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What does the Sustainable Farming Incentive mean to farmers?

The phasing out of Direct Payments assistance means that farmers are facing a new regime of financial support.

British farmers are experiencing the most rapid period of change since accession to the EU in 1973. With the removal of Direct Payments and the phasing in of the Environmental Land Management (ELM) scheme in England, farm businesses will need to change and adapt to ensure they can remain profitable in these challenging times. 

The Agriculture and Horticulture Development Board (AHDB) will examine the new schemes across the UK as details are published so that farm businesses can make informed decisions. But ahead of then, it is in a position to share some key takeaways from analysis it has commissioned from Harper Adams University. This work examines attitudes towards the Sustainable Farming Incentive (SFI) on farms in England, as well as its potential impact. The SFI pilot began towards the end of 2021 and has eight standards that apply to farms. The wider rollout of the SFI is due to begin in spring 2022 and has fewer standards.

AHDB’s analysis consists of two parts:
  1. Discover farmers’ attitudes and perceptions: whether they are likely to participate in SFI, and how they feel about the agricultural transition. 

  2. Measure likely economic impact on farm businesses by carrying out modelling using AHDB virtual farms. 

The schemes will be most attractive for those who are already experienced at delivering environmental goods and who are already undertaking many of the tasks outlined in the SFI

Key findings from the AHDB SFI survey

AHDB asked 34 farmers how they feel about the changes and how they are responding. While not representative of an entire industry because of the small sample size, the 34 responses have given an early indication of reactions. 

The findings from farmer interviews are as follows: 

  1. Farmers vary considerably in level of preparedness for the loss of Direct Payments: just over half of those interviewed have made plans. 

  2. Of farmers that had made plans, diversification is the most favoured strategy. Other ideas included entering new environmental schemes, working out how their Direct Payments will reduce, scaling production either up or down and improving efficiency. 

  3. Many farmers are unsure what impact the policy change would have on their business. This may have been exacerbated by strong market prices last year, masking the first staged reduction in Direct Payments. 

  4. For those farmers not participating in the SFI pilot scheme, the main barriers to entry are cited as: not seeing the standards fitting in with their current systems; the process being too burdensome; and too much uncertainty to consider the SFI in its current form. 

  5. For those in the SFI pilot, financial incentives are the key driver for farmers choosing to engage. 

  6. Most participating farmers (72%) chose standards that they were already meeting on-farm. 

  7. Farmers who applied to take part in the pilot were split on whether the current payment rates would be enough for them to continue participating, with most uncertain of how much it will cost them.

Farmers should prepare for Direct Payments

What these key findings suggest is that a large proportion of farmers are not well prepared for the loss of Direct Payments, with many having not calculated exactly how this loss of revenue will impact their businesses. Farmers will need support in the form of clear information and analysis, as well as support from their financial partners, to encourage forward planning and decision-making.

To this end, AHDB also carried out a study of the financial side, using AHDB virtual farms to model likely outcomes on farm when participating in both the SFI pilot and SFI 2022. 

Importantly, AHDB’s analysis shows that the net payments (payment less cash cost of participating) for most of the standards examined in the SFI were positive. However, the overall impact on the farms’ net profits (total revenue minus total costs) was negative once it considered land taken out of production. 

The AHDB says it is crucial that farmers understand that the headline payment rates will not be an addition to net profit. There are direct and opportunity costs to consider when deciding whether it is profitable to participate in SFI. These will vary from business to business but, broadly speaking, AHDB analysis shows that it is unlikely to be financially beneficial to farmers to participate in certain standards unless they are already undertaking at least some of the actions required. The schemes will be most attractive for those who are already experienced at delivering environmental goods and who are already undertaking many of the tasks outlined in the SFI.

Farmers should plan ahead

AHDB concludes that farmers would benefit from treating environmental outputs like any other agricultural output within their businesses. If they became top performers in terms of the efficiency with which they can produce these public goods, they will benefit the most from the current and future schemes. 

AHDB’s advice for farmers and those involved in farm businesses in England is:

  • Start preparing now. If you haven’t already done so, work with trusted advisers to calculate the impact of the loss of Direct Payments on your business. It cannot be emphasised enough that SFI will not replace Direct Payments, even for those most efficient at producing environmental goods, so it is important that farmers consider the SFI within a wider review of their business.

  • If farmers are already carrying out actions on-farm that are required under the SFI, it is likely to be beneficial to join the scheme because they will receive extra income. 

  • If farmers are not carrying out the actions required but their farm set-up will allow them to do so with little additional cost, it is beneficial to join the scheme.  

  • For farmers where this is less apparent, it is worth carrying out the calculations for their own farms to see if taking part in the scheme will be worthwhile for them. 

This article was produced by our partner specialists at AHDB. For more information on the topics covered here, please visit AHDB.

This material is published by NatWest Group plc (“NatWest Group”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest Group and NatWest Group makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of the NatWest Group Economics Department, as of this date and are subject to change without notice.

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