Food versus the environment – unintended consequences of the SFI: Grain market daily

Market commentary

• UK feed wheat futures (May-24) closed yesterday at £165.15/t, gaining £0.85/t on Friday’s close. New crop futures (Nov-24) closed at £182.50/t, down £0.50/t over the same period.
• Grain markets ended mixed yesterday; Chicago wheat futures ended up as the market rebounded from early losses. Short covering by speculative traders supported wheat prices, plus slipover support from maize filtered into wheat. However, there was broadly pressure on Paris wheat futures as the Russian export price dropped, which, along with large global supplies, kept the focus on export competition.
• Paris rapeseed futures (May-24) closed yesterday at €407.50/t, down €0.75/t on Friday’s close. Old crop Chicago soyabeans future gained yesterday as short covering emerged after the nearby contract fell to its lowest price in over three years (LSEG). However, new crop futures dropped with the bearish fundamentals of large South American supplies.

Food versus the environment – unintended consequences of the SFI

Sustainable farming is now the foundation on which English domestic agricultural policy is based. Defra has announced that over 10,000 farmers have signed up to the Sustainable Farming Incentive (SFI). While the aim is to produce food in an environmentally friendly manner, the debate of producing food versus looking after the environment has again raised its head. We have to look no further than the food versus fuel argument in biofuel production as a recent example of this clash of objectives. Even though the purpose of the new Environmental Land Management schemes (ELMs) such as the SFI is to produce food in harmony with the environment, there may be unintended consequences, not only for individual farm businesses but the industry as a whole.

Some of the recent payment rate changes to SFI and Countryside Stewardship (CS) actions look rather attractive at first glance:

IPM2 – flower rich grass margins, blocks or in-field strips at £798/ha

AHL2 – winter bird food on arable and horticultural land at £853/ha

AB10 – unharvested cereal headland at £1,072/ha

It might be tempting for some farmers/landowners to enter considerable areas of land into these actions. As we have shown in our analysis on the economics of the SFI, there are costs involved in carrying out actions and these need to be factored in, and so the net payment farmers receive is likely to be lower than the rate published by Defra. We will be modelling the first-order financial impact of taking vast areas of farmland out of production using AHDB virtual farms, so look for the trade and policy team’s analysis over the next few months.

There are also a number of other key factors to consider from idle machinery to impacts on the next crop and impacts on food security – read more information in the full article here.

Unlikely shift of considerable land from food production

The factors highlighted above show that the decision to enter vast amounts, or all, of your farmland into agri-environment schemes is not one to be taken lightly.

In times of challenging weather and market conditions, however, it’s not surprising that this idea has crossed the minds of some farmers as, arguably, there is a higher chance of guaranteed income.

The Farming Minister, Mark Spencer, has indicated that Defra would look at ‘tweaking the system’ should there be evidence that large blocks of land were being put into agri-environment schemes and will be closely monitoring the situation. So, even if many farmers/landowners decided to take land out of production, it is unlikely that Defra would allow it to significantly threaten domestic food production and could, perhaps, cap the amount of productive land entered.

Our analysis of the SFI has shown that, financially, it makes sense to enter unproductive areas of your farm into the more ambitious, higher-paying actions of the SFI, as sacrificing crop area/productive land has a negative impact on a business’ bottom line. Furthermore, income from the SFI can act as a buffer against challenging market conditions. Yield mapping may be a good way to understand the condition and potential of your farmland. The SFI can make you money from your least productive land and, potentially, increase its productivity in the long-run.

If you’re having persistent challenges with growing certain crops and then not receiving enough income to warrant growing it in the first place, the SFI may be an option. We will shortly publish analysis looking at the economic effect of replacing break crops, such as rapeseed and beans, with SFI herbal ley or legume fallow actions.

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