ENVIRONMENTAL PAYMENTS TO FARMERS: GOLDMINE OR MINEFIELD?

Seller Beware!This is our key message to farmers on the terms on which environmental payments may be offered.

‘Buyers’ and ‘products’ may be many and varied. At one end are the organisations we are used to doing environmental business with, like Welsh Assembly Government and Natural Resources Wales.  Along the way there will be developers seeking to offset their environmental impacts, large companies wishing to reduce their carbon emissions and, potentially most risky of all, a range of intermediaries seeking to broker deals in one way or another between buyers and sellers.

Agreements will vary too:

• Some will be for short periods with limited impact on the farm
• But at the other extreme some agreements may be for very long periods, 30 years or longer, and their requirements will be very limiting.

What are the risks?

We have now done a lot of work with long term projects.  Here are some of the risks we have found:

• Biological risk: flora, fauna, pests and diseases – new plantings die or fail!
• Climate change risk: what works in current conditions may struggle within 15 or 20 years
• Regulatory and compliance risk: rules change; over-zealous inspection regimes fail to appreciate practical difficulties of working with the natural environment
• Covenant risk: the buyer has promised to pay you every year for 30 years; they go broke…
• Economic risks: inflation runs out of control; tax rules change.  Our work with other projects has looked at the average amount of annual inflation over successive 30 year periods from 1947 (ie 1947 to 1977, 1948 to 1978 and so on up to 2023).  The average rate of yearly inflation over each successive 30 year period? Nearly 6%.
• Capital Risk: are you betting the farm on the 3.30 at Chepstow?  What will happen to the value of your principal asset
• Tenure risk: who else needs to have a say?  Lenders? Tenants? Your children and grandchildren?
• Human and managerial risk: Most projects will need regular monitoring, some of it specialised.  Effective intervention will be needed to make sure schemes stay on track.

Does this mean you should stay away from the opportunities? No.  But it does mean you should weigh them up very carefully.  Make sure the people advising you are working for YOU.  Some will be obviously working for the buyer, for example government advisers.  Other approaches will come from intermediaries – seeking to build new businesses in the gap between farmer suppliers and industrial and commercial buyers.  Their interests may not be your interests.  If in doubt seek your own independent advice and proceed with caution.  Figures that look juicy and mouthwatering may look very different in 10 or 15 years.  Don’t sell yourself or the farming industry in Wales short!

Ed Bailey and Charles Cowap are both members of Natural Capital Consortium, a group of like-minded advisers in and near Wales seeking to support the farming industry as it weighs up new opportunities, threats and challenges.

Please get in touch if you require further details. Our member firms:

Natural Capital Consortium is a trading name of the firms named above, chaired by Charles Cowap, MBA MRICS FAAV PFIAgM FRAgS CEnv, Visiting Professor in Land Management at Harper Adams University: cdcowap@gmail.com, 07947 706505