 SCOTLAND'S COUNTRYSIDE - IT'S FUTURE
CHRISTOPHER HALL BSC (AGRIC) MRICS, DIRECTOR OF RETTIE & CO.'S RURAL & PROFESSIONAL SERVICES DEPARTMENT, PLACES SCOTLAND'S LANDSCAPE - AND ITS ECONOMY - UNDER THE MICROSCOPE.
Rural Scotland covers 98% of the landward area of our country and is home to 20% of the population. As head of Rettie & Co.'s new Rural department my remit is to consider the countryside in its widest sense, to include Highland sporting estates and the extensive areas of predominantly monoculture woodlands in the Highlands and Islands and south-west Scotland.
But it is agriculture, of course, that exerts by far the biggest influence on the appearance and economy of Scotland's rural areas - and so it is to farming that we must turn first if we wish to understand what is happening to our countryside.
Scottish agriculture is facing its biggest change since the introduction of the Common Agricultural Policy in the 1970s. The most recent round of EEC reforms for the Scottish agricultural industry are phasing out agricultural subsidies, now in the form of Single Farm Payment, on a progressive basis. In 2005 the various modulation measures to the historic base for individual subsidy payments accounted for about 10-13% of the historic payment. In 2006 a further modulation of around 10-15% is expected. The recent first trading in Single Farm Payment Entitlements established an average multiplier of 2.5 times the entitlement value. By comparison, trading in milk quota often capitalised values on a 5 - 6 times multiple. This highlights the limited impact going forward that subsidy payments will have for Scottish agriculture.
The table below sets out the substantial contribution of agricultural subsidies to Total Income From Farming (TIFF). The conclusions that can be drawn from these statistics are evident. On an accumulative basis since 1995 the Total Income From Farming has been £3,809M and the total income from production subsidies has been £4,136M: a net deficit of £327M. Encouragingly, both 2003 and 2004 have been years where TIFF exceeded subsidies.
1Part of the fall in production related subsidies in 2001 can be explained by the change over from HLCs to LFASS.
Looking in more detail at the subsidy regime, the following stands out:
Total grants and subsidies in 2004 were £531.76M; including capital grants this rises to £548.04M. Within these totals the Rural Stewardship Scheme accounted for £16.27M, the Countryside Premium Scheme for £5.92M; and the Environmentally Sensitive Areas Scheme for £10.5M. A total of £32.69M allocated therefore to environmental schemes - a significant sum but only 6% of the overall subsidy and grant budget.
Interest payments from Scottish agriculture to the main clearing banks have been:
| 1998 |
£114.739M (base rate 6.25% - 7.25%) |
| 2002 |
£ 84.142M (base rate 4.00% - 4.00%) |
| 2003 |
£ 94.568M (base rate 3.75% - 4.75%) |
The rise in interest payments between 2002 and 2004 accounts for a probable overall increase in indebtedness of about £160M, employing an average base rate of 4.25% and a charge of 2% over the base rate.
In 2004 the output of Scottish agriculture could be broken down as follows:
The influence of the livestock sector is clear and this is further highlighted by the level of subsidies to different sub sectors in 2004:
"Since 1984 the number of agricultural holdings has increased from 50,683 to 50,763, but the total area in agriculture has fallen by 522,011 acres."
The figures boldly illustrate that the livestock sector accounts for about 67% of output with cereals, oilseeds, vegetables and horticulture accounting for the balance. An analysis of the subsidy payments reveals that cattle attract about 41% of the total subsidy excluding capital payments.
Since 1984 the number of agricultural holdings has increased from 50,683 to 50,763, but the total area in agriculture has fallen by 522,011 acres. Also the 2004 census revealed around 10,000 tenanted holdings, under the various forms of tenure, with rented land declining from about 5.5M acres to about 4.12M acres. Many tenants continue to buy their landlord's interest when given the opportunity - witness the Panmuir Estate transaction of 2001 when 48 out of the 50 tenants I negotiated with bought the landlord's interest to become owner occupiers.
A DECLINING MARKET IN LAND
So what does all this mean? If the farmland market were responsible for the answers then the answer would be very little. Despite the ageing population amongst Scottish farmers, ever decreasing numbers of willing successors and a strong demand for both farms and farmland, the supply of property for sale has been at unprecedentedly low levels in recent years. Since the start of the 21st century the average amount of Scottish farmland acres offered for sale has declined to around 50,000 acres with 2004 and 2005 accounting for about 75,000 acres cumulatively. This is in contrast to an annual average of 70,000 acres in the mid and late 1990s and over 100,000 acres in the late 1980s and early 1990s.
The changes to the Common Agricultural Policy Reform and the subsidy regime dictate that Scottish and United Kingdom agriculture is no longer isolated from world market forces. Cycles in agriculture have been long, and the last substantial decline was in the late 1920s and early 1930s. In the past, when liberalisation of trade allowed the importation of both grain and meat this led to problems for the domestic marketplace. Scottish agriculture is now dependent on world market prices and can do little to influence these prices. If world market prices are not going up then attention has to be turned to the underlying cost base of production.
"I have it on good authority that a beef carcass is cheaper to ship from buenos aires to liverpool than to transport from orkney to scotland's central belt."
Labour costs can only go up; chemical and fertiliser prices are most likely to continue to go up; machinery costs are likely to increase and therefore it is very difficult to see how those who have not yet turned their attention to their cost base can make marked improvements in real terms. The saviour of the domestic agricultural economy in recent years has been interest rates and they have undoubtedly delayed change and helped to smooth out fluctuations.
The way of life that farming offers and is has also had a profound impact. Many farmers in return for being their own boss, enjoying their way of life and not having the skills or desire to change are in turn happy to accept much lower returns on their capital and are willing to accept the gradual consumption of their capital base over a period of time. For owner occupiers in particular the capital base is considerable in comparison to many others and it is always salient to remind ourselves that in many other industries a 15% return on capital is the often adopted benchmark.
DECLINING INVESTMENT
In the last two years, as I tour the Scottish countryside, it has become increasingly noticeable that fences, unless linked to environmental schemes, are gradually falling into disrepair, rushes are more numerous, localised drainage imperfections are increasing and there is very little sign of investment, outwith soft fruit, potato and vegetable production, in new buildings and fixed equipment. The area of land under arable production is beginning to decline significantly and world market forces will continue to dominate - I have it on good authority that a beef carcass is cheaper to ship from Buenos Aires to Liverpool than to transport from Orkney to Scotland's central belt.
FLEXIBILITY REQUIRED
Amenity values can and will support agricultural values. If the more flexible approach to rural residential development advocated by Scottish Planning Policy 15: Planning For Rural Development is embraced with greater enthusiasm by our local councils, than they have shown to date, then there is undoubtedly a desire and willingness amongst many to create country houses of the 21st century with appropriate policies similar to those created by our Georgian and Victorian ancestors. In the short term, within the next five to seven years, I believe there will be significant changes within the Scottish farming industry.
"Despite numerous thought-provoking trips to argyll and elsewhere in scotland, i have yet to find a credible answer to justify the retention of a largely nationalised forestry industry."
It may not be apparent for another two years or so, but thereafter the pace of change could be significant and substantial. Diversification will be the answer for some but in many instances they will already have diversified and for many others they will either lack the location, capital or skill base to be able to successfully diversify.
As the world continues to shrink and living standards of many improve there will be increased demand for protein in the diets of many of the worlds' population and the huge, in proportionate terms, carbohydrate requirement for the production of protein could lead to a recovery in the medium term for Scottish farming. But it is difficult to be too positive in the short-to-medium term. The best 25% or so of Scotland's farmers will continue to thrive and to develop their business in positive, income-generating ways. The remainder will need to learn how to adapt much more rapidly in the future than has been the case in the past and there will be significant changes in land use.
In recent years the top 25% of producers have seen net income fall by 25% whereas for the bottom 25% incomes have declined by 134%!
However, low interest rates, continuing residential appreciation and relatively static agricultural land values will underpin demand for farmland throughout Scotland from outwith the agricultural sector. Whilst world market forces and world market prices will create unwelcome pain and distress in the short term we can only hope that in the medium-to-long term they provide the driving force for an improvement in commodity prices at world levels. Unfortunately it is difficult to see how our costs of production can significantly decline, in real terms or otherwise, to have a worthwhile impact on the bottom line profitability of Scottish agriculture.
"Very few estates in the highlands and islands have alternative land uses and whilst a number will continue to remove sheep stocks with red deer filling their places it is difficult to imagine much change to the countryside in these areas."
CHANGE IN FORESTRY
Looking outwith the Scottish agricultural industry, we have extensive forestry and numerous large sporting estates. The Labour Government has clearly decided that agriculture is not deserving of any special treatment and despite numerous thought-provoking trips to Argyll and elsewhere in Scotland, I have yet to find a credible answer to justify the retention of a largely nationalised forestry industry. What surprises me even more when contemplating these extensive areas of monoculture coniferous woodlands is the continued requirement for replanting of these areas, once felled, despite the ever growing influences of the environmental lobby. The Scottish Forestry Grant Scheme is undergoing yet further change which is widely believed to reduce grant aid levels, and any analysis of planting in recent years show that outwith traditional farm and estate woodlands there has been little or no establishment of substantial woodland areas unless locational specific grants have justified their establishment by leaving a net profit to the bottom line as has happened in areas of Central Scotland and Banff and Buchan.
Presuming the replacement to the Scottish Forestry Grant Scheme is responsive and helpful then there can only be increased pressure for amenity type woodlands as the continued trend towards non-farming owners of the countryside continues.
THE HIGHLANDS
Outwith the farmland and forestry sectors we have the estates of the Highlands and Islands where farming and forestry have little influence. Beyond the Highlands and Islands farming and forestry are the dominant influences on estate landscapes. Very few estates in the Highlands and Islands have alternative land uses and whilst a number will continue to remove sheep stocks with red deer filling their places it is difficult to imagine much change to the countryside in these areas.
I foresee little change to the landscape of the fertile coastal belts nor the traditional Highland landscape we treasure. The intermediate ground, typically between 400 and 1000 ft above sea level, could however be subject to significant change, with agricultural influence on our landscape rapidly diminishing in the short-to-medium term. Below 4500 ft I am optimistic about the future of our farming industry and believe it will have a strong and increasing role to play in the short-to-medium term. Above 4500 ft in some districts the non-farming community can and should have a positive influence on the landscape, but this will not prevent many other areas falling out of farming use.
For many the next five years may be a window of opportunity to exploit their capital assets. As surveyors with particular expertise in rural land and business we can do much to facilitate and enhance this. We can help in many ways other than outright sale, particularly if consulted in good time.
CONTACT CHRIS HALL:0131 624 4074 chris.hall@rettie.co.uk
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