Stacking options for SFI 2023: Dairy

Applications for the Sustainable Farming Incentive (SFI) 2023 opened on 18 September 2023. We calculate 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 15 January to reflect changes in payment rates.

A further update is planned by Spring 2024 to add 2023 data. 

Note: The table shows current actions available – more will be funded as the scheme progresses.

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

SOM: Soil organic matter
SDA: Severely disadvantaged area

Source: Defra, AHDB

An SFI management payment is also available, which is £20/ha up to the first 50 hectares of land entered into the relevant SFI actions. This has been factored into the analysis: the virtual dairy farm receives the maximum SFI management payment of £1,000 per year.

The baseline year

Our analysis used 2022 as the baseline year as this is the most recent year for which there is a full set of annual data. Later, though, under 'Market prices can have a big effect’, we look at the difference made to net profit levels using 2019–2021 average milk prices.

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, 23 ha of land was selected, which equates to 23% of the farmland available.

If the farm selects the actions under option B, the net profit of the farm increases by 8–11% 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 £2,714/ha. If the farm had a lower gross margin of £1,400/ha than the 105 ha dairy farm, the net profit of the farm would be 32% higher in year 1, 38% higher in year 2 and 34% 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 income the farm will receive from carrying out SFI actions in option B will vary depending on whether these are carried out on unproductive or productive grassland, because the latter will include the cost of lost income from any forage that is sacrificed.

The additional income the farm receives if it selects actions listed for option B, and carries these out on productive grassland, is £8,000–£11,000 per year, 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.

The overall cost associated with managing grassland with very low nutrient inputs (LIG1) was greater than the payment rate after the cost associated with replacement hay for feed was factored in. However, the cost savings from the reduction in fertiliser usage outweighed this shortfall, so contributed to the increase in net profit shown in Figure 4.

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.

Jump to section below for more about Countryside Stewardship actions

In year 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.

Market prices can have a big effect

Our analysis of the effects of selecting options A and B used 2022 as the baseline year – as this is the year with the most recent data. However, 2022 milk prices were higher than average, so that analysis shows an inflated net profit for the farm relative to an average year.

Figure 5 shows the change in the net profit of the 105 ha arable farm if option B was selected and the 2019–2021 average milk price was used.

Figure 5. Effect of 105 ha dairy farm’s net profit level after implementing option B at average (2019–2021) milk prices

Source: AHDB

The 2019–2021 milk price averaged 30 ppl, whereas in 2022, the average milk price was 40 ppl. Costs for the dairy farm in 2022 were higher than in previous years. At a milk price of 40 ppl, the 105 ha farm remained profitable, but at a milk price of 30 ppl, when faced with higher costs, the farm makes a loss, as shown in Figure 5.

The additional income the farm receives from undertaking option B actions is the same as in Figure 5. But in a time of lower profit margins, it comprises a larger proportion of the farm’s net profit. This demonstrates how in leaner years, the overall impact of taking part in environmental schemes like the SFI is much greater and can provide a buffer for farm businesses in testing circumstances.

The same argument is valid for the gross profit of the farm. Percentage increases will be amplified for farms with lower gross profit levels.

Countryside Stewardship actions

While Defra will not fund equivalent SFI and CS actions twice on the same parcel of land, some actions can be stacked. This has been demonstrated in the SFI stacking analysis for arable farms (option C), where three CS actions were added to 15 SFI actions. For the 105 ha dairy farm though, it was difficult to select grassland CS options that:

• Were not already covered by the chosen SFI grassland actions
• Would significantly increase the farm’s profit levels

We therefore didn’t include CS actions in the dairy analysis.

Where there are similar SFI and CS actions to choose from, it is important to read the details, as requirements may differ. For example, SAM3 (herbal leys) in SFI and GS4 (legume and herb-rich swards) in CS have the same aim and same payment rate (£382/ha). However, for GS4 there are more specific requirements about the species composition of the legume and herb-rich swards, whereas for SAM3 there are no such criteria.

Details on SFI and CS actions can be found on GOV.UK here:

• Defra’s 2023 guidance: SFI Handbook for the SFI 2023 offer
• Countryside Stewardship grant finder

Conclusions

The 2023 update of the SFI scheme offers farmers 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 £7,000–11,000 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.

It is worth remembering that more SFI actions will be made available to farmers as the scheme progresses, providing more choice and sources of income. AHDB will continue to examine the details of the scheme as it develops and analyse the effect on behalf of levy payers.

With applications now open for SFI 2023, it is in farmers’ interest to investigate which options work for their farm and make the best-informed decision about their business.