The Unintended Consequences of a Move to Regenerative Farming

In the June 2024 issue of its regular publication Food and the Environment Spotlight, land agents Savills asks the question, “Can farmers afford to switch to regenerative farming?” (p 6-7). Its answer is based on financial modelling put together for the Savills "Virtual Farm," a theoretical farm described as, "a top 25% arable producer on 810 hectares of clay-based soils in the East Midlands."

Looking forward six years, Savills has estimated the impact of implementing various regenerative management practices (zero-till, enhanced field margins, chemical input reduction etc.) on the Virtual Farm's yields, income profile and margins, and come up with some thought-provoking results. 

While at a high level the model presents a pretty positive picture of the opportunities available to farmers from regenerative agriculture, it also highlights some unintended consequences which are worth drawing out.

In particular for me, the yield hit taken by the Virtual Farm under regenerative management begs the question, "Is it really appropriate for our most productive farms to go through this transition?"

Read on to find out what I thought.

The findings

To start with, let’s take a look at what Savills’ concluded about the Virtual Farm’s finances during and after a regenerative transition (if you’ve read the article, skip ahead!):

It’s a pretty encouraging picture overall. Savills estimates that a switch to regenerative practices would result in a 10% drop in net margin per hectare in year one, but increase in subsequent years, reaching +30% vs conventional farming in year six (results for the in-between years are not given).

What’s driving this profile? Well, yield is a large part of it, dropping off sharply in year one (-26% vs conventional methods), but recovering to -18% vs conventional by year six. This reflects the fact that in the initial years of transition, the modern mechanical and chemical intervention that the farm relied on has been removed, but the soil biology has not yet recovered sufficiently to support the maximum yields possible under regenerative management (plus, the farmer is learning a whole new system!).

Although some regenerative practitioners have found otherwise, it is generally accepted that in most situations, the yields produced from even fully-fledged regenerative systems will be down on conventional ones. Regen systems dedicate more space to biodiversity, or fertility building fallows. They accept more “weeds” within the crop, and may place less emphasis on yield when selecting which crop varieties to sow.

Importantly though, the financial impact of lower yields is cushioned by several other elements of the Virtual Farm’s costs and income profile, which kick in to support the transition from year one.

Costs - fixed and variable - go down on the farm. Fixed costs associated with farm machinery go down reflecting the move to zero-till, while variable costs including labour, fuel and chemicals are all reduced, with greater savings in later years of the model as soil health improves.

Meanwhile, non-farming income goes up significantly, with the Virtual Farm able to access carbon payments of around £50/hectare, and a much wider range of government sustainable farming payments (£183/hectare compared to just £49 under conventional management).

Finally, the model assumes that the farm will receive a £20/tonne “regenerative premium” for its crops, by selling to companies like Wildfarmed, or via the Green Farm Collective.

Short-term pain for long-term gain?

So, at a high level, this model seems to be telling a pretty positive story: for a fairly modest amount of short-term pain, farmers can transition to a system which is better for the environment and their bottom lines. This kind of result, from trusted sources like Savills, will give their clients much-needed confidence when considering big changes on-farm.

But there are a couple of elephants in the room.

The most glaring, is that the Virtual Farm is far from typical for a UK farm. To start with, it is ten times larger than the average farm - 810 hectares, vs an average of just 88 in England. It is a “top 25% arable producer” - i.e. on high-yielding land, and it has no livestock. Granted, large arable farms cover a good proportion of the farmland, but they are relatively small in number. There are thousands of small livestock farms - most likely with far more precarious finances starting out than the Virtual Farm, that these results have almost no relevance for.

If we assume that the farmer has to pay his/her living expenses out of the profit left at the end of the year, then at small scales even short-term margin declines may be unviable, or at the very least carry a human cost. Obviously, Savills is going to produce resources most relevant to their clients, I’m just saying this to highlight that much more situationally specific modelling is needed to really answer the question, “Can farmers afford to switch to regenerative farming?”

The other element of the model that might have caused your eyebrows to raise, is the critical role that environmental subsidies play in the financial viability of the Virtual Farm by year six (making up c.35% of farm profits vs c.12% previously). You could argue that this shows post-Brexit subsidies are going in the right direction - enabling more environmentally friendly farming while keeping food prices down. As Savills points out, the 2023 version of the model was far less attractive (-41% margins in year one, rising to +18% in year six), due in large part to the lower subsidy support available at the time.

This shift in farm income would give the government more power to direct land use in different parts of the country via targeted subsidies, perhaps in line with the conclusions of the much-anticipated land-use framework. Whether you think this is a good thing or not will very much depend on your politics and your perspective. 

But…you have to wonder if Whitehall has really considered these consequences, and whether they are truly desirable. To start with, if subsidies are going to underpin the regenerative business model, is DEFRA prepared to pay out the same level of subsidies per hectare as achieved by the Virtual Farm across all farms in the country? I somehow doubt it. And if not, then at some point the subsidy pie will start having to be chopped into smaller pieces, with the impact going straight to the bottom lines of the farms that have faithfully transitioned.

In this scenario far more farms will have become dependent on government to turn a decent profit (or to stay viable at all) – even those like the Virtual Farm for which subsidies were previously the cherry on the cake. 

Regenerative farming and food security

For me, all of this links back to the fact that government really needs to take a stance on where it wants to see different kinds of farming and environmental outcomes delivered, so that it can target subsidies accordingly. Page two of the Savills report points out that, “80% of UK food production is on 20% of UK farms using 50% of our farmed land.” (You might need to read that through a couple of times!). The Virtual Farm is part of the highly productive 20%, but according to Savills, is looking at an 18% hit to yield even once regenerative management has bedded in.

Now, for the various reasons discussed above, the yield modelling applied to the Virtual Farm will not be universally applicable. But let’s just say for the moment it is. Because the top 20% of farms punch above their weight in productivity terms, an 18% reduction in yield across all of them would translate into a 15% reduction in total domestic food production. In contrast, on the less productive 80% of farms, the same yield drop would translate into just a 3-4% hit. These numbers won't be entirely accurate, but the basic point stands.

With this in mind, I have to say I have doubts as to whether the Virtual Farm (and those like it) really should be subsidised through a full-blown regenerative transition. They should of course have regard for their soil health and environmental impact – for their own sake if nothing else (in fact, this is starting to happen due to pressure from major agricultural buyers)…but to subsidise this kind of reduction in domestic food production, when there are farm businesses more in need financially, and better placed to adopt a hybrid farming/environmental management business model…seems like a policy that could come back to bite us.

I’d be interested to hear what you think.