Time to invest in Scots growth industry

Published on Thursday 12 February 2004 00:00

ALMOST every conceivable niche in the business market is represented on the London Stock Exchange, from patent attorneys to pawnbrokers and brewers to banks, but farming is one notable exception.

Other than firms such as Genus, the bovine genetics company, and Scottish livestock auctioneers UA Group and John Swan & Sons, it is practically impossible to buy or sell shares in agriculture.

Farming represents colossal sums of public funds, but investors cannot add it to their portfolios or subscribe to a fund based on rural skills.

Peter Smaill, director at Dunedin Capital Partners in Edinburgh, says: "Of course you can invest in commodities - the future price of wheat or pork bellies - but that is different from investing in the farming itself."

But trading in commodity futures is far from easy for the armchair investors, because it generally involves large minimum contract sizes and a great deal of documentation.

Spread betting on commodities - taking a punt on the future price of products such as potatoes or oil - offers an easier alternative, because investors can take smaller exposures via the same account they already use for spread betting on shares, indices and currencies.

Mr Smaill adds: "It is odd that farming and land are always excluded from tax breaks such as venture capital trusts or enterprise investment schemes. Agriculture is cocooned from the rest of the economy. It is all but impossible to invest in - other than buying farms outright."

Several institutions offer investment opportunities in forestry, which - like farming - enjoys a fairly secure system of grants and subsidies which can be factored in and priced.

The European Union currently pays around 30 billion in annual subsidies to farmers - about half the entire budget of the EU - but with ten new member states set to join this year, the common agricultural policy has been reformed.

The CAP bill is expected to rise to around 34bn when the ten countries - Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia - join the EU in May.

The reforms are closely linked to the World Trade Organisation’s drive to liberalise international commerce, and the EU’s Tassos Haniotis recently offered a robust defence of CAP.

"We are not prepared to put into question the regulatory stability that our farmers are entitled to enjoy as they endeavour to become more market orientated, and ensure the sustainability of European agriculture," said Mr Haniotis, who is responsible for external relations, trade and enlargement in the cabinet of Franz Fischler, the EU agriculture commissioner.

By the end of this month, farmers should know how the new-look CAP will be implemented from next January and how farming will be asked to fit in to the rural economy.

The main features of CAP reform, debated and discussed since European Union farm ministers reached agreement last June, are that subsidies will be "decoupled" from production and replaced by a single annual farm payment, and there will be "freedom to farm" dependent on compliance with strict environmental and good farming practice rules, and diverting farm subsidies to general rural development.

Lloyds TSB Scotland’s agricultural specialist, Professor Donald MacRae - who is also the bank’s chief economist - says: "If the current level of direct payments is ‘de-coupled’, production levels would be expected to adjust downwards to reflect the profitability of alternative enterprises. The beef and sheep sectors have a high reliance upon direct payments."

According to a recent survey by Lloyds TSB Scotland, most farmers expect this trading year to be their best since 1996, with an average net income of 17,000 - 134 per cent higher than a year earlier.

Two per cent of those taking part in a survey said they were "very optimistic" about the future, with a further 18 per cent saying they were reasonably optimistic. Only 12 per cent of the 620 respondents said they were pessimistic, compared with 32 per cent the year before.

Mr Smaill at Dunedin says: "Lavender, oil-seed rape and other artificial crops offer a sort of security. The latest fashion is windfarms, which would not be viable without their tax breaks."

He adds: "The value in farmland may be in constructing new homes or in recreational uses. Enterprise will think up new uses for land none of us can imagine now. Who could have guessed townies would pay big money to shoot pellets of ink at each other?"

The Royal Institution of Chartered Surveyors (Rics) says most people currently buying farmland are no longer farmers.

"More than half those buying farmland have no previous connection with agriculture," says Julian Sayers, the institute’s rural spokesman.

According to Rics, individual non-farmers accounted for 51 per cent of sales nationwide during the final three months of 2003, up from 45 per cent in the previous quarter, while the number of farmers buying more land had fallen to less than 40 per cent. The body adds that, during 2003, farmland was selling for an average of 3210 an acre, 7.3 per cent more than during 2002.

Farmland is seen as a worthy investment because it enjoys tax breaks. Normally, heirs pay inheritance tax (IHT) on the value of an estate above the annual exemption, which currently stands at 255,000.

But if rural land is rented to a farmer, it becomes exempt from IHT once the owner has held it for seven years. Alternatively, if the landowner sets up a business and has a contract with the farmer, the land becomes exempt from IHT after two years.

Investors also pay a lower rate of capital gains tax (CGT) on any profits if the land is let or contracted to a farming business. The rate of CGT for a higher rate taxpayer would be just ten per cent if the farm had been owned for two years or more, compared with between 24 per cent and 40 per cent for most other assets.

While more people are cashing in on the investment opportunities, a survey published earlier this month shows most people know little about farming.

The Scottish Executive, which commissioned the study, claimed three-quarters of the Scottish public believe farming is important, but of those surveyed, two out of five could not recall any specific farming issues, and three out of five had never heard of Europe’s 30bn-a-year common agricultural policy.

The average Scottish farmer’s annual income fell to 5000 by 2000, although there has been a partial recovery over the past three years. But most respondents did not have a clue about farm incomes.

In rural areas, there is a perception that Scottish farming is in decline, although it is still seen as the main contributor to the rural economy. Those living in urban areas are more likely to believe that other industries have suffered more, but have received less government support.

The Executive report concludes: "With the exception of those living in remote rural areas and those connected to farming, the public has a poor understanding of farming in Scotland."