Horizon Blog: Can profitability and sustainability work in harmony in the SFI?

Are farmers meant to produce food or provide habitats for wildlife, introduce biodiversity, look after our soils and waterways etc? This has been an ongoing topic of debate. There’s no reason why they can’t be both, but it depends on the success of the new schemes being developed. By success, I mean farmers take part in large numbers because they see their participation as worthwhile and rewarding (not just to their bank balance but also their natural capital) and a real tangible difference is made from the environment point of view.

This is certainly the aim of the Environmental Land Management Schemes (ELMS) which are currently being introduced as Direct Payments are being phased out. ELMS are not intended to replace Direct Payments (and they won’t – not by a long shot). The Sustainable Farming Incentive (SFI) is the most farmer focused scheme within ELMS but to receive payment, farmers will have to complete actions on farms which will incur costs.

In our latest Horizon report, ‘Assessing the impact of the Sustainable Farming Incentive on farm businesses’,  we’ve looked at what these costs are, how much farmers are likely to get paid and the implications of taking part in the SFI on the overall profitability of the farm.

One of the key points is that the additional costs of taking part in the SFI will vary from farm to farm as they depend on what is already being done on farm as well as the farm’s set-up. We used the AHDB virtual farms to carry out this analysis, which represent middle 50% performing businesses and looked at how participating in the SFI would affect their bottom line. For the two soils standards, available in the wider rollout of the SFI this year, the improved grassland soils provided a better return compared with the arable and horticultural soils. This doesn’t automatically mean that the improved grassland soils standard will be the best for every farm – repeating the point made earlier, it will depend on what farmers are already doing on farm and their farm set-up.

The main conclusions from the analysis were that if farmers were already carrying out the actions under the SFI standards on their farms then it would be worthwhile for them to take part in the SFI as they would be getting paid for something they were already doing and/or could potentially do with minimum hassle. For others, the financial benefits were generally minimal at best.

However, it wasn’t possible to model the implications of improving soil health in this analysis and the potential benefits this would bring in the future. Improved yields further down the line, as well as reduced reliance on fertiliser would certainly help farm businesses’ bottom line. This is particularly relevant at the moment with fertiliser prices going through the roof due to the Russia/Ukraine conflict.

As described in the report, according to previous work done on farmers environmental management behaviour, there are four types of farmers:

• Those who are environmentally-oriented, do not participate in agri-environment schemes (AES) and already have or will adopt agri-environmental practices voluntarily without subsidy
• Those who are environmentally-oriented, take part in AES, and will adopt more complicated agri-environmental practices when receiving lower levels of subsidy
• Those who are production-oriented, do not take part in AES, do not adopt agri-environmental practices and remain focused on traditional/conventional farming systems
• Those who are production-oriented and take part in AES, but adopt minor, incremental agri-environmental practices when subsidised. To adopt more complex practices, they would require higher levels of subsidy

Based on the above, unless farmers are environmentally oriented in the first place, they will need the right level of financial incentive to take part. Our analysis shows that at current payment rates there are small to modest financial benefits as long as farmers do not have to make significant changes to their current practices – so how will this lead to vast improvements being made in order to hit national environmental targets?

From the farmer types mentioned above, it appears that for substantial change to take place the financial rewards also need to be greater. The problem is managing the overall national budget to achieve this which we’ve highlighted in a previous blog looking the difficult balancing act that is required.

As escalating input prices have shown recently, it is worthwhile looking towards methods and practices that reduce reliance on fertilisers etc – and this may well have some production-oriented farmers considering a more environmentally focused approach. Analysis of nitrogen fertiliser application strategies has shown that prudent reduction of application rates will pay off financially.

So, what’s the solution going forward? Where does that balance of farmers as food producers and environmental custodians sit? It’s clear that farm businesses that have a high dependence on Direct Payments are going to have to find other ways to mitigate their loss – taking part in ELMS is one way, but it’s not necessarily the best solution for all businesses, and it certainly won’t fully mitigate the loss of Direct Payments for any businesses. Farmers will need to determine whether if it is right for them.

Policy makers need to be aware of that while these schemes will benefit farmers’ natural capital in the long run, many businesses will be losing considerable money now and will be looking at options that provide the best return. Perhaps once farmers are taking part in the new schemes and can see the benefits made to their natural capital (including cost savings) higher levels of payments won’t be required as more production-oriented farmers may become increasingly environmentally oriented. This could potentially lead to farmers engaging with the new schemes while maintaining a favourable financial outlook and delivering the environmental goods which are required. This is indeed would be where all aspects could work in harmony. Only time will tell – but the first step is to incentivise enough farmers to take part in the first place.

The full and summary report of the impact of the SFI on farm businesses is available on the AHDB website.