Upheaval on cards for Scots farming

There are many similarities between what is happening in the north east as a consequence of the collapse in the oil price and what is happening in the agricultural industry. A newspaper article last week reported that buying petrol was cheaper than buying bottled water.

Dairy farmers have often made the same comparison with a litre of milk.

Until recently Aberdeen had largely avoided recession and had enjoyed a buoyant local economy.

I met a friend recently who works for a large oil company. She explained that the company had dramatically reduced headcount and costs, almost overnight.

As a consequence of these sudden changes their marginal cost of producing a barrel of oil dropped dramatically.

While the cost was still below the current oil price, it demonstrated that when a business needs to focus on reducing its costs it can.

When things are too easy for too long it is natural that businesses can become inefficient and complacency sets in.

Any business cannot survive where the sales price remains below the cost of production over the long term.

In the UK the coal and steel industries are obvious examples.

Hopefully for Aberdeen the low oil price is just part of an economic cycle rather than the start of a structural change to the oil industry.

Agriculture in Scotland is also in crisis. There are variable factors combined with the low commodity prices. The weather, exchange rate and subsidy reform have all come together to create a perfect storm.

The question is whether this is another low point in a cycle or the start of structural change for the industry.

Personally, I think it is a bit of both. We are undoubtedly suffering from economic conditions, largely as consequence of a strong pound, however in my mind there is undoubtedly a structural change about to happen.

I expect an upheaval in farming over the next 10 years. The average age of a farmer has been highlighted as a major problem for the industry.

Looking at my own clients they simplistically fall into two main categories. Firstly, there are clients with a generation following behind them. They are looking often to expand and their business decisions are often focused on growth.

In the second camp there are farmers and land owners–those with no obvious succession. Of those with no succession many are reaching their fifties and six ties.

This may be no different to previous decades, but it is the number of businesses in the second camp that appears to have increased dramatically.

In the last decade there have been few reasons for farmers to retire.

Why would you offer your land for rent, share or contract farming when you are profitable?

Land prices have been rising so there has been no urgency to sell in a rising market. The Single Farm Payment regime provided a stable income and while the pound was weak the subsidy and commodity prices benefited.

There was no overwhelming reason to change anything. What now for those with no succession?

For those moving towards retirement age the current crisis may influence them. Periods of difficult trading conditions are often a catalyst for a change. Change can provide opportunities for others.

Similar to the oil industry, farming requires significant upfront capital and as a consequence the barrier to entry is high. Unless you inherit or succeed an existing farming business it is difficult to get started.

I am not a great believer that land reform or subsidy changes will really provide opportunities to young entrants. Perversely, it could be that the current farming crisis will present a chance for new entrants and those looking to expand.

Landowners with no succession may increasingly look to rent out land or have their land managed.

Arable farms will likely be taken on by existing operators looking to expand further. It will be the more marginal and upland areas that will command less demand and could provide affordable opportunities.

It would be encouraging, particularly for the livestock sector, to see an increase in share farming and similar arrangements that provide an opportunity for new entrants and young farmers to get a start.