ECONOMIC DEVELOPMENT
Approval for a request for extraordinary States funding to support Woodside Farms to maintain local production of a range of seasonal vegetables that are grown and eaten in Jersey.
Purpose of the Report
To request extraordinary States funding to support Woodside Farms to maintain local production of a range of seasonal vegetables that are grown and eaten in Jersey.
1. Introduction
1.1 Albert Bartlett took over Amal -Grow Produce Ltd in January 2013. On the 18th of February after two years of unprofitable trading, the Directors confirmed that they were reviewing the business with a view to cease trading beyond July 3rd 2015.
1.2 Following the submission of a Business Plan supported by Jersey Business, Woodside Farms Ltd. are seeking Government support in the form of a £450,000 - £525,000 loan to assist in the successful transition of the current Amal-Grow trading activities to Woodside Farms, with the key aim being to maintain local production of a range of seasonal vegetables that are grown and eaten in Jersey. A formal request for funding was received by the EDD on 16th March 2015.
1.3 Woodside Farms Ltd is a 100% family owned farming business based in Trinity, which grows and markets a range of vegetables and flowers for both the local and export market and are the second biggest grower of local produce after Amal-Grow. The business is managed by the fifth generation, with the family having farmed from the same site for 128 years.
1.4 Co-op and Waitrose are the main on-island buyers of the produce grown by this operation and Waitrose have set conditions on pack-house standards and a deadline of July 5th that Woodside Farms have to meet to be permitted to pack produce into Waitrose branded packaging for sale in Jersey.
1.5 On the 26th March, the owner of Woodside Farms visited Waitrose in Bracknell to meet with the buying managers for Vegetables and Salads and to outline a plan of what both parties are looking to achieve and opportunities for the future, including the range of lines that are or could be grown in Jersey. The visit went very well and Waitrose are excited about this project describing it as “a great opportunity”. However, the one area that was of concern to Waitrose was that Woodside Farms had not yet had a decision from the States with regards financial support to take the project forward.
1.6 This demonstrates the importance of a swift decision on the provision of States support for this venture, as if the deadline is not met, both Co-op and Waitrose will switch to UK suppliers.
1.7 Both Co-op and Waitrose have committed to transfer their relationship from Amal-Grow to Woodside with a strong stated wish to increase the volume of local produce sales and a longer term potential to develop exports into the UK.
2. Discussion
2.1 It is important to be clear about how the proposed support to Woodside Farms would fit with existing States economic policies, principles and strategies.
2.2 States Strategic Plan: The draft Strategic Plan targets productivity-led growth across all economic sectors. Initial comments from the States Economist are that based on the business plan provided and an estimated requirement of 30-35 FTE, the proposal would result in productivity of approximately £24k-£28k per FTE, below the average for the agriculture sector (£32k per FTE) and the economy as a whole (£64k per FTE). This suggests that the proposal could actually lower productivity in the sector and the economy as a whole. In addition, when compared to potential alternative use of the same resources, this project may result in a net negative impact to the economy.
2.3 However, the financial projections in the business plan have been calculated on a 'worst case scenario' (rather than base/expected) basis to demonstrate the serviceability of the loan (i.e. the business plan has deliberately sensitised Amal-Grow turnover down by 30%). If the actual Amal-Grow figures were used these would equate to a productivity per FTE comfortably above the Agricultural sector average, therefore improving the average of the whole agricultural sector. Revised figures based on actual sales for Amal-Grow in 2014.provided by Jersey Business show a much improved GVA per FTE of £44.9k in 2016. This is to be expected as Amal-Grow are employing 50 FTE and Woodside would employ 35 FTE resulting in increased productivity associated with 15 FTE less staff and the introduction of new mechanisation which is much less labour intensive. The numbers in the revision still remain cautious for 2 reasons (1) The current Amal-Grow packaging is commercially un-attractive and own label Waitrose and Co-op will do much better especially Waitrose and (2) new crops that Waitrose want grown have not been factored in. However, the project would still result in a reduction in productivity for the economy as a whole – compared to what would happen in the absence of funding.
2.4 The economic advice also suggests that there is insufficient evidence to calculate whether the project would result in an improvement in productivity for Woodside Farms Ltd and that even if the project were to improve productivity, the 2014/15 Enterprise Action Plan (EAP) focuses on productivity improvements which can be made without significantly increasing the resources used by low value-added activities. The point being made that the proposal appears to increase the labour resources used, compared to what would happen in the absence of support and in a sector that is already dependent on significant levels of inward migration.
2.5 The Enterprise Action Plan does aim to ensure access to finance to take advantage of growth opportunities by high-growth high value-added companies, but economic advisers consider that Woodside is unlikely to fit these criteria. This is based upon the view that:
- There is no evidence that the company has high-growth potential (turnover fell in 2013, when compared to 2012 and even with the proposed acquisition would increase by <20%).
- There is no evidence that the company is high value-added (very little profit in 2013, with the majority of this the result of subsidies received from government - plus agriculture is a relatively low-paying sector.)
2.6 For firms who do not meet this definition, the EAP’s aim is to help them to gain access to finance for high quality productivity projects, rather than for growth projects.
2.7 Further, the States Economist suggests that in the medium term, both the land and labour resources currently used by Amal-Grow could be put to an alternative use. This alternative use may be a more efficient use of these resources than the proposed Woodside acquisition and that without proper analysis and understanding of alternative uses it is also not possible to assess the real environmental and social impacts.
2.8 In addition to concerns over the project’s fit with States economic strategy, the economic advice suggests that there is insufficient evidence to conclude on the long-term viability of the project, or on the additionality of Government support, as well as concerns that this would set a precedent in the current economic and fiscal environment and that such support could easily be justified for other businesses across the economy which would make it harder to deliver on current economic objectives in the future.
2.9 Ultimately, given the information provided to date the view of the States Economist is that under the current fiscal situation it would seem counterproductive to proceed with a proposal that has not demonstrated it is in line with economic objectives or that it is the most efficient use of States funds.
2.10 Whilst these are reasonable views, they are based upon existing States economic strategies. The proposal has been assessed on the assumption that the Amal-Grow business has been lost to the Island and moved to being sourced from the UK.
2.11 If the assessment is being done on that basis, then it must also take account of the knock on impact to Woodside Farms and all the other growers that would be disadvantaged by the loss of this potential business in order to calculate the full impact. The view of the Rural Economy team and Jersey Business is that this would result in a very much less productive agricultural growing sector which would then no doubt have to contract considerably. However, this might also have the impact of increasing the productivity of the sector and the economy, as less productive operations exit the market and the most productive operations would continue.
2.12 With reference to alternative use impacts, alternative land use is conditioned and restricted under law to an agricultural use so there is every possibility that, in the medium term, this land could continue to be used for agriculture.
2.13 Agriculture will never be as high-value as other sectors of the Jersey economy, but Jersey agriculture almost by definition has to do higher-value agricultural products as it cannot compete with commodities. Woodside has an excellent track record of high growth, showing significant expansion and increasing productivity since 2006, particularly since consolidation in 2009. Whilst it is clear that profitability in 2013 and 2014 was below levels achieved in 2012, this is associated with poor weather rather than inefficiency.
2.14 Rural Economy Strategy: The RES supports the sustainable development of the rural economy, based on a triple bottom line that considers economic, social and environmental considerations. In the context of the economy there are various policies that aim to promote growth and increased productivity through removing productivity barriers associated with securing investment, promoting innovation and skills development and through encouraging enterprise and competition.
2.15 The RES states that in order to achieve sustainable growth of GVA the industry and Government need to improve labour productivity per FTE; increase market value of crops produced; diversify production; increase crop yields; reduce costs; increase mechanisation; motivate businesses and support through finance, advice and enabling provisions.
2.16 RES policies PR12 and PR14 focus on collaborating to develop local markets and address food security. With policy PR10 promoting increased productivity through the Rural Initiative Scheme (PR10).
2.17 RIS applications/business plans are assessed against a set of business, financial, environmental and States of Jersey objectives and ranked as low, medium and high priority for receiving RIS support prior to final assessment/approval by an independent Panel. Only projects which are assessed medium or high priority are recommended for funding.
2.18 For illustration, the Woodside Farms proposal has been assessed under the RIS scoring criteria achieving a ‘medium’ priority ranking for funding reference the business plan and a 4 out of 5 score with regard to meeting States objectives as set out in the RES 2011-2015. The overall project score for the Woodside proposal would therefore be an M4. Consequently, if this proposal had come to EDD as an RIS proposal (which it didn’t as there is only one application window and funds are allocated at the beginning of the year) there would have been a strong recommendation to allocate funding to the project.
2.19 In terms of track record, Woodside Farms have previously received 11 RIS grants, from 2006 – 2010. The outcome of these grant awards have been monitored to gauge their success and to measure the effects on business turnover, employment and profitability. Of the 11 projects supported, 10 have been successful i.e. a 90% success rate.
2.20 The RIS Panel awarded total grants to Woodside Farms to support the above developments amounting to £197,844 (42%) from a total farm investment of £473,296.
2.21 Monitoring the outcome of the RIS grant support from 2006-2008 3 years after the last RIS grant was received, the turnover of Woodside Farm had increased in 2007 from £1,689,327 per annum to £4,564,567 in 2011 (3 years after the first monitoring period) a growth of 170%.
2.22 Profitability has increased from -£99, 813 in 2007 to a positive £237,354 in 2011 an increase of 337% with paid wages increasing from £942,370 to £1,629,344 an increase of 73%.
2.23. The GVA of Woodside Farms has therefore increased from £842,557 in 2007 to £1,866,698 in 2011 a growth of 122%.
2.24 The above indicates the value in terms of productivity gains of providing support on a targeted basis and the management skills and commitment of the owner in turning round the fortunes of Woodside Farms.
3. Food security
3.1 The subject of food security, along with water and energy security are rising as priorities for Governments globally and particularly in locations geographically isolated or reliant on complex transport links. The States has started exploring the issues around food security for Jersey which has highlighted that the majority of fresh fruit and vegetables purchased on the Island are imported.
3.2 The 2014/15 Jersey Annual Social Survey found that few people (5%) felt that all the food needed to feed Jersey residents should be grown on Jersey rather than imported, although half (50%) thought that ‘most’ of the food needed should be grown in Jersey, with some imports for variety. Two-fifths (39%) thought that ‘some’ of the food should be grown on the Island, with most being imported. However, respondents were not asked if they were willing to pay extra (either on the purchase price or through additional subsidies) for local products.
3.3 What is clear is that if the Amal-Grow/Woodside proposal is not supported by the States, the Co-op and Waitrose will seek alternative UK suppliers and that is a decision that will likely never be reversed. This will result in Jersey becoming almost totally reliant on imported food and potentially vulnerable to supply shocks,.
4. Importance of local food production
4.1 The total market for fresh vegetables and potatoes in Jersey, measured by the Household Spending Survey stands at £6.90 per household per week. Given there are approximately 23,500 households in Jersey the total annual spend on fresh vegetables per annum is £8.4m (2009/10 data - population growth and inflation will have added to this total).
4.2 Amal-Grow generated annual sales of fresh vegetables and potatoes of £2.5m representing 30% of the potential market. Therefore 70% of locally consumed produce is imported from the UK including the M & S franchise which does not utilise local suppliers.
4.3 Waitrose currently sells approximately £10m worth of local products in its three Jersey stores and has the stated aim of increasing this to at least £20m. The sourcing and selling of local agricultural produce is a key part of the proposed increase and it is anticipated that this will be sourced from Woodside Farms. As such, the Woodside Farms proposal with the backing of the Jersey Farmers Union and in cooperation with other smaller existing arable farmers, presents a real opportunity to profitably increase the output and sale of local fresh vegetables and capture a significantly increased level of the potential market.
4.4 A survey by the New Economics Foundation in 2001 found that £10 spent on local food in the UK is worth £25 for the local area, compared with just £14 when the same amount is spent in a supermarket on imported food. The same amount is worth more with local schemes as it stays in the area where its value increases as it is reinvested. Local initiatives help support a sustainable local industry, reduce imported produce and help diversification by providing an alternative to growing crops for export. This may not be the case for the Jersey economy.
4.5 Market research undertaken in 2014 by Genuine Jersey shows that the desire to buy local is increasing. Although price will always be important, the survey finds that the number of people who value buying local is at its highest since the recession began in 2007. Other key findings are that 40% of those questioned said that knowing a product was local would exert a strong influence on their product choice and that 55% of local retailers felt that ‘locally produced’ was ‘very important’ (up from 24% in 2010). Though again it is not clear how much customers were willing to pay extra (either on the purchase price or through additional subsidies) for local products.
5. Local food production under-pinning Jersey agriculture
5.1 Jersey struggles to compete on production and export of commodity produce against other jurisdictions due to economies of scale and prohibitive transport costs. Only niche, branded and protected produce (Jersey Royal potatoes, Jersey milk products, speciality produce/alternative) can be exported at profit. This means that local consumption of local produce is vitally important to maintaining the existing agricultural product mix.
5.2 A potential farmers co-operative (led by Woodside Farm) supplying a wide range of crops in branded packaging to Co-op and Waitrose Jersey, with the potential for future exports of these products to multiples in the UK (with Jersey brand) could assist in introducing rotational practices to the Jersey Royal model, safeguarding the sustainability of Royal production whilst reducing the impact of continuous Jersey Royal cropping on soil nutrient enrichment and water quality. However, there is no evidence that these environmental benefits would be additional to what would happen if the project did not proceed.
5.3 The loss of this local outlet would be a critical blow to agricultural production on the Island and possibly a fatal one to the smaller individual businesses that feed into the local supply chain. In addition, a relationship with a major UK retailer would be lost, with all its potential and their decision to source externally is highly unlikely to ever be reversed. Failure of the smaller, independent enterprises would trigger a loss of industry expertise, skills and crop diversity,.
6. Expenditure
Phase 1 - £1,325,000
- £450,000 - £525,000 – States Loan sought*
- Santander will not back this phase as there are no assets to claim against. The States of Jersey could register first call on the machinery and infrastructure sourced with the loan although the re-sale value would be lower than the initial purchase price.
- To proceed the loan must be agreed by Friday 3rd of April, with the funds available by Friday 10th April 2015.
- Cold store and Pack House wall lining £190,000
- Refrigeration equipment £75,000
- Electrical and installation £45,000
- Packing equipment ex Amal-Grow £80,000
- Additional packing equipment £60,000
- Waste water disposal £25,000
- General site clearance and building £50,000
* Mr Gallichan has indicated that some of the above equipment could be leased (see below) reducing the required States loan to circa £450K. Leasing all this equipment is not an option as Woodside Farm has existing lease arrangements which together with the new agreements will put the company over its maximum credit limit.
- £200,000 for equipment purchase (leased ex Amal-Grow – leased from finance companies i.e. Close Finance/Acorn Finance)
- Tractors £80,000
- Delivery Truck £20,000
- Harvesting equipment £30,000
- Cultivation equipment £70,000
- £600,000 working Capital (funded Santander overdraft extension)
Woodside will fund the initial cash flow and additional CAPEX. This equates to £800k contribution from Woodside vs. the £450 - £525k loan being sought.
Phase 2 - £1,500,000 - provision of cold storage facilities
Woodside will be financing a £1.5m purpose built cold storage facility (late Autumn 2016) to avoid having to rent and enable crops to be stored until required. This will be financed via Santander after year one trading. Santander will not support the Phase I set-up as it yields no fixed assets (buildings) and is in effect unsecured.
7. Bullets on the Woodside Farms financial position
- The business plan suggests a two-year investment programme involving a total investment of £2.85m.
- Good level of profitability - £187k according the latest management accounts (Sep 2014).
- Cash flow that should allow them to take on the Amal-Grow business (EBITDA c£600k).
- Strong existing workforce with a low staff turnover.
- Net Tangible Assets of £2.8m.
- Santander has first charge on existing assets following earlier financial restructuring.
- Santander fully supportive of Woodside taking on Amal-Grow.
- Jersey Business satisfied that the Woodside business plan represents a balanced summary of the situation and is a credible solution for a difficult situation. The business proposition is based on reasonable assumptions and is projecting acceptable levels of return (including the servicing of the proposed £525k loan).
- The owner has agreed Jersey Business access to Santander and their advisors to show due diligence has been carried out.
8. Comments on due diligence
8.1 On the basis that it would be difficult for the States to conduct its own detailed due diligence process within the allowable timeframe, it was agreed with Woodside Farms that Jersey Business contacted Santander to explore their approach and attitude to the proposal.
8.2 The CEO of Jersey Business contacted Matt Philips (Director of Agricultural Services, Santander Bank) on the 27th March. Santander verified that they are supportive of the Woodside Farms proposal, as in their view it makes good commercial sense for Woodside and is good for Jersey in preserving some degree of food security. They are aware that they will be approached by Woodside for phase 2 (c £1.5m for cold storage facilities) and had a positive stance. They confirmed that at this stage, phase 1 was not bank fundable in their view, but given by phase 2 Woodside would have proven their capability re Co-op and Waitrose, this was likely to be bank fundable.
8.3 Santander talked Jersey Business through the sanctioning/ due diligence process they went through with Woodside Farms when they took over the banking relationship from Lloyds and approved significant borrowing facilities. Their steps were as follows:
- Detailed site visit by Relationship Manager and also the Director of Agricultural Services to view farm/ facilities/ equipment/ processes/ procedures. This involved in depth questioning of the owner on all aspects of the business. They found him to have an excellent grasp of the business/ sector and all aspects they would expect from a top agricultural business.
- Santander conducted detailed analysis/ questioning of the owner re his historic financial accounts, latest management accounts and all budgets/ forecasts. These were then separately analysed by a dedicated Santander Credit team as part of the internal credit process. The forecasts were sensitised and challenged to ensure that they supported the long-term commitment which was being sought.
- Based on the recommendation of the Director, the funding request was then approved by a Senior Credit Sanctioner and then in turn by the Santander National Lending Panel. Given the level of funding this will have had very senior scrutiny/ support from within Santander.
- It was clear from the openness of the conversation with Jersey Business that Santander that they are very supportive of Woodside Farms as a business both now and going forward.
9. Conclusion
9.1 While States economic strategies (EGDS, EAP and RES) are supportive of productivity growth in all sectors, the objective is to do so without increasing the resources used by lower value-added activities – otherwise it will result in decreasing the productivity level of the economy as a whole. As such, any decision will ultimately be a political judgement call.
9.2 There is a high level of risk that unless alternative suppliers can be found that both Co-op and Waitrose will be forced to switch to UK suppliers. This would almost certainly result in a more permanent move of supply and would have a material and long term impact on Jersey growers affecting their long term viability with all the resultant negative consequences for the agricultural sector and Jersey as a whole.
9.3 Woodside Farms has strong track record of increased growth and productivity and delivering its business plans. The Woodside proposal certainly meets provisions within the RES 2011 -2015. In addition, the draft Strategic Plan targets productivity-led growth across all economic sectors. By definition this must include agriculture and the rural sector which has received modest direct support compared to EU competitors but has grown by 4% GVA in 2013.
9.4 The Amal-Grow jobs already exist in the economy and the personnel involved risk being made redundant in July 2015, though this will free up resources in a labour-constrained economy
9.5 There is huge potential to grow the market from the current £2.5m (30% of the market) to something nearer self-sufficiency of £8.4m though the relative benefits and costs of self-sufficiency are not yet clearly understood. A stronger relationship with Waitrose, once they have developed confidence in the supplier, will also be likely to lead to export opportunities to the UK.. So, aside from the direct commercial merits/ risks of a States intervention, there is also the much wider consideration for Government of whether Jersey is prepared to accept the implications of the vast majority of vegetable growing and packaging leaving the island.
9.6 There is inter-dependence in Jersey agriculture and the agricultural skills base in Jersey is very small. Failure to support this venture will see the demise not only of Amal-Grow but a retrenchment of Woodside Farms and the possible loss of several smaller farmers who currently grow crops for the local market, again diminishing the skills base for growing. This would leave in the arable sector the two dominant UK players currently growing Jersey Royal potatoes.
9.7 Alternative use of agricultural land and labour has been the subject of much research and advice over many years and no viable alternative has been found to the Jersey Royal export market, dairy production and the production of vegetables for the local market. The agricultural land bank is also protected by law so there is every possibility that, in the medium term, this land could continue to be used for agriculture. High rents, input costs (imported) and transport costs do not favour the production of commodities and therefore only higher value crops are viable.
9.8 Various mechanisms exist for the provision of States funding including a miscellaneous loan from the Treasury or the existing Agricultural Loans Scheme, which currently has a positive balance close to that required by Woodside Farms.
9.9 Whilst Woodside are requesting a 20-year loan the projected EBITDA of the Amal-Grow business would support a much shorter amortisation profile. Advice from Jersey Business proposes this could realistically be 6 years maximum with a 1 year capital holiday.
Recommendation
That the Economic Development Minister requests from the Treasury and Resources Minister extraordinary funding from central contingency of £485,000 to support the Woodside Farms proposition in the form of a States loan for that amount, subject to appropriate security being provided.
Written by: | Director Environmental Management and Rural Economy |
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Approved by: | |
Ministerial Decision Case Ref: MD-PE-2015-0036
gov.je