This article was first published in the July/August 2015 UK edition of Accounting and Business magazine.

Human beings are a spectacularly successful species. We dominate this planet and have created technology that has allowed us to travel through space to others. But our domination is also our downfall. By 2050, the world’s population is expected to reach 9.6 billion – and we will all need to eat. According to the Food and Agriculture Organisation (FAO) of the United Nations, agricultural production will need to increase by between 60% and 70% over the same period in order to feed everyone. We will need to grow 45% more cereals, 47% more vegetables, and produce 76% more meat than we do today.

This looming crisis is already shaping international policy, most noticeably in the buying and selling of land. Several nations, notably China, India and several Middle Eastern states, have bought millions of acres of farmland in Africa over the past 10 to 15 years – the World Bank documented media reports of land deals in 2008 and 2009 that amounted to almost 60 million hectares worldwide, which is roughly an area the size of Ukraine. 

A report by the International Fund for Agricultural Development, the FAO and the International Institute for Environment and Development said the land purchases were being driven by food security concerns, rising demand for food and biofuels, and changing dietary habits. China, in particular, has a pressing need to grow food for its population outside of its geographical borders; its food deficit stood at US$31bn in 2012, and its annual meat consumption increased from 4kg per person in 1961 to 61kg per person in 2010.

The need to produce food is driving rapid innovation in terms of technology and business models in many regions, from large-scale, precision and intensive farming to GM crops and agrocorridors (where agribusiness, people and investments are concentrated around existing transport infrastructure). It is also causing controversy, from concerns that smallholders and local farmers are being pushed out or taken advantage of, to environmental worries. The humble Californian almond, for example, has been partially blamed for the state’s drought crisis. California grows 80% of the world’s almonds – a business worth US$11bn in 2014 – but also accounts for three-quarters of the state’s human water usage.

Land grab

Underlying everything, literally and figuratively, is land. While there may be acres of rich farmland ripe for cultivation in parts of Africa and South America, its value is rising – to the extent that it is beginning to attract professional investors. The Economist reported in January that pension funds and private equity companies are steadily venturing into farmland as an investment, attracted by annual returns that in the US reached 12% in 2014. The important point to note is that it is the land itself that is increasing in value; the crops and livestock on it are, in investment terms, almost incidental.

Which brings us to the UK, where farming is a very different beast – and much of the reason for that is the price (and scarcity) of land. ‘In 1982 land was priced at around £1,500 an acre in the UK,’ says Nick Dee, partner and head of the agricultural team at Hazlewoods, a member of HLB International. ‘Today, the price stands at between £8,000 and £9,000 an acre. You may need 600-plus acres today to have a viable farm, whereas 30 years ago a viable farm would be 250 acres. The barriers to new entrants are enormous.’

Unless you happen to have millions to spare – the investor James Dyson has bought up 25,000 acres of farmland in Norfolk and Lincolnshire for his sustainable farming venture, Beeswax Farming – buying your own farm is a pipedream for most farmers. Six thousand landowners, including the Crown and the National Trust, own about 40m acres of land in the UK, and 32% of productive farmland in the country is worked by tenant farmers. At the top end of the scale are large farm management companies such as Velcourt, the largest farm management company in Europe, and Wellcome Trust, which bought the Co-operative Group’s farm business in 2014 for £249m.

Low yields

But it is not an easy business. Farming is very capital-intensive, requiring expensive machinery with a limited shelf-life, and with income that is dependent on the whims of the weather and international markets. As a result, the return on capital in the UK, as a result, is limited – usually in the region of 1% to 2% for owner-occupiers. The fact that a farmer who is lucky enough to own a 1,000 acre farm would cultivate it rather than sell it is, says Douglas Young, managing partner at Lovewell Blake and head of its agricultural department, is an indication of the character of the breed. ‘Farmers are eternal optimists,’ he says. ‘They have never farmed based on return on capital – many of them could rent their land out and get a higher return. They see themselves as guardians of the land for the next generation.’

So what is the state of UK farming? Both Dee, who is based in Gloucestershire and deals with arable and livestock farmers, and Young, who is based in East Anglia and whose clients are mainly arable farmers, agree that farmers are now finding it tough going. ‘While land prices have gone up in recent years, commodity prices have fallen sharply, partly through over-supply on world markets and partly because of the strength of the pound,’ says Dee. ‘The price of milk peaked at about 33p a litre 18 months ago and is now less than 25p a litre, the lowest it’s been in five years. Anyone who has negotiated a cost-of-production-based contract can get about 29p, so it’s made who you trade with much more important.’ 

Arable prices have also plummeted. ‘Wheat was £200 a tonne two years ago and it’s now half that,’ says Young. ‘Farmers can’t make up that difference in volume yield. Oil seed rape has fallen from £440 a tonne to £200 a tonne, and because there’s an oversupply of potatoes, the price is now about £40 a tonne when in a good year you could get £300 a tonne.’

Farmers have ‘little or no control’ over commodity prices, says Young, and the need to rotate crops to keep the land in good » order limits their options. ‘Some are becoming better at changing their business model according to demand and pricing, but most just tighten their belts and keep going,’ adds Dee.

The model for dairy and livestock farming is also changing. ‘The number of dairy farms in the UK is decreasing by between 1% and 2% a year, but the number of cows is falling at a lower rate because the farms are getting bigger,’ says Dee. A ‘big’ dairy farm is considered to be more than 500 cows. Some UK farmers are taking lessons from US mega farms, but environmental concerns – plans for an intensive dairy farm in Lincolnshire were recently rejected – are limiting the potential. ‘The US is very different in terms of farming,’ says Young.

Staying green

The long-term challenge for farmers both at home and abroad is, as the National Farmers’ Union (NFU) succinctly puts it, how to increase productivity and keep costs down, ‘in order to provide safe, affordable, high-quality food in an environmentally sustainable manner, while also adapting to the demands of a changing climate’. Research and development is central to this, but agricultural science has been underinvested in recent years.

Large-scale arable farming drives down unit costs but there’s a limit to what it can achieve when land is so expensive in the UK. Velcourt and others have tried buying or leasing farmland in Ukraine, Romania and Poland, where purchase prices are around £1,000 an acre. But while the land is fertile, distribution and security of crops and equipment has proved to be a challenge.

So in spite of the difference in land value, the UK still wins, for the time being at least. ‘The one thing we have going for us in the UK is proximity to the market, and that makes a huge difference,’ says Dee. As an example, 105,331 tonnes of beef was exported from the UK in 2014, and more than 100,000 tonnes of that went to EU trading partners.

The prospect of an in/out referendum on EU membership, then, is a huge issue for the agricultural sector. The Common Agricultural Policy (CAP) has few fans, but many farmers are financially dependent on the payments they receive under it – the NFU describes the CAP as ‘critical’ to farm businesses. 

The CAP is worth between £80 and £90 an acre for qualifying produce. In 2012, it contributed £2bn to farmers in England, around a quarter of the total farming income. Because the CAP is production based, the larger farms get more – around six in 10 farmers receive less than £5,000 a year. But it is still vital money.

‘In most years most farmers wouldn’t make a profit without the CAP,’ says Young. ‘Their biggest fear is that if we came out of the EU and there was not that money from the CAP to distribute any more, would they be left high and dry?’ Dee, though, argues that some farmers would be happy for the CAP to end: ‘There would be winners and losers, but by and large farmers would like to farm without the restrictions they have at the moment.’

In the event of a Brexit, the government could choose to replace some or all of the lost CAP subsidy. Or it might not. There is evidence that farming can survive as a subsidy-free enterprise – New Zealand abolished its farm and fishing subsidies in the 1980s and while it was predicted that 20% of farms would fail as a result, only 1% of farming exits over the next seven years were identified as forced sales. Today, New Zealand’s agriculture sector is larger, more profitable and efficient than it was when subsidised – but the UK might not follow suit.

And we, as consumers, also need to take some responsibility for the future. UK food self-sufficiency currently stands at 60%, compared with 75% in 1991. There are many reasons for this, not all of which are connected to farming; we import more far food than we did (£40bn in 2013 compared with £28bn in 1996), partly driven by our own shopping habits. Supermarkets offer strawberries, apples and asparagus all year round, sourced from the UK when they are in season and elsewhere when they are not. That works for now, but for how much longer?