Integrating Sustainable Farming Incentive (SFI) actions into Arable Contract Farming Agreements provides a number of challenges for agreements moving forward.
Peter Roberts, Associate Partner in the Agribusiness team at leading property consultancy Fisher German, discusses the considerations ahead for farmers deciding on their best options now that Defra has launched SFI 24.
With the decline in Basic Payment Scheme (BPS) payments, many growers are now looking at the Sustainable Farming Incentive (SFI) as a way to ‘claw back’ subsidies in a different form and also to make improvements where possible to help improve soil organic matter and reduce inputs.
Contract Farming Agreements (CFA) structures have differed with BPS either in or out of the agreement, meaning in most cases farmers’ prior charge has altered usually with a larger first charge, where BPS income has been included in the agreement.
With the BPS de-linked payment continuing its staged decline to zero by 2028, this has – and will continue to – prompt a review of the CFA structure, particularly surrounding the level of prior charge and the split of the divisible surplus.
Bubbling away in the background, contractors’ costs have also risen in recent years, particularly on fuel. Many agreements are now structured with a fuel multiplier as an addition to the contract fee to support the contractors’ remuneration.
SFI income in the form of the expanded SFI 24 offer that was released this August by the Department for Environment, Food & Rural Affairs (Defra), provides a number of options that support various actions, and these need to be considered carefully to weigh up the positives and negatives.
The challenges and discussions now surround whether the SFI options should be included within the CFA, or, if they are included, whether the CFA terms need to be amended.
It is really important that farmers give this careful consideration and don’t make a swift decision without considering various factors.
That is crucial because we are likely to see more CFA agreements in years to come. With the backdrop of a poor harvest in 2023 and similar predictions this year due to the weather we have experienced, profit and particularly cashflow are both impacted. Machinery inflation continues and with asset finance now more expensive, economies of scale are now more important than ever in arable farming.
Those businesses with no solution or those who haven’t considered future succession, particularly where this is looming, may look more favourably towards CFAs since it will offer reduced risk but they will still have the ability to retain their farming status and the tax benefits that this brings.
It is important to reflect on SFI CFA integration. A good approach is to breakdown the SFI actions (in this case those which are eligible for arable land) into the following categories:
- Management plan options
- Boundary options & smaller in field options
- Whole field options – Used as Break Crop Replacements
- Static Whole Field Options
The management plan options such as CIPM1 (integrated pest management plan) will most likely already be done annually by the contractor or by the agronomist and should be included within the CFA and any costs associated with it
Boundary options and small plots of environmental crops need to be reviewed, especially where they have little impact on cropped areas, and it might be wise to remove the more marginal bits from cropping anyway, it would be better if they are excluded from the agreement.
The farmer will then take the income for these in the N01 account and pay the contractor or another party separately for operations required to manage the options, which will be similar to the management of hedgerows which is typically outside the CFA.
Then there are whole field options which may affect yields, such as not applying insecticide or those that support the growing of a crop, such as a companion crop – typically impacting the contractor – potentially leading to an extra operation. The income and costs for these would go into the CFA.
For farmers with whole field options – break crop replacements, there are a number of factors to consider.
There are options such as CNUM3 – Legume fallow, which now looks favourable again since the latest Defra announcement has now made it rotational once more.
Options such as this can provide benefits over other break crops like Oil Seed Rape (OSR). At current OSR prices we are seeing break-even yields around the 1.3 t/ac mark over CNUM3 legume fallow. That means if farmers can’t grow OSR above 1.3 t/ac and the rotation limits greater inclusion of other more profitable break crops, CNUM3 could be considered as a lower risk alternative.
With the option being rotational and supporting entry to first wheats, the income should be included within the CFA.
But consideration should also be given to what level of the contract fee should be charged compared to other crops. A reduced rate fee and separate fuel multiplier to take account of no combining and less spraying should be considered.
Then there are the whole field options – Static Options (three years) where the existing rules allow for 25% area limit for some options – such as the CAHL2 – Winter Bird food option, which can be used as a static option, at £900/ha plus income with the inclusion of stacking options. This does offer a good margin without the yield risk versus the farmers’ return out of CFA and could be looked at being treated differently to a break crop option.
Taking land out in this way will not be popular with contractors, and consideration should be given depending on how big the 25% is and how it would affect the contractors’ business because many of their costs will still continue to be incurred.
There will be more weighting where a CFA is being retendered and the farmer opts to take out up to 25% with plenty of notice, rather than part way through the term and many agreements will have a permanent withdrawal limit, which will need cross checking.
So, in summary, historically the BPS, with values back in 2020 at £93/ac has helped prop up farmers’ returns in poorer farming years, whether the BPS is in or out of a CFA agreement.
With this now going, many more farmers in CFAs should look at:
- Firstly, entering into an SFI agreement to generate income, in most cases for activities that are already being done.
- Many of the actions require the contractor’s input and, in most cases, bar boundary features, the income should go into the agreement.
- If the farmer is offering such income, it will support their level of prior charge.
- Larger removal of land into whole field static options out of the CFA needs assessing carefully, particularly if a farmer is part way through an agreement.
- But with the existing working capital required to fund combinable crops, and the difficulty of the last two seasons, larger scale static SFIs on the more marginal land could be considered if it is appropriate with the farmer’s relationship with the contractor.
All of this may seem complicated and with Government advice being updated, it is important for farmers to gain expert advice to make sure they are making the right decision for the short and long-term future of their businesses.
