- Difficult times to navigate.
We are living extremely complex and tumultuous times, the last 3 years have gone by at reckless speed with sizeable changes of economic, supply-chain. It sometimes feels from my previous work that we are a make or break moment for the farming industry. I tried to summarise most of those challenges and showcasing them through a multi-scalar analysis of the agrarian diagnoses in several small agricultural areas of Wales in the forthcoming; Lenormand et al. 2022. But if I am to summarise them they would be as follow:
- We are currently witnessing an unseen succession of events that have had wide ranging economic, social and environmental challenges. Coronavirus and the Ukrainian War that have led to supply chain issues, fear of shortages, high volumes of monetary inflation, high market volatility for many agricultural commodities and key agricultural inputs. The tale has been told many times in terms of how big the impact on the sector was, unions report an inflation in the farming sector over 30%.
- But as I pointed out before Wales has a specific, family farm led sector with a deep co-evolution between farming and the environment/communities as shown in Lenormand and Morse (2022). And those immediate challenges developed above pose a risk to them but as well can be difficult to negotiate when already anchored to past developing factors that constrain and limit farming system evolution (e.g. ageing sector, specialised, other policies…). Brexit also represents a step change for Welsh farming, a changing environment for agriculture in Britain and Wales, new trade/agricultural policy. And yet another layer of complexity to deal with and integrate in a complex environment.
Positives and negatives can be seen from this situation, one could argue that it is a good time to enact a transition towards more sustainable system. But while we analysed that the long-term consequences of the Sustainable Farming Scheme – the future Welsh Government Agriculture Support policy could have a long/medium term positive impact as shown in the forthcoming Lenormand et al. 2022, will farm survive until then with what‘s on offer?
2. Building possible scenario and research method
I tried to collect a range of different farm archetypes to look at the possible impact of the short-term impacts, we focus our analysis on 10 different archetypes, we aim at representing part of the diversity of the Welsh farming ecosystem in terms of operating structure, production types or landscapes - all those originate from my fieldwork in Wales:
- A valley dairy spring calving herd with 500 Dairy Cows mostly flying herd (that could be a joint-venture), a result of the development of Dairy Spring Calving farms (DSC)
- A hill dairy heifer rearing farm with some sheep (that is linked to a lowland dairy farm) – Family Farm (FFM) (Bala)
- A beef breeding to finisher with some sheep holding a strip of land (bottom of the valley to top of the hills – rough-grazing) – Plas type farm (Vale of Clwyd)
- An organic beef and sheep farm holding all the different categories of land but with a high and rough mountain profile. – Large FFM (Bala)
- A beef and sheep farm with a large hen unit with access to mountain land– Large FFM (Bala)
- A small holding with Beef and sheep selling locally but also rearing some calves to top up its income – Tenanted smallholding – SMH (VoC)
- A small holding with sheep and a small hens shed selling locally – Tenanted Smallholding - SMH (Bala)
- A family dairy farm of 200 Dairy Cows based on grass mostly – FFM (Pembrokeshire)
- A family beef finishing farm with a 100 head with a high level of autonomy – FFM (Pembrokeshire)
- A small scale organic dairy farm with 90 Dairy Cows with a mixed farming approach – Small FFM (Pembrokeshire)
- A large scale potato operation (Pembrokeshire)
This allows an ease of representation while still including very different production systems. We focused on family owned farm as well as joint ventures but we will also check in which position rented farms would be in a later development of this analysis. We will also check later whether people will choose to plant the farm with trees using latest welsh government grants.
Before we start analysing which farms would possibly be impacted I designed different scenario to test the resistance of archetypical farming systems in the new short/medium term context as well as the possible shocks that could take place. From the secondary data for agricultural outputs and inputs I had a careful look at how different scenario could look like to analyse farm sensitivity to those evolutions. We identified several elements that we need to test on our archetypes:
- The first one aims at looking the sensitivity of farm archetypes to input and output volatility separately, to better understand how they can be impacted by evolution of one and not the other
- The second step is to combine together high prices for both input/output and the low ones to observe one context that could be similar to an inflation process at a relatively quick and steady increase in demand or a process of deflation with a worldwide contraction of the demand.
- Finally for our last step we decided to analyse the possible impact of an uncontrolled hyperinflation, combined to a massive cut in subsidy payment in a political orthodoxy move, a flare-up that would be difficult to deal with.
After analysing those elements on farms as they stand we will also try to estimate whether the farm that might have applied the SFS measures earlier would be in a better position. Although we gave in the table 1 below the different prices retained, the rational is developed below in appendix 1.
Table 1: Different price evolution scenario detailed per production types (From an extensive secondary data analysis)(By the author)
Nota - Reminder research method: I used a French method of agrarian diagnosis enabling a holistic systems-based approach working in small agricultural area and studying it using a 3-step approach: landscape; agricultural history of the area; and finally, the production conditions of today’s farmed landscape (Devienne et Cochet, 2007). The working farm archetypes modelled from this approach will be taken through these price scenario. To analyse the consequences on the farming system I will focus on the agricultural income per family worker and the reliance on subsidy. For each scenario I will try to compare it to a situation of Reference which is 2019.
3. Results:
3.1 Input price variations, which farms are the most sensitive to input prices evolution?
Figure 1: Agricultural revenue and reliance on subsidies on a range of archetypical farms from Wales (By the author from fieldwork)
We would like to remind readers that the low input price scenario is very close to the reference position.
Looking at the results we can see that some farming system are particularly impacted by the input prices changes, those are mostly high added value systems, they have the steepest trajectory; dairy, hens or potatoes farming. On the flipside the beef and sheep system of any sort tend to be less impacted by inputs price rise. Nevertheless, the implication in terms of farm agricultural revenue are dramatic in a high price scenario, most witness losses of around £20-30K per family worker.
The high added value production system displayed have a relatively low self-sufficiency compared to their level of productions. Explaining the challenges linked to high input prices. The archetype rearing meat livestock and with a low self-sufficiency (local food producer as it rears calves on top of its activity) or finishing cattle (Large beef finisher), or those using loads of fertiliser’s (potatoes…). Overall system that have an artificially high added value per hectare due to high inputs use are challenged. The small dairy organic farm with it’s very high self-sufficiency is an example of a high added value per hectare not linked to high inputs, it is also true for the slow finisher. We also have truly extensive systems that are not impacted as much, in that case the large organic beef and sheep farm.
We note that two system drop well below the line of £20K that represent for us a living wage. 5 of them drop under £32K, the UK 2018 median wage in a high input price scenario. With unsustainable levels of income.
Some of the newly differentiated system tried to escape the low remuneration of beef and sheep systems, except at high inputs prices they get to the same income. One of them, the local selling hen farming system is a much smaller scale system than the large hen farming system, using more manpower to generate its output and using cheap tools, it is impacted as well, not as brutally but goes under the £32K threshold. Poultry in a system remotely conventional is a technological lock-in, it is difficult to produce one’s own feedstuff for those demanding chicken. In that regard integrated contracts can be slightly easier as they incorporate a lesser financial risks.
The dairy spring calving archetype is an interesting case-study as its income goes down to extremely low levels making it simply unsustainable. We took the example of a late development from the Dairy Spring Calving trend we have investigated previously, it’s fragile landholding and despite a low output low-cost system, high cost base (rent, profit sharing, investments, cost of rearing out animals) and use of fertiliser means it suffers a lot. Looking at the agricultural income split between partners is very interesting (see figure 1.1 below). It reinforces what we thought the latest development of these share farming models tend to be more fragile. (as explored in the work on the Vale of Clwyd)
In that scenario, the reliance on subsidy is massively increased on all farming system showcasing the role so far of BPS payment as farm income stabilisation even for high added value production system.
Summary: High production factors users take a beating. If it can’t be mostly delivered from the your own production factors, you run the risk of being liable to volatile markets. Farms relying on rented land or workers and taking a competitive best price approach to access those production factors suffer. Subsidies still play an important role in all cases for low added value producers.
3.2 Output price variations, which farms are the most sensitive to output prices evolution?
The low output price is approximately 10% under the reference position, over the last 30 years we have witnessed sustained low prices in real term, the high output prices reflects much more the current prices.
Figure 2: Agricultural revenue and reliance on subsidies on a range of archetypical farms from Wales (By the author from fieldwork)
It is a simple analysis, if you imagine that the cost are fixed, the output varies, if you have more room between the two per unit of output you do better.
In this case, the higher the output per family worker, the higher the "work productivity", the more you are impacted. We can see the very steep curve of Dairy, hens or potatoes or calf rearing- local meat archetype that all have high output. They all have a high sensitivity. Interestingly, the family dairy farms and large beef finisher have a less steep curve, they have more family workers limiting their total output per family worker despite relatively high work productivity. It is also revelatory of the tight margins given how much the variations impact farm income. Some farms are on extremely volatile prices, for example potato farming on usually high added value production, fluctuating output and inelastic markets giving an income swinging quite a lot. In that case the capacity to deal with the volatility is part of the expectations.
For all beef and sheep, heifers rearing systems, heifers rearing or smaller dairy farm the impacts are more limited, partly because maybe their margins tighter compared to high added value systems per unit sold but volume are a bit smaller, and sometimes the swing is smaller. But their income is also impacted in monetary terms by the evolution of output prices, with not the same multipliers but to more challenging levels. It is still a reduction in half for the small local food farm or the organic beef and sheep farm.
Interestingly, the challenge to the local hens is not as important as the large hen archetype, the lesser volumes combined to the better margins (at the cost of more work).
Some systems might have knock-on impacts due to the evolution of prices, for example those needing high number of replacement stock, being subcontractors of others, there is a clear question on how well to model it. For heifers rearing we bet on an alignment on milk prices mostly, for archetypes needing breeding stocks, it is indexed on livestock prices (more demand for livestock, higher stock prices).
We note that having a diversity of productions of the farm can improve the mid-term situation on a farm if different outputs fluctuates at different time, in that case beef and sheep, hens, local food or diversified archetype (electricity/tourism) tend to do better.
Generating a revenue in a non-crisis situation is a thing, but in a crisis output cost the majority of farm archetypes would be on lower incomes, something quite dramatic for some farming systems, with low outputs.
Finally, we highlight with Figure 2.1, giving the multipliers between the 2 scenario for the input and output volatility that the farm income is more dependent on outputs prices than input prices. Farms have a good efficiency overall. Few farms are in the opposite case, namely high production factors requirement; dairy spring calving and high yielding dairy farms.
Figure 2.1: Comparison of multipliers between farm income linked to our scenario of input/output volatility
3.3 Low input low output vs high input high output, comparing 2 options for future UK context
Figure 3: Agricultural revenue and % of the income of reference on a range of archetypical farms from Wales (By the author from fieldwork)
We note that in those cases farming is in a very different context, one that could be seen as quite challenging. Farming as some inertia and it takes time to adapt a farming system to large change of context that we are witnessing, for any part of a farming system, many things are set out in the long-term.
The low prices context seems more challenging for farms than the high prices context, as the high prices can outweigh some of inputs price rise, on the flipside as margins tend to be thin drop of output prices with limited prospects for drop of inputs prices would be dramatic. It represents the biggest risk ahead for farms around with drops in income going from 5%-10% for those on the “cheap" market supported eggs or milk, more 20% for Beef and Sheep farms. Outliers, with the Local, small scale beef and sheep farm (12% of its output sold locally, the rest to livestock markets) challenged by the low margins on stores, and the Dairy Spring Calving that has a low output per cow which means that it is directly hit by substantial price reduction, combined to a high number of intermediaries to remunerate.
The most challenged one is potato farming, its income is yoyoing depending on the context, high rent, interest charges here combine to the output variations. This system uses many different production factors for a product which is a staple and relatively cheap part of our diet, the volatility on it is unlikely to go away. It was already a finding from the original 2019 report.
When prices are high, systems tend to be less impacted economically with incomes hovering around or surpassing the reference levels. The systems with the highest level of risk tend to see their level of income increasing the quickest – potato farming, dairy spring calving, small scale store producers… - with also the farms with an efficient or low input use benefiting from the increase in output prices, like the two organic farms, dairy heifers rearing or the slow beef finisher (with a high self-sufficiency). All the more if they are on low added value productions. Relatively lower level of risks are built in high demand but price pressured, hens archetype. This scenario can increase all farms income sustainably above the living terms threshold.
A limitation is that there are many elements not modelled in terms of impact for example contracting costs which could further impact farm operating cost, for now we made the assumption that they would remain constant in real terms. Additionally, we made the assumption that the inertia of farming systems prevented some changes on the farming system, something which is partially true. We would expect some retirements, slight changes in patterns of input use and agricultural products being sold.
Finally, to conclude in two scenario that we deem likely the deflation one is potentially, more dangerous to the industry than the inflation scenario.
3.4 What about the hyperinflation context:
In that scenario, inputs prices rise faster while output prices tend to stagnate or go down slightly. We also decided to run the hyperinflation context in the case where we substitute the new SFS – the future policy of the welsh government- that we modelled to the current subsidy system.
Figure 4: Agricultural revenue per family worker for a range of modelled farming system in 3 different cases, the Reference one, the Hyperinflation and hyperinflation but with SFS:
We quickly realise that the hyperinflation scenario has the potential to be much more challenging than the one seen above, farm income is dropping substantially in all cases, while in HIHO we witnessed mostly higher incomes. Looking in more details, the ones that suffer the most would be those with heavy investments and high input dependence; dairy farms, potato farming, particularly with very high overheads linked to past investments, high inputs or production factors consumption. Those that are self-sufficient fare better. The systems with low added value struggle, for example beef and sheep farms, particularly the extensive ones as subsidies are cut extensively. Hens would be less affected despite heavy investments due to a more supportive context around this output, the small hen archetype despite lean investment would be more challenged due to its lesser income overall.
The position of spring calving systems, particularly the late developed ones with their high number of intermediaries to remunerate could be challenging. Others that would struggle would be the ones with a heavy debt, like the 400 Dairy Cows archetype. Those two systems lose nearly half of their agricultural income per family farm. Albeit for the 400 DC archetype it still stands at reasonable levels which is not the case of the spring calving system.
Interestingly the low scale, local beef and sheep producers is the only one that could see a modest total revenue increase, linked mostly to low inputs costs, low reliance on subsidy.
Looking at what would happen in a scenario of hyperinflation with the SFS implemented we can see that the consequences are dramatic for large scale beef and sheep producers, particularly those with the lowest added value. On the flipside, given the scheme is based on actions, some work intensive farms benefit from it – including with a lot of seasonal work, potato farming, dairy spring calving - , compensating some of the loss in subsidy due to the 50% drop in subsidy payment but for high inputs systems linked mostly to improvement in terms of farms self-sufficiency. I would note that our model is particularly challenging for extensive farming and does not support them adequately as shown by the impact on large low output organic farms.
Table 2: Difference of agricultural revenue per family worker for each archetype between the system adapted to the SFS and the reference situation within 4 possible scenario, the first with the SFS scheme, the second in the LILO scenario, the third in the HIHO scenario and finally in the hyperinflation scenario (By the author from fieldwork)
If we compare the situation with and without the SFS in Table 2, we note that most systems that we picked benefit from the transition to the new scheme with the drive to self-sufficiency, if not in the reference scenario, at least in some of the extreme scenario showcased. The ones for which the scheme represents a definite challenge would be the large beef and sheep farms that benefited from the previous arrangements, very extensive farms with comparatively slow amount of workers on the ground. We note that on the flipside, work intensive systems, and seasonally operating system benefit from the scheme in nearly all scenario.
The only exception would be farms in a technological lock-ins or supply-chain lock-in, namely some dairy farms, hens or in some cases potato farming limiting the adaptations of the farming systems to new conditions. In our case, I assumed some supply chains adaptation to potato farming for Wales, given the structure of the supply chain, mostly as a coop. While for hens given the higher number of intermediaries the leeway is much more limited.
If things are not always better with the scheme, the swings tend to be of lesser impact, at least for the less extensive farms. Finally, organic farming, in its “sustainably intensive” ways could do better due to its higher level of work.
As a limit to this approach I would note that we made a number of assumptions around the level of funding, the actions that would take place on the holdings. All those have been developed in this blog article/paper. Additionally, I had the feeling that I was only partially reflecting the hardships faced by farmers at the moment, part of it is due to the fact that not all inputs are taken into account in the evolution (contractors, chicks... but most of all I focused on a mid/short-term vision already levelling some of the very short term challenges and volatility.
4. Complement and conclusion: What is the most likely issue
To complement the analysis above we should look at what will be the possible risks for farms; right now the challenge is that the uncertainty and volatility are so high that it’s difficult to analyse anything else than very short-term moves.
First, interest rates rise are a huge problem for farms given the fact that the industry is a low margin high capital operation, combine it with rising interest rates, sometimes on very huge loans (all the more if it takes into account land) and you size in the scale of the challenge. At the moment, given the situation, combined to subsidy uncertainty it is unlikely that loans would be attributed, all the more to those with no or little capital. I think it is important to remember that back in the 70s and 80s the context in agriculture and an incentive to increase farm productivity led to a massive selection among farms. Capital spending is likely to dry off.
Secondly the fodder situation of many farm is not great, the summer has been dry and prices of feedstuff/fertiliser quite high could have led many livestock farms to destock provisionally or for the longer-term, or sell some stock early. I am expecting slightly more self-sufficiency on holdings be it via a reduction in inputs or growing more on the farm, even with reduced inputs use. Within ones operating limits; agro-ecological/tools/work limit and with little/no capital.
Output price rise have stopped for Beef and Sheep (with even going down on sheep) and are creeping more slowly at the moment on Dairy farms. Pigs are on the upsurge after a massive cull in terms of producers linked to low prices during the last couple years. The later production as well as egg/poultry are likely to be less impacted by the context, given their high added value productions profile, maintaining somelevel of "progress/investment/productivity gains".
Subsidy wise, Wales got a bit more clarity with 2 more years of BPS before it is phased out gradually until 2029, actually taking the transition up to more than 10 years. In all fairness I remember saying that it would be useful to plan a long transition and not rush it to give clarity to farm businesses with time to adapt. Except the fact that the announcements have trickled by, knowing broad intents and political orientations in this regard in 2019 would have been useful.
Imported food costs/inputs have started rising, combining the covid and Brexit impact on transport costs, how much the pound has fallen against other key currencies ($ and €) against which imports are based is a clear problem. There would be room potentially for some import substitution but as the pound has only gone down on the short term I would say that those are time limited. Britain was only the first one to go down macroeconomically in terms of investor’s fears, others will follow. The pounds falling has also buoyed exports, all the more in a supply-short global market for red meat.
To understand future trend in terms of inputs/outputs and the most likely scenario we need to understand what the consumers could do, first information from Kantar panels (2022) show that households limit their purchases of high added value products. There would be further meat consumption reduction, particularly red (inc. for socio-cultural reasons). Low-cost retailers are on the up everywhere, with their much reduced range of products on offer, fair to their producers but focusing on a commodity vision. Limiting the choice of the consumer and produce differentiation across the supply chain.
The risk in the short-term is a crunch. A lot of projects being crunched and a lot of natural/social capital disappearing as a result, the operating circumstances are extremely. While some productivity gains can be attained by investing in IT equipment and scaling up, at the moment would come at a very high cost, another route is to cut cost as much as possible. This revolution to improve productivity is deeply incompatible with the UK landholding, the diversity of ecosystem available or the agro-ecological vision of the welsh government. At the same time facing this difficult operating context, a number of farmer in the ageing sector will cut down their activity quite severely, most of all those part-retired, all the more the potential other lucrative opportunities.
Note: I am waiting the publication of the June survey results with a lot of interest but some worries to try to understand how local trends have scaled up at the Wales scale. I am expecting that they will show some of the above.
Conclusion:
As shown, agro-ecology and adaptations geared around self-sufficiency could deliver some benefits, but will need to be implemented gradually. I would say that targeting an easement of work productivity to reduce the strain should be prioritised to have the potential to deliver on farms in the short to mid-term as well. But to get there, we might need counter-cyclical investment in the general economy and on farms in a situation of crisis to invest in communities, people and usable capital/tools rather only trying to pay in the bill of our dependence to fossil fuel without adapting. The cuts in agricultural income, would be a challenge to many farms and would result in cuts in terms of spending in the rural economy, likely to drive a decline.
I would go further given the findings of the article focusing on “hill farming in North Wales”, combined to the scenario showcased before, not all is great for the farms that chose to add value to their production or to specialise but neither is it a disaster, but the ones that suffer the most tend to still be specialist beef and sheep farms, with a low added value in extensive system. Hence the move of specialisation, polarisation of land use, efficiency/lean/productive/larger vs extensive/little management/opportunity based divide is likely to grow stronger if reassurance is not given around the future scenario. And as we showcased before in “North Wales Socio-Ecological Production Landscape” agricultural production systems are a key part of the rural society and carry with them part of the Welsh ethos.
Food wise my advice would be multi-fold, first we have a small window to develop import substitution particularly on fruit and vegetable but we need to act quick and we could reduce our dependants on volatile imported food. People might not spend much of their income in food but it still represents more than it used to be in monetary real term, if people feel the bite of the cost of living crisis we can drive down food price by revisiting our supply chain; removing the packaging when possible, each one should be able to pick a portion adequate to its needs, in turns reducing waste. Making sure that wonky size animals or products are not wasted if they are of edible quality… I believe that the development and consumption of seasonal veg boxes/ag products should be incentivised, more in sync with the environment, maybe through management subsidy/a better operating framework, making it attractive with easy, tasty and healthy recipe will be useful. One thing is sure, in the short term small scale low value initiatives, cooperation are the easiest to move forward and adapt and supply chain value sharing approaches should be considered carefully, the current situation in the poultry sector (in the UK or France) is the illustration of our failures around them. One link being crushed by the input/output price squeezes.
6. How tenanted farms would face those situation
Looking at a situation where the farms are entirely tenanted, when possible is quite worrying, we limited the switch to a fully tenanted situation for only 4 archetypes in orange in table 3, 2 archetypes were already fully tenanted (in red in the table); for the others it was unrealistic given their "history" that they could be tenanted, we have in our case 2 types of tenancy on the whole farm arrangements; either an AHA type agreement complemented by FBTs and more unsecure tenancies or those with a main long-term FBT and several other FBTs/more unsecure tenancies.
Looking at the economic results in terms of agricultural revenue per family worker. It is interesting to note that the tenanted farm fare slightly worse for the converted one than their non-tenanted counterparts. The agricultural income goes down, significantly. But we also realise that they are very challenged economically in crisis conditions, particularly the hyperinflation and the Low-cost scenario, with farm incomes that can be under our sustainability thresholds.
We realise that beef and sheep farms, particularly the uplands ones tend to be in a more challenging position than the high added value productions, be it dairy or hens, even at a small scale. The results are still above the median UK income in all cases. It is a clear challenge. We are particularly worried for non-differentiated tenanted beef and sheep farms.
Nevertheless, the impact of farm being tenanted should not be overestimated, the challenge of buying land can weigh heavier on the shoulders of a farm, particularly linked to the interest rates, in an hyperinflation scenario. Where the future challenges might lie for tenanted farms would be in terms of operational flexibility to fit into the schemes, securing the necessary funding (including loans vs low amount to mortgage against) to adapt to regulatory elements or necessary productivity investments. Finally, the cashflow vs payment dates is very important for tenanted farms, this might further pressure them on the road to differentiation, more than diversification (given again, the restrictions in terms of operations/change to the holding for tenanted farms). We note that cashflow wise, beef and sheep system tend to be more fragile in many cases than other production systems, a seasonal income is a bit of an issue (tourism I am looking at you).
Considering those challenges for tenanted beef and sheep farms, some of those, guardians of the Welsh SEPLs, the options are limited to add value, in a sufficient manner to remunerate the different production factors, namely the high added value production systems. For some farms rent increases might be purely unsustainable with the current mix of production.
Table 2: Agricultural income per family worker on a range of farming system, family farms from large to small and entirely tenanted, in different economic scenario, all economic value are presented in £2018 (By the author from the fieldwork)
In terms of recommendations, I would recommend a flexible approach to tenancy payments if needed to adapt to the seasonal income and the new subsidy payment calendar. Additionally, for those farms a clear question in terms of how much of the subsidy payment can be claimed by landlords will be very important to their subsistence.
If measures are taken to adapt tenancies to the new state of affair the tenanted model can subsist, but a very careful approach will have to be taken around beef and sheep farms.
7. Is tree planting a better option?
Small woodland grant creation scheme (Welsh Government):
- <2ha
- Capital grant for the trees and to fence it on agricultural land
- 2 to 4,5 K£/ha
- 12 year for management according to british forestry standards, £60/ha to £350/ha per year
On tree planting we had a careful look at the current small woodland tree plantation a scheme we put the details above. We took the assumption given the focus of the Welsh government that it was likely that the funding levels will keep covering expenses. We think it will keep running in the SFS in the future. It will be possible to plant 2ha per application window if retained, after 5 years it could be up to 10ha. It would represent very little for large farms but given that the average farm in Wales is around 48ha (and that the median size is lower than that) it could already represent more than 20% of the farm. It makes us think that this programme acknowledges the fact that large farms often already hold some tree-planted land (a fact showed by fieldwork) and that it is aimed at smaller farms.
We then set off to try to understand which farm operating system would take it up. We used the Welsh Government assumptions in terms of payment levels over the next 12 years, around £410/ha (management and loss of income), we then looked at lowering the payment for loss of income in case of a shortage of funding or a non-compensation of inflation (£235/ha), we increased the payment by 50% as a way to approximate farms that farm with low inputs, in a as much as possible sustainable and good quality land, like the organic dairy farm of 90 Dairy Cow, it’s economic performance of around £600/ha. £615/ha represents an increase by 50% of the payment level.
We are going to look successively at the economic performance of farm per hectare, as a way to approximate their economic interest in letting land go, moving to the agricultural income per hectare gives us a view incorporating all production factors and costs. We considered two scenario, the reference one and the low input low output representing the more challenging conditions for archetypes as shown above.
Is it interesting to plant trees and who is likely to do it?
Table 3: Economic results per hectare of the range of archetype studied in 2 operating scenario (Reference prices and Low Input Low Output prices), the results have been colour-coded (By the author from fieldwork)
- Added value
Looking at the added value gives us an opportunity to understand who would be likely to convert some land to trees to generate more farm output and produce more economic wealth.
The colour coding gives us the idea that high added value producers are unlikely to go for the tree planting scheme, except for marginal land that does not benefit directly the farming system. But at this game, a permanent pasture providing a” medicine field” – a drought resilient fodder production is directly benefiting the farming system. Therefore, we encourage advisors, policy makers and farmers to consider the system logic before focusing on marginal areas. Admittedly, less motorisation/mechanisation friendly are more likely to be selected first in general.
Those finding it interesting from an economic performance point of view would be low added value systems (Green or Blue), mostly beef and sheep farm, particularly extensive producers, even if they must share the funding with a landlord (as showcased by the green option). A question remains if those farms would have the expertise and be confident enough to conduct the work themselves and therefore which share of the funding would be retained, for now many would need contractors. For large farms, particularly in uplands they already tend to have forestry, they are used to deal with it which won’t be as much the case for lowland, smaller farms.
By looking at the LILO scenario the interest for the scheme would grow as a way to make system more resilient in times of crisis. Particularly for beef and sheep farms, even when finishing some cattle and heifers rearing.
We nevertheless consider that the lower threshold of high added value farms per hectare, between 410-615 £/ha Would farmers might do it, for the sake of entering the next Welsh government scheme as their economic performance per hectare is relatively limited and they suffer from volatility.
- Agricultural income:
The picture looking at the levels of agricultural income per hectare would be one of wider interest for the scheme, particularly encompassing fully the lower levels of high added value productions; heifers rearing, small hen farming or small-scale dairy organic farming. The same that suffered in the LILO scenario could be interested by the scheme in a crisis scenario, with high volatility or high overhead/production factors to pay… Potato farming for the first, dairy spring calving for the second.
I want to underline that despite the general economic vision and analysis not always supporting tree planting as per the scheme, there could be an operating/opportunistic logic to go in the scheme. For example, even with a high economic performance from the land in terms of added value as seen in the table, if this performance is not depending on the land directly it can be interesting, for example small scale beef and sheep or hen farming. For tenant as shown above it could be potentially interesting depending on agreements to strike with landlords, but it would be possible for most farms. As a result, it makes us think that due to the amount of work to do on each agreement, there might be a bottleneck, or a one-size fits all approach from land-agents/landowners.
Finally, despite the economic rationale, we can consider the behaviour of farms; those trying to diversify and secure their income or compensating for a reduced activity on the rest of the farm, for example retiring; the potential to add up to £410 per hectare, let’s say up for one farm taking it up one time adding £820 of income per year, a small amount but not a meaningless one, and a medium-term (12 years) security.
Additionally, linking with our past work on the SFS, this would enable several farms to get in line or over the forestry threshold for entry into the scheme or to benefit from higher payments. It also questions whether those areas will be doubly subsidised. Something, which is unlikely in our opinion but will have to be clarified.
We then look at what the remuneration could be higher at market rates, some companies buying land to offset carbon at market rate over 10-15 year of a financial buy up are ready to pay; roughly it amounts to £400-1000/ha (in 2018 value) without considering money depreciation. We consider that the management would be relatively limited from those buyers. Those level of remunerations, in that horizon compete with the agricultural production or the Welsh government scheme. The payments level for the tree planting scheme would remain lower than what is paid for electricity generation schemesfor example which limits its interest in lowlands.
To summarise we could say that extensive farms or with a low production demand from the farm and non-tenanted farms could do it potentially more easily than others. There would be a potential competition from corporate elements.
Appendix 1: Details of the hypothesis retained for each element:
- General - ADHB 2022, HCC 2022, IDELE 2022, Kantar 2022
We took the assumption that inflationary pressure that are mainly linked to commodities and primary produces. It has latter on rippled through the wider economy, in terms of food prices or wages. In our case we will be looking at it from a real price point of view, putting everything back to a reference situation of 2019. Given the wider economic conditions, the available liquidities, I expect more volatility on the market, of the kind we have seen over the course of the last 3 years.
The structure of the UK food and farming supply-chains in those times of constraints for households is unlikely to change with a focus on the price and a possible increase in terms of discount retailers.
- Our price percentages depend on a £2019 baseline which means that to turn it into £2022 we already need to multiply it by 1,15.
- Milk – AHDB, IDELE
A constrained market internationally in terms of offer by main producers, the investment and input heavy nature of dairying is not easy to bear in the current inflationary context. The demand might be dampened by price rise but less so than the demand, some downsized packaging is of little use given the enshrined vision around classic formats. Given that prices have been quite depressed over the last decade we do not think that they will get any lower in real terms than 95%, they might drop on international market (volatility, plus milk is perceived as nutritionally important.
- Beef and Sheep – AHDB, IDELE
A similar situation to dairy. We recognize that those products are more free-income dependent, in a cost-of-living crisis they are more likely to be dropped, but they are representing a small share of the total UK protein consumption, on the international market, like on dairy products, those are quite constrained in terms of offer compared to the demand, even more. Additionally, reduced buying power can be compounded by adaptation of the packaging to the customers with a downsizing of portions sold.
- Poultry and Hens - AHDB, IDELE
A different situation to the two categories before, contrary to the two above, the risk-bearing is more built-in the contracts for those operating categories when integrated in the supply chain, despite this it might not fully align with the witnessed inputs evolution. In a constrained food budgeting, given the lower price and the perceived benefits of white/lean meat, there will be in all scenario a steady demand and production being roughly maintained given the financial commitments on those investments, a time and technological lock-in.
- Potatoes and crops - AHDB, Financial Times
We expect crops, the offer to be slightly lower and also slightly more diversified, a challenge to reach given specifications with adaptations to reduce input use. On the world stage, limited supply will continue, buoying prices. Cash crops will continue to follow boom/bust prices types depending on a range of factors (demand, availability) – given that supply chains will not change soon- and they will be under pressure to keep prices relatively low by dominant retailers whatever might be the scenario.
Overall, in a volatile word, agricultural products facing the most volatility would be crops/potatoes due to the fact they are the less constrained on the offer side on the medium terms. The others are benefitting from a step by step approach in terms of prices.
For feedstuff fed to animals, an amount of substitution would take place in the mix limiting price rises compared to other commodities.
Fert and Fuel – Financial Times market data analysis
We expect the volatility to keep going on this input parameters, all the more in the UK where no strategic approach has been taken to deal with the offer or demand compared to some EU countries. We nevertheless made some assumptions in terms of a stabilization of the market in the short or medium term, with a slightly lower price for a number of item than the peak ones we have witnessed. The hyperinflation scenario took in turn a higher price assumption but only slightly lower than the peak.
Rent – From fieldwork and Savills, 2022
Basing ourself on three pieces of work Lenormand et al. 2021, showing the impact of the land market on farm operations and the fact that a number of farming system can operate on it, combined with Lenormand et al. 2022 looking at pressures on land on hill areas of Wales, those pressures will not alleviate in the short-term, finally taking in the picture developed by the historical approach around the land market in this blogpost, with a very constrained landholding. We do not expect any relaxation in terms of land market parameters, those will continue to evolve in line with inflation or slightly higher. In a high input price context we expect that there will be additional demand for land as a result of a willingness to grow more from the land and reduce inputs dependance.
Workers – From fieldwork
In the current inflationary context workers will need to have salary increase, all the more given the fact that the agricultural sectors, repeatedly reports shortage of workers. We adapted it to the context faced. The increase given depends on the other inputs/outputs context ranging from 5 to 20%.
- Interest rates - here
In terms of interest rates we have based ourselves on the latest information from the BoE, interest rates are set to rise but depending on the scenario we have made a choice to maintain them low in deflation, slightly higher in deflation and much higher in hyperinflation. To give an example from a 3,5% interest rate contracted in 2016 that gives us 3,4%, 4.3% and 7% rates. Nothing close to 1980.
- Regulatory context and subsidies
As we are taking a short to medium term vision, the new SFS scheme is not yet implemented. The funding remain broadly constants, though we note that in the case of hyperinflation it would drop by 50% due to austerity cuts. The SFS implemented would follow the assumptions set out in Lenormand et al. 2022.
