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Agriculture faces up to net zero uncertainty

Author: ICAEW Insights

Published: 08 Nov 2021

Changing cows’ diets to reduce their methane output may go some way to reducing farmers’ impact on global warming, a recent story in Farmers Weekly suggested, but it’s fair to say more dramatic action will be needed if the goals of the government’s 25-year Environment Plan and the UK’s commitment to reach net zero emissions by 2050 are to be achieved.

The need to feed growing populations and mounting pressure to tackle climate change are upping the ante on the agriculture sector to find more sustainable approaches. But against a backdrop of growing financial pressures and uncertainty about the post-Brexit regulatory landscape, government attempts to encourage more environmentally-focused approaches remain very much a work in progress.

It’s almost a year to the day since the UK’s Agriculture Bill passed into law, representing what farming industry leaders described as a “landmark moment” for post-Brexit farming. For advisers, it presents potential opportunities to guide clients through the intricacies of evolving legislation and subsidy rules, and identify new and sustainable revenue generating opportunities.

As the transition away from the EU’s Common Agriculture Policy (CAP) farm subsidies continues apace, the UK government wants to transform agriculture policy with financial incentives for farmers and landowners designed to encourage more sustainable approaches to agriculture. 

Payments to farmers will shift away from being based on the area of land they own or rent. Instead, they will be rewarded in the future by adhering to practices that improve air and water quality, enhance wildlife and soil health, reduce flooding and tackle the effects of climate change, under its flagship Environmental Land Management (ELM) scheme. 

Raft of new schemes

Andrew Wraith, Head of Food and Farming at Savills, specialises in the set-up, restructuring and management of farming and related businesses. Wraith says environmental issues are a big focus across the sector for those businesses wanting to benefit from government funding schemes. “There is a raft of new schemes in play that will allow farmers to choose how they manage land and gain payment from the government.” 

At the same time, an emerging private market for carbon offsetting is promising farmers who are prepared to change their farming practises the ability to make money from the corporate desire to hit net zero targets, explains Bill Goldie, Sales Director at Redshaw Advisors. 

The most popular carbon offsetting projects tend to involve tree planting. However, there is not enough available space on earth to plant the trees required to remove the volumes of CO2 required to meet Paris Agreement’s 1.5-degree target, Goldie says. Instead, significant volumes of carbon removal credits could come from the agriculture sector, more specifically through improved agricultural land management practices including reductions in fertilizer application, improvements in water management, cover crop planting and harvest, and grazing practices. 

‘Be careful what you’re locked into’

There is no shortage of organisations looking to act as go-betweens or marketplaces in this burgeoning market. However, the absence of robust guidance, protocols and industry experience in this embryonic market is problematic, not to mention the challenges of measurement, verification and quality standards to work out how many carbon credits should be awarded.

“There is an emergence of marketplaces and schemes for offsetting but the advice we’re giving to farmers is to understand and measure what you do and your carbon footprint and be careful what you’re locked into. Over time there will be more standardisation but [the offsetting market] is still currently quite opaque,” Wraith warns.

Similarly, despite a general direction of travel and the lure of future potential incentives for farmers to go green, the long-term nature of agriculture and the evolving rules and regulations are making it hard for the sector to plan ahead and implement meaningful changes to business strategy, Wraith warns. “If you’re at the point of making an investment decision for example in a grain store or a bit of kit, it’s tricky. Capital allowances may save you tax but it has to be about investing in the right thing.” 

Consequently, Wraith says there is growing demand for advisers to put together forward-looking views of the numbers and benchmarking against others in the sector to guide farming clients through the current uncertainty. “It’s about demystifying the numbers and using your skills to put together meaningful budgets and cashflow forecasts,” Wraith says.

Be part of the solution not part of the problem

Will Davenport runs the organic Davenport Vineyard across 24 acres, split between five parcels of land across Kent and East Sussex, which in a good year produces around 40,000 bottles of wine. “It’s all a bit up in the air,” he explains. “No one really knows what’s going to happen when the single farm payments run out. We don’t know the details of the ELM scheme so we can’t plan anything. We’re almost putting things on hold because we’re waiting to see if we’ll get any money for it when the ELM kicks in.” 

Davenport welcomes the government’s recognition of the need to farm in a more sustainable way but he is sceptical of their understanding of the practical implications of its net-zero ambitions for the agriculture sector. “I was brought up in Kent where there are a lot of fruit farms but it’s not very environmental; there’s no wildlife, no hedges, no small fields and no mixed farming,” Davenport says. 

These new environmentally-focused payment schemes will force farmers to think about things beyond the crops they grow and manage their farms more sensitively, Davenport believes. “Farmers have got to pay attention to all of this - they need to make sure they’re seen as part of the solution rather than being a big part of the problem.”

Join this webinar and hear from Dr David Christian Rose and Dr Laurence Smith as they explore trends of farm innovation and understand how advisers and farmers may need to amend and update their skills.

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