Food versus the environment – unintended consequences of the SFI

Monday, 26 February 2024

Will it really pay to take farmland out of production and capitalise on high paying agri-environment actions? We consider the various considerations and implications at play.

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 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 Sustainable Farming Incentive (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 and 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 out for this analysis over the next few months.

There are also a number of other key factors to consider (expand tabs below to read more).

For arable farmers, reducing your cropped area means lower reliance on your farm machinery; the old combine and grain trailer, for example, won’t be needed as much (if at all, if you go all out with your nectar pollen mixes and winter birdfood).

On one hand, given the financial investment in these items, it doesn’t make economic sense for them to sit in sheds, largely unused and depreciating in value. However, on the flipside, the useful life of the machinery will be extended and so the need to replace it will occur further down the line.

Surplus machinery could be sold, but what if you want to go back to growing more crops after the three years is over? Would contracting out the machinery be an option?

Agricultural property relief (APR) lowers inheritance tax on agricultural land used to grow crops or rear animals.

In March 2023, HMRC put out a consultation as part of their review of tax rules which considers extending tax relief to land in environmental schemes. The consultation document suggests that land entered into the SFI will still qualify for APR as it will be used for farming.

HMRC believe there are aspects of Countryside Stewardship (CS) and Landscape Recovery (LR) which may mean that land will no longer be in agricultural use. As a result, specific clauses for land in CS or LR would be needed to ensure that APR would always apply.

While the Government doesn’t want to disincentivise farmers and landowners participating in ELMs, it also wants to prevent land which has never been used for agriculture taking advantage of any tax relief. At the time of writing, the findings of the consultation had not been published and so the industry awaits clarity on this matter.

One of the key objectives of the SFI is to improve soil health, which in turn could lead to better yields for future crops and reduced reliance on inputs.

Actions such as establishing legume fallows are designed to deliver nutrients to the soil, but even leaving land fallow and/or creating favourable conditions for increasing biodiversity allows the land to rest and replenish.

It’s fair to say that some farmers are more environmentally focused than others and will be more naturally inclined towards land requiring SFI actions as it fits in with the long-term aspirations for their farm.

For others who are considering going down this path, the question to ask is whether it is part of an overall strategy or knee-jerk reaction to attractive looking payment rates.

Does this course of action fit in with your overall aims going forward?

It is likely to take more than just a few years to see the benefits to your soils etc. and if you then return to less sustainable farming practices in the future it will undo any substantial progress made.

Contrasting perspectives will come from different farm managers who have different aims and timeframes. Farm owners are more likely to have longer term objectives and could be more willing to invest time and money into natural capital. Tenants will take their lengths of agreement into account, and one can argue that they are less prone to swap growing crops for longer term agri-environment actions.  

Arable contactors may experience lower land availability for farming but could benefit from higher demand in services requiring machinery, especially if idle machinery is sold (see above).

The factors above are those which affect individual farmers but if many farmers decide to veer away from food production, then we’re undoubtedly looking at the UK’s self-sufficiency in primary agricultural goods dropping and paving the way for increased imports.

If recent years are anything to go by, there is a high element of risk here; if you do manage to get hold of supplies in times of conflict, then you can almost bet that the price will be sky high.  

At the moment, the government has pledged to maintain the same degree of self-sufficiency for agri-food in the UK, but a collective effect of taking land out of production may jeopardise this objective.

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.

Image of staff member Amandeep Kaur Purewal

Amandeep Kaur Purewal

Senior Economist

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Image of staff member Annabel Twinberrow

Annabel Twinberrow

Trainee Analyst

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