Horizon Blog: Defra’s difficult balancing act

Tuesday, 26 April 2022

Defra are in an unenviable position right now. As the industry transitions as a direct result of EU Exit from a heavily subsidised sector, well protected from overseas competitors, towards an ideology of the current government of the UK becoming a ‘great trading nation’ and towards a more free-market agricultural industry, the challenges are immense.

Co-authored by Jo Cave, Senior Media & PR Manager.

Subsidies are going. Although the first years’ reduction in direct payments was limited to a 5% reduction for most farmers, which was in large part buffered by strong market prices, subsequent reductions will start to bite as we progress through the transition period. By 2024, the value of direct payments will be roughly half of that received in 2021, and 2027 will see the last of the subsidies to agriculture in England.

Environmental Land Management (ELMs) schemes are either in design, pilot or launch phase. The first of these, the Sustainable Farming Incentive (SFI) has a pilot scheme running and is due to launch the first few standards later this year. A full and comprehensive analysis has been undertaken on this scheme by AHDB and Harper Adams University, in order to determine the impact of SFI on farm businesses profit. The full report can be found here.

The report finds that there is little incentive for many farmers to participate in SFI as it stands unless they are already undertaking the actions required, or they can do so at very little additional cost. For some, the opportunity cost of taking land out of production, especially in times of high market prices, means that there is no benefit at all. Far from being a criticism of the scheme, we at AHDB think of the analysis as valuable feedback, helping to highlight just what a challenging position Defra is in.

ELMs was never intended to replace direct payments, so it would be unrealistic of farmers to expect the new schemes to make up for the loss of direct payments in their entirety. ELMs is not a system of subsidies for farmers. It is a scheme that attempts to redress the market failure that exists in our industry. The public goods that farmers provide (clean air, water, healthy soils, bio-diverse habitats and iconic landscapes) are not rewarded by the market system. What that means is that farmers are not financially rewarded, in the marketplace, for being responsible guardians of the environment in which they farm.

In the absence of this market mechanism for public goods, the government has to decide the value (or price) and the quantity of these public goods that should be provided. It is this ‘should’ that is problematic. It involves a value judgement. Like every government department, I am certain Defra would welcome increased funds in order to encourage uptake of the schemes and reward farmers for taking positive environmentally friendly actions. In reality, Defra has to compete for funds with the NHS, Education, Defence and every other government department, so determining the optimal amount to be spent instead becomes how much can be achieved with the available budget. With EU Exit, Covid-19 and now a war in Europe, the UK economy is forecast to be the hardest hit of the G7 countries, with the most sluggish growth in the coming years, so the likelihood of generous government spending in any department seems a remote possibility.

With the stretching environmental goals that the UK has signed up to with regards to global warming and environmental protection, participation by the farming industry in environmental schemes is a fundamental factor for success. Will the current payment rates be large enough to encourage widespread participation? Or large enough to provide the quantity of public and environmental goods required to reach these goals?

Image of staff member Sarah Baker

Sarah Baker

Head of Economics - Analysis

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