Why is the return so low?

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The first job I had after leaving university was with an insurance company which specialised in agriculture. During the time I was there, the company introduced a new type of policy for farmers, namely Consequential Loss. The basic idea was that, if a farmer lost stock, a building, or whatever due to storm, fire or some other insured peril, they could claim not only the value of what had been lost, but also for any loss of profit which ensued. A meeting was convened in Cardiff to which the local inspectors from the southern half of Wales were summoned to hear a presentation on the benefits of the policy and to help them sell it. After the presentation, Johnny, ‘our man in Carmarthen’ as he was, quietly asked a question about the information that farmers would have to provide to get the insurance. Specifically, which figure would they have to give about their profit – the one they gave the Inland Revenue or the actual one. After hearing the explanation that both the premium and any payout would be based on the figure that they put on the application form so it needed to be an accurate figure, and that, in any event, providing inaccurate information could invalidate the whole policy, Johnny shook his head briefly before declaring, “Well, I’ll never sell any of that in Carmarthen”. Some might see that as a foul calumny against the honest farmers of Sir Gâr, to which all I can say is that Johnny was astute, was good at a job of which he had decades of experience – and he knew his customers well.

An alternative, and rather more charitable, interpretation of the point that he was making is that the way numbers are presented, and the assumptions used to derive them, can sometimes depend on the purpose for which they are to be used. I wonder, however, if that little anecdote might still help to explain the gulf between the farmers’ understanding of the impact of the changes to inheritance tax (IHT) and that of the Treasury. I don’t recall many farmers ever underestimating the negative impact of any change that they don’t like (which at times seems to cover any proposed change), let alone being optimistic. That’s another way of saying that it’s just possible that they may be ever so slightly overstating their case. On the other hand, the idea that Rachel Reeves and a few allegedly ‘clever’ economists at the Treasury understand agricultural finances better than the average farmer is risible; the probability that the government are significantly underestimating the impact of their proposals is high. But unless we start from a set of commonly agreed and understood assumptions, we will not close that gap in perceptions.

If we assume that the average family farm in Wales really is worth the millions of pounds which would start to attract IHT, and that the average farm income really is as low as some are saying, then in purely financial terms, farmers in that position would be better off selling up, buying a house in the nearest town or village, and putting the rest of the money into a building society from which they would enjoy a much better income. Those are big caveats though. (And the issue isn’t purely financial either. Family farms are the backbone of many rural communities and a major factor in the survival of the Welsh language in the rural north and west of Wales. Few of us would want to see that undermined.)

But if the return on capital from farmland is so poor, why is the price so high? Conventional economics would suggest that low return on an asset should lead to lower asset prices. Part of the reason for the high price of agricultural land is precisely the current exemption from IHT, an exemption which makes it attractive for the very wealthy to put part of their wealth into an asset which, unlike their other assets, will not be taxed on death. And part of the problem with Rachel Reeves’ proposal is that she’s only doing half a job. Not only will her changes not be enough to deter the transfer of non-agricultural wealth into farmland, they will therefore also not do enough to stop the artificial inflation of farm land prices, and will as a result catch many more farmers in the net than the government are claiming.

They also don’t address the real underlying issue – why are the rewards from such an essential enterprise as agriculture so low for those engaged in it? But that’s a whole other question, and not one about which the Chancellor seems particularly bothered.

Cracking down on crackdowns

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One of the key weapons in the armoury of a desperate politician is to announce a ‘crackdown’ on something or other. It’s not unique to the Tories – I seem to remember a certain T. Blair announcing ‘crackdowns’ on various perceived sins – although it’s more likely to come from a government which has the power to do something than from an opposition which does not. It was Sunak’s turn yesterday, with his pledge to ‘crack down’ on mob rule. Announcing a crackdown always sounds forceful and macho – although it doesn’t exactly play to Sunak’s visible strengths. Or even his invisible ones. The most useful crackdown would probably be a crackdown on the announcement of crackdowns.

‘Mob rule’ isn’t something which is easily defined either – at least, not by someone who wants to prevent people blocking the streets protesting about climate change or war whilst also joining in with those who use their tractors to block the streets in protest against revisions to farming subsidies. Whilst I would describe neither as ‘mob rule’, in Sunakland it seems that either there are good mobs and bad mobs or else the definition of a mob is such that protests against a Labour government in Wales are magically excluded. And that, of course, is part of the point – it’s really divergence from his own views on which he wishes to crack down.

I’ll admit that I’m not sufficiently familiar with the details of farming finances and subsidies to judge whether the Welsh Government’s proposals are as bad as some farmers are making out. What I do know is that any Brexit promise to maintain the level of farm finance was as false as all the other promises, and that a reduction in funding inevitably leads to replacing previous schemes. George Monbiot argued yesterday that the differences between the English schemes and the Welsh schemes are not as great as they have been presented by some, and that “The main difference is that in Wales, the offer for farmers is better – with more consistent payments and a smoother transition from the old system”. If that were true, it would mean that Sunak was busily supporting farmers who are arguing that a deal better than that which his government has offered isn’t good enough. An entirely normal level of honesty from the current UK government. I suspect that the truth is more nuanced. Farming subsidy schemes are complex and any change means, especially if accompanied by an overall reduction in funds, that some farmers will inevitably lose out, even if the Welsh scheme is indeed better overall than the English equivalent. And that will undoubtedly impact rural communities in Wales, for whom the farming industry is still a key factor.

The easiest ‘solution’ would be to ensure that the pre-Brexit levels and methods of funding were maintained, a matter which is wholly in the hands of one Rishi Sunak. Joining in with protests which are effectively against his own government’s actions is taking a leaf straight out of the playbook of Welsh Labour members in relation to hospital and school reorganisations, so there isn’t a lot of moral high ground for Drakeford et al in this. Although constrained by Westminster decisions on funding, the Welsh Government does have some room for manoeuvre on what is still, officially, a consultation process. I really hope that they will listen carefully and use that room for manoeuvre. It’s doubtful, however, that they will be able to please everybody and still achieve the aims that they’ve set out for themselves. Calling on Sunak to intervene and over-ride whatever is decided in Wales (as some of the protesters have done) is counter-productive for an industry which has more direct influence over what is decided in Cardiff than it does over what is decided in London, and is, instead, playing to the agenda of people whose aims go way beyond reforming farming subsidies.

Sunak’s apparent ‘support’ for Welsh farmers is a double-edged sword, and his real agenda is about party political advantage and undermining Welsh democracy. If English farmers start protesting with tractors in the centre of London, he’ll soon enough be ‘cracking down’ on the ‘mob’.

Drawing perverse conclusions

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If a good trade deal exists between two countries (or trading blocs), it should be no surprise to anyone if producers in those countries take advantage of that deal to sell their produce. Neither should it by any surprise to anyone if the result of making it easier to trade with the partners to that deal means that producers concentrate their sales in those places to which it is easier to sell. That is, after all, the purpose of having a deal in the first place. It does, though, seem to have come as a surprise to the International Trade Secretary, Liz Truss, who las week expressed her concern that, by trading so successfully with the EU, Welsh farmers had put all their eggs in one basket.

It’s perverse, to say the least, to blame Welsh agriculture for making the most of favourable terms of trade rather than putting their time and effort into selling their produce on less favourable terms elsewhere. The more logical conclusion to draw would be that the existing trading relationship needs to be protected. Someone who can argue that “My job as international trade secretary is to make sure there are plenty of other markets for Welsh producers to sell into" rather than protect successful existing markets might just possibly be in the wrong job. But just in case there was any doubt about that, she went on to argue that amongst other potential markets for Welsh lamb is New Zealand – a country which is not only on the other side of the planet, it also has even more sheep per capita than Wales and probably the highest number of sheep per capita in the world. Next on the list will presumably be a deal to sell world-class British ice to Eskimos.

What is it with Liz Truss and cheese?

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Let me start with a full and frank disclosure: I like cheese, and I eat more cheese than is good for me. I am not, however, obsessed with cheese in the way that the International Trade Secretary seems to be. One of her early forays into the comedy circuit world of international trade was her infamous speech at a Tory Party conference in 2016, which (because it’s always worth another watch) is available here. As she makes clear, “That. Is. A. Dis-grace.” Although the disgrace in this speech isn’t really much to do with cheese imports.

Last month, she hailed the new trade deal with Japan, which more or less replicates the deal we previously had as part of the EU. The deal nearly foundered, however, on the vexed question of the Japanese desire for Stilton. Or rather, the lack of such a desire - their desire to eat it didn’t entirely match Truss’ desire to sell it to them. However, an eventual concession by the Japanese now allows the UK to sell them as much Stilton as the Japanese want, although there is, of course, no known mechanism in any trade deal to ensure that people want a product which they regard as being rather odd.

And earlier this month, Truss has dismissed all concerns about a trade deal with the US allowing in hormone-fed cattle or chlorinated chicken by arguing that the deal actually has more to do with shipping ‘artisan cheeses’ across the Atlantic. It’s a statement that demonstrates that her understanding of the dairy industry (to the extent that she has one) far outstrips her understanding of US trade priorities.

Now I don’t want to underestimate the importance of the dairy industry to those who work in it; and its importance is obviously greater here in Wales than it is in the UK as a whole. But cheese accounts for around a third of all dairy produce, which amounts to about 16.9% of agricultural GDP in the UK, which in turn amounts to around 0.61% of UK GDP. Simple mathematics shows us that cheese therefore accounts for around 0.03% of UK GDP. Anyone who believes that a marginal increase in exports in such a small element of such a small sector is going to make up for a Brexit-led slump in trade is either mathematically challenged, or else has been eating too much of the wrong cheeses. Trying to spot the silver lining, at least it's a step forward from one of her predecessors who apparently thought that the UK’s trade would be saved by ‘innovative jam’.

Guarantees for the richest, but not the poorest

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To date, the new government has made no commitment at all to replace the EU structural funding from which Wales benefits with an alternative regional policy within the UK.  Strangely, however, none of the reasons which apparently prevent them making that commitment have prevented them from committing to retaining farming subsidies after Brexit. 

Whilst Welsh farmers certainly do derive benefit from the CAP subsidies, some of the most eye-watering amounts actually go to the richest landowners in England – some of whom are large donors to the Tories.  So monies which are targeted at the poorest communities cannot be guaranteed; those which just happen to benefit the richest are being guaranteed.  How surprising.

No doubt farmers will be pleased that they, at least, will not suffer the immediate financial consequences of withdrawal; for many farms in Wales (assuming that, given the way the block grant operates, the Welsh Government follows the same policy as the English Government in this case), the monies paid out under CAP are all that keeps them in business at all.

But hold on a minute – wasn’t one of the arguments for Brexit about being able to tailor policy to suit our needs rather than having to fall in line behind a common policy decided in Brussels?  If there is one policy area which needs to be changed to meet local needs rather better, it is surely the Common Agricultural Policy; and specifically, the way in which the largest subsidies go to those who least need them, whilst those who really do need them are barely surviving.

Perhaps, even more radically, it’s time to look again at the whole principle of subsidising an entire industry.  Many will throw their arms up in horror at the thought of an unsubsidised agricultural sector, but how have we got into a situation where an entire industry, and one which is so essential to us all, cannot survive without tax-funded subsidy?    

It's our decision, not theirs

Tweet Some of the coverage this week about the cloned cattle, or rather offspring of cloned cattle, which have got into the food chain seems to have shown a degree of confusion between cloning animals and genetically modifying them. And some of it has been somewhat alarmist as well.

There are, in my view, good grounds for continuing to reject the application of both technologies at this stage; but that isn't the same as saying that all laboratory research should be stopped.

In the case of cloning, the evidence is clear. At current levels of knowledge and expertise, many if not most cloned animals suffer developmental problems and lead short and painful lives. Not all the reasons for this are properly understood as of yet, and for me that's adequate reason for keeping cloning in the laboratory for the time being.

In the case of GM products, whilst the techniques for adding single genes which act as 'on-off' switches for single characteristics are well tried and tested, the understanding and control of genes which act in concert is far less well understood. And the long term impact of releasing exotic gene combinations into the natural environment is another huge area of uncertainty. Again, that's adequate reason for me to want to keep the technology in the laboratory at this stage.

There is a danger, though, that fear of the unknown, or just the highly complex, leads to a form of 'anti-science'; and we need to be careful that we don't throw the baby out with the bathwater as it were. I don't oppose continued research in both cases; it's more a question of deciding how much research is enough to give us the degree of certainty which we need.

And that's another point. One of the things that struck me about the coverage this week was that some people were seeking an absolute degree of certainty about the safety of eating cloned cattle. Science just cannot give us those absolute guarantees which we instinctively seek. All it can give us is probabilities based on a mixture of facts, estimates, and assumptions.

Science can do the research, and give us the probabilities. But it is for all of us to decide, through political processes, when that science is to be applied, and what degree of certainty we want to see first. That in turn requires a more informed debate than we often seem to get on subjects which are highly complex.

It also means that we should not allow ourselves to be driven into a too-early application of new technologies by the agri-businesses which are, ultimately, mostly concerned with recovering their investment in the research and delivering value to shareholders.

The real issue is a long way removed from the entry of two cows into the food chain; but that event, apparently based on someone flouting the law for their own gain, will have been of some accidental benefit if it encourages us to deal with the underlying questions.

Elin Jones visit

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Nerys Evans and I hosted a meeting in Llanddewi Velfrey last week at which Elin Jones spoke to a group of farmers. We had a really good session with Elin outlining the policies which she and the government are following, and then an opportunity for questions and debate.

There was lots of praise for the way in which Elin has approached the job, and her knowledge and understanding of the farming industry, although there's always more to be done of course. Those in the industry certainly understand how Plaid can and does make a real difference in government.

One of the biggest concerns for farmers locally remains the question of getting a fair price for the produce they sell, and the way in which the large supermarkets are able to dominate and control the market, because four or five large companies are effectively pitted against thousands of small farming businesses.

Even for those who believe in the free markets from an ideological perspective, the current process doesn't operate fairly, and on this issue, the charge was led by Sir Eric Howells, who lives locally and frequently writes on this matter to the local papers and the Western Mail. When the market is distorted as heavily as it is in this case, we need government intervention to fix prices at a fair level.

Cheap Food vs Food Security

Tweet It has taken a lot of hard graft by farmers and their unions to push up the price of milk at the farm gate over the last year. The price had previously been forced downwards by supermarkets in a price war, and the suggestion that the supermarkets may be about to start another price war over milk is of concern to many in rural areas.

There's nothing wrong, of course, with the supermarkets competing for customers by selecting certain products and cutting their prices. Few consumers will complain about getting the foodstuffs at a lower price. 'Loss leaders' have long been a staple weapon in the competition between retailers. But 'loss leaders' should be exactly that; and supermarkets should expect to take a loss on them.

What is unacceptable is for the retailers to arbitrarily drop their prices of staple products and then use their buying power to force producers' prices down, beyond even the point at which producers make any money at all. When they do this, the retailers protect their own profits and margins, so they lose little or nothing by introducing price cuts - and the winners of the price war may even increase their overall profits by drawing in more customers. The real losers in such a price war are the producers.

Ideological supporters of the free market might argue that it doesn't matter – there's plenty of milk around, and the retailers can simply buy it from elsewhere if the farmers won't match the prices which they are willing to pay. That may make ideological sense, and it may make economic sense to the supermarkets who look only at their own profit and loss; but it does not make sense in social or environmental terms.

'Food miles' is already a significant issue, and food security will soon be another. Food production is not something that can simply be turned on and off like a tap – capacity lost now will take many years to restore later. It is in all our interests to ensure that we have a viable agricultural sector in Wales, and that short-term game-playing by the major retailers is not allowed to destroy our production capacity.