The impact of the EU referendum and CAP payments on Scotland's rural economy

Royal Highland Show 2016 - credit RHASS

Scotland’s rural economy, especially the farming and producing industry, is vital to the Scottish economy. Food and drink alone accounts for Scotland’s biggest non-energy export, and has generated a record turnover of around £14bn. Coupled with a growing tourism sector, you could be forgiven for thinking rural Scotland is basking in success. 

The truth is it has not been plain sailing for the rural economy. A fiercely competitive food market and a number of gaps in skills and connectivity provide a challenging backdrop to the most prominent obstacle that has faced farmers in the last few years: the delays in EU Common Agricultural Policy (CAP) payments after a major IT infrastructure failure.

Scotland’s public spending watchdog Audit Scotland produced a damning report on the Scottish Government’s handling of the scenario, revealing the £178m IT system had been hit by “multiple failures” including a “significant conflict of interest” with a lead contractor.

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The five-year IT scheme began in 2012 but has  been beset by multiple delays and rising costs. Originally estimated to cost £102m, it now has a final budget of £178m and a reduced scope.
The project was hit by weak governance and “a lack of trust and blame culture” among workers, the report said.

Caroline Gardner, Auditor General for Scotland, said: “The CAP Futures programme has been beset with difficulties from the start. These problems, and the way they have been dealt with by the Scottish Government, are a serious concern, particularly as the programme continues to face major obstacles and is unlikely to deliver value for money.

“The scale of the challenge ahead should not be underestimated,” she added. 

Whether the SNP heeds the warning from the Auditor General or not, the message from voters proved impossible to ignore, as the Conservatives made key gains at the Scottish Parliament elections, particularly in rural areas.

In her cabinet reshuffle, Nicola Sturgeon created a position solely responsible for the rural economy and connectivity, and appointed veteran Fergus Ewing to the role, someone thought to be respected by rural communities.

Apart from Sturgeon herself, Ewing became the first minister in the new government to give a statement to the parliament, on what he called his “top priority”.

“Among the farming and crofting communities and businesses in Scotland, the Common Agricultural Policy payment scheme has caused anger, frustration, hardship and cost,” he said.
“As I have for 17 years represented a constituency with vital farming and crofting interests, I am very well aware of that. 

“On behalf of the Scottish Government, I address three simple words to all farmers and crofters who have suffered as a result: we are sorry. Let me follow that up with four further words: we are fixing it.”

Fixing it, said Ewing, would start by making sure farmers received the 20 per cent of funds still to go out.

“I have three objectives: to complete the 2015 payments so that farmers get their money as soon as possible; to deliver compliance and minimise any financial penalties; and to see the 2016 payments placed on a proper footing,” he said.

However, both Ewing and Sturgeon persuaded EU Commissioner Phil Hogan to extend the 30 June deadline for delivering payments to farmers in an attempt to avoid a £125m fine.

Aberdeenshire farmer Peter Chapman, a former vice-president of the farmers’ union in Scotland, is now an MSP as part of the Conservative surge, and was immediately appointed as shadow rural economy spokesman by party leader Ruth Davidson.

He told Ewing an apology was not enough.

“His apologetic words do nothing to make up for the months of chaos and heartbreak in our rural economy that his department has caused,” he said.

“Time and again over the past six months, government ministers have had to come to the chamber and explain that they need more time to get payments out. That is simply unacceptable, and it has completely eroded farmers’ trust in the Government.”

Chapman tells Holyrood’s Rural Economy supplement that previous rural affairs minister Richard Lochhead had enjoyed “good vibes” and was perceived as a “listening minister” who cared about the rural economy, but the image had been lost over the CAP payments “catastrophe”.

But what kind of impact did these delayed payments have? In an industry already struggling with severe flooding and low milk prices, European funding covers essential running costs.

“This isn’t an add-on, it isn’t a top up, this is essential money that virtually every farming business requires to operate, to have any kind of profitability,” says Chapman. 

If a farmer buys a new business asset such as a tractor, they will spread their bill based on expected CAP payments. This will have led to a number of unpaid bills last December, according to Chapman. 

“I’ll tell you what it looks like. It looks like a lot of farming families sitting across the kitchen tables wondering how they’re going to pay their bills. It’s a very serious situation to be in,” he says.

This has led to a number of farmers seeking additional borrowing in the first quarter of 2016, which will impact the industry going forward as interest costs set in. In the case of those businesses already struggling, particularly in dairy, the costs of borrowing will be even higher, if they are allowed to borrow at all.

Dairy giant Muller recently announced the closure of two processing sites in Aberdeen and East Kilbride with the loss of 225 jobs, the latest in a series of devastating episodes for the dairy industry in Scotland struggling with a persistent decline in the price of wholesale milk. 

Last summer farmers took to supermarkets – sometimes with live cows in tow – to protest at low prices paid for their product. Some supermarkets reacted positively, but the situation doesn’t appear to have got easier since. 

Chapman says dairy isn’t the only sector struggling with commodity prices. “Cereal prices are at an unsustainable level; pig producers have had a really hard time. Beef and sheep are way back from where they were 18 months ago. Commodity prices right across the board are low, the industry was in a bit of trouble anyway,” he says, calling the CAP delays the “final nail” for those who have been bearing down their costs “at every opportunity” for a number of years.

Recovery is about more than sorting out an IT system, Chapman warns. “The food market isn’t working properly. The percentage of the end spend of the consumer that comes back to the primary producer is less and less and less. That’s the problem. Food is cheap.”

The farmers’ position in the chain, he says, is unsustainable. “We’re taking far too much of the risk and carrying far too much of the burden. Everybody along the chain manages to get their margin, and if there’s enough left at the bottom for us to get a profit then that’s what we get.”

In this precarious environment, and with such a reliance on European funding, it would be safe to assume most farmers will back a vote to remain in the EU in the forthcoming referendum. However, voices of dissent have grown. At the National Farmers’ Union annual conference in February UK government farming minister George Eustice broke rank and called for farmers to vote to leave.

“The truth of the matter is that if we left the EU there would be an £18 billion a year dividend, so could we find the money to spend £2 billion a year on farming and the environment? Of course we could. Would we? Without a shadow of a doubt,” he said.

Farmers may well have been surprised. Only the day before, the Secretary of State for Environment, Farming and Rural Affairs, Liz Truss, had told them a Brexit was a “leap into the dark”.

Chapman says heads may be turned by threats to the use of agricultural chemicals from EU regulation, which recently saw an EU-wide ban on neonicotinoids – thought to harm bees. Chapman argues farmers have had to respond by using “four or five worse chemicals” to replace the insecticide. Next up is a prospective ban on the popular chemical Roundup. 

“It’s the most widely used chemical in the world. There’s a danger it’s going to disappear, we’re going to lose it, because the green lobby is getting pretty strong in Europe, and I would say from very flimsy evidence there is a chance we might lose a very valuable chemical,” he says.

However, when it comes to the CAP funding, farmers are “not sure” about promises to replace it after Brexit with cash from a dividend, according to Chapman.

“The UK Government has been saying for a number of years we want to phase out subsidies, and to some extent I would agree with that, provided the market place can give us the returns we need. I would love to farm without CAP money. Every farmer would tell you that, but the reality is we can’t do it. Not at the moment, anyway.”

The delays in recent payments have also had an impact on the wider rural economy, he says, leading to a “general downturn”.

Douglas McAdam, chief executive of Scottish Land & Estates, said: “It must be remembered that this is not just a crisis affecting farmers but has had severe knock-on consequences for the whole supply chain, especially in rural areas that are heavily dependent on the farming sector for the majority of their trade.”

And the European perspective is not the only question mark hanging over the rural economy. The Federation of Small Businesses (FSB) in Scotland has warned about a much mooted “tourist bed tax” which was suggested by several politicians before the election.

An FSB poll of 682 Scottish small firms showed 82 per cent against a levy on visitors’ accommodation bills, while the Scottish Tourism Alliance and British Hospitality Association have also voiced their opposition.

According to the poll, businesses in rural Scotland, especially in the Highlands & islands, were especially critical of the proposals. 

Colin Borland, FSB’s head of external affairs in Scotland, said: “While we understand that public sector budgets are under pressure, FSB cannot support the introduction of a regressive tax on visitors. 

“Tourism is a key industry for Scotland and the ambitious targets we have to increase the number of return visitors could be undermined by these proposals.”

The land reform agenda, too, may have unintended consequences, says Chapman, pointing to how one statement alone from Lochhead on giving tenant farmers an absolute right-to-buy led to many landlords being more reluctant to give new farmers a first step on the ladder.

“One of the big ideas is to increase the amount of land available for tenancy, but I think it’s going to do completely the opposite. A tenancy is so important for a young keen farmer to get a start in the industry, but the prices are such that unless you have a millionaire dad, you’re not going to be able to buy your way in,” he says.

And as for the Scottish Government’s rollout of digital connectivity, it can’t come quick enough for Chapman. 

“I for one can’t get an internet signal through the phone line at home. We have a wee dongle thing, it comes through the atmosphere. BT can’t give me anything. Nothing. We’re about four miles from the exchange. They promised we would get a connection but there’s nothing. What we do have is slow, and it makes life difficult in this modern age when everybody is online.”

Connections to government, Europe and customers will be vital, then, if Scottish agriculture is to thrive.