Stacking options for SFI 2024: Dairy

Applications for the expanded offer of the Sustainable Farming Incentive (SFI) are due to open on 22 July 2024. We calculated the likely effect on dairy farm profit levels of stacking SFI actions over a three-year period.

We have also examined the impact of stacking on two other sectors:

• Arable
• Beef and sheep

Main findings

• The SFI alone is not going to be enough to mitigate the loss of Direct Payments – this is an intentional feature of the scheme. But the right combination of actions could make up a considerable amount of the shortfall
• Taking part in the SFI can provide extra income for dairy farm businesses
• If farmers select SFI actions that are right for their farm, they can considerably boost the farm’s net profit level
• The farm’s net profit will benefit more if SFI actions requiring land are carried out on less productive or unproductive areas of grassland
• It is likely that actions carried out on unproductive grassland will regenerate the land and make it more productive in the long term
• Dairy farmers need to maximise the potential of every hectare of land on their farm
• The SFI has a greater impact on farms with low gross profit margins compared with those that have high gross profit margins
• Regardless of the farm’s gross profit, the financial benefit of taking part in the SFI is most likely to be felt in years where milk prices are average or below average, or when costs such as feed and fertiliser are higher than average: the SFI can act as a buffer in challenging market conditions
• Looking ahead, the SFI can play a role in stabilising farm business incomes

Two stacking combinations have been analysed

Our dairy analysis considers two ways of stacking actions:

• Option A: SFI ‘lite’ – combination of SFI actions which do not require additional land
• Option B: SFI ‘ambitious’ – option A plus a combination of SFI actions which require additional land

Table 1 shows which actions were included in options A and B, along with payment rate and the area of the virtual farm selected for each action.

Updated 11 July 2024 to incorporate SFI expanded offer.

Note: The table shows current actions available.

Table 1. SFI actions under options A and B with payment rates and area of land

SOM: Soil organic matter

Source: Defra, AHDB

An SFI management payment is also available, which is £40/ha up to the first 50 hectares of land entered into the relevant SFI actions in the first the SFI agreement. In subsequent years, the management payment is £20/ha up to the first 50 hectares of land entered. This has been factored into the analysis: the virtual 105 ha dairy farm receives the maximum SFI management payment of £2,000 in year 1 and £1,000 in years 2 and 3.

Methodology

Option B

What’s the overall impact of option B on the farm’s net profit?

The more ambitious SFI grassland actions require land. Because of this there is a cost to farmers of forage such as silage and hay, which may need to be compensated for. To carry out the ambitious actions in option B, 18 ha of land was selected, which equates to 18% of the farmland available.

If the farm selects the actions under option B, the net profit of the farm increases by 85–193% over the three-year agreement, as shown in Figure 3.

Figure 3. Effect on 105 ha dairy farm’s net profit level after implementing option B

Source: AHDB

The percentage changes shown in Figure 3 are based on a gross profit level of £1,840/ha. If the farm had gross margin of £2,750/ha than the 105 ha dairy farm, the net profit of the farm would be 10% higher in year 1, 12% higher in year 2 and 13% higher in year 3.

While the more environmentally ambitious SFI actions are likely in the short term to incur a higher opportunity cost if carried out on areas used for pasture, they are likely to benefit the productivity of all the grassland longer term.

How much money can the farm make from option B (SFI ‘ambitious’)?

The additional income the farm receives if it selects actions listed for option B is £10,500 in year 1 and 12,500 in years 2 and 3, as shown in Figure 4.

Figure 4. Three-year projection of income received by 105 ha dairy farm from Direct Payments and SFI actions – option B

Source: AHDB

See a breakdown of SFI payments with option B

Income from SFI in year 1 is lower than in years 2 and 3 for SAM3 (herbal ley) because there is an establishment cost in the first year.

For IGL1 (take improved grassland field corners or blocks out of management), the farm is able to apply for a Countryside Stewardship capital grant to help cover fencing costs.

In years 2 and 3, the farm receives more income from the SFI actions under option B than it does from Direct Payments. This highlights the advantage of option B over option A: higher payments are received for more ambitious environmental actions. However, these are still not enough to plug the gap left by direct payments. The 105 ha dairy farm received £23,300 in 2020 before gradual reductions of the subsidy began. With SFI option B providing less than £13,000 in additional income, it is clear that the farm will need to look at additional sources of income to mitigate the loss of direct payments.

Conclusions

The expanded SFI offer in 2024 provides farmers with more flexibility in terms of choosing actions which suit their farms, but only careful planning and selection will ensure each farmer benefits economically in their particular situation.

The 105 ha dairy virtual farm in this analysis benefited from taking part in the SFI to the tune of £8,000–12,500 per year in additional income over three years. The more ambitious the actions selected, the higher the additional income.

More ambitious actions require more land to be entered into the scheme and this may impact the forage potential of land entered, so there is a balance to be struck.

It is also worth considering what motivates you as a farmer: some actions may not give a good financial return straight away but may provide benefits in future if they increase the productivity of your grassland.

Participation in the SFI alone is not enough to mitigate the loss of Direct Payments. But the right combination of actions could go a long way to making up some of the shortfall. This will be more pronounced and helpful to farm businesses in years of average or below average milk prices rather than in years where prices are high or when costs, such as feed costs, are high.

Similarly, farm businesses with lower gross profit levels will benefit more from the SFI than businesses with higher gross profit levels. The SFI will have a role in stabilising farm incomes, as has been the case for Direct Payments and the wider Basic Payment Scheme. Gains from the SFI will be amplified in low/average cost years and for businesses with low gross profit levels. But if a loss is made, that too will be amplified under these conditions. This highlights the importance of choosing actions with care and making the best plan for your farm.

With applications for the expanded SFI offer opening on 22 July 2024, it is in farmers’ interest to investigate which options work for their farm and make the best-informed decision about their business.