only, should be able to take advantage of Capital Gains Tax, Roll Over Relief on any expenditure on improvements on the let land at any time during the tenancy.
19. Landlords who have agreements with tenants which, from their outset have the ability to run for 10 years or more and do not contain clauses limiting use to agriculture only should have access to the taper relief for business assets on disposals of agricultural land and buildings previously tenanted.
20. Agricultural landlords who have agreements with their tenants which, from their outset have the ability to run for 10 years or more and do not contain clauses limiting use to agriculture only should be able to declare their rental income under Case I Schedule D as opposed to Schedule A.
21. Landlords willing to enter into agreements with tenants which, from their outset have the ability to run for 10 years or more and do not contain clauses limiting use to agriculture only should be assured that their position as to Agricultural Property Relief would not be put in jeopardy by the tenant's wish to consider rural development or agri-environment type activity.
22. The UK should lobby for the introduction of a Producer Bond in future CAP reform negotiations.
23. Border protection will continue to be necessary to mitigate the impact of unfair competition from abroad and to stop the influx of cheap imports produced with low animal welfare, animal health, safety or environmental standards when compared with domestic production.
Tenant Farmers Association
23 October 2001