Agriculture needs economies of scale
Richard Sanders, partner, Fisher German Estate Agents also says food waste is diminishing in the UK and much of it is post purchase by the consumer.
What innovations have you seen in agriculture?
The sector is becoming more specialist, with individual businesses focusing on far fewer enterprises to achieve economies of scale. This allows investment in technology and expertise. This has largely taken place in the pig and poultry sectors and is in process in the dairy, specialist vegetables and fruit crops. It is less developed in the beef and sheep sectors. The traditional “combinable” crop sector which means harvesting many types of crop with a combine harvester is becoming more specialist with larger operators farming greater areas by contracting their work on small farms. UK agriculture as a whole is being adversely effected by substantial surplus world stocks of basic commodities such as wheat and maize. It is difficult to see how farm profitability will change until world supply is reduced. The focus for innovation is therefore cost reduction by achieving economies of scale.
Where does agriculture sit as an investment?
Most UHNWs would consider investment in land as a separate investment proposition to agriculture as a business. Investment in land is seen as secure and safe in that, whilst the value might fall, it is difficult to see how it could disappear to nothing. It is also relatively illiquid and therefore considered a good investment in terms of discouraging ongoing generations from mismanaging their inheritance. The investment currently provides significant tax advantages. The Inheritance tax reliefs currently available on land and agricultural assets make it an extremely attractive asset class. In addition, they can derive some considerable enjoyment from owning these assets. The business of agriculture and farming on the other hand is relatively unprofitable currently, requires high levels of investment and is difficult to manage. It would therefore not feature in most investment portfolios other than to satisfy the requirements to get tax relief. In the longer term, most investors take the view that land and agriculture will increase in value as populations and demand for food increases.
To what extent is there a performance trade-off when going green?
From a land investment point of view, the cost of investing in this way is relatively marginal because subsidies are often available to mitigate the cost of operating a “green” system. Our view would be that agriculture in the UK is sufficiently regulated and customer focused for normal practices to be considered sustainable in the main. Soil management is an exception and some businesses will have to accept a short term performance trade off to bring soils back to a sustainable condition by improving organic content and fertility. Again many UHNWs seem interested in this area and are prepared to invest for the long term to ensure that their soils are productive in the future.
Tell us about ‘farm to fork’.
Food provenance is critical, as borne out by recent meat scandals. Some specialist Farm businesses are focusing on this rather than expanding and achieving low cost of production for basic commodities. Interestingly, many UHNW individuals seem very interested in these enterprises because they can generate high margins. We don’t see them forming part of a formal investment strategy though.
Is it more attractive to invest in companies that reduce food waste or crop supply?
Food waste is substantially diminishing in the UK and much of it is post purchase by the consumer. I would not think that there is much remaining food wastage in UK agriculture except in fresh fruit and vegetables where the waste is caused by seasonal overproduction rather than inefficiencies. The wastage is due to oversupply of a perishable product. From UHNW investor point of view, I doubt that this would impact on their decisions.
We hear a lot about “precision agriculture.” What exactly is it?
Precision agriculture is the use of technology to apply inputs precisely where they are required. This could involve more accurate use of machinery through satellite control or application or fertilizers and sprays to the specific areas that require them. It is investable on a farm level if the business has the scale to make the investments. The returns relate to the cost savings in the input costs. The technology is also investible in terms of the businesses that supply it such as soil mapping, satellite guidance and technically advanced machinery.
Will EU subsidies stop after Brexit?
The government has stated that it will continue to provide subsidies at their current level to British Agriculture after Brexit. Our view though is that it will be very difficult to sustain this politically with so many other demands on Treasury funds such as the NHS. If funding does continue, we would expect that it would require more active provision from farmers to be targeted at Conservation measures, water management to include flood mitigation and soil quality management for example. We would also expect it to be targeted at areas of the UK where farming would not be viable without subsidy such as National Parks, Uplands and extensive grassland areas. We do not expect the current Basic Payment system whereby subsidy is paid at a relatively fixed rate with very little contribution required from the claimant to continue after Brexit.